Phil: SCF's long history blurred in an instant

Tuesday, August 31st 2010, 10:35PM 3 Comments

by Philip Macalister

South Canterbury Finance’s demise, and this may seem odd, was a little bit of a surprise. Sure there were the regular commentary crowd baying for a receivership. They are a bit like the peasants in the old days wanting to see people hung, drawn and quartered, a beheading or simply someone being thrown to the tigers. Well they got their head this time. Many thought the company was too big to fail. That’s now history the receivers have been called in. I’d argue though that SCF’s collapse is not like most of the other failed finance companies. (For a start it’s bigger!) Most of the failed companies were dodgy. The growing list of legal action is testament to this. Was SCF dodgy in the same way? Arguably not. It certainly wasn’t run by the nouveau riche in Auckland, the white shoe brigade or the dodgy dealers. It’s one, as Carmel Fisher noted on Larry William’s Newstalk business programme, that has stirred emotions and pitched many groups against each other. But we need to cut through the emotion. The questions which, for me, linger around SCF are firstly its openness. The company has never, until recently, been transparent. It has always refused to provide information to people. One of the best examples is the research project FundSource tried to establish. It wanted to understand the finance company sector and get companies to voluntarily disclose pertinent information. SCF always refused. This was either arrogance or management trying to hide what it was doing. Secondly, blame must be sheeted home to some of the management. CEO Sandy Maier was interesting on Campbell Live last night when he described some of the lending practices of the company, especially when money came flooding in under the government guarantee as “cyclical excesses and rushes to the head”. Former CEO Lachie McLeod should be called to account for the company under his watch as it appears that is when most of the damage to this 80-plus year old firm took hold. The third point, and one perhaps is the most worrying, is comments around how the Hubbard businesses were run. According to the Statutory Managers Mr and Mrs Hubbard weren’t likely to win any best practice awards for their back office systems. However Prime Minister John Key made a comment that administration wasn’t much better at SCF. Surely this is something management should have sorted and ratings agencies like Standard and Poors’ should have been all over. While the “commentators” were baying for blood it seemed that SCF was nearly too big to fail and that the political fallout would have been too great for this government. Well that was wrong. Receivership may well be the best option, particularly because the assets are relatively good (compared to other failed finance companies). Don’t be surprised to see a deal done quickly where some of the assets are on-sold. As for the government. Well it has handled the collapse pretty well. Writing a $1.6 billion cheque on the spot is a pretty good effort. Investors should be happy (enough) and it is a smart move that the government has essentially taken over the company. (As an aside it is now a finance company – in wind down – and it maybe some sort of political omen). Whether it has handled the statutory management process well and what effect that had on SCF’s demise is another matter.

You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

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Comments from our readers

On 1 September 2010 at 2:06 pm PM said:

No one seems to be commenting on the people and organisations who actually borrowed the money from SCF. Was it not their lack of business acumen or understanding the risks they were taking on that has lead to SCF's demise. If all the borrowers had been paying back the money SCF lent them then there would be no problem now. To lay all the blame at the feet of SCF would seem to be looking at a narrow part of the whole picture. A whole lot of people who borrowed from SCF have also made serious misjudgments about what they could achieve in their developments/businesses.Lets have some balance in this debacle.

On 1 September 2010 at 6:11 pm Forthright said:

One of the greatest disservices you can do a man is to lend him money that he can't pay back. It appears Hubbard and the senior managers at South Canterbury Finance, did not only do the borrowers a disservice but ultimately perpetrated a much greater disservice to the long suffering NZ taxpayer.

Allan Hubbard personally wrote a letter to all investors in July 08 stating, “Our business is about managing risk and providing you and our shareholders with an excellent return on their investment”, he also went on to say, “We have always taken time to understand the borrower and his proposition before considering his present financial position”. Recent events clearly demonstrate Hubbard and his senior managers had no idea about appropriate risk management or understanding their borrowers ability to repay.

The audited accounts for year ending 30/6/09 reported under the property lending summary, “The Company significantly reduced its lending of this nature in early 2008”. ($485.7m) 29.8% of total assets, exposure to property lending. $275m secured by first mortgage and $210m secured by second or subsequent mortgages. The 30/6/09 audited accounts gave no indication about what we are now lead to believe, only $700m (42.9%) of the total lending assets of $1,650m are good loans and the remainder 57.1% are bad loans.

It would be fair to say the global financial crisis was partly to blame, however the majority of blame should be fairly apportioned to Hubbard and his senior managers for the demise of South Canterbury Finance.

On 3 September 2010 at 7:14 pm Michael Donovan said:

Just wait for the research into the demise of SCF in the coming months and years.
No doubt,there will be a distinct "gap" between the direct divisions held by Allan Hubbard and his wife and SCF itself?. The problem may have roots in the fact that the "old fashioned' approach may be good only in "old fashioned times".

Just like other finance companies who grew to be BIG ones (like Money Managers and Bridgecorp and more)there became a level of size which actually out-grew the capabilities of it's management systems.
A clear example is where the original "bosses" expanded their "empires" out-of-town, and with the pressures put on those out-of-town brokers to get the huge amounts of incoming funds loaned out, the quality of the loans deteriorated accordingly.
I personally was made aware of loans made to vehicles (sight unseen) in Te Puke where I was told that a neighbour had seen one of the vehicles in a section next door, and noticed it was sitting higher than normal, so he had a look one night.....and ...saw it had no motor or gearbox.
Was that the only one like that....wake up...!

Now, what about a viable remedy to a debarcle like that of SCF?

When a bank lends a mortgage at say 7%pa and it goes into default, they apply a "penalty' rate of 14%.
So...the borrower can't handle the 7% payments, and the bank (lender) is actually saying that they are really going to go to a mortgagee sale...with the obvious result that we are all well aware of...the sale will inevitably achieve nothing more than a capital loss.
The bank is usually covered for the shortfall by the "re-insurance".
These "fire-sales" only help to reduce the values of the properties sold, which, in turn affects the whole market to include those sales which are "cool" sales. A form of false "Boom/Bust".

The same theory applies for the finance companies.

Why then do they not all take a different approach?

A REMEDY?

(a) charge a "lower" interest rate (for a helpful period at least).
(b) Extend the term a bit longer (to reduce the monthly repayments).

I just hope that a clever thinker is successful in being able to "buy the book" and show that a more modern approach can work.

Banks have their own finance company divisions (eg: Westpac/AGC).
Banks have a big coup over finance comapnies too.
The fractional reserve allows them to lend out at least NINE times the money held in their asset base.
Could that be the ultimate (acceptably-legal) PONZI scheme).

Blow the Government Guarantee scheme.
What a great success the likes of SCF would be if it could have loaned out NINE times the money out of the front door that it had to normally pay to get in the back door???

What about the TRUSTEES of these failed companies...they just seem to drift away into the mist?
The way I was raised, we still consider that a TRUSTee should act that way..!?

LASTLY..
The media wrote that the Govt bailout by the NZ TAXPAYER equated to approx $400 per person.
I reckon most readers assumed that meant that it was TAX money that paid the bailout guarantee?
Be intelligent and ask around your work colleagues and family the following question.." where is the cheque actually written from???"

Is it not more true that tax- collected money pops overseas to a big daddy, only to return here as part of our deficit debt?
Maybe my info source has put me wrong?
If all it does it get you thinking, that has to be a good start??
Michael Donovan

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