Finance Companies

Elijah Lineberry's picture
Submitted by Elijah Lineberry on Wed, 2007-08-29 20:19

As I write this a seventh finance company in New Zealand is about to collapse.

The announcement will be made in a couple of hours or so, according to the NZ Herald.

It has been a source of great delight to me these slimey financiers are dropping like flies as a result of their idiocy and bad management, and I suspect there are another half dozen companies who will collapse before the year is out.

I am taking bets from friends as to how long Geneva Finance lasts, (owned by yet another 1980s 'wide boy' who came to grief), once their 2 year Debenture notes start falling due in a couple of months time.

One aspect of this whole matter which has intrigued me is the drying up of investment money lodged with finance companies.
The owners and managers are saying "The rate of reinvestment has been cut to zero and that is why we are going under".

I find this absolutely shocking!

What it means is the entire finance company industry was a 'Ponzi Scheme', with total reliance on using the money of new investors to repay existing ones ...with a tacit endorsement from Lianne Dalzell about this being standard business practice!

Had these companies been more prudent in their lending and management there would have been no problems with redeeming investments as they fell due.

The Bridgecorp collapse I saw coming, and my only surprise was that it took so long!
I analysed their balance sheet and other information back in 1999 and commented at the time they were more or less insolvent, and can only express admiration Rod Petricevic managed to get away with his nonsense for another 8 years.


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I

Elijah Lineberry's picture

think that last message was for you, Nickotani Eye Sticking out tongue

You

Elijah Lineberry's picture

heard it here first folks....TWO weeks before anyone else mentioned it!

For those who think thousands of elderly people holding debentures are not going to be told to 'whistle for it'...cast your mind back a couple of decades to Chase Corporation Eye

Oh how history repeats...

One

Elijah Lineberry's picture

thing I have noticed since the turn of the century is how "history is repeating".

There have been remarkable similarities between New Zealand in this decade, with Britain in the 1970s.

In the early 1970s Britain went mad in economic matters...credit controls were cut, and credit was expanded, there was a property boom out of all relation to fundamentals, there was a sharemarket boom, consumer credit (and debt) ballooned.

There are other parallels such as terrorism, unknown in the 1960s, becoming a major problem in the 1970s... an oil shock, free trade agreements (Britain joining the EU, NZ with Chile, Malaysia, Singapore etc)...so many things.

It is quite remarkable the similarities.

Brian Gaynor suggesting the Reserve Bank bail out Finance Companies is the latest similarity, and I feel I should explain why I am against such a course of action...

In 1975 the Bank of England bailed out what the British called 'Secondary Banks', more or less the equivalent of Finance Companies in NZ.

This was because during the first half of the 1970s British Secondary Banks had gone mad like everyone else.

Loans were made to spivvy Property Tycoons (cannot think what that reminds me of) ...consumer credit provided to people who may not have the incomes to qualify for loans (but what did it matter in 1972 when everyone had gone mad)...and some "novel" proposals had been lent money and given a trot etc. etc.

Inevitably the crash came, the Bank of England stepped in with a bailout.

A substantial amount of fraud, absurd lending policies, related party loans of the Bridgecorp variety and other nefarious activities came to light.

The poor old British central bank had to cover these losses, and indirectly the British taxpayers through a hike in interest rates and I do not think we should go down the same road in New Zealand today.

If intelligent Adults set up a Finance Company, make loans of an unwise nature and it all turns to custard...(despite some of us warning what will happen) Eye ...that is their problem.

Why not bail out Feltex shareholders? or Sheep farmers experiencing a difficult season? or go through the Public Notices section of the NZ Herald for the Applications to put companies in liquidation and bail them out?

People should take responsibility for their actions they voluntarily entered into.

Another

Elijah Lineberry's picture

one bites the dust.

http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10461596

LDC finance based in Nelson.

I notice they specialised in Property Developments Eye Sticking out tongue..gosh..what a surprise Sticking out tongue

Yes

Elijah Lineberry's picture

Julian, I did not make myself very clear.

When I said I was delighted, I was meaning that Finance Companies engage in lending money to property developer cowboys.

A businessman with a 'proper' business, with proper customers, making proper profits is wasting his time seeking a business loan from any of these Finance Companies...(gosh, he may be making a profit and want to engage in exporting, job and wealth creation)....whereas slimey 'flash harry' with his cheap jewellery, vulgar suit and dolly bird girlfriend seeking a couple of million for a dubious real estate development is welcomed with open arms and has (superannuitants') money thrown at him.

Then everyone (right about now) stands around scratching their heads wondering how it all turned to custard.

Elijah, I take no delight in

JulianD's picture

Elijah,

I take no delight in seeing companies fail. It is actually rather sad since many good people loose considerable sums of money as they have in this case. One can question their wisdom in choosing the investments they did, however it is certainly nothing to take delight in.

Having said that, bankruptcies play a very important role in the market. They are necessary in order to incentivise companies to use capital efficiently. They are very important in other words. And yet, at an individual level, diversification means that bankruptcy should not impact on any one investor greatly.

One can question the management ethics of many of these companies, however I am more interested in what appears to be the systematic failure of auditors/analysts/investment advisors over the last two or three years to accurately quantify the risks involved here. I am sure that this string of failures will impact on the reputations of these aforementioned groups who were entrusted with monitoring these companies. This will result in better capital allocation in the long run. That is the only good thing I can take from this.

Julian

It

Elijah Lineberry's picture

is Five Star Consumer Finance, the latest domino to fall.

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