Uncovering The Truth About The "Bailout"

I wrote this post in response to the mass of uninformed and confused commentary spreading like a virus across the blogosphere about the collape of South Canterbury Finance. I ain’t no Fancy-Dan finance whizz, but some things are pretty clear, nevertheless.

Here are seven of the things people are saying about the SCF mess that I think are wrong. 

This is a government bailout.

Some people appear not to understand the difference between a bailout and a guarantee scheme, and happily conflate the two. This is not a “bailout” in the way institutions in the US that were “too big to fail” were rescued by huge amounts of government largesse. It is not “corporate welfare”, except to the extent that some of the retail depositors will be companies. The owners of SCF will get nothing from this.

The retail guarantee scheme should never have been extended to finance companies

Had it not been extended to cover all significant institutions where money was invested, almost every finance company would have collapsed in 2008. Sure, many of them collapsed anyway, but the effects of all of them falling over overnight, as investors frantically tried to pull their money out, would have been potentially catastrophic.

How come the Government can instantly find $1.6 billion to pay a few thousand investors when it says it can't afford pay rises for teachers? It's a have!

The Government has contractual obligations under the retail deposit guarantee scheme. It is not choosing to pay SCF; it is fulfilling an obligation. The Government had set aside in its books about $900 million to cover expected liabilities under the scheme, so it's not as if all the money has been suddenly found from nowhere.

And, yes, teachers deserve more money, but that's not a related issue. 

The owners of SCF should be made to pay, not the taxpayer

They are paying a heavy price. They will lose everything not covered by the deposit scheme. The Crown will be a first secured creditor over the company, meaning it will take out what it is owed under the guarantee before the owners receive a cent. Given there is expected to be a shortfall of $600 million or so, that means everything Mr Hubbard has put into SCF is likely to be gone forever. 

This is all the Government’s fault

Only indirectly, in the sense that decades of politicians worshipping at the altar of deregulation has left us in a situation where our financial and capital markets were operating like the Wild West. But that’s where the blame should end. This was a business failure, and the people who are to blame are those who ran the business into the ground. Those who say the government caused this failure by its SFO investigation and statutory management of Hubbard are ignoring the fact that several months ago Hubbard was effectively sidelined from the business by his own board. It appears the board saw the damage he was causing and tried to get rid of him, too late. This hasn’t just happened – it’s been bubbling away for months.

In fact, as much as I would love to, I can't fault the Government on its response to the crisis. Labour's attempt to make political mileage out of this is pathetic. 

This latest failure shows capitalism doesn’t work

No, it shows that unregulated capitalism doesn’t work (note to ACT Party: Don’t you look like fools now?). If we had a decent set of financial disclosure regulations, and a regulatory watchdog with some teeth, maybe some of these rotten companies would not have got so big before failing. 

The retail deposit scheme was set up to favour the rich – who happen to mostly vote National

No. Dr Cullen set the scheme up. Hardly a National man. He did so to restore confidence in our financial markets, and to avoid a catastrophic collapse that would have made Iceland seem an attractive place to do business by comparison.


Discuss.