Business ouquets and brickbats

BY TIM HUNTER

This year could have been a lot worse. Last year was a shocker and in early 2009 the situation looked extremely bleak.

Fortunately we emerged in December without the need for soup kitchens on every street, the recession has officially ended, and latest forecasts for 2010 suggest the NZ economy will continue to improve. So we can begin our roundup of gold stars and black marks.

BOUQUETS

Timothy Geithner

US treasury secretary

When Geithner took office in January the American economy was in deep trouble and dragging the world down with it. Something had to be done – and fast. Geithner's solution, announced in February, was a stimulus package of enormous size. It involved up to $US2 trillion, split between a fund to buy bad debts and a fund to buy new loans to restart the debt markets. A further $US789 billion went in a mixture of tax cuts and government spending on infrastructure projects.

The plan was highly controversial, not least because it involved effectively printing money – in normal times a highly inflationary move – and an increase to the already enormous government deficit.

So did it work? It will take some time to find out, but so far the signs are promising. After four consecutive quarters of contraction and the worst recession since the 1930s, the US economy returned to growth in the three months to September, expanding at an annualised rate of 3.5%. Further growth is expected in the December quarter and on into 2010. Sharemarkets have rebounded strongly, with the S&P 500 index steadying around 1100 this month after touching just 676 in March.

The Troubled Asset Relief Programme – a bank bailout of up to $US700b put in place by the previous administration – now looks like it will cost $US200b less than feared. Geithner told congress this month: "Banks have already repaid nearly half of Tarp funds they received over the past year, and we now expect a positive return from the government's investments in banks."

America isn't out of the woods – unemployment is still extreme at close to 10% and the US dollar is a basket case – but the worst appears to have been averted.

While Geithner had a lot of help, not least from Federal Reserve governor Ben Bernanke and the previous administration's Tarp scheme, he appears to have steered the fragile US economy away from danger. For that, he deserves a pat on the back and a bunch of flowers. He might even be forgiven for forgetting to pay $US34,000 in taxes on money he earned while working for the International Monetary Fund between 2001 and 2004.

Alan Bollard

Reserve Bank governor

After a spurt of activity early in the year, Bollard has done nothing for months. As a result, we've had an official cash rate of 2.5% since May and we're likely to get more of the same for several months yet. This is despite money markets casting doubt on his steadfast predictions of low interest rates till the end of next year.

How long Bollard sticks to his previous resolutions remains to be seen, but the important thing is that the economic outlook is improving like a nervous kiwi coming out at night, and the Reserve Bank is trying to avoid scaring it away with sudden potshots at inflationary weasels.

Bollard can also take satisfaction in doing central banking a bit better than some of his northern hemisphere counterparts. Returning from a conference of his peers at Jackson Hole, Wyoming, he noted a consensus view that bankers in America and elsewhere had kept the purse strings too loose for too long.

After the crash, those same banks had to pull every trick in the book to keep their economies ticking over, leading Bollard to note that extremes such as "quantitative easing" were necessary in New Zealand. "The closest we have got is with our new liquidity management and our acceptance of residential mortgage-backed securities as collateral for loans to banks," he said. "Our measures will be much easier to exit from, when the time comes."

While navigating a careful course through the crisis, Bollard fired a few shots over the bows of his commercial cousins for profiteering on floating mortgage rates and delivered a 69% increase in net profit to $906 million. Crown coffers benefited with a dividend of $630m. Merry Christmas, Alan.

Rob Fyfe

CEO, Air New Zealand

If it's not recession, it's Sars, or bird flu, or fuel prices, or carbon emissions – airlines have not had their troubles to seek in recent years. To that litany of struggle Air New Zealand can add being a tiny airline at the end of the world, yet it has come through the turbulence in pretty good shape. So good in fact, that last month it announced the purchase of 14 new Airbus A320s for its domestic fleet at what it described as "a discount" to the list price of $US1 billion. "The industry is at the bottom of a deep cycle so demand for aircraft is limited, creating favourable conditions for buyers with strong balance sheets like Air New Zealand," it said.

Fyfe can take a great deal of credit for the airline's performance, having focused on making the business flexible enough to adjust to changing conditions. Less profitable routes were closed and new ones opened, capacity reduced and planes parked when demand slumped in the financial crisis. Meanwhile, investment has continued in new planes, check-in facilities, and fuel efficiency.

The only real black spot for Air NZ has been industrial relations, with some ugly disputes such as over pay for cabin crew employed by subsidiary Zeal. Still, Fyfe spends a lot of time on employee contact and seems able to avoid escalating the inevitable tensions from such disputes.

2degrees

In August, mobile phone company 2degrees finally muscled in on the duopoly of Vodafone and Telecom. Its arrival was a long time coming – under previous guises as Econet and NZ Communications, it had been talking about launching a mobile service for years – but it was worth the wait. The company handled the launch of its offer with aplomb, targeting the prepay niche with a clear message and canny advertising, despite swapping its CEO mid-year. Much remains to be done in making the mobile market more competitive, but competition is better with three than two.

Lloyd Morrison

Investment banker Morrison has had a tough year. In January he revealed he was suffering from leukaemia and stepped down from his roles at Infratil, Trustpower and his firm Morrison & Co to seek treatment in Seattle. While he was away things didn't exactly go swimmingly, with Infratil antagonising its bus drivers at NZ Bus, the loss-making sale of stakes in overseas airports, the loss-making sale of a stake in Auckland Airport and the failure to win an integrated ticketing contract in Auckland. After a year away, Morrison made a public return this month and will be back at work part-time.

He still has some fighting to do against the disease, however, describing his condition as "15 rounds in and ahead on points". Best wishes for 2010, Lloyd.

Gerard Prinsen, Andrew Davidson and Paul Markham

Frozen Funds Group

As the core triumvirate behind the Frozen Funds protest group, Prinsen, Davidson and Markham dedicated themselves to forcing ING and ANZ to compensate investors for huge losses made in the Diversified Yield and Regular Income funds, which held complex debt instruments ripped apart by the global financial crisis. Their blend of skills – an academic, a former supermarket group chief executive, and a financial planner – their common sense and determination to ask the next question shone light onto an otherwise murky subject and played a large part in forcing ING and the bank to compensate investors. They were also instrumental in encouraging the Commerce Commission to investigate.

Rupert Murdoch

Chairman and CEO, News Corp

The media mogul's reputation is controversial, in part because of his intimidating manner with editors of his newspapers and his highly partisan Fox News Channel in America, but Murdoch has a solid grasp of which side his bread is buttered. This has led him to the conclusion that newspapers should stop giving away their journalism and figure out a way to ensure the fourth estate stays in business.

In a speech to the Federal Trade Commission, for example, he reminded listeners that quality content is not free.

"In the future," he said, "good journalism will depend on the ability of a news organisation to attract customers by providing news and information they are willing to pay for.

"The old business model based on advertising-only is dead. Let's face it: a business model that relies primarily on online advertising cannot sustain newspapers over the long term.

"In the new business model, we will be charging consumers for the news we provide on our internet sites."

How Murdoch will achieve this is not clear – and it will be particularly difficult in markets such as the UK where the BBC provides huge quantities of news via TV and internet free to end users – but his public statements on strategy suggest the industry is beginning to understand the self-destructive path it has been following.

Honourable mentions: NZX, task forcer Rob Cameron.

"BRIQUETS"(ie, things could turn out either way)

George Kerr: a visionary rescue of a directionless corporate (Pyne Gould Corporation), or a self-interested money grab.

Tony Gibbs: a visionary jolt for a bullying monopolist (Zespri), or a self-interested money grab.

Rob Alloway: a visionary rescue of a directionless corporate (Allied Farmers), or desperate last roll of the dice.

Stephen Joyce: a visionary build of long-term infrastructure (fibre optic), or a costly vote-grabbing white elephant.

 

BRICKBATS

Allan and Frank Crafar

dairy farmers

The Waikato dairy farming brothers were convicted in July of serious effluent discharges from a farm near Hamilton and criticised by the sentencing judge for carelessness and a cavalier attitude to their environmental responsibilities. The Crafars ran one of the biggest dairy farming operations in the country at the time and were serial dirty dairying offenders. There were also animal welfare problems on some of their farms, with the Ministry of Agriculture and Forestry involved in 35 inspections for neglect in the past six years. In October the Crafars' operation was placed in receivership with debts of $200m. For a country that sells itself on environmental responsibility and efficient farming practices, the Crafar business could scarcely be more damaging. The fact they were able to borrow such huge sums to build their farming empire, with apparently such poor management practices, is also an indictment on the financiers who loaned them the money – Westpac, Rabobank and PGG Wrightson.

John Shewan

tax partner, PricewaterhouseCoopers

In October the Inland Revenue won its court case against Westpac Bank for $961 million in unpaid tax and penalties arising from several years of "structured finance" transactions. In the course of the hearing, evidence emerged that Westpac carefully monitored its effective tax rate with the help of tax expert Shewan to stay within what it deemed acceptable levels in comparison to other corporates. Tax law being the grey area that it is, companies and individuals are often tempted to minimise their tax bills in creative ways and often need professional help to do so.

While some may view this as legitimate sport, the fact is, tax dodging is damaging to this country and increases the burden on the ordinary mortals who pay their dues.

Hanover Finance/Strategic Finance

Both these finance companies got moratorium agreements from their investors a year ago, allowing them to delay paying back investors owed a collective $1 billion. There was criticism at the time that their projections of loan recoveries was too optimistic. Sure enough, both have admitted investors won't get all their capital back as previously promised, an outcome of little surprise given their predominantly weak, highly concentrated and risky second mortgage positions. While no one can say for sure whether receivership would have been a better option, investors appear to have been misled over their prospects. Given both companies paid large dividends to shareholders in the months leading up to their default, and both were involved in related-party deals, it looks increasingly like they were more motivated to avoid the scrutiny of receivers than give investors the unvarnished truth about likely returns.

Allan Hubbard

South Canterbury Finance

The Timaru multimillionaire has enjoyed an unblemished reputation for many years, but the unravelling of South Canterbury Finance this year led to closer scrutiny of Hubbard's affairs – and many didn't like what they saw.

While South Canty hasn't failed its investors as others have, it has been exposed as significantly more fragile than previously thought. Moreover, Hubbard's efforts to support it revealed some strange money-go-rounds within the Southbury Group and a rat's nest of inter-company relationships. Hubbard is not of the same stripe as the much-maligned Eric Watson and Mark Hotchin – investors are still being paid – but it seems he shared their recognition that owning a finance company was useful for all sorts of other enterprises.

As a result, Hubbard's star was sadly tarnished in 2009. We hope restructuring plans restore some shine next year.

Ken Anderson, Lane Walker Rudkin

Venerable textiles company LWR fell into receivership in April, shocking hundreds of staff who had little inkling the company was in trouble. Its owner, Ken Anderson, was held responsible by unions and staff, who felt mismanagement was the root of the company's difficulties. In October the Serious Fraud Office revealed it would investigate after receivers alleged LWR's financial situation had been misrespresented to its lender, Westpac Bank, owed $120 million. "[The receivers allege] if Westpac had known the true position it would not have lent so much," said SFO director Grant Liddell. About 230 staff were made redundant as a result of the collapse.

Dishonourable mentions: tax-dodging banks, excessive fee-charging banks, overseas bankers with excessive bonuses ... (there's a bit of a theme developing here, isn't there).

- © Fairfax NZ News