The harsh truth on Hubbard

BY ROD ORAM

OPINION: 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 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 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.

- © Fairfax NZ News