Friday, 28 March 2008

you want what?

i've posted before on blue chip investments, and remain totally unimpressed with the behaviour of those involved in setting up and peddling this investment scheme, including the lawyers, accountants and bank managers.

however, i was a little surprised at criticisms of the government's failure to act, levelled by olly newland and paul dale on radio nz this morning. there has been a call for government appointed statutory management. however, the shareholders have already appointed a liquidator voluntarily. the government can't just step in and over-ride that decision, unless there is some compelling evidence to do so. there is of course concern that the current liquidator will act in the interests of shareholders rather than investors. actually, the liquidator's job is to ensure that creditors get paid the maximum amount possible, and is therefore required to manage affairs to ensure that happens. as the liquidator points out:

...statutory management at this stage would harm any chance he had of recovering funds for investors...
He said he would rather have companies go into liquidation in a controlled way, and would make an announcement about further liquidations in the group by next week.
"I'm not going to use a sledgehammer. I'm not going to bring down a whole host of companies if I don't believe it's in your interests short term," he told the morning meeting.
"If you come in with statutory management today it's not going to get dollars for you in the next three months."

then there is the fact that the majority of investors gave "an overwhelming vote of confidence" in favour of the current liquidator.

but the other disturbing aspect about the criticisms today was the parallel drawn between blue chip investors and leaky home-owners. olly newland stated in the radio nz interview that the leaky homes problem was not the government's fault, but the government had chosen to provide compensation to homeowners. similarly, he believes that bluechip investors should get some form of compensation.

there are two major problems here. first, the leaky homes problem was a direct result of deregulation of the building industry, for which you can thank the national government of the day. the lack of oversight is something that both central and local government should have taken responsibility for, and have done so. the homeowners were defrauded, in that they were getting an inferior product and were relying on inspections made by local government.

the blue chip investors are not suffering as a result of government actions. they are suffering because many of them failed to get independent advice or failed to take that advice when they got it. they were naive, and most probably mislead. but the government has absolutely no responsibility in this case.

second, i would be really concerned if our government started handing out cash to cover poor investment decisions. that would really skew capital markets. it gives a signal that the government is willing to back bad practice, lack of due care and research. the bad players get to keep the money from their shoddy practices, and investors would become more careless in making investment decisions. there is just no substitute for putting in the work yourself or paying for some decent, independent advice before investing large sums of money.

there is a role for government, but only if fraud has occurred. currently, the liquidator says he hasn't found any evidence of fraud. he is seeking government funding to investigate further.

i do have a lot of sympathy for the people who have lost their life savings in amongst all of this. it's a very human tragedy, and having to face poverty in old age is devastating. but i don't think it's the taxpayer who is responsible for replacing lost capital. taxpayers should provide support services, in terms of decent superannuation, free public health system and so on, as would be the case for anyone suffering from poverty.

there may be a need for tighter regulation around information provided to investors. but i'd rather wait to see what is uncovered in the investigation on this case. and if there is the slightest evidence of fraud and collusion, i hope that prosecutions will abound.


Renee said...

I heard that from Ollie Newman (for whose acumen I have considerable respect) and thought that in this case he's wrong. I'm working with a couple of people who've invested in Blue Chip and feel great sympathy for them - misled, yes and unwise, yes, and very afraid for their futures now. It was not govt agencies which misled, and it cannot be govt's (ie other taxpayers) responsibility to compensate. As you say, it IS govts responsibility to provide the safety nets of superannuation, access to justice if necessary plus affordable health care and housing, for all who need it, young or old. Govt guarantees and compensations would only encourage unwise and risky decision making.

Deborah said...

i would be really concerned if our government started handing out cash to cover poor investment decisions.

But of course, that is capitalism in action - privatising profits and socialising losses.