New Zealand banks not squeaky clean; told to clean their act


An inquiry into the conduct of New Zealand’s banking sector has found widespread wrongdoing across the sector. The inquiry, which follows a damning assessment of Australia’s banking sector several months ago found that 11 banks have had instances of misconduct by staff.

In the Australian bank sector inquiry fee gouging, bribery, fraud, board level deception among other instances of misconduct had been found. The sector was left battered by a Royal Commission, though no immediate recommendations for overhauling conduct and procedures was made. That will be in February 2019.

Although the New Zealand inquiry found none of that type of severe misconduct, it did find much poor lower level behaviour. Among the failures of the banks the inquiry found that they had:

  1. Used high pressure incentives to get staff to sell products such as credit cards which a customer did not necessarily need
  2. Despite knowing they needed to be rid of them, banks had dragged their feet on ending the use of incentives
  3. Done this despite having huge profits

Notably the failings of the New Zealand banks were not found to be of the sort that were identified in the Australian banking sector inquiry, where not only was the wrong doing widespread it pointed to much bigger problems in the industry.

Still, this is not a great look for New Zealand banks and banking. Customers have a right to be disappointed that this has happened. I hope that the inappropriately charged $23.9 million is refunded where possible and that those who were identified as making the charges are sent to ethics training.

Banking like any other sector faces ethical issues from time to time and all staff, from the C.E.O. down to the person who started their first day as a teller in a branch, have ethical responsibilities that their training should identify. The majority will to the best of their ability try to do their job and remember their ethical and legal responsibilities. But as with any other industry there will be a few rotten apples who will steadfastly refuse or otherwise prove incapable of proper conduct. It is they who must be made to move on.

Iceland jailed their bankers as a result of the Global Financial Crisis in 2008. Their economy began to grow again the following year when most other countries, New Zealand included were still in recession. I am not suggesting we do anything like that if our banks fail to meet the February deadline, but I do like an earlier idea I had of requiring bank branch managers, and higher levels to be registered with the Financial Markets Authority who would have the right to strip them in instances of serious misconduct.

That I think would make all but the rotten apples stop and think about their conduct.

 

Another stock market crash coming?


One day in October 1929 the stock market suddenly went into a catastrophic
plunge. The resulting economic depression saw millions of people across the west struggling to feed and clothe themselves and their children. Farmers walked off farms in places like Oklahoma, that then proceeded to be ravaged by dust storms of particular ferocity. It also enabled the rise of dictators like Adolf Hitler who seized on Germany’s ill fortune to push extremist agenda’s that would ultimately prove horrendous.

89 years after the 1929 crash, with notable crises or severe corrections in 1987 and 2008 is it possible that another is looming?

Possibly. When the 2007-09 crisis ended, legislation.was being pushed through Parliaments and national Houses of Representatives world wide. It was an attempt to ensure that the appropriate legislation would have time to be passed by Parliament seeking to address those concerns knowing a contentious debate about anything that may entail restrictions or negative attitudes is likely to follow.

New Zealand should not fool itself. A large scale collapse would affect all economic sectors. Tens of thousands of jobs in New Zealand could be potentially wiped out by the collapse.

As was the case in the 1930’s a new collapse with prolonged depression could give rise to a new generation of hardline politicians and/or dictators. The key players however are already firmly entrenched.

The conditions are favourable. The key conditions in the United States that contributed to the Global Financial Crisis of 2007-09 include:

  • Reserve Bank failing to check toxic mortgages
  • Massive corporate governance breakdown
  • Powerful mix of debt and risk by a large number of households and Wall Street
  • Policy makers inability to.understand what was happening and how to fix it
  • Massive failure of public and private accountability

Attempts to rein in the banks were introduced under President Barak Obama. The reforms that were enacted by Chris Dodd and Barney Frank were meant to check the conditions that led to the 2007-09 Global Financial Crisis. They have been systematically under cut by President Donald Trump. On 24 March 2018 much of the gains that were made by the passage of the legislation that Mr Dodd and Mr Frank put their name to were undone by the Financial CHOICE Act.

New Zealanders need to spread their savings across multiple sources, so that their exposure to undue risk is mitigated. Although New Zealand banks are more transparent than American banks, they are lacking in corporate oversight. Between 01 January 2006 and 01 January 2013, 67 financial institutions failed in New Zealand between 2006-2010 costing New Zealanders more than N.Z.$9 billion in savings that they thought were secure.

What have New Zealand institutions done to reduce the likelihood of further collapses in the future and improve the chances of recovering the losses? Not very much. I cannot recall any regulatory checks and balances being put in place that ensure savings are not being squirreled away.

What new tools and ideas does the Reserve Bank have for dealing with the challenges a stock market crash, post Global Financial Crisis? Shamubeel Eaqub, an economist, painted a grim picture in 2017 of how well prepared New Zealand banks are.

It honestly seems like a really radical idea, and possibly one that would not work in New Zealand. When Iceland suffered the Great Financial Crisis like other western countries it decided that enough was enough, and that the banking sector was going to get a lesson. The bad players were arrested, tried and jailed. Whilst the rest of Europe wallowed in recession or very little growth, Iceland began to recover in a way that surprised many.

How could New Zealand learn from these experiences?

The (REALLY) risky business of crypto currency


Back in December, one weekend I decided to have a serious look at investing in cyber crypto currency.

The week before I had watched Bitcoin experience an unprecedented surge in value that was as dizzying as it was abruptly short lived. I knew even before considering whether to even start investigating crypto currencies that Bitcoin was clearly well out of my ball park. I therefore did not look at Bitcoin and instead I turned to look at other crypto currencies. One of the ones that I looked is one called Litecoin. Others, such as Ethereum, Ethereum Classic and Ripple were noted but not explored.

To this day I have not purchased anything. Litecoin as I mentioned earlier may have been selling at a rate low enough when I first looked at it to consider buying a few just to see what happened. There were several factors that I needed to consider:

  • What broker would I use – one called BitPrime, which is located in Christchurch seemed like a good option. Its website listed the terms and conditions of the sale, and the government regulations that it was compliant with.
  • How much would I be prepared to pay? Even then, one Litecoin would set me about N.Z.$140 and seven would have set me back about N.Z.$1,000 – yesterday it was worth N.Z.$365
  • Given the extreme volatility of Bitcoin which in the space of a week in late November-early December rose nearly $8,000 in value before plunging several thousand in a very short time, would I be able to sell and the sale be given effect to in time before a plunge possibly wipe out everything I had put into crypto currency – at the present time one Bitcoin will set you back N.Z.$19824
  • Would there be unseen hooks in this unique system of electronic currency that for the most part you do not actually see, and which is prone to hacking, cyber theft and and other criminal activity

As easy as it looked on the computer screen – the registration for Bit Prime almost seeming too easy – there were immediate questions. My brother had noticed Bitcoin’s surge as well and, having watched initially out of curiosity, he could see where Bitcoin was going and that a sharp correction would come, potentially with little or no warning.

Some serious misconceptions also exist. One is that Governments cannot regulate Bitcoin. A Government can regulate whatever it wishes and China has banned Bitcoin transactions. The I.R.S. in the United States has also moved on crypto currencies with a court win forcing the most reputable exchange to hand over records of transactions. In short you cannot hide finances in Bitcoin, and presumably none of the others as well should Governments go after them.

At some point in the future on a crypto currency in its relative infancy I might invest a bit just to see where it goes and pocket a little bit in return. However right now, sitting on the fence and watching the various crypto currencies going up and down as if they were puppets being jerked by a puppeteer seems to be a much more sensible – and less daunting – proposition.

Change afoot at the Reserve Bank: New Governor appointed


Today it was announced that Adrian Orr, who has overseen the New Zealand Super fund will take over the role of Reserve Bank of New Zealand Governor. Mr Orr who has spent a decade overseeing the fund, which witnessed substantial growth during his tenure will take over at the end of March 2018.

When Dr Don Brash was Governor of the Reserve Bank, he became something of a household name. Dr Brash was willing to be interviewed by the media. He seemed to have the respect of Reserve Bank observers. His tenure lasted from 1988 to 2002, when he stood for National in the 2002 election.

Dr Alan Bollard replaced Dr Brash in 2002. He earned a reputation of encouraging staff at the R.B.N.Z. to develop their own ideas about how goals should be met, took out a layer of management and regularly talked to staff one on one. His tenure was eventful too, for he oversaw a major postwar boom in the New Zealand economy, where at one point the Government had a N.Z.$10 billion surplus and had started paying back some of the debt accrued during previous Governments. He also presided over the R.B.N.Z. during the days of the Global Financial Crisis where more than 30 financial institutions collapsed in New Zealand. Dr Bollard left in 2012 to take over the Secretariat of Asia Pacific Economic Conference.

And then there was Dr Graeme Wheeler. Mr Wheeler replaced Dr Bollard in 2012. Mr Wheeler was not known as a media friendly Governor. During his tenure the Mediaworks company which owns TV3 and operates the Newshub programme was banned from Reserve Bank briefings after one of its reporters leaked an embargoed report on the interest rate. Mr Wheeler was also known for not readily granting interviews, thus making it difficult to report on issues facing the R.B.N.Z. Following Mr Wheeler’s announcement in February 2017 that he would stand down at the end of his five year term which would end in September 2017, the then Treasurer Steven Joyce indicated that due to an impending election three days before his term ends, the Government would appoint a caretaker Governor to oversee the R.B.N.Z. until the new Government can appoint someone for the next term.

With the change of Government, new Treasurer Grant Robertson has signalled substantial changes are coming for the Reserve Bank. The major changes are that its targets are likely to be broadened and that external officials will be able to contribute to decisions around changing interest rates.

So, it will be interesting to see how Mr Orr handles the Governorship. Notable economists speak highly of him. He faces numerous challenges such as balancing the need for higher wages against inflation, the effect of international tensions on the New Zealand economy and the rise of crypto currency.- will it become big enough as a player to influence policy or will crypto currency go the way of the .com bubble?

Addressing banking sector concerns in N.Z.


I remember the onset of the 2008 Global Financial Crisis all too clearly. In the space of about two years 31 separate New Zealand finance companies crashed and burned, taking about N.Z.$3 billion worth of savings with them. The crash of so many companies and the resulting fallout cost numerous jobs, led to criminal trials for fraudulent activity and caused a loss of trust in banks. Nine years later, not having learnt much from the previous crash New Zealand, like the world at large is at risk of another, possibly bigger, crash.

The causes of the 2008 Global Financial Crisis are well documented. In the United States lax banking regulations led to the failure of Fannie Mae’s, Freddie Mac’s, Lehman Brothers amongst others . Hundreds of billions of dollars was wiped from the value of the U.S. economy when Lehman Brothers collapsed. The bailout plan authorized by U.S. President George W. Bush cost about U.S.$700 billion to enact. Following these collapses President Barak Obama passed legislation called Dodd Frank Act which enabled large scale reform of the banking sector, in terms of transparency, tightening up reporting requirements and protecting whistle blowers.

In New Zealand the following are just some of the financial institutions that failed in 2006-2010 (N.Z.$)¹:

  • Capital Merchant Finance ($190 million)
  • South Canterbury Finance ($1.6 billion)
  • Provincial Finance ($296 million with $273 million recovered)
  • Bridgecorp ($467 million)

¹67 went into liquidation or receivership, or entered moratoria all up between 2006 and 2012

I believe that legislation needs to be passed in two respects to bring accountability to the banking sector, but also institute a better code of practice than the one that exists. Elsewhere I have mentioned the need for better whistle blower protection. This is to ensure that the fate of whistle blowers at the Ministry of Transport who exposed fraudster Joanne Harrison and lost their jobs for doing so, is not repeated.

But perhaps the biggest reforms that I think need to be made are to how individuals enter and exit the financial industry, and the range of tools that can be used in dealing with significant breaches. We have the Financial Markets Authority investigating significant breaches, which is well and fine. But, given the size of some of the aforementioned collapses and the fact that individuals who had leading roles in precipitating said collapses were handed what I think were very light sentences, I think the law needs an overhaul.

For small fraud (less than N.Z.$250,000), claims can be dealt with in the District Court and the High Court deals with larger claims. We saw out of the court trials arising from the collapses of companies like Bridgecorp that in many cases the sentences were too light. The sentences did not appear to take into account ill gotten assets such expensive cars. Nor did they appear to stop the defendants from working in the industry again. The sentences should be proportionate to the size of the losses incurred by the investors. Such a scale could look like this:

  • Category E (dealt with in District Court) up to $250,000 = suspension of trading license + fine (up to $250,000) or jail sentence (up to 2 years)
  • Category D – $250,000 to $10 million = loss of financial trading licence + confiscation of luxury assets or fine (up to $500,000) or jail sentence (up to 5 years)
  • Category C – $10 million to $100 million = loss of financial trading licence + confiscation of luxury assets + fine (up to $1 million) or jail sentence (up to 15 years)
  • Category B – $100 million to $250 million = loss of financial trading licence + plus fine (up to $2 million) + jail (up to 25 years)
  • Category A – $250 million+ = loss of licence + fine (up to $4 million) + jail (up to 40 years) + confiscation of luxury assets + loss of passport

Sound harsh?

Not as harsh as thousands of investors having their retirement plans and anything that they might have been relying on their investments to fund now having nothing to show for their efforts. Not as harsh as hundreds of people working for these forms in good faith finding themselves without a job because of the collapse. Nor as harsh as any community finding that sponsorship of community events and projects have just gone up in smoke.