Professor Robert MacCulloch: Call in the Bailiffs.....

Call in the Bailiffs: How the NZ Government's Green Investment Fund Turned Itself Into an Unpleasant Predatory Lender and Debt Collection Agency.

The just resigned Chair of the NZ Green Investment Fund (NZGIF) and Chancellor of Auckland University, Cecilia Tarrant, previously worked at Morgan Stanley Bank in New York, starting in 1997 and finishing in 2009. She's a very nice person, a lawyer by training, and Structured Products expert, in particular on Mortgage Backed Securities. 

The collapse of the MBS market in the United States was blamed for being a major cause of the Global Financial Crisis in 2008. This article will argue that the creation of a similar type of security, which formed the key feature of the NZGIF's $115 million deal with the now bust private company, Solar Zero, was a mistake. A mistake that caused a lack of interest by the Fund in the fundamental quality of the underlying assets in which it was investing.

In the case of Mortgage Backed Securities, the underlying assets are thousands of future interest and capital repayments coming from individual mortgages. In the US before 2008, many were of low, or "sub-prime", quality. People were signed up to their mortgages often by brokers on commission. Mis-selling was rife. After packaging the mortgage receipts into securities, Banks sold them off. The securities were hard to value. Ratings agencies were accused of rigging their ratings to help the Banks get higher prices. When the US property market fell, mortgage defaults broke out, precipitating a fall in the MBS market. The Financial Crisis ensued. Morgan Stanley got a $US 107 billion emergency loan from the US Federal Reserve to stave off bankruptcy, the largest of any Bank.

At the heart of the NZ Green Investment Fund's calamitous deal with Solar Zero is a Structured Product just like a Mortgage Backed Security. Instead of mortgage payments, it packaged receivables from thousands of Solar Zero customers to be paid over the next 25 years. The firm's sales brokers appear to have told potential clients that solar energy would save them money, was a good cause, and came with no up front costs. Customers would not own the roof panels installed on their houses, instead paying annual solar energy bills, including maintenance. The idea was that those bills would be lower than one's existing power costs. What a deal, or so it seemed. However, consumer agencies raised concerns. People had to sign up for a full 25 years, during which time they couldn't switch suppliers. Selling one's house became fraught, since you didn't own the panels on your own roof.

There was another hitch. The no-up-front-cost, so-good-you-couldn't-refuse offer that its brokers were pitching left Solar Zero with little immediate cash flow to cover the firm's costs. It had to buy panels and pay staff. Where could it find cash in the short term to keep the business going and expand? Enter the NZ Green Investment Fund. A Structured Product was designed. By securitizing the payments that Solar Zero customers were contractually obliged to make for the next 25 years - and buying that security from the firm with $115 million of taxpayer cash - the Fund thought it solved Solar Zero's liquidity problems. The cash was replaced with an asset called "Debt Investment" on the NZGIF's balance sheet, backed by Solar Zero receivables, representing families struggling under cost-of-living pressures.

The Structured Product concocted as part of the Green Investment Fund / Solar Zero deal would've been met with approval from some of the hardest-nosed New York banks, as well as the Wolves of Wall Street. Customers thought solar panels would make them financially better off. The NZGIF retained its full balance sheet strength, swapping cash for a securitized asset. Solar Zero got $115 million deposited in its bank account. The environment would improve. The government was made to look good. Except, like in the run-up to the Global Financial Crisis, it was built on a house of cards. Solar Zero busted. The NZGIF seemed not to care. Maybe due to pride in the elegant nature of the legal structures behind the deal, Tarrant defended herself after being hauled in to a meeting with Finance Minister Willis, putting it down to a weak understanding of finance by the less literate. She told the media, "understand that we did not lend to Solar Zero. We lent on the receivables".

But behind the slick transfer of $115 million to Solar Zero, the economic welfare and environmental impacts of the deal were awful. The $115 million security valuation was opaque, especially so because of the long 25 year horizon of the receivables - just like valuations were opaque for Mortgage Backed Securities that blew up in 2008. Judging by web sites, like Trust Review, a bunch of Solar Zero's customers were angry. They gave the firm a 2.4 out of 5 rating. "Intentionally Misleading. Since I've had Solar Zero, they've mislead me with the benefits. I've paid more in electricity than I ever have", says one. "We decided to go with Solar Zero so our bill will be reduced. I DON'T RECOMMEND ANYONE JOIN", says another. "The system never produced anywhere near the power needed, so no savings"; "Feels like we've been SCAMMED"; "Solar Zero sales tactics are misleading. They fail to disclose all the associated costs. We're now paying more for power than ever". Tarrant says she had "no reason to believe there was a problem" with Solar Zero. She mustn't read reviews. Why would she want to anyhow, when her argument is that we "lent on the receivables"? The fundamentals of underlying assets were ignored.

Most remarkably, because the NZ Green Investment Fund is publicly owned, its purchase of Solar Zero receivables has turned you and me into unpleasant debt collectors, pursuing drowning families, ordering them to keep up repayments for decades. Such harassment is now required to maintain the value of the Debt Investment sitting on the Fund's balance sheet. For those unhappy with their Solar Zero costs and panels, disputes and defaults will break out. The reviews above suggest many strongly feel they were mis-sold contracts. Why did the NZGIF turn our government - why did it turn you and me - into predatory lenders? Why transform us into bailiffs, crushing decent families who only wanted to save money and use renewable energy? Why did the Fund bring socially irresponsible investment banking deals of a type that caused the Global Financial Crisis to our shores? The Green Investment Fund morphed itself into a seedy debt collection agency. It calls itself Green. But that doesn't mean its Good.

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.