Wednesday, December 28, 2011

Mike Butler: Daylight Robbery in 2011

How South Canterbury Finance was taken down, how finance companies failed, the new round of privatisation, the Air NZ bailout and train set repurchase, KiwiSaver fee rip-offs, and Chinese attempts to buy NZ dairy farms, all feature in an 80-page new section of a revised version of investigative journalist Ian Wishart’s 2001 book “Daylight Robbery”.

A legal notice is posted on the copyright-ISBN number page stressing that the book “contains very serious allegations relating to named individuals” some of which have been made under parliamentary privilege. Readers are urged to remember that some allegations of fraud made in the book remain unproven until a court has ruled upon them.

The global financial crash is simply a bigger version of what brought the Bank of New Zealand to its knees in 1990, Wishart argues.

Boom-bust financial cycles characterize our banks that use the fractional reserve banking system, where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer's deposits. Trading banks are then allowed to lend out up to 20 times the amount held on deposit, charging fees and interest on every movement of cash. Based on that ratio, when you deposit $1000, your bank could lend out $20,000, with the extra $19,000 being credit.

He explains enough banking history so the reader is clear that trading banks create credit at no cost, then charge borrowers full fees to utilize the credit.

New Zealand’s credit economy grew $25-billion from 1994-2001, but surged a whopping $200-billion since 2001. That credit ballooned during the “carry trade”, as Japanese investors borrowed yen in Japan at 0.3 percent and invested into New Zealand dollar bonds at 6.5 percent, a trade that became so popular that by 2005 there were $NZ45-billion of these uridashis outstanding.

With loans far in excess of deposits, trading banks are a few missed payments away from being insolvent. A crisis in confidence at any time could trigger queues of customers demanding their money, causing the bank to collapse. Deposit guarantee insurance is in reality a customer- soothing scam because when banks need help, bankers go cap in hand to the government for a taxpayer bailout, of which there have been a few in recent years.

Our Reserve Bank this year responded to this sort of liability with its Open Bank Resolution scheme, Wishart points out, which puts the cost of bank failure on the trading bank’s shareholders and depositors.

Under this scheme, if a New Zealand trading bank became insolvent, it would secretly notify the Reserve Bank at the close of business. Over night an automated lockdown of the bank’s accounts would take place. Online, phone, and mobile banking would become “temporarily unavailable”, as would ATMs. A would project the expected loss and a sophisticated computer program would impose account “haircuts” across the board so that when the bank opens the next day a portion of your funds would no longer be available.

If you don’t believe Wishart, check the Reserve Bank website for details of the OBR scheme. Depositors beware!

Property investors copped the blame for the so-called housing bubble from 2002 to 2007, even though it is clear that the explosion of credit in the 2000s meant too much money chased too few properties, creating house price inflation.

As we head into a new round of privatizations, it is timely to re-read the Wishart’s story of “greed and backroom deals” in the 1980s and early 90s “that enriched some well-connected people but left the public feeling fleeced.” All suspects, including those involved in the South Canterbury Finance saga, are named and their activities chronicled.

1 comment:

Wingate said...

I took a case Arklow vs Maclean through the NZ High Court all the way to the Privy Council regarding the conduct of a merchant bank Far Financial. Far latter set up Lombard after their escape from my case. In 2002 I went before the Justice Select Committee with a 107 page submission and I begged them to see better regulatory control be put in place to control rogue Kiwi merchant banks. They never listened and so in 2008+ 232,000 New Zealanders lost $8.5b. Our politicians make endless mistakes yet they are never held too account. The only hope NZ has is to change that. As I so often say- if the fiduciaries running NZ fail, the nation will fail.