Deborah Hill Cone: Same old problems under the skin

I was out at Cibo for dinner the other night and as a new couple arrived, someone whispered - with not a helluva lot of sotto voce - "The husband used to work for one of those (head lowered, but strangely still swivelling) finance companies". This was accompanied with one of those moues of distaste that will necessitate another injection of botox sooner rather than later.

Now steady on, ladies. I may be a lone voice here, but where finance companies are concerned things seem to have got a bit out of proportion. They were not all evil. I feel I can say this as I was one of the first to write about sinister related-party transactions within non-bank financial institutions back in 2002.

But finance companies provided a useful service that the banks refused to do because banks, strangely, do not actually like to take risks. (They cover themselves by making sure if everything goes belly-up they are the first ones to get their mitts on security.) A lot of finance companies - even the so-called "bad" ones - created some good: they provided jobs, they kept Euro going, they built some buildings.

Admittedly, a lot were ugly, but that's another story. There has also been a general widespread Manichean view that there are the bad finance companies - Bridgecorp, Hanover and suchlike. And then there are the good ones, epitomised by cosy Allan Hubbard-led South Canterbury Finance.

I have been examining the Government's Retail Deposit Guarantee Scheme and it does look a bit like it could be called the "We Love You South Canterbury Finance Scheme". The Government last year announced it was extending the scheme, which was due to end in October this year. Why? There is a suspicion it was specifically because South Canterbury Finance could not be allowed to fail.

Rod Petricevic and his ilk were flashy and big spenders. But as everyone knows, Hubbard admirably drives an old VW and financed half the South Island. Theoretically speaking, how would it look for the Government if South Canterbury Finance had been allowed to, ahem, go south?

Any readers who still doubt the power of image please note: PR is everything - even if it is seemingly the anti-PR of not driving a Porsche and not looking like an Auckland wanker. That really helps if you want the Government to tide you over.

The reality is that South Canterbury Finance is not just a backer for Red Band-wearing farmers - it is big in property development. It is a lot like other finance companies, which is why it is also in the swamp. Given its background in rural lending, any default would have much wider ramifications than for the players who spend every Friday at Soul.

Of course this is not the official reason the scheme was extended. At Treasury and Bill English's office, the official line was the reason that the scheme was extended was not to give help to any specific company.

Although the view given as background was that it was "obvious" it would be more expensive for the Government if certain companies were allowed to fail as a result of the scheme ending. It was cheaper to just extend the scheme but tighten it up. The amount covered per depositor has dropped from $1 million per institution to $500,000, for example.

Eight institutions have applied for the extended scheme and been approved. They are what one might call more "respectable" finance companies than the Soul bar gang. One of them is South Canterbury Finance. Just try to say it without a sneer.

dhc@deborahhillcone.com