Boscawen John: Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
Boscawen John: Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
[Volume:657;Page:6122] 
JOHN BOSCAWEN (ACT) 
: 
 I start by addressing some of the issues raised by the Opposition about the Crown Retail Deposit Guarantee Scheme Bill. Opposition members talked about the growth in the finance company sector as a result of the guarantee that was introduced last year. They said deposits into the finance company sector had been declining but following the introduction of the Government guarantee last year those deposits had taken a turn and were now going upwards. 
The first point is that we need to acknowledge that it is good to have a very strong secondary market beyond the banks in the non-banking sector and to use the words of the Minister of Finance to have someone to fund the diggers and the trucks. I ask Opposition members why they would not expect deposits to grow. Of course we would expect them to grow. Since the guarantee was put in place 12 months ago for a 2-year term anyone lending to a finance company was basically lending to the Government. People were lending to the Government for a period of up to 2 years; as long as their deposit did not go beyond I think 14 October 2010 they were lending to the Government. 
The guarantee that was put in place did not actually cost most finance companies anything because the guarantee was priced on a figure that was based on a margin over a company’s loan book at the date plus a 15 percent margin. If a finance company owed its depositors and equity holders $100 million and had invested $100 million it was able to get the benefit of a Government guarantee for free as long as its loan book did not exceed $115 million—so the base loan at the date the guarantee was introduced plus a 15 percent margin. 
I thought that the Hon Lianne Dalziel gave a very interesting commentary on this bill and I accept her concern that it was introduced at a very late stage. The Labour Opposition has a genuine reason for expressing disappointment that it was not given copies of the bill earlier. But Lianne Dalziel talked about privatising the gains and socialising the losses. It was the guarantee put in place by the previous Labour Government that privatised the gains and socialised the losses because although there was a need for a guarantee and although it was put in place because of international circumstances it could have been priced entirely differently from how it has been. It would have been quite possible to put a pricing structure in place that had the finance companies paying for the benefit of what they got. In essence the previous Labour Government gave a free gift to the owners of those finance companies. It was the Labour Government that ensured the gains were privatised. 
I say that because within a day of the guarantee being put in place on that Sunday on the Monday I had emails inviting me to invest in various institutions. I was told the investments would meet the requirements of the Government guarantee and I could invest in a particular institution and earn an interest rate of 7 8 or 9 percent—and many people did. The finance companies were flooded with money and that is why we had a growth in deposits. Those companies would have moved to drop their interest rates had they needed to pay the full price of the Government guarantee. So of course there were distortions and those distortions were generated because of the structure that was put in place. 
Hon Clayton Cosgrove 
: So were you against our guarantee? 
JOHN BOSCAWEN 
: No I am not against the Government guarantee I say to Mr Cosgrove. What I am concerned about is the way that it was priced. If there was any reason to privatise the gains and socialise the losses it arose from the way that the previous Labour Government priced the guarantee. 
Let me move on. The Hon Lianne Dalziel made the very good point that a lot of investors have absolutely no idea of the risks they are taking. I want to come back to an issue that I raised in this House last night and to talk about one particular finance company. That company is Strategic Finance. That company went into a moratorium. It had its bondholders its note holders and its debenture-holders vote for a moratorium on 22 December 3 days before Christmas last year. The company owes roughly $400 million to its debenture-holders and its creditors. On 15 July this year Strategic Finance announced that it anticipated making a loss of $98 million and that was reported in the  
New Zealand Herald 
. But the report went on to say that the loss might be bigger than that as the company was still discussing its accounts and was yet to finalise them with its auditors. Strategic Finance stated rather surprisingly: “It is the Board’s assessment that the provisional full year results have no impact on the forecast repayment of 100 cents in the dollar of principal and all interest to depositors debentureholders or the prior ranking BOS International (Australia) facility.” It announced what amounted to a loss of a quarter of its loan book but it said that would have no impact. 
Ten days ago Strategic Finance said the accounts were out the auditors had signed the accounts and it now looked as though the loss was $180 million. That is double the earlier anticipated loss. The company owned up to its investors and said it will not be able to pay out 100 percent of their invested funds to them. It said it looks as though the amount will be from 85 percent to 93 percent. If ever there was an example of investors slowly being let down then this was it. On 22 December voting for a moratorium was held where investors were promised that the base-case projection was that there would be full repayment of principal and interest. In July of this year they lost a quarter of their investment and by the end of August they had lost half of it. 
But the situation is worse than that. There is at least one transaction—there may be more but I have been advised of one—where the money lent by Strategic Finance on a second mortgage was in two tiers. There was a priority second mortgage and then the regular second mortgage. Part of that advance has been lent from funds raised from a privileged group of people who have prior rights to repayment of their money over other contributors to that second mortgage. That group of people also have prior rights to payment of their interest so they have priority as to security and interest. I understand that some of the people who contributed to the top part of that second mortgage were still being paid an interest rate of 17 percent up until quite recently. 
The tragedy of it is that the mums and dads the people who do not comprehend the risk they are taking the people whom Lianne Dalziel referred to when she said that such investors had absolutely no idea of the risk they were taking—all those people—rank in the bottom half of that second mortgage. Essentially it is a third mortgage. The first mortgage is to the Bank of Scotland International as the moratorium refers to; the second mortgage is to a priority group of people; and the rest is to the mums and dads who will get what is left. When markets move down and a company says property values are dropping I ask who misses out? It is always the people at the bottom. 
I am very concerned that regular mums and dads the investors in Strategic Finance will get far less than 85c in the dollar. I say this because the trustee of Strategic Finance Perpetual Trust Ltd is now in the gun. It has to make a decision as to whether it moves to put Strategic Finance in receivership. If it chooses to continue with the moratorium I believe that matter needs to go to a court. I believe Parliament needs to pass legislation to provide that a company cannot simply go for a roll over of its moratorium. There has to be accountability. Independent experts have to take a closer look at the projections because surprisingly in the year to June 2008 Strategic Finance paid a dividend to its shareholders yet 13 months later it said it had lost $200 million. Clearly had those losses been known at the time no dividend would have been paid. 
This area concerns me a great deal because different classes of creditors voted on that moratorium proposal. People with priority rights would clearly have voted for a moratorium because they would have voted to protect their own interests. I come back to the point that regular mum and dad investors—many thousands of them lost their life savings—in many cases did not understand the true risk that they were taking. Thank you Mr Assistant Speaker.