The moral hazards of that other quake

After the shock came the earthquake.

Two traumatic eruptions razing the calm that traditionally carapaces the Canterbury Plains and the geometrically ordered streets of Christchurch.

Our second largest city, its heritage centre still a place of considerable danger as tremors reverberate, will recover over time.

Not so that other fixture on the "cultural" - and I use the term advisedly - landscape: South Canterbury Finance.

Exactly how and why this formerly respected finance house, run by the revered Allan Hubbard, came to grief is presently testing the skills of financial investigators, including the forensic accountants of statutory managers and receivers alike.

It could be years before the full story is known.

But there are significant pointers.

And they relate neither to the dangers of falling masonry nor to deep fissures in the patchworked paddocks of the plains, but to something called "moral hazard".

This concept is apparently well-known to contract lawyers, insurance brokers and economists.

Nobel laureate Paul Krugman defined it as "... any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly".

There was much talk about "moral hazard" when the previous Labour-led government, in a move essentially endorsed by Reserve Bank governor Dr Allan Bollard in a television interview at the weekend, introduced the retail loan guarantee scheme in 2008.

This was in response to the global financial crisis of 2007, and to the reality that if New Zealand did not follow Australia's lead, our investors' funds would have rapidly emigrated across the ditch.

Dr Bollard has just published an account of the times.

He was being questioned on revelations in his book that appear to indicate he both defends the necessity of the scheme, but also warns against its potential abuses: namely the possibility of entrepreneurial finance companies and well-schooled investors taking advantage of the scheme.

That is to say, they would pile into high-interest yielding, high-risk investment ventures in the certain knowledge that they could bet the farm and never lose it.

Plus, it now transpires, they would get their 8% interest yield and all.

And this, as we saw with the receivership of SCF, just over a week ago, and the rescuing of investors through the guarantee scheme, is what to an extent may have transpired.

Last week, company chief executive Sandy Maier, asked whether the company had been cynically exploiting the Government guarantee, said: "It might have been cynical, it might have been merely incompetent . . . it probably violated a lot of prudent lending criteria."

We do not yet know when, if at all, Allan Hubbard was seduced by the siren prospect of unrealistically high-interest investments, and changed from being the ultra-cautious, conservative accountant to imitate the flash Harrys and multimillionaires who built mansions, drove fast cars and wore their wealth like ostentatious badges of courage.

If he did, he concealed the makeover: he continued to drive his ancient Volkswagen, live in his ordinary old house, and, by some accounts, tot up his loans in a little notebook.

It is easy to romanticise this old-fashioned philanthropist, the "lifetime president", who alone among his financier peers lost everything when his company went into receivership, but Mr Hubbard cannot be so easily absolved.

Who knows what battles were being waged in the boardroom; what sharp practices were introduced when, fighting cancer, or his renal condition, he was looking the other way.

But if he was being kicked in the kidneys, by among others those who saw "moral hazard" coming a mile off and are now laughing all the way to another bank, then it was because he had no-one watching his back.

As with so many who build empires, Mr Hubbard's downfall may have been in his lack of succession planning: specifically the succession of his own traditional values - before they were lost to a creeping culture of greed and cynicism which, when the quake shook, brought the empire tumbling down.

Simon Cunliffe is assistant editor at the Otago Daily Times.

 

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