Written By: - Date published: 2:48 pm, July 24th, 2008 - 54 comments
Categories: economy -
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With the collapse of Hanover Finance, the 25th finance company to go under, Hanover co-owner Mark Hotchin has declared ‘the finance companies’ model is broken’. Here’s an illustration of that model:
I think they went wrong at step 1. Of course, as always, it’s the schmucks who lent Hotchin and Watson the money who lose out. Meanwhile, construction work on Hotchin’s $30 million mansion continues.
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I don’t think step one is part of their model in reality.
It’s actually
Step 1: Trust house prices will go up really fast for 4 or 5 years, long enough to make it look like you’ve made huge profits on paper so your depositors won’t complain when you draw truly obscene ‘fund management’ fees.
Step 5: Realise that all your paper gains were actually a crock, and watch company fall into receivership. Cackle over the fact that your ‘fund management fees’ are not a company asset, flip your investors the single finger salute, and move to hawaii.
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‘Silly’ and ‘Schmuck’ – yeah.
‘Greedy’ though is perhaps a little harsh. People are told all day and all night to invest in their future and plan for their retirement, and these finance companies have been largely unquestioned until they all started falling over.
Despite being a liberal at heart, I think the government should try to protect people from their own stupidity. Problem is that whenever it does it’s accused of being a ‘Nanny State’.
Govt: “Hey, dude, don’t stab that knife into your hand, it’ll hurt”
Family First supporter: “THE GOVERNMENT IS INTERFERING WITH MY FREEDOMS!”
yeah, greedy is harsh but this is all a bit of a reflection on the babyboomer mentality. They’ve had it all their own way since they were teens – policy and the economy has moved to suit them for decades (hell, who is the Cullen Fund for?) – and the gimme gimme attitude saw them get into property speculation directly or indirectly because they expected high returns and didn’t think risk applied to them. Of course, they were all betting that each other would keep on betting more, so it came falling down in the end.
Just out of curiousity, if say Kiwisaver funds were invested in such a scheme would they still be consdiered greedy?
MikeE. Not worth the hassle of your ilk running distraction, I’ve removed the word.
Well MikeE, if someone invested retirement funds in get-rich-quick investments, wouldn’t the answer have to be yes? If KS fund managers are doing this with, say, more than 20% of their fund, I’d like to know who, so I know which funds to avoid!
Another one bites the dust, but Aunty Helen won’t worry as the big bad wolf can’t blow her house down.
Edit – I meant houses and I do huff and puff.
Matt – Look at the Aussie managed funds.
Avoid ALL of them! I ticked the big ‘ol conservative box. I don’t mind taking risks, but I’ll do it myself so I can see what’s going on rather than trusting some asshole fund manager who “just wants to get out before it all comes crashing down”. The quote is from a couple of traders in the UK… though I think they had “house of cards” in there somewhere.
Always thought that was a bit unfair… houses of cards are built on solid design principles and are quite sturdy really!
That’s erie d4j, Lukas was right, you and Trav do sound just the same!
SP – T-Rex
While I pretty much agree with you wholeheartedly, I think there is substantive room for some regulatory body or regulations regarding disclosure from these companies – if you looked at a large portion of the investors you’d see elderly who probably thought they were doing the right thing and believed their money was as safe as being in a bank.
T – Rex be well warned there is only one dad4justice!Who the hell is Trav or Alex Burns that cost me two months !!!
HS – Every such company is required to make available an ‘Investment Statement’, which details how they’ll behave etc etc. The thing is that something like ‘risk’ relies so heavily on a value judgement that it’s almost meaningless in such a form.
I can’t see how it could be regulated without the govt being, probably rightly, accused of undue meddling.
Sueing all the directors for negligence (for which they CAN be held personally liable) would be a very, VERY good start in my opinion. Off you go people, if you lost money in a finance company and you’re not pursuing a personal liability claim you should get on it.
You must be a lawyer T-Rex.As you know it’s very expensive and time consuming trying to sue for negligence ( thank you Minister of Courts Rick Dumb Bell).Lawyers always like meandering civil cases!~!
No, I’m not. But fair point.
Ok – better idea – “If you lost money in a finance company and you’re not getting a mob together to lynch the directors and demand they return the money they made through directors fees then get on it”
I just love those cartoons. Especially the rabbit and the piggybank.
Agreed T -Rex, hang em high, hang em all.
Edit ; Steve – I like the bottom cartoon as I am sure its the good Doctor Caustic Cullen in the vault?
Whats up Doc ?
T-Rex basically got it right in his first post. I would add:
(1) It seems to me that in step 2, the finance companies didn’t actually need to offer terribly high rates due to many NZers’ low financial literacy, and didn’t. Part of the problem was that the rates didn’t reflect the risk, which in turn mean that the warning signals weren’t there. I was happy to hear Diane Crossan on NatRad today outlining steps to increase the teaching of financial literacy in schools. Why has it taken so long?
(2) Where’s the National Party on this? We do need better governance requirements, oversight, etc in the financial sector, but the neo-liberals prefer wild-west light regulation and don’t give a damn about the “schmucks” as you call them.
(3) I blogged on this yesterday.
I’d say that, due to low financial literacy, NZers don’t equate high returns with risk at all.
Definitely something that’s needed. IMO, a significant reason why a lot of people are poor is because they don’t understand the financial system.
I am heavily entangled in this area. Your assessments imho are in the vicinity but wobbly. A few two cents’s..
Investors should do their homework more. I borrow from these organisations, and I warned my own parents about investing in them (and they are so very thankful now!). It was well known what the business was – borrow from the public at say 9% and lend to others at say 15%. It was not hard to find out where and what the finance companies lent the money to. Generally more risky property ventures (not overly risky, just more so). The question each person that invested in these outfits should have asked is: Would I put my own money directly into these property projects that these outfits lent my money to? If investors had asked that particular question they would have, I reckon, said NO lets put our money elsewhere because that development is too risky for us.
So, why was that question not asked? Financial advisers who advised Bridgecorp Hanover etc and got a heavily conflicted commission? Lazy investors who saw an extra 2% per annum and couldn’t be bothered reading the prospecti? That question is for someone else to answer.
Now its a stampede. Immensely simple equation here – if everyone asks for their money back, who then is re-investing to enable that money to be paid back? Answering against the stampede now – if everyone had remained calm and kept investing in the same manner as before and getting their 9$ per annum then this would not have happenned. So, investors in dorchester provincial hanover north south east west, you are the author of your own demise. But go against the herd at your own risk … hence the strain to be at the front of the queue (should I dare mention pulling your money from the foreign owned banks Westpac, BNZ, ANZ, ASB, etc? it doesn;t bare thinking about that particular consequent calamity)
The owners and operators of these finance companies were generally prudent wise business folk who got caught up in things as much as anyone else. Don’t go looking to them personally for reimbursement – that shows huge naiveity and immaturity. The limited liability company was created to allow people to take business risks without putting their personal position at risk. This creation, back in the 1700′s, is more responsible for the comfortable state of the mostly western nations who have made use of the limited liability company than almost anything else in subsequent history. But it obviously comes with a risk. One of those risks has just come to fruition.
If I can be brutal to all those caught – grow up.
(but that doesn’t help those whose life-savings are now gone. sad very sad. if its any consolation we are about to be donged on the head too)
First time I’ve seen a documentary in cartoon format. Well done.
Steveo,
One point, mate and its a bit technical but what the hell.
Hanover has not gone under YET. They have placed a moratorium on repayments which is quite a bit different. It doesn’t mean that all is lost at this stage ( though admittadly it is shakey).
I have been in the industry (property and development) and know full well the place that second tier lenders occupy. Granted it is riskier however the rewards are generally higher than, say, the banks.
In good time, people are happy to take the risks and perhaps should do so as PART of a diversified portfolio (I welcome the suggestion of more training in financial literacy for this reason) as it can improve the performance of said portfolios.
To have a crack at Hotchins is a bit puerile though, steveo. The guy put his bollocks on the line and has created a lot of wealth for ordinary New Zealanders over the past few years. So what if his house is bigger than mine or yours, a great many people have been able to make a lot of money off Hanover and, if he and watson front up with a sizeable chunk of cash to ensure Hanover’s survival, I would be impressed. It is entirely disparate from the likes of Petrecivic who, it looks like was raping Bridgecorp knowing full well it was going down the tubes.
The current economic situation is largely to blame for this – not how much the guy is “alledgedly” spending on his house.
The punters think a currency speculator/merchant banker will be a ‘safe pair of hands’to run the country. Talk about lack of financial literacy. It’s a pity Watson and Hotchin aren’t politicians, they’d be polling through the roof, they’re much richer (safer pairs of hands) than Mr Key.
(safer pairs of hands)
Wrong PA, when pretty boy Watson had the blow hard lemons -the Warriors they dropped more ball than safe hands Burnside Rugby Key boy.
Dad, suggest that you not only sign up for Financial literacy courses but for ordinary english comp as well.
Great one Brownie, I suggest you got back to sleep. What a mullet.
Hi Steve,
You might want to have a look a beautiful model for fraud.
It goes a long way into explaining why John Key and National don’t stand up for what will be a large portion of their voters; middle class mom and pop investors still believing that they too can reach financial independence.
Slippery John was after all the head of the European department for Bonds and Derivatives for Merrill Lynch. He may very well have been peddling crappy bonds to our very own collapsing Finance Companies or to the institutions that those companies relied on for refinancing. I would sure like to ask him under oath.
T-rex,
Still fighting to regain your comfort zone I read. You become smaller and more pathetic with every attempt you make at bullying and stigmatising me.
It is just not going to happen, let it go. Chill, have a long cold shower or a w*^k or something. Perhaps you should lay of the Standard for a bit and get some fresh air. Your beginning to look a tad obsessed with the failed debunking bit. LOL.
It is a fact that another finance company just bit the dust so it is very likely people will use the same term.
You are right d4j there is only one d4j.
Misogynist and angry to the bone.
I’m definitely not in your league.
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Please stop talking to me.
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Brownie – The point that Hanover has not gone under is a fair one. Freezing repayments is a reasonable action. I don’t even know if I’d go as far as to say it’s even ‘shakey’ – as long as their lending has been reasonable then it’s highly likely all will be repaid in time.
However:
1) “Granted it is riskier however the rewards are generally higher than, say, the banks.”
I haven’t looked at the particular case of Hanover, however most of these finance companies don’t seem to have even come close to paying an adequate level of interest to make up for the increased risk.
2) “In good time, people are happy to take the risks and perhaps should do so as PART of a diversified portfolio (I welcome the suggestion of more training in financial literacy for this reason) as it can improve the performance of said portfolios.”
Ya reckon? As above, I’m unconvinced that the return has justified the risk in examples to date. But certainly I accept it COULD be true in future if lenders were more prudent.
The sad thing with the finance companies is all the risk is carried by the ‘investors’ and little or no risk is carried by the ‘fund owners’. The Rod Petricevic’s of the world have all their assets in trusts and they can’t be touched. They also help themselves to large management fees all paid for by the Mum and Dad investors who have trusted them with their retirement savings.
As well as relying on the property market having long term high growth they also rely on more money going in (or staying in) than coming out, it is a house of cards that really only has one possible outcome and that is collapse.
I do hope that at some stage, someone is held accountable, it is pretty clear that behind the scenes they are aware of the impending collapse of their finances yet still carry on with their ‘safe-as’ or ‘weathered all kinds of storms’ advertising campaigns.
“Misogynist and angry to the bone.”
How could this be pathetic tulip? FYI my house is home to many ladies.
What a clog hopper, surely your home land calls for another finger in the dyke.
Nice post T-Rex.
Generally the 2nd tier providers were offering up to 1 – 1 1/2% higher, which is, if you had $250,000 invested is a goodly sum. Taking that on average, every investor in Hanover is ON AVERAGE has invested $37k, it doesn’t sound a lot but 1% of $500m is.
With regard to your second point, I think that this is the part where regulation could play a role. I think that there have been far to many “cowboys” out there playing fast and loose with other peoples money and, when they tumble, have affected the better ones such as Hanover, in a far more serious way that the situation dictates.
“I do hope that at some stage, someone is held accountable” – I wonder if the govt could fund a class action personal liability suit. Would probably be cheaper and more effective than regulation
With all these finance companies going down and some alleged skullduggery I cannot for the life of me understand why Labour removed the Serious Fraud Office?
d4j,
I rest my case. LOL.
T-rex,
My pleasure. What’s with the arrows anyway?
Travellerev.
What a crap post, full of insinuations that are not backed up by the facts.
Forget that Slippery has been out of that business for a while, forget that most of the 2nd tier lenders have based their portfolios on property which the Reserve Bank took the acid to.
I know that my middle class family is struggling a lot harder under 9 years of governance by Labour than someone that hasn’t had a chance to do things his way yet. Its just a fact that most other middle class AND lower class famillies are struggling to. That it has happened under Labour’s watch is a fact.
Is it all Labour’s fault? No. They can’t help what happens to the world economy.
So why try to blame Key? You must have taken a leaf from Winston’s book and are trying to paint a picturte without base, truth or evidence and are just sensationalising, trying to create a climate of fear.
I suggest you take up writing fiction, you seem to have a talent for it instead of trying to debate the issues and offer constructive reasoning.
If you had your way it would be Aotearoa: The Narrowest Perspective
“1 – 1 1/2% higher, which is, if you had $250,000 invested is a goodly sum”
This is my point right here. That is low. Even for commercial property. For consumer lending it is simply disgusting.
Current call rates are 8% in RaboPlus – risk ~ very low.
You’re telling me you think 9.5% is remotely attractive?
Let’s assume you put 1k in each of 10 banks, and 1k in each of ten finance companies.
Ok, I’m not going to copy and paste the spreadsheet, but if I get time later I’ll graph it and get Steve to post it up – but suffice to say that at those relative interest rates (and assuming no bank failures), to break even you can have ONE of your finance companies fail every 8 years.
Over 10 companies, that means an annual probability of failure of 1.25%. Given recent events, I think it’d be pretty hard to argue the true probability is that low.
Looks like something a twelve year old would do. LOL