SMELLIE SNIFFS THE BREEZE: Not quite Lehman Bros

SMELLIE SNIFFS THE BREEZE: Not quite a Lehman’s moment

By Pattrick Smellie

Aug. 31 (BusinessDesk) – OK, everybody take a deep breath. Underneath all the fog of commentary and arm-waving, a fairly simple thing has happened to South Canterbury Finance today.

Its affairs are in the hands of receivers, as has happened to many a company in corporate history. What makes it special is that it has also triggered the provisions of a government guarantee scheme that was put in place to ensure such a collapse did not derail the economy. That makes things better, not worse.

In the wings are various potential investors, all of whom are probably hoping that it now becomes easier to pick apart the good parts of the SCF book, while leaving the taxpayer to pick up the pieces.

We’ve been here before, when the BNZ damn near fell over 20 years ago, not once, but twice. In those cases, the BNZ really was “too big to fail.” Nor was there a government guarantee in place, other than that implied by government ownership. There was certainly no money in the bank to anticipate the crisis it provoked, early in one of the more prolonged of the four recessions to hit New Zealand in the last 40 years.

SCF is clearly not “too big to fail.” Its total assets comprise barely 1.3% of total farm activity, and a little over 3% of total farm lending, estimated by the New Zealand Institute of Economic Research to be around $47 billion. And farming is only one part of the economy.

Since the Crown can expect to recoup at least half that $1.6 billion over the next four or five years, the real cost to the taxpayer will be less again. This is not exactly a Lehman Brothers moment, although NZIER principal economist Shamubeel Eaqub worries the impact on national economic confidence could be far greater than the issue’s real importance.

Coming from a man normally noted for an almost funereal turn of phrase about current economic prospects, an injunction from Eaqub for sanity to prevail should be taken seriously.

Most of all, there is no reason for the SCF process to end messily. The government guarantee scheme was put in place for this very purpose and for everyone who howls now about bail-outs and waste of taxpayers’ money, let them contemplate the possible alternatives. A run on SCF would have done no one any good.

Instead, it’s still possible a commercial solution will emerge. There’s likely to be a gradual and orderly realisation of so-called “bad bank” assets, even if takes a few years. The Crown didn’t want the BNZ’s bum loans 20 years ago, but it did manage to quit them at a profit.

Who knows? It’s entirely possible that a $600 million bill to bail out SCF will turn out to be no worse an investment than the unbelievable $665 million paid for KiwiRail by the previous government, from which the taxpayer can have no serious hope of commercial returns any time soon.

Of course, today is an absolute tragedy for Allan Hubbard and his legacy of both boldness and kindness as an investor, and the millions he has spent on good works over decades that will make him out forever as a pioneering New Zealand philanthropist of extraordinary generosity. No one will ever accuse him of living high on the hog.

However, further humiliations are likely in store as the spider-web of cross-party Hubbard empire transactions is picked apart by the Serious Fraud Office and the Hubbards’ personal statutory managers. That will be hard to watch, and difficult for Hubbard and his friends and supporters to bear. It will definitely not look “fair”.

But those issues are not part of today’s action, which is the result of nine months’ largely under-the-radar effort by the rescue CEO, Sandy Maier. Had the atmosphere stayed a bit calmer ahead of today’s deadline for an extension of the SCF Trust Deed waiver, Maier might even have got a deal over the line.

Instead, the biggest business news story of the year has attracted inevitable white-heat media attention, egged on in part by the actions of zealous, well-meaning but ultimately wrong-headed supporters, with whom Hubbard is increasingly aligned.

His statement today, saying he would fight on to save his reputation and attempt to rescue the business was issued by the StandByHubbard group, a small outfit of vociferous local supporters whose Facebook page, boasting more than 44,000 supporters, has been a hotbed of “two and two makes five” type amateur sleuthing and polemic in recent days.

By aligning with this group, however sincere and understandable its sense of hurt and betrayal on Hubbard’s behalf, Hubbard will only abet a sense that his sidelining from the business he built and loves, while brutal, was probably necessary.

And if Hubbard does fight on, there’s a danger he may still be capable of doing harm to the process, making an orderly settlement of its affairs all the more difficult, and a greater cost to the taxpayer more likely.

The only people who’ll gain from that will be the would-be investors in SCF’s assets, who will drop their offer lower every time the Timaru lender’s affairs become shakier.

(BusinessDesk)

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