Taking Stock

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Taking Stock 14 November, 2019

ONE does not often hear good news from moneylending organisations these days. In general, those organisations are under political, regulatory and social pressure because of their indiscretions and, oddly, because of their profitability.

Their indiscretions are the result of unintelligent governance and leadership over many years; decades.

The BNZ displayed this insensitivity recently with Angela Mentis, its leader, stupidly extolling half truths, bragging about how the bank had increased annual leave, but failing to acknowledge that the bank had also decreased its previous equivalent amount of “family leave”.

Do bank executives feel cocooned from scrutiny?

We know how poorly their governors understand scrutiny.

The ANZ chairman John Key could barely have displayed more folly when he sought to use his diminishing media capital to gloss over the bank’s errors with supervising the expense claims of its chief executive David Hisco.

It seems to me that the ANZ was highly cynical in selecting Key as its NZ branch chairman, presumably imagining that his media capital would lead to better public relationships.

I accept that the NZ branch role has little need for vision, strategy or tactics, but it seemed to be highly cynical to pay such little heed to what the public expects from a chairman.

Whatever Key is, he is not a visionary or a strategist, though in the narrow fields of foreign exchange and politics he may be a wily tactician, a grouping not lacking in numbers.

His social maturity would be something each of us might assess differently, some impressed with his personal interactions with the likes of Obama, Cameron, and other short-term political leaders, others more focused on evidence of larrikinism, displayed in restaurants, on talkback radio dross and in Parliament.

My personal focus is on values-based, intelligent decision making.

Banks need a break from the environment in which they have basked in the past three decades. A period of respectful behaviour, even austerity, with a focus on their retail customers, the regulators and their investors would be an agenda I would applaud.

The good news I spotted last week was the confession of one modern-age quasi ‘’bank’’, Harmoney, that the basic premise of its banking model was flawed and would be changed.

Harmoney set out to be a ‘’peer-to-peer’’ lender, arranging faceless loans with online borrowers and on-selling bits of each loan to online retail investors, who would choose which low-rate or high-rate loan they wanted to fund. In theory, the computer assessed which loans were to high-risk borrowers, charged a higher rate, and filtered out low-risk borrowers, charging them lower rates. Investors chose which loans suited them.

In old banking terminology, this was ‘’matrix’’ loan approving, creating questions posed by a computer to the aspiring borrower, checking his credit ratings, and then assessing his answers.

As a theory of how to make good loans, it is about as cretinous as would be an All Blacks selector who chose as his wings the people who could run fastest, no other criteria required.

Real and value-add lenders often decline a loan because the proposed borrower is trying to fund something he should not borrow to buy. A successful car salesman may well be able to show that his past earnings could repay a loan for a $20,000 jet ski.

An experienced lender would want to assess the state of the car sales market now, not listen to what it was like last year, and might even want to ask whether the jet ski would be used so rarely that hiring a jet ski became a better option.

A good lender would be nosy enough to seek out reliable people who can testify to the character of the proposed borrower. This was my job 42 years ago. Nothing should have changed.

An investor in loans ought to be interviewed to ensure he understands any risks that are not obvious. How, for example, will one check that the insurance on the jet ski is renewed each year or that the jet skier is going to meet the behavioural conditions of the insurance policy?

Matrix lending is a cheap, robotic shortcut, which reduces the intermediation cost at the significant cost of being a glib assessment of risk.

Harmoney now sees that. It accepts that its model has not worked out well.

It will no longer ask retail investors to choose the loan they fund by accepting the logic of an easily-gamed matrix.

Harmoney instead will raise wholesale money to lend by approaching the banks and institutions, effectively securitising its lending portfolio and underwriting the loans, promising to repay the banks, which should apply their knowledge.

Harmoney’s cost of funds will therefore be priced expertly, its ‘’no hands’’ approach will change and because it should be able to raise money at a better price, it should lend at lower rates, attracting a better class of borrower.

It must have noticed that its matrix is regularly ‘’gamed’’ and is an inadequate predicter of risk and loan worthiness.

In effect, it will begin to behave like a banker rather than like a broker. I commend its decision.

It should be noted that banks can sometimes succeed with loan applicants interrogated online by a matrix, because the banks genuinely can afford the bad debts and will have solid data on the likely level of future bad outcomes.

Retail investors in a loan might say they can afford losses but most experienced advisers will know that a realised loss hurts investors much more than the concept of a possible loss.

Banks usually charge ridiculous rates for credit card loans – still around 18% per annum – because they have the data to show that bad debts on average will eat up 8% of the 18%, leaving a healthy nett margin for the bank. The honest borrowers underwrite the defaulters.

I loathe this logic, not understanding why a meticulous, ethical borrower should subsidise a feckless, irresponsible borrower.

One day credit card, unsecured lending will have variable rates, charging the meticulous borrower 6% and simply not allowing the irresponsible borrower to obtain credit.

Harmoney now seems to understand this.

That is good news.

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THE BNZ is to abolish staff bonuses, restricting these ‘’entitlements’’ to senior executives.

The staff will not be asked to cross-sell.

With a bit of luck, the BNZ will revert to having appropriately small branches for those customers who prefer face-to-face banking, the staff devoted to being skilled administrators, working in a culture of ‘’customer first’’. The instruction to mix administration with less-than-subtle selling will have been withdrawn.

In small areas like Geraldine, Otaki, Featherston, Waipawa, Waverley or Opunake, there might yet be an unbranded banking centre, allowing congregations of all faiths to enjoy a local facility at minimal cost to each banking brand. Who knows? We might even have a mobile caravan bank visiting the even smaller settlements for an hour or two each day.

If these developments occur, they will come as no surprise to any long-term readers of our newsletters. We urged the banks to think like this (putting customers first) 27 years ago.

My guess is that banking will not be the only activity that will need to think creatively about servicing very small towns.

Our wonderful doctors, who have served NZ so well, are now reaching an average age that invites retirement planning. There are very few young doctors willing to take on a general practitioner’s role, even in towns of a few thousand people.

So the prospects for tiny towns and villages seems bleak. Will we have many caravans visiting towns, some offering banking, some offering medical advice, dental services or even legal services?

Or will we do all of this online?

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IF our under-skilled, poor-performing, under-resourced Ministry of Business, Innovation and Employment ever wants to write its laws on the basis of real data, one law it would re-write is the awful, self-serving Insolvency Practitioners Act that Parliament passed a few weeks ago.

Most of us never come across insolvency practitioners, receivers, liquidators or statutory managers.

As business owners, we moderate our behaviour and suppress our ambition by taking on business levels that we can afford, should the world dump on us.

But more than one business in every five ends up in trouble, unable to pay its bills. Often those businesses were under-capitalised (nothing to offset a bad day), over trading (using creditors’ money as cash flow, as Mainzeal did), failing to find enough customers or, most unfairly, being destroyed by the failures of those to whom they provided credit.

Again, an example of the latter of those problems was in the construction industry, where Mainzeal’s illegal and rapacious behaviour destroyed sub-contractors whose money was being eaten by Mainzeal, surreptitiously.

The sub-contractors were unwise ever to work with Mainzeal, that public company demonstrably over-trading, under-capitalised, error-ridden and leaderless.

But it is unrealistic to assume sub-contractors had the knowledge to sidestep such a large, NZX-regulated company.

Instead, the sub-contractors each week paid wages to their staff and probably borrowed to buy the materials to meet their commitments to Mainzeal. They were left unpaid when Mainzeal collapsed. The demise of such companies was mostly Mainzeal’s fault.

My point is that the sub-contractors, not being the cause of their demise, should not be further victimised by what happens when the sub-contractor goes into receivership or liquidation.

Since my book was published (The Billion Dollar Bonfire), I have been regularly contacted by those who could demonstrate that they had been cheated by the laziness or ineptitude of insolvency practitioners.

The most alarming were claims of simple dishonesty, one legal clerk citing a case of stock being purloined in the receivership process.

Many believed that being ‘’ripped off’’ by the lazy practices was seen as ‘’part of the punishment’’ of business failure.

Others believe that the receivers, buyers and bankers are indifferent to any party other than the secured lenders.

When a company fails, the most likely outcome is that the shareholders appoint a receiver or a liquidator, or that a bank imposes a receiver that it chooses to recover the money owed to the bank.

If the shareholder owes nothing to the bank, he himself might appoint a receiver, instructing him to repay all creditors and then return any surplus to the shareholders. Sadly this is rare.

Sometimes a company owner might have lent money to the company after first preparing an agreement that gives the shareholder priority over any recovered money. He would then have control of the receivership behaviour.

But the normal situation is that a bank appoints one of the small number of registered insolvency practitioners. Usually the bank will specify it wants its money back as soon as possible, and prefers to write off amounts rather than wait for better prices from the asset sales.

Once granted these lucrative assignments, the liquidator/ receiver will validate the asset and liability ledgers, collect up all the claims of unsecured creditors, and then either sell the business as a going concern, or more likely, sell off individual assets, applying the funds exclusively to the secured lender (the bank) until the bank has collected its loans and its penalty or unpaid interest. If there is any surplus, the unsecured creditors will get a dividend. Rarely does the shareholder receive anything.

But the receiver will pay himself each month. In theory, the bank authorises this payment. In practice, receivers tend to pad their bills without being questioned (eg photocopying costs 20c a page, car usage $2 a kilometre etc, time sheets unaudited, hourly rates absurd).

Third-party payments to valuers, lawyers and other advisers are rarely contested and are often indefensible, as we saw with South Canterbury Finance.

The asset sales are not supervised in any real sense. The receiver might advertise the sale of a truck, perhaps in a local paper. Those who tender to buy the truck might be opportunists, Steptoe & Son, or business competitors.

They will sniff a chance for the bargain of their lives. Rarely are these processes optimal.

There is no independent supervision of these asset sales. A lazy, soft or inept process might lead to assets selling for a fraction of their real value. For example, in a sale of office equipment, who compares the sale price of office chairs with the cost of an equivalent chair? Second-hand gear is often dumped onto Steptoe for a return of coins.

In bigger company failures, who contests the value of a brand, or a franchise, or a controlling interest in an external company?

Why is there no input from shareholders and the usually hapless unsecured creditors?

The answer to these questions will not be found in the submissions made before the latest Insolvency Practitioners Act was documented, debated in Parliament and then approved.

There were NO submissions, other than from lawyers, bankers, insolvency practitioners and trust companies, according to one insolvency operator, Damien Grant, who made this observation in his Sunday newspaper column.


Out came the one-sided new Act, defining pitifully small penalties for any poor work by receivers or liquidators.

The new Act required no supervision of receivers and liquidators.

It established no affordable, immediate process for contesting poor work.

For heavens’ sake, it led to the current situation that receivers and liquidators may ‘’self regulate’’ after registering with a Companies Office that itself has had so many recent defections that it is regularly described now as dysfunctional.

Of course there are competent, caring, sharp operators in the insolvency sector. I know two of them to whom I would lend my bach, happily.

Most lawyers, accountants, receivers, banks and trust companies are not without skills, or without conscience, but very few have ever been immersed in the wiles required to run businesses, understanding the intrinsic values of markets and assets, and the need for entrepreneurialism.

I once was travelling with a skilled contracting business owner when he stopped beside a paddock in the country, climbed a fence and inspected abandoned reels containing wire cable.

He recognised the value the cable would have on a particular project and after some effort discovered the city owner, who virtually gave it to him for taking it away.

The ’’owner’’ was, of course, a receiver.

The skilled businessman sold it that day for about $18,000, money that should have gone to the creditors for whom the receiver was acting.

The atrocious outcome achieved for taxpayers by the South Canterbury Finance receivers, McGrathNicol, should on its own have been the catalyst for a new relevant Insolvency Practitioners Act (IPA).

The opportunity, for the moment, has passed. The dog in the Toyota ads would have the right response to this missed opportunity.

Rip-offs, weak practices and old boy networks will continue to be a sick component of some receiverships and liquidations until the IPA is reviewed by a more caring party than MBIE.

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Edward will be in Auckland City on Thursday 21 November and Albany on Friday 22 November.

He will then be in Napier on 2 December and Blenheim 4 December.

Chris will be in Christchurch on December 10 (pm) and December 11 (am), his final visit until February 2020.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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