How Treasury put us on the hook to finance companies

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If a firm stopped taking deposits last September, and was heavily exposed in the current economic climate to a major loan to a Queenstown property developer, you’d think that might be ringing a few warning bells, wouldn’t you? Yet on 13 January Mascot Finance got Treasury’s nod for entry into the retail deposit guarantee scheme whereby it gets all its failed investments paid out bv the taxpayer, Barely seven weeks later, the taxpayer is on the hook for at least $10 million, and up to $70 million. Prime Minister John Key says that ‘with hindsight’ Mascot should not have qualified for a taxpayer bailout. Duh.

In case you want to know the names of all the firms that your dollars may be called on to bail out their risky investments check out the alphabetical list here.

It includes everything from the New Zealand branch of the Kookmin bank of South Korea, to Fisher and Paykel Finance Ltd to the Wine Country Credit Union, which on its website is offering first home owners a mortgage interest floating rate of 10.98 %.

Hmmm, that seems rather high, don’t you think? The list also includes the ANZ National Bank, which thanks to their pre-planning for the credit crunch, had by last September 30 amassed had $8 billion in liquid assets – some of which Key will now be eyeing for the joint NZ government/banks capital fund that was mooted at the jobs summit.

How on earth did Mascot ever qualify in the first place for this gold-plated bailout scheme ? After all, people who invest in finance companies are supposed to accept the inherent risk involved, in return for the higher returns compared to them leaving their money in the bank. The potential for failure comes with the territory. Now they get to keep the returns from these speculative investments if they win, and they get the taxpayer to meet their losses if they lose. Incredible. That’s sometimes called privatizing the gains, and socialising the losses.

According to Treasury, the criteria for the taxpayer retail deposit scheme that Mascot found so very helpful include : the company’s track record, whether the firm has met its payments as they fell due and maintained solvent, how long the firm had been in business, its importance to New Zealand’s banking system, whether those controlling the firm were of good character, if they had the experience to run the firm, and whether the firm lent to related parties.

Frankly, its hard to see how a small finance company in Southland which had ceased taking deposits months ago and was fatally extended to a land speculator in Queenstown could meet these conditions. In practice it seems to be that if it had lent money and was still breathing, Treasury would sign it up for the scheme. –

How much in total is the New Zealand taxpayer now potentially on the hook for ? Somewhere between $462 million in the best case scenario, and $945 million at the worst, according to this Cabinet memo from last October.

Was this system devised because New Zealand’s Aussie dominated banking system was in danger of collapse ? No. As mentioned, ANZ National alone had $8 billion in liquid assets as the scheme was being put in place. The real reason was that other countries were doing it, and the cost of borrowing for New Zealand-based banks and finance companies would have been higher on world markets, without the scheme. So, we all got roped in to underwrite their business dealings – in order to reduce the cost of their borrowing at one end of the investment chain, and to eliminate the risk they face at the other end. As corporate welfare, it could hardly be sweeter.
Celtic Tigers, Nordic Tigers

If you want a few minutes grim amusement, try Googling the words ‘Nordic Tiger’ and ‘Celtic Tiger’ these days. What you get are many enthusiastic endorsements of the economic policy in Ireland and Iceland dating from a couple of years ago, and written by the likes of the Cato Institute and other right wing think tanks. Huzzah for the low tax, de-regulated, privatization model that Ireland and Iceland were following ! Before, that is, they went down in flames. These days, the Irish are once again trying to emigrate.

The think tank articles have all the hollow, doomed quality of a black box recording just before an airline crash. We know where these policies are leading – to Ireland and Iceland, and Singapore and Taiwan becoming the basket cases of the global economy – but the authors don’t know this yet. Flash forward to New Zealand in 2009, and its as if the news hasn’t reached here yet. Politicians from the twilight zone – Sir Roger Douglas, Rodney Hide etc– continue to make the same zombie calls for de-regulation, lower taxes and reduced government spending, as if the global financial crisis had never happened.

It has been, of course, a very bad fortnight for Treasury. Besides the Mascot debacle, Treasury got caned in the review of the ACC shortfall fiasco, in which the extent of the finding gap was not included by them in the last financial update presided over by Michael Cullen. The twin failures of Treasury over both the ACC figures and retail deposit scheme are especially disheartening as we enter the era of public/private partnerships.

Overseas, PPPs have been a prime example of privatizing profits and socialising losses. To stop that from happening, it requires government economic advisers to be able, vigilant and committed to driving hard bargains over the contract detail of PPP projects – and to combat the kind of contract mechanisms whereby taxpayers get lumped with all the downsides, often running to millions of dollars of additional costs. Given their track record over the last few weeks Treasury look more like being PPP lapdogs, and not watchdogs.

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