Finance melt-down continues

Another finance company goes under today. $554 million frozen. Hanover is/was one of NZ’s biggest finance companies, and had a respectable (though not quite investment grade) rating from an international ratings agency.

As I posted a few weeks ago, the finance sector is in meltdown. Even well run and long-established companies have been caught by an unprecedented pincer of collapsing reinvestment rates and cancelled credit lines on the one hand, and a tanking property market on the other.

Hanover is to be applauded for taking this action while it still has a “cash positive position.” It is prudent, with things the way they stand, to act early before things sour too much, and preserve something of the investors’ cash. Interestingly, one of NZ’s wealthiest men, Eric Watson, is a major shareholder in Hanover.

Economists have debated the impact of the melt-down, with some pointing to the long-term problems funding property development and the like if kiwis shy away from the finance sector in the future, others saying it’s just a money-go-round (shit happens, you know), and others pointing to the impact on disposable income — on this last point, freezing another half billion won’t help much with consumer spending.

You won’t hear too much from the Nats, because they’re the ones who most favour light-handed regulation of our financial sectors — Doug Myers led the way with the sale of his brewing interests to the Japanese at the expense of small shareholders, remember. They’re also the ones most opposed to any government intervention in the market place, such as helping out failing finance companies.

What these people fail to realise is that a deregulated market will be exploited by those who can profit from exploiting loopholes and who have access to information that others don’t. With NZers’ low standards of financial literacy, information asymmetry seems an understatement. The victims are so often honest, hard-working folk who lose their life’s savings or a big proportion of them.

There’s not a lot that any Government could do right now, given that things have reached this point. Since my last post we’ve seen further movement on investigating and prosecuting those in the shady end of the business. But that won’t help rebuild the finance sector on a sounder footing that will restore kiwis’ trust and confidence.

What we need now is a careful investigation into what happened and how the finance sector should best be regulated in the future. And a lot less ideology in regulating these sectors.

Update: According to TVNZ news, Bruce Sheppard says that “investors would be nuts to approve a moratorium. He says company directors Eric Watson and Mark Hotchin pulled at least $20 million in dividends in the last 12 months, and only a liquidator can claw that back.” but it looks as though the directors, who include Sir Tipene O’Regan, acted early as they are bound to, to protect investors’ interests.

Update: TUMEKE! has a series of posts about Hanover’s collapse. Good stuff and well worth a look. Not sure that I am that reassured by the Hotchin’s and Watson’s “continued support for the business”. That’s the “business” and not the investors we’re talking about. But then again, Hotchin and Watson now have to convince the investors to accept their restructuring plan if they want to salvage anyting from the wreckage, so if they want to continue to have a business they need to think hard about keeping the investors happy.

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One Response to “Finance melt-down continues”

  1. adamsmith1922 Says:

    JP

    Watson is not our wealthiest man by a long shot.

    On regulation I agree with you.

    When I arrived in NZ in 1989 I thought I had come to the Wild West.

    Actually this is an area we could have an interesting debate on, as are one or two others much like Becker/Posner, interested?

    Thanks Adam. Fixed. On the debate, doesn’t look like we’ll get it in the Herald’s news pages — the slags are only interested in the ‘human interest’ stories. Still, there’s Brian Gaynor on Saturday…

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