John Armstrong: Govt whipping boy over $1.6b payout

Allan Hubbard. Photo / The Listener

An announcement from the Vatican is surely due any day now, such is Timaru's relentless beatification of Allan Hubbard, a man supposedly so broke he can still apparently afford the top-dollar advice of a top-flight Wellington public relations company.

Not that the 82-year-old self-made financier needs much help on the publicity front.

This week's television pictures of him negotiating Timaru's streets tortoise-like in his ancient mustard Volkswagen were priceless PR in evoking sympathy for his largely self-inflicted plight.

The Beehive, however, has had its fill of him and his plaintive cries of "if only" - as in if only he was still running the show or if only he had been allowed another $250 million capital injection then South Canterbury Finance could have been saved from the knacker's yard.

John Key and Bill English initially tried to be polite when it came to attaching blame to Hubbard for the company being placed in the hands of the receivers on Tuesday.

But Hubbard's whining soon had the Prime Minister and Finance Minister using blunter language.

They could see the chasm opening between Hubbard's supporters and the rest of the country, who were shocked and angry at seeing tax money being siphoned off to recompense those who had gambled on getting high returns from high-risk ventures.

Before the default of South Canterbury Finance, seven other institutions out of the nearly 100 covered by the Crown's retail deposit guarantee scheme had - largely without being noticed - similarly triggered repayment provisions to the tune of around $320 million.

But the sheer scale of the $1.6 billion payout to the more than 30,000 depositors in South Canterbury Finance - a sum equivalent to a round of tax cuts - suddenly had people questioning the fairness of the scheme.

Was it fair that finance companies were included when the scheme was rushed into existence in October 2008 during the darkest hours of the global banking crisis and the last days of the Labour Administration?

Was it fair that finance companies still afloat then got protection while investors in those that had already crashed got nothing? Was it fair that some people had subsequently invested money in finance companies to exploit the Government guarantee?

The lack of fairness inherent in such a scheme meant National got it in the neck from all quarters.

While Tuesday's seizure of effective control of South Canterbury Finance was a well-executed operation on Key's and English's part, they found themselves on the back foot, having to explain why the taxpayer was picking up the tab.

The exposure of flaws in the deposit guarantee scheme provoked demands they be called to account for failing to rectify them. There has been criticism of Treasury granting South Canterbury Finance an extension of coverage when officials were well aware the company's accounts were looking pretty sick. We know they knew that because Treasury has had consultants closely watching the company for 12 months.

While much has been made of the approval of that extension, it is essentially irrelevant. The Government was obliged to pay out the $1.6 billion to depositors because South Canterbury Finance is still covered by the original two-year scheme which has run from October 2008.

The Crown could have withdrawn its guarantee earlier if it considered there was misconduct on the part of the company or a material change in its financial position for the worse.

But the Government would still have had to pay out investors after the company inevitably defaulted as a result of the guarantee being withdrawn. Some money would have been saved. However, the Government gambled on the appointment of restructuring guru Sandy Maier as chief executive to get large portions of the company back on a sound footing. The gamble failed. But it was surely worth a go.

The simple truth is that once South Canterbury Finance was under the umbrella of the deposit guarantee scheme, the taxpayer liability was there for as long as the scheme was in place.

There are grounds for arguing the scheme has been in place too long. But that is from the benefit of hindsight.

Such was the fragility of world financial markets back in October 2008 that the introduction of a Government guarantee was enough of a selling point politically for Helen Clark to announce it at Labour's election campaign launch.

Fully briefed by Finance Minister Michael Cullen, National by and large concurred with establishing such a regime, which had been forced on the Clark government by Australia's adoption of a similar scheme.

Everyone involved was well aware of the pitfalls, particularly the distortions the scheme would cause in terms of money flows, which were spelled out in detail in a report by senior officials from the Treasury and Reserve Bank to Cullen only days earlier.

Cullen and Clark faced Hobson's choice when it came to including finance companies in the scheme. The officials correctly predicted that their high-risk investments, weaker funding lines and the absence of a robust regulatory regime meant there was a much higher chance of them toppling over than the trading banks.

Both main parties - Labour in setting up the scheme and National this week in seeking to minimise both the cost to the taxpayer and the economic fallout - have sought to act in the national interest.

Yet, no one - apart from those who creamed it on the back of the Government guarantee - is happy. The Government is the convenient whipping boy. This is the classic example of how support for a government erodes over time.

And there is little National can do about it.