Taxpayers set up to take the hit

The company has been nationalised just long enough for its debts and liabilities to be transferred to taxpayers before it is sold off by the government.
September 2, 2010

Taxpayers set up to take the hit
John Minto

The most surprising thing about the bailout of South Canterbury Finance is that it has passed without much more than a ripple. It seems we have become so used to being fleeced by corporate incompetence that the eye-popping $1.6 billion government bailout isn't worth more than a shrug.

The company has been nationalised just long enough for its debts and liabilities to be transferred to taxpayers before it is sold off by the government.

Some of the SCF assets are apparently performing well and Prime Minister John Key says there are several potential buyers for these money-making investments. In other words the scavengers are circling, waiting to pluck the plums from Hubbard's pie after the rest of us have been force-fed the indigestible lumps.

As well as the $1.6 billion bailout the taxpayers are also providing a $175 million loan so the company can pay its immediate debts. So how does the government explain the bailout to us mere mortals who are footing the bill?

Finance Minister Bill English says there's nothing to worry about because the expected loss after the plums are sold will leave just a $600 million loss for taxpayers and since the government has budgeted $900 million for its deposit guarantee scheme we are still in credit. Well done minister! It's just like the big sales where if you spend $1000 on a new fridge you will save $200. Except in this case we didn't need the fridge and it's busted anyway. Bill English missed his calling - he should be selling bicycles to fish.

There's much more that should be revealed about this deal. It's clear the company was in trouble and known to be so by the government at the time it was allowed to enter the cover of the deposit guarantee scheme. It seems clear we were being set up to take this hit by Bill English and the farming lobby.

Prime Minister John Key expects yet more finance companies to collapse. I've lost count of the numbers in recent years but it must be over 30 of our 70 or so. The most high profile previously were Bridgecorp, Hanover Finance and the misnamed Blue Chip property investment group. Investors in these companies lost out while SCF investors are covered by the deposit guarantee scheme. In any case it seems that SCF was much larger and so interconnected with the economy it couldn't be allowed to fail - not to mention the power of the farming lobby, which would have suffered the most without the bailout.

The lack of courage of our government dealing with the private sector was highlighted by the fact the government extended the payouts to SCF investors to cover people not in the deposit guarantee scheme, such as foreign investors, who John Key says could have been able to order fire sales of assets to recoup their losses despite being just small investors. A government worth its salt would have stood its ground and prevented such a fire sale while saving us at least a bit more of the loose change.

The government is planning to set up a new body to oversee the finance sector next year but it will be too little, too late. It seems clear its limited powers are designed to build confidence rather than deal effectively with these recurring crises in capitalist markets. We will continue to face the worst of both worlds.

The broader issue is the country's reliance on a half-baked financial sector and consecutive governments with self-imposed impotence. We have our economic development in the hands of the likes of Rod Petricevic, Mark Hotchin, Eric Watson, Mark Bryers and an 80-year-old whose financial records are kept on the back of envelopes.

It's the old story of capitalism on the way up and government bailouts on the way down. We will know taxpayers are winning when we have a government prepared to do the opposite - nationalise profitable businesses (rather than the lemons) for the benefit of the community and leave the capitalists to stew in their own fetid mess.

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