Saturday, May 15, 2010

Finance markets have some work to do

(First published in the Nelson Mail and Manawatu Standard, May 12).

What an unedifying spectacle it has been, watching the local fallout from what is now commonly referred to overseas as the GFC – the global financial crisis. Barely a day passes without fresh reports of the carnage suffered.

The recession has been no respecter of reputations, taking down some big names along with countless anonymous small investors. Many will never recover.

Take Craig Norgate. Prior to the first ominous rumblings in the financial sector, Norgate was a powerful player in agri-business whose every move was closely watched. Now his empire is in tatters and the wealthy McConnon family of Dunedin, who threw in their lot with Norgate when he was on the up and up, appear to have gone down with him to the tune of $40-odd million.

The most spectacular collapses, though, have occurred in the property sector, which seems to operate on the delusional belief that development booms will go on forever. Many of the finance companies that failed did so because they were grossly over-exposed to highly speculative developments, and often were engaged in related-party lending – in layman’s terms, taking money from investors and passing it to mates.

At best, those involved were over-optimistic and probably greedy. At worst, their behaviour was criminally reprehensible.

In the aftermath of the various company crashes, recriminations have been flying in all directions as those involved seek to escape responsibility, point the finger of blame elsewhere or salvage whatever spoils they can get they from the wreckage. Last week, investors in stricken property company DNZ Property Fund were baying for the blood of the company’s directors, two of whom – astonishingly – were still demanding to be paid $43 million for their management contract even as the company was struggling for survival. Audacity hardly begins to describe it.

In addition to the predictable assortment of opportunist scoundrels, arrivistes and fast-buck merchants, the recession has sullied the names of some pillars of the establishment. Prominent lawyers – the sort of well-connected people the Australians call silvertails – have been implicated in the collapse of several dodgy companies, demonstrating once again that membership of the right clubs is no guarantee of either business acumen or probity.

Most sensationally, two former Cabinet ministers – Remuera blueblood Sir Douglas Arthur Montrose Graham and former Labour Party Justice Minister Bill Jeffries – face charges which, theoretically, could see them imprisoned. Both were directors of the failed Lombard Finance. (Two of Sir Douglas’ former Cabinet colleagues, Wyatt Creech and John Luxton, may count themselves lucky to have bailed out of another failed company, Blue Chip Investments, before it crashed.)

That’s another lesson each generation apparently has to learn all over again: that the presence of “solid” public figures on a company board – or, for that matter, endorsements by TV newsreaders and famous sportsmen – doesn’t guarantee a thing. In fact they should probably be read as warning signs.

As I say, not a pretty sight. In many ways it’s a replay of the 1987 collapse, when people with more ambition than ability over-reached themselves and took thousands of gullible investors down with them. Indeed, some of those involved in the 1987 fiasco have cropped up again, like the proverbial bad penny – most notably the egregious Rod Petricevic of Bridgecorp.

Naturally we feel sorry for investors who have lost their savings, particularly those who were counting on it for retirement income, but many must accept some responsibility for their own fate. Doubtless some were naïve and some were misled by unscrupulous advisers, but others, dazzled by the interest rates offered by finance companies of dubious repute, allowed greed and hope to get the better of common sense.

I remember going to see a Wellington investment manager, a shrewd and respected operator, in 2003 and showing him a fistful of finance company ads clipped from the business section of that day’s paper. Even then they were offering generous interest rates. I asked him what he thought of these companies and his reaction surprised me. Normally the most mild-mannered of men, he gestured contemptuously, almost sweeping the ads off his desk, and said he knew nothing about any of these firms.

Given that he was one of the country’s most experienced investment managers, the message seemed plain: steer clear of these outfits. I did.

One potentially long-lasting consequence of the financial crisis is that New Zealanders once again will become gun-shy about investment, cautiously placing their money in Kiwi Bonds and term deposits or reverting to the time-honoured reliance on property.

That could be damaging to our fragile economy because the private sector depends on investment in business enterprises, principally through the share market, to promote growth, employment and prosperity. But you can hardly blame people for backing away from shares in the current climate. Their confidence in the entire business sector is likely to have been severely shaken.

My own fingers have been burnt too. My wife and I had a relatively modest investment in a company – not a finance company, but a firm making a widely used and apparently good product – that went belly-up last year. I still don’t know why it went belly-up, because no one from the board or management has had the basic courtesy to explain to us, as shareholders, what went wrong and why our money disappeared into a black hole.

Even though this omission breaches no law, it struck me as showing contempt for the shareholders. And while I still have investments in other companies, and have read all the research that shows that the share market usually generates a good return over the long haul, that experience has made me sceptical about shares and reluctant to invest in more. It has left the impression that the market is opaque, and favours insiders with the time, the contacts and the expertise to know what’s really going on.

If I multiply my own disenchantment by the number of people who have taken far heavier hits, the finance markets have a lot of work to do to win back people’s confidence.

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