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Archive for September, 2010

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Two of the writers on my Blogroll have been kinda singing from the same songbook recently: Karl Denninger and Mike (Mish) Shedlock – re the side bar. One of their pet peeves of late has been Unions in general, and Public Sector Unions in particular.  On the one hand I do know where they are coming from, although on the other hand I also think there is more to this whole story than they have mentioned. So in the first instance, lets look at the arguments they have raised.

On the subjects of unions in general, going on strike for better pay and conditions when a company is in trouble is probably not the best way to advance your cause. In fact that could well be a perfect way to send the company that employs you under; or cause them to fold their tent, pack up and move way (as in – overseas). Then you are left with nothing. I suppose that rather comes down to whether you trust and believe anything that comes out of the mouths of the management of the company you work for.  And if you don’t have a sneaking little thought in the back of your mind that if the company went belly up, then while that might be hard on you too, you really wouldn’t shed too many tears and would consider that a subtle justice for a company that deserved it.

So the arguments comes down to: are you cutting off your nose to spite your face? If you need to take a pay cut to save your job, is that better than no job at all? Do unions need to be more flexible and realistic, particularly during tough economic times?

The subject of public sector unions is even more tricky. If only because the situation with public sector Unions in the United States is significantly complicated by their Federal. State and local body structures. The argument of Mike and Karl is that in order for politicians to secure a support base, they have pandered to public sector unions and thereby created an unholy alliance that has run away to extremes. They are claiming that by capturing the political process, these unions have managed to effectively extort outrageous pay, working conditions and pension provisions that are far in excess of anything anyone gets in the private sector. As well as, incidentally, providing worse and worse services to boot – that being a result of being a monopoly provider, amongst other causes. Mike in particular goes so far as to declare that he would make public sector unions either illegal, or at the very least make it illegal for them to go on strike.

I wont bother going into all the reasons here for why he feels this way, and I do have some sympathy for his position. (go to his website and do a Search for “unions” if you are interested) The problems he highlights are real and do need urgent attention. They are issues that will arise in any situation and country that has similar institutions and politics. On the other hand, are they problems caused by the Unions, or is that just a symptom, a response to wider issues within the economy and the political system?

Our economic system, in fact any economic system, is always in a state of flux and will evolve in response to the factors working on it.  Over the last couple of decades, one of the predominant themes has been out-sourcing and the transplantation of jobs to cheaper-labour countries. The rational is simple enough – it is cheaper, it cuts costs and therefore products can be brought to market and sold more cheaply. At least at face value, that is good for the economy on several levels. As always though, the consequences and cost tend to be hidden, or lost in the shuffle.

And one of the cost and consequences is the public sector union and the “runaway” costs attached.

Talk to anyone actually in a public sector union however and they will vehemently deny that they aren’t being paid or compensated outrageously at all, and that they have in fact been going backwards for years, their cost of living is moving up faster than their pay. Also, in order to be able to retire they better damn well have a gold plated retirement scheme, because otherwise just like everything else, they will end up being nickeled and dimed into penury.

So there you have it, the two sides of the arguments: why should public servants get better pay and conditions than anyone else – particularly when the services they are suppose to provide are so poor anyway, and, “we are barely on a living wage anyway”.

As it happens, I think they are both right, and that dichotomy has completely failed to identify the real problem.

For an economy to work, you need to have a chain of consequences. Worker – producer – product – wholesaler – retailer – customer – and back to worker. If you break the chain somewhere, then the rest of the system will fall apart. In fact, if the worker at the bottom of the pyramid is unemployed, then the whole superstructure built on that base falls over. Outsourcing jobs to another country is not a recipe for success. If you can replace those lost jobs with other productive enterprises then fine. But if all you have done is simply wiped out a whole tier of the economy, then it is all going to collapse sooner or later. Which brings us back to the unions.

Over the last hundred years or so, unions have become an integral part of the political and economic system. It did not happen overnight, or without a lot of trouble and conflict along the way. However inspite of all the problems, Unions, productivity, the economy and the standard of living, all managed to rise together. Unions need not be an obstacle to progress and prosperity. They have done much to improve the working and living conditions for everyone. The weekend and the eight hour day came from union movement. Would anyone want to go backwards from that? But we are.

If you have a business that is solely instituted and tasked with providing a quarterly profit to its shareholders, is constrained by tax, material, utility costs that cannot be reduced or avoided, then the only way left to reduce total costs is to look at the labour component – the wage bill. Either you cut the number of workers, cut the pay of the workers, or move the work to another country where labour cost are lower. That is simplistic of course but nevertheless, true in essence. In fact it is so true that large sections of the worlds manufacturing have moved to Asia; notably China and India, with a few other lesser countries thrown in for good measure. Good for Asia, bad for the original countries.

It means two things, labour costs everywhere trend back towards the lowest common denominator, or they trend to zero in those jobs that have been outsourced. Progressively what was being paid to the workers and recycled back into the domestic economy is getting shrunk more and more as the trend continues – and then accelerates due to tighter and tighter economic conditions. One part of the economy can’t be isolated from another, they all ultimately feed back into each other. Begger one part and you eventually begger them all

Except that some areas are more resilient, or resistant, than others. If your job has just been sent offshore then you are screwed, there is nothing you can do about it. However, there are some jobs that simply cannot be outsourced. Government sector jobs particularly. So as more private sector jobs vanish, it becomes more and more incumbent for the government to supply jobs at home, and the easiest way to do that is expand the public sector. There are a couple of other sectors as well that also can’t be outsourced, like the building trade. I am quite sure it is no coincidence that the runaway growth in the housing market and in government departments over the last decade/s were infact linked together by macro economic changes that include outsourcing.  The sectors that could be shrunk were – and the ones that couldn’t, tried to expand in consequence. Government in so many way has become the resource of last resort. From a “golden” age around the Sixties with good paying jobs and full employment – instead of increasing wealth, productivity and education generating more prosperity and security; things have paradoxically slid the other way.

I won’t spent any time here analysing why things have gone the way they have, I will simply focus on the proposition that the natural instinct of people to hold onto what they have got has lead to a situation where the jobs that couldn’t be defended have capitulated and gone, while the ones that can be defended have remained, but come under more and more pressure. The unions have fought to maintain relativity and cost of living increases – and then only moderately successfully. While everyone else has gone backwards to the point that they are in second place now. Actually, everyone has lost, just some more than others. Blaming each other for being the problem is to miss the point.

Yes, bureaucratic incompetence and oppression is a genuine problem, but blaming the unions for that is misguided. Yes, megalithic and monolithic government is undesirable, but under the prevailing conditions, what were the options. More particularly in an unplanned, evolving system, the actions and responses were entirely natural – even rational. The government did what it is supposed to do; it does its best to protect the people/electorate. If the jobs are disappearing, then the government pays the unemployed a minimal benefit, expands the public sector to provide more jobs, and attempts to provide services that the rest of the economy can’t or wont. Of course that is doomed to failure because it is unsustainable. The current preferred political option of borrowing billions is definitely a dead-end, because pretty much nowhere in that is there any actual productivity and production.

What is needed is private sector jobs that actually genuinely produce something. And you know what, no-one really has come up with a good answer to that question to date. We simply don’t know what to do to make our societies work. We have spread manufacturing industries around the world, and made them more efficient and productive, but there still simply aren’t enough of those jobs to go around. What’s more, they migrate to where the cheapest labour is, thereby dragging down all incomes via global arbitrage. And even then, how much of our productive potential is diverted into trivial, inane endeavours like making knick-knacks and other rubbish that doesn’t last and is thrown away broken within a couple of years. We are wasting our resources; time, money and energy, doing effectively nothing. As a comment I read just a couple of days ago said, with cheap oil came a multitude of ways to waste it: jetski’s, private yachts, world travel and tourism, 4×4’s, etc, etc, etc. We waste what we have, and can’t really think of anything useful to do either. As it stands, there simply aren’t enough jobs to go around for everyone on earth.

Not jobs that pay well enough to ensure we can achieve our aspirational dreams anyway – even leaving aside how asinine most of those aspirational dreams are. So what happens is what always happens, people protect their patch.  Unions, governments, even corporations and businesses are just doing the best they can to hold it together in their own sphere of interest. Pity there isn’t really any wider analysis of our problems.

It is OK for one sector of society to stand on the shoulders of another, everything in fact ultimately stands on the shoulders of our farmers who are the irreducible base of all of our societies. But it also has to be balanced – and it’s not.  Starting from the bottom, we need to have a pretty clear vision and understanding of what is needed and what we are trying to achieve within every sector of our societies. Each has its part to play, but can’t be allowed to have free reign either. Government and the public sector is needed, but must stay within rational bounds. It can’t be left to try and compensate for every other failing in society. This is an organic system, and in that sense, the analogy the best fits our current dilemma is cancer.

We are being hollowed out, even as the tumour grows. Unfortunately, cutting out a tumour wont necessarily solve your problems, a tumour will result from a carcinogen, it is not the cause of it. We need a radical shift in lifestyle and priorities if we are going to be healthy again. We have binged on things we shouldn’t have, and neglected the things we needed. Like an addict, we can’t get better until we finally decide we are the problem, and we have to be the change we want. Fighting amongst ourselves won’t help, and miss-identifying the problem also wont help. Having said that… cutting out the cancers isn’t a bad thing either. Recision is definitely a necessary first step.

After that it becomes [more] complicated, we need to address our real problems.

There is a topic for another essay.

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Greedy

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(Sequel up to my previous post – SCF: Follow-up)

Another surprisingly good Newspaper article – My comments at the end

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Greedy investors damned by critics hiding own secrets

OPINION: ~ By FINLAY MACDONALD – Sunday Star Times

Greed always gets a bad press, never more so than when the greedy are shown to have got away with it.

So the South Canterbury Finance (SCF) collapse has been a gift to the censorious. This week’s moral pariah – the stupid and/or avaricious investor who should have known better, and certainly shouldn’t have been bailed out by that hardworking paragon of virtue, the taxpayer – has taken an absolute pasting.

Singled out for special hatred have been the chancers who poured money into SCF when it was known to be on the ropes, in the knowledge of a healthy return under the government’s weirdly generous Retail Deposit Guarantee Scheme. Bugger them, they knew the risks, surely the free market is all about wearing your losses … in short, greedy pigs make their sty and should lie in it. No, we have no time for the greedy. We hate the scheming shysters running the finance companies, bloody flash Harrys, swanning around tropical islands or European capitals having looted their own ruined empires. They ought to be put in stocks.

But we’re none too pleased with the poor old “mum and dad investors” either. Victims with little or no chance of recouping their losses they may well be, but that doesn’t mean we can’t blame them for being credulous idiots, chasing high returns then bleating when it doesn’t work out. Stiff cheese, we say, not our problem.

The greedy are everywhere, ready to be hated: the useless, on-the-take financial advisers and consultants, pimping investment opportunities they knew – or should have known – were bubbles waiting to pop; the real estate speculators and capital gains’ junkies draining the economy of more productive investment; the price-gouging hoteliers trying to make a killing on the Rugby World Cup; the householders putting everything from flat screen TVs to cosmetic surgery on their credit cards – an overwhelming desire for more being the definition of greed.

As for the bankers who created a false economy out of worthless derivatives and phoney financial products, then were bailed out and paid themselves bonuses – greed barely does it justice.

Or the politicians and economists who presided over the whole insane credit orgy and never gave a thought to the morning after – off with their heads! Not that we’re surprised by anything politicians do, with their snouts buried in troughs full of perks and expenses, lecturing the rest of us about tightening our belts while the only belts they were tightening were across their fat midriffs in business class on their way to a “fact-finding” trip around the Mediterranean or Caribbean. Greed so ingrained they don’t even know they’re being greedy.

If you’re looking for the living embodiment of grasping swinishness, how about the high-earning Working For Families’ scammers who arrange their affairs so as to meet the income thresholds for state assistance? Such gluttony would surely be applauded by the like-minded oinkers who hide their real assets and wealth inside trusts and companies in order to avoid paying their child support dues from previous failed relationships. Morally bankrupt, but fiscally prudent.

What hope is there for a society where the same kind of people preaching welfare “reform” and tax cuts for business are simultaneously fiddling the books to take advantage of the state’s unwarranted largesse? Where “high net worth individuals” still want to minimise their tax liabilities, even when paying up will make no difference at all to their quality of life?

The trouble is, when it comes to hating greed and its symptoms in our culture, where do you stop? Like the tall poppy syndrome, it’s always everyone else who’s guilty. Those who pride themselves on resisting the temptations of covetousness and cupidity, who invest their money cautiously or stash it under the mattress, are really just being greedy in another way.

Greed never sleeps. Even attempts to depict its evils are twisted to mean the opposite. Gordon Gecko, unethical anti-hero of Oliver Stone’s Wall Street, famously declaimed “greed is good” – and promptly became the poster boy for the next generation of venal bankers. Michael Lewis, former Wall St trader and author of the brilliant Liar’s Poker about his time at Salomon Brothers in the 1980s, lamented that what was meant to be a cautionary tale became, in the eyes of some, a recruitment document.

The SCF deal is just emblematic of a system that rewards greed in general – and indeed requires it to fuel material consumption and economic growth. That doesn’t exactly make greed good, but it certainly makes it rational.

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Corruption is so ingrained in our society, economy and politics we don’t even see it anymore. Or if we do, we just shrug and move on, looking for our own opportunity to scam the system.

But how does anyone honestly think this can end any other way than very, very badly.

Or do we need it to end badly, before we are at all motivated to do something about it.  (the absolute minimum we can get away with?)

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Why am I calling for a revolution????

All the reasons above is why.

And because I have a young daughter – I don’t want her to have to grow up in a world that is so venal and so befouled by us all crapping in our own nest.

I don’t suppose I should even bother wasting my breath about Honesty or Ethics?

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SCF: follow-up

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I was going to write a follow-up to my “Moral Hazard” piece. And then this article came out which really rather said what I had intending to say, so I will go with this and highlight the points I was pondering on.

(I have redacted parts of the article – go here for the original story)

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The Harsh Truth on Hubbard

OPINION: ~ By ROD ORAM – Sunday Star Times

Greed and incompetence lie at the heart of all financial failures. South Canterbury Finance is no exception. Many people will say that is an offensive, cruel and dead-wrong judgement about one man and his community.

After all, Allan Hubbard was once a brave, talented and successful investor, he is very generous and frugal and he is loved and revered by many in South Canterbury and elsewhere. Something, though, went horribly wrong. Not just in the past few years. But a decade or more ago. And the seeds were sown a long time before that.

However, this judgement is not just about one man and his community. It is also about New Zealand and the wider world in this past decade of financial recklessness.

Before making that case, it’s important to set the context and make a prognosis. The government said on Tuesday it would spend $1.8 billion to reimburse all non-equity investors in Hubbard’s failed finance company.

To do so, it will write cheques worth more than 1.3 percent of GDP. That’s more than the net growth of the New Zealand economy over the past three years. In nominal dollar terms, it is by far the biggest bailout of a New Zealand company.

The government hopes the net cost will be only $600 million or so if the receiver can raise some $1.2b from sales of South Canterbury’s assets, good and bad. Just 18 months ago, they were worth well over $2b.

That, though, is optimistic. The economy, rural and urban, is weaker than the government admits; the value of the good assets will deteriorate faster than the government can sell them and the $700m of bad assets will only grow.

So, coupled with the $250m bill to the government for other finance company failures to date, taxpayers will very likely stump up more than a net $1b. That’s more than the government will spend in the next three years on the Primary Growth Partnership or six years on fibre optics for telecommunications, its two central projects for transforming the New Zealand economy so we can earn more real wealth.

The repercussions of the finance company losses – the government’s and the multibillion-dollar losses by investors – will multiply and deepen across the economy for a long while yet. South Canterbury Finance’s impact, psychologically and financially, is by far the biggest.

This is an ignominious end for a company that had done so much for its local economy and people. From the early 1950s, Hubbard had invested cannily in people and companies in the local rural sector, thereby generating wealth for many of them. He and his wife live frugally and give generously. He estimates he’s donated some $200m to charities.

By 2000, South Canterbury Finance had $400m of assets. Other companies controlled and largely owned by Hubbard, such as Southbury, his main investment company, and Dairy Holdings, Scales and Helicopter NZ, his main industrial companies, were worth hundreds of millions more.

By 2009 South Canterbury Finance had increased its assets by 450% in nine years, all with borrowed money. It ended up recklessly investing a good chunk of it in property markets it knew little about. Less than a year later, it is bust.

Many people say this happened because Hubbard was old, ill, unlucky and badly advised. All those factors are true. But they don’t explain what happened or why no person or institution succeeded a long time ago in stopping him doing so much damage to himself, his investors and the economy.

The one factor that does is Hubbard’s personality. He is incredibly smart, with a phenomenal memory even today at 82. He works hard. He has enormous belief he is right. He isn’t the least bit interested in his own material wealth. He enjoys helping others. The more successful he became, the more people came to him for help and the more he would help(sic) them.

But catastrophically, he began to neglect the fundamental separation and distinction that has to exist, even in the making of investments, between his money and his clients’ money. He treated it all as if it were his to invest as he thought best.

What mattered most was making good any losses from his own funds so investors were never out of pocket, he said repeatedly as South Canterbury Finance and his other investment vehicles spiralled down.

It seemed the greater his conviction he could generate wealth, the greater his appetite for risk and the more convoluted his business dealings became.

Grant Thornton lays all this bare in its recent second report as statutory manager of Aorangi Securities, Hubbard Management Funds, Te Tua Charitable Trust and some others of Hubbard’s investment vehicles.

Poor record-keeping, high-risk investments, allocation of nonexistent assets to client accounts, over-statement of values, high levels of lending to other companies owned by Hubbard and uncommercial investments such as interest-free loans to farmers were many of the features Grant Thornton found. Breaches of securities laws may be involved, it says.

These companies in statutory management are only a small part of Hubbard’s business activities. The Companies Office lists him as a director of more than 500 companies; in many, he and his wife Jean are the sole shareholders.

As South Canterbury Finance began to face a rapid rise in bad debts, vanishing liquidity and chronic shortage of capital over the past two years, it began resorting to more unusual forms of finance. One was the placement of high-yield bonds among a very small group of investors in the US.

Hubbard tried to help by pouring into the company some $200m of assets from his myriad investments, mostly his industrial holdings. As he said, he felt personal responsibility to make sure investors didn’t suffer.

He says he could have kept finding more funding to save the company if the government hadn’t put some of his companies under statutory management and put South Canterbury Finance into receivership.

But given the scale of its losses we know to date, it seems highly unlikely that he would have had any capital left to help stabilise it and attract new investors. And nothing of his past experience equipped him to save the company.

Hubbard was chairman of South Canterbury Finance until earlier this year; his board was small and made up of local business partners and friends; a high proportion of its lending was to related parties; its auditor was a tiny Timaru accounting firm and its trustee was Hubbard’s second employer as a young man.

Hubbard’s fierce loyalists say that’s how business is done locally. Sadly, that’s true. That might be OK for a small business owner when he’s on personal terms with all his lenders and borrowers.

But it was no way to run South Canterbury Finance, even back in 2000 when it had only $400m of assets. And once it began soon after to aggressively drum up deposits and seek ever-riskier investments, it started down the slippery slope to failure.

Why wouldn’t he accept offers from some others of common sense and better governance and management? People who tried said he wouldn’t accept their advice.

Anyway, lots of people were enjoying the ride, just as they were on Wall St, in property in New Zealand and elsewhere and in many other financial and asset markets the world over during the 2000s.

It was no different in South Canterbury Finance or in Hubbard’s other activities, as far as we can see from Grant Thornton’s reports.

Except for two things: in his case, it was intensely local and emotional. The more successful he was, the more his neighbours invested in him, hoping to share his success. The more charitable he was, the more they asked from him.

Making money for others, not for himself, gave him great satisfaction, purpose and sense of rightness.

And once the government rightly(hmmm…?) introduced the retail deposit guarantee scheme at the height of the global financial crisis in October 2008, he became a national phenomenon. Money poured in to South Canterbury Finance from around the country and some from overseas.

To meet these insatiable demands by investors for returns, the company became even more reckless.

The more he gave, the more people wanted from him. Until he had nothing left to give. We’ll all pay a high price. But not as great as his (well, that’s a matter for debate isn’t it).

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So…

We just keep coming back to the same old things don’t we.

Hubris, arrogance, greed, opportunism, crappy accounting standards, poor oversight and supervision, bad regulation…. etc, etc, etc.

These clowns ALWAYS think they are cleverer than everyone else, and can do no wrong.

…If only people would leave then to carry on, they can double up the bet, then somehow, someway, they will be able to make it all come out OK in the end…

They don’t want to be restricted by boring old accounting rules, they want to do it their way – coz they know best about everything.  And on that note:

It isn’t just that things could slip because the accounting wasn’t up to scratch… It is that these guys deliberately set up bad accounting schemes so that they CAN get away with fiddling the books. World Com, Enron, Parmalat, Arthur-Anderson, Madoff… and now SCF, the list is endless. And as Rod said, the same old story over and over again.

The crying pity of it all is that any halfway competent government regulatory body could and should be able to spot the warning signs on this sort of thing from a hundred miles away. Yet somehow then never do!  Why do you suppose that is?

Like Rod also said: as long as there is money being made, no-one wants to stop the money train or look a gift horse in the mouth.

It is all too easy to justify, because all this cheap money and great returns is “Helping” everyone isn’t it.  The fact that this shit ALWAYS falls over eventually and leaves disaster in its wake with ruined lives – well that’s for other people and another time to worry about…Right?

Or…

We could stop turning a blind eye and start doing the right thing from the start.

Because the other reason these people get away with this sort of thing is because we let them, and worse we even pay them to do it. Look at the fabulous “profits” of the Banksters. No-one can make that sort of money honestly, and in the long run they never made it at all – once the long term losses are factored back in.

Although, that is what the Bailout is for isn’t it – so that you never actually have to swallow your losses.  You just pass that along to someone else.

At that point who cares what the costs are (and they are massive and ongoing – in wasted money and time and opportunity that could have been going towards doing something useful, rather than just playing money-go-round games).

Success is measured by what you can get away with – and what you can get someone else to pay for.

……..

In my favourite fantasy, this all would be what you have firing squads for.  Whether that would actually work to disincentivise fraud (does anything, ever?), At least you get to sanction it quickly and comprehensively. And they sure aren’t running around free having “got away with it”.

Well, that is an end game anyway – at the very least we need to try to prevent these sorts of abuses from ramping up right at the beginning.

Teaching people and setting an example and environment that doesn’t encourage it in the first place.  That would need a big mindset adjustment and social change. We are so used to shonky dealing, we accept it as normal.

(and on that point, read my next post – Greedy)

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This Post is about an article from the News within the last week.

Now it’s not just the Northern Hemisphere which are playing these dodgy games.

Apparently we just aren’t happy either unless we can get to play just like the big boys.

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‘South Canterbury Finance’ is a regional Finance Company in the South Island of New Zealand.

The thing that really gets me steamed, is that none of this is unpredictable or otherwise surprising. As the story continues to unfold, the depressing thing is just how much of this is exactly the sort of things we have always know to be problematic.  And yet we still manage to get “surprised” by it.  Give me a break. It is the same shyster scam, ponzi scheme, and crooked shuffling that has been going on forever, and wherever, the crooks can get away with it.

And why do you suppose that is? How come this same crap just keep coming up and repeating over and over again.

Could it be that if you actually cracked down on all this stuff then there would be too many of the Rich and Powerful that would also be caught out?

The Bail-out is the means by which the old boys network looks after their own interests. Not necessarily directly, but cant let the house of cards start wobbling can we – you never know where that might end up.  And that would be just tragic wouldn’t it. Imagine all those rich people losing all ‘their’ money – the horror!

(that’s sarcasm in case you didn’t get it)

… anyway, on with the story – or in this case the article.

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(From the Sunday Star Times)

Hubbard-faces-a-wealth-wipe-out

~ By GREG NINNESS   29/08/2010

Allan Hubbard is likely to get nothing from a government-backed restructuring of South Canterbury Finance expected to be announced in the next few days.

The loss of the company, in which the Timaru businessman is ultimately the major shareholder, will wipe out most of his wealth, estimated at $550 million in last year’s NBR Rich List.

(So far so good)

Although the final details of a rescue package to save South Canterbury from collapse are still being finalised, they are likely to include an arrangement for the government to take over more than $500m of the company’s impaired loans.

(Hmmm… sorry… what?)

The Sunday Star-Times understands the amount of bad loans on South Canterbury’s books has been a sticking point in negotiations to find new investors willing to pump urgently needed capital into the company.

Its accounts to December 31 show it had total loans of $1.5 billion, of which nearly $600m was impaired.

(Hmmm… over a third…)

The government has been looking at a plan whereby it will take over the troubled loan portfolio, probably at its face value.

(SAY WHAT?  FACE VALUE???   Have these clown, at the very least, ever heard of the concept of a “Hair-cut”)

South Canterbury has already taken steps to facilitate this, putting its impaired loans under the control of a separate administrative unit which has been nicknamed “the bad bank”(You bad, bad bank…  OR, is that… you bad, bad Wan Bankers)

Last month the company said the bad bank was administering about $500m of loans.

(OK, so we have up to a $500m problem then?  Huh, no wait, you said just previously $600m…?  So what is it?)

Under the proposal, the government would effectively buy those loans from South Canterbury, immediately giving the company a $500m cash injection.

(And we want to do this …why?  They have already proven they can’t be trusted with money)

A new owner could then take 100% control of the remainder of the company by injecting another $200m or so of cash into it, although it is believed negotiations are continuing around those numbers.

That would leave South Canterbury with around $700m in new cash and about $900m to $1 billion in “good” loans, significantly allaying concerns about the company’s ability to repay investors as its debentures fall due.

(OK… so new owners then, and we avoid the possible knock on effects from a complete collapse.  I guess if we run the numbers and that all stacks up and we have some guarantees, then that may be a good solution. Assuming the numbers ARE correct etc.   Although – I am still wondering about that whole “Haircut” issue)

However, in the medium term, additional cash could come from the sale of various assets which Hubbard sold into South Canterbury in a desperate attempt to shore up its balance sheet. These include Helicopters NZ, a majority stake in Scales Corp and various property assets.

(well Duh… Yes, at least.)

The sale of those assets might release another $200m in cash. The company would also have the cashflows from the interest and capital repayments from its good loans. If more cash was needed in a hurry, the better-quality loans should be readily saleable to other financial institutions.

The advantages of the plan are that it would not only solve South Canterbury’s pressing cashflow crisis, it would also leave the company sufficiently well capitalised to begin writing significant amounts of new business.

(Say what? What planet are these clown living on. Dumb lending was what created this whole problem in the first place. In case you haven’t noticed, there is a recession going on caused by an overload of debt, widespread defaults and a general lack of interest in borrowing money. That old cashcow economic model is gone and it ain’t coming back. It was rotten to the core and now that it has finally failed from its own internal flaws, what do they want to do… they want to rev it up for yet another dash around the track. Everything about SCF’s business plan was rubbish – you can’t save it. The best you can do is give it a mercy killing and a decent burial for gods sake)

And new owners, particularly if they were part of a larger group, perhaps with overseas connections, might be able to source institutional funding, making the company less reliant on the mum and dad investors the company has traditionally depended on.

(Good grief… So now they want to attract the ‘Hot Money’ crowd from oversea’s, and the big money Multinationals. They will be raped and pillaged without mercy. What exactly do they think is the Raison D’etre of those institutions? They live for this sort of turkey shoot.)

The controversial part of the plan is the initial $500m or so the government will need to stump up, although the ultimate cost to taxpayers would be less than that because the government would eventually recover some of the money from the bad loans, possibly as much as half.

(Ohh no, I assure that is not the controversial part, the controversial part is even thinking about going there in the first place. After that, it is just so much cheating and lies. The ultimate cost would be less would it? Can I have that in writing and signed please – and do I get to put you up against the wall and execute you if  that turns out not to be true afterall? Because as it happens, within the week we have been told that the costs have already gone up.  Hmmm… so that would mean you would be DEAD by now, if some-one actually ever held you to account for your crap. But the prize has to go to that last statement “possibly as much as half”  Whoo, as much as ‘Half…’ wow.  I’m sorry, was I supposed to be impressed by that or something. Anywhere else, that would be called a disaster)

But if South Canterbury is not recapitalised and is eventually tipped into receivership, the government could be liable for $250m anyway under the Deposit Guarantee SchemeThe proposal may not be any more expensive, and, as well as protecting retail investors, would prevent the possible contagion effect from a major financial institution’s failure, while ensuring the economic benefits of having a substantial finance company lending into the business sector.

(Ohh boy, where to start with that little gem of a paragraph. How about here – within a week of this article being published, the government has decided to put not $500m into this lemon, but $1.6 BILLION.  Hey if something is worth doing, it is worth doing RIGHT, huh? Yeah, I would say that is more expensive, how about you?  Then we go onto my absolute favourite, “protecting retail investors”. Ohh I so want to shoot somebody right now. Can we all spell ‘moral hazard’? Do you clowns even vaguely know what that term means? Let me explain, it means doing something really, really stupid when you should be doing the exact opposite, because otherwise you get people doing what you don’t want them doing. You actually end up paying them to do the wrong thing because when their stupid scams and schemes come undone, you bail them out. I have a saying about the definition of insanity, going around and around in my head about now.)

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I think I already covered the issue of “continuing to lend into the business sector” didn’t I?

Let me let you in on another little home truth here – New Zealand already has an over-abundance of lending institutions. We have got banks out the whazoo. The only reason and way you can run a scam Finance Company, is if you are lending on terms that a reputable and prudent institution wouldn’t touch with a barge pole. And surprise, surprise, in the end everyone gets screwed.

So, where are the cops and the regulators? Nowhere to be seen… as usual. While there was money being scammed made, everyone turned a blind eye.  And when it all goes tits-up, everyone implicated runs for the hills and covers their butt. It’s just poor old ‘muggings’ the taxpayer who gets reamed, again, while their elected representatives “work hard to do the right thing”. Hmmm, funny how the profits get privatized and the losses get socialized isn’t it.

Ohh… and just in case you imagined this might be some sort of aberration, think again. Look around, this is the standard operating procedure and it is happening all around the world as we speak. This is power, politics and money par-exellence – running the exact same scam for the umpteenth time, and we just sit back and let it happen, again.

If “the people” don’t rise up and put a stop to this now, then they deserve to be raped repeatedly. Why would the crooks stop now, when it pays so damn well.

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And if only the press and the journalist weren’t so pathetic – or a bunch of Shills

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For more on this story: here and here and here

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This is a Post from one of the writers on my Blogroll, Karl Denniger (redacted).

It is written by an American about an American situation.

I will leave it to you to decide to what extent his criticisms are appliciable here.

Cheers R.

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(Link to article)

“Crime has been holding steady in Chicago in recent years. Through July, there have been 1,089 shootings in the city.”

The first problem is that the numbers are flat-out unacceptable in any year in any city in the U.S.  Years of complacency by Chicago’s middle and upper classes have brought the crisis to their doorstep.

“Thugs, gangs and renegade groups run the streets and neighborhoods, intimidating and victimizing the decent citizens of this city. They go mostly unchallenged and unchecked by a totally demoralized police force that is dangerously understaffed and still out-gunned on the
 streets.  The police force desperately needs manpower and both physical and leadership back-up. Officers confident that their authority is respected, their judgment is trusted, and their tools are equal to a dangerous and difficult job will produce better results than people who have been left hanging out to dry, while their colleagues are massacred.”

Uh, we’re forgetting what police officers are once again… and trying to ascribe to them some sort of “Superman” complex.  I hate to disabuse [people] of [their] belief systems, but I am compelled to do so.

Let’s start with reality: There is no duty for the police to protect you. So says a long line of court cases.  This is true even if the police have specific and actionable knowledge that you are at some sort of special risk!

Many people do not understand this: The police department’s primary job is to investigate crime.  That is, once the crime happens the police department shows up, takes a report, and then attempts to identify the guilty party(s) and presents the evidence to the prosecutor, along with presenting the alleged bad guy(s) to the court system. That’s their job.  That’s why you hire them.  That’s what they do.

But in performing this job they have to contend with two things: The small percentage of the citizens who are thugs, and will do evil things – and the citizens, who the police needs as allies and advocates in their investigatory activities.

How do you get the second to happen? I’ll tell you how you don’t get it to happen.

You write a hundred thousand parking tickets for $50 each, and start booting people’s cars – after you removed all the parking meters – or turned them over to a private company [who] failed to reasonably maintain them, thereby making it impossible for someone to run into the post office for 2 minutes without risking a $50 ticket.  You write lots of tickets for questionable traffic violations and falsely claim that they’re about “safety” when in fact they’re a raw revenue grab – and many of the offenses are in fact “driving while black.”

While upper-middle class people are inconvenienced by a bogus $100 ticket, a poor person who is barely getting by ends up shorting his kid’s diapers as a consequence.  He is going to be permanently pissed at every cop from that day forward, instead of being mildly inconvenienced. When the police want that man’s help in the future in finding some thug, they’re going to get the middle finger in response – and that response is entirely and richly deserved.

You bust Joe’s brother – or best friend – for smoking a doobie.  Joe’s brother was helping Joe pay the rent, because both Joe and his brother don’t have much money.  Joe winds up eating cardboard for two weeks as a consequence, or even gets evicted – because his brother was arrested for a victimless crime.  Oh yeah, and in order to catch Joe’s brother you had to snoop around and stick GPS devices on his car (recently ruled legal without a warrant!) to follow him around furtively much like a snake in the grass – or the Gestapo.

Then we add a dollop of corruption.  Various sorts of scams all fall into this category, from politically-incentivised promotions, to outright bribes up and down city government.  Chicago has this sort of thing down to a science.

But all of these things are corrosive to public trust – and yet that’s exactly what’s necessary if the hooligans are to be kept from taking over in times of stress.  The police will never be able to suppress the criminal element with “mere force” – we have a near-police-state now in our major cities when it comes to these matters, and yet the environment deteriorates instead of improving.  This corrosion is insidious and pervasive in our major cities.  It doesn’t happen immediately; it takes decades.  But we’ve spent 20, 30, even 40 years, intentionally destroying the public trust.  And it shows.  The police do not have the respect of the citizenry at large – they’ve forfeited it with their own acts.  You need only see what happened in New Orleans after Katrina, where not only did the cops abandon the city some of them are alleged to have stolen automobiles on the way out of town!

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No, what’s necessary is a different view.  A view that both admits the lawful and proper role of the police and accepts that without cooperation of the citizens at large (which is not owed to the police department but instead must be earned) the police have no chance – and neither do the citizens.  The underlying economic and social situation is not going to get better on its own.  It’s going to get worse.  A lot worse.

Attempting to “appeal to authority” is not going to work, and “staffing up” and acting like a military junta instead of a police department is only going to turn the local citizens into people who hate the cops.  And that hatred, when unemployment turns to homelessness and hopelessness, is going to boil over with disastrous results.  To fix this you need to do a number of things.

Specifically:

* Stop harassing motorists.  Traffic enforcement has to stop being a revenue source.  I’m talking about the incessant and intentional squeeze, the tricks and traps that are all-too-often part and parcel of traffic “enforcement.”

I can point to specific examples from my time in the Chicago area, including one intersection in Palatine where a right turn onto a two-way street is forbidden by a sign hidden behind a tree such that it is literally impossible to see until you have committed to the turn and thus have also committed the violation.  Yes, I got a ticket there, and showed up in court with over fifty other people who had identical violations.  The city thought it was cute,  this was nothing other than a tax that was effectively extorted from me through intentional trickery by a man employed by the city wearing a badge and carrying a gun. It is not much of a stretch at all to say that I was quite literally – robbed at gunpoint.

* Cut the crap with “victimless” crimes.  If you have to snoop around to find something that’s illegal because there’s nobody who will, or has complained – you are engaged in the acts of a police state.

Anyone who winds up on the wrong end of that is going to indelibly HATE you from that day forward.  Is it worth it?  100 years of history says we can’t win that “War On Drugs”.  But we can piss off huge numbers of citizens, most of them minorities.  Now – about those folks who don’t “respect the law”… Gee, how did that happen?  Did they watch their kid or best friend get hauled off in irons for smoking a joint?  A lot of them did, and now they hate anyone wearing a police uniform.  Pull your head out of the butt.

* Aggressively bust all the thugs.  Rob a store-go to jail.  Steal a car-go to jail.  Pull a gun on someone-go to jail.  Kick in someone’s door and invade their home-go to jail.  If the homeowner doesn’t shoot you on the spot.

Use all the space we free up in the jails and courtrooms by leaving consensual adults alone –  to lock up all the bad guys, for a long time.  Right now there’s no space for them in the prisons, nor can we monitor them once released with our parole officers – they’re too busy keeping track of Joe who got busted for smoking that doobie.

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Speaking of the “shoot you on the spot” thing: start encouraging the people at large to stop the sort of crap that these armed and dangerous thugs like to perpetrate.  When seconds count Smith and Wesson will be there; the police will arrive five minutes late.

We must throw out the infantile model of “the people are under the cops as a baby is under his or her parents” and transition to a model of “you’re adults, you’re free to act as adults, and we both trust you to be adults and assist us in our job of identifying crooks when necessary.  We also both believe in and support your right to stop the thugs on your own in lawful self-defense should it become necessary.  And we will not only cease and desist from interfering with that right we will start encouraging you to exercise it.”

…Law Enforcement [needs to] respect the right of the people to self-defense – and to recognize that they need the common citizens more than the citizens need them…

For Chicago to achieve that, it’s Law Enforcement community is going to have to quit treating the citizens like infants, whom it can rob candy from any time it feels like it.

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