Moral hazard II

The more I read about South Canterbury Finance, the angrier I get. Yesterday, I called the business practices of SCF the financial equivalent of arson. That, it turns out, was right on the mark:

South Canterbury Finance ramped up its risky real estate loans after it signed up to the Government's scheme that protected its investors' money, the company's chief executive Sandy Maier said last night.

SCF went into receivership yesterday and the Government is paying out $1.6 billion under the Retail Deposit Guarantee Scheme.

Bad loans were the main reason for its downfall, and Mr Maier revealed the high-risk tactic in an interview on TV3's Campbell Live programme.

Asked whether it had been cynically exploiting the government guarantee, Mr Maier replied: "It might have been cynical, it might have been merely incompetent ... it probably violated a lot of prudent lending criteria."

So, which geniuses allowed such a company to remain in the Retail Deposit Guarantee Scheme? Treasury of course - and apparently without any proper due diligence or even a look at the company's books:

A lot was already wrong with South Canterbury when it had its public guarantee extended [in April].

For a start it was effectively in breach of its trust deed and had failed to file audited accounts. Having a look at the numbers is usually considered important when assessing a business decision.

The Treasury - which officially makes the call on who gets in to the scheme - could have waited months before accepting the finance company.

But it didn't. It rushed South Canterbury in to safety because the Government knew it was a goner without the guarantee - although in the end it was a goner anyway.

When those accounts finally arrived a few days later, the auditors highlighted serious concerns about the company's viability.

Like Danyl, I'd love to see Treasury's advice on this. And if the above picture is correct, and they offered insurance without even basic checks, then someone thoroughly deserves to lose their job over it. If OTOH they said "this is a really dumb idea", and their Minister over-ruled them, then the whole thing ends up in his lap. But either way, someone has to pay. Stupid decision-making has just cost us $1.7 billion, and those responsible need to be held to account for it.