The receivers are in, and the government is throwing in $1.7bn in order to buy assets they expect to get a return of $700m from. Sounds like a typical New Zealand investment to me
There are a few points to come out of this. In some sort of order these are:
- The government had to pay the money when the receivers came in – they had no real choice, after all SCF was guaranteed by government.
- However, it does show you the type of cost that can be associated with such a scheme – and raises the question of whether putting finance companies in the scheme was a good idea (both Agnitio and myself were skeptical).
- It is apparent that the scheme may have led to some dodgy lending in that sector. I am genuinely concerned about what other moral hazard issues will appear over the coming year – is this just the tip of the iceberg from a poorly designed scheme, or is it just one unfortunate failure.
- Questions have to be raised regarding the price placed on risk by the guarantee – was it really high enough?
- Why is anyone defending Alan Hubbard when he used other peoples money to make risky bets that made people like him – just to fail and have the rest of New Zealand paying for it? Running a company under a government guarantee and not following best practice is immoral – no matter who you are.
- This can’t be compared to TARP, and the lack of insurance would not have made this like Lehman Brothers. The scope for contagion from a finance company failure like this is small – which implies absent the scheme the government should have just let this company fail.
- Another nail in the credit rating coffin? What credit rating did SCF have at the start of the deposit guarantee scheme?
Another point is that this statement:
Furthermore, being in control of the receivership process takes the pressure off the receiver to quickly sell any assets
Is actually a good one, if they feel the assets would be shot off at fire sale prices. This is one of the main lessons from TARP. However, the sad thing is that the government is stuck buying them at an inflated price instead
Surely this tells us that it is at least near the time to get rid of this deposit guarantee scheme – and why not do it retroactively so they all don’t “fail” just before the scheme runs out. Investors that get burned because they saw a high return and decided to face a high risks should have to deal with the consequences of it.
Update: Bunch of details listed down on Rates Blog.