Chris Lee - The Billion Dollar Bonfire: How Allan Hubbard and The Government destroyed South Canterbury Finance

Allan Hubbard lost a fortune and taxpayers paid the bill. Timarus reclusive moneyman still troubles the national memory, years after his death. His recklessness cost hundreds of millions, yet many people think of him as a kind of saint. He gave perhaps $200 million to charity and to Christian causes while gambling with other peoples money. Many lost most of their savings when his finance company, South Canterbury Finance (SCF), failed.

Now his story can be told for the first time in full and from the inside. I knew Hubbard for thirty years, both as a fellow financier and later as a friend. I met him in Timaru in about 1980 while I was working at General Finance, whose original company, Valley Finance, had jump-started Hubbards success. We maintained our working association after I formed my financial advisory company, Chris Lee and Partners Ltd, and developed a friendship which I valued, even after I finally and far too late saw through his veneer. Until his death we spoke regularly, sometimes handwrote letters to each other, and occasionally met for breakfast or dinner in Timaru. Often he forwarded to me internal SCF papers, for my observation and sometimes comment.

Hubbards story is complex and confused, partly because of the mans own contradictions. I had listened to his recollections and I knew that the tales of philanthropy were true. I also thought for quite a while that his businesses were sound. I recommended South Canterbury Finance to the clients of my company. It was only in late 2009 that I began to discover that Hubbards company was really a quasi-Ponzi scheme supported by the state. It slowly became clear to me just how Hubbards business virtues turned into vices, and how his unusual strengths of character could in different circumstances become tragic flaws. I started out as an admirer and ended as a critic. This book explains why I changed my mind. Hubbards catastrophic errors surfaced during the global financial crisis, which in 2008 threatened a meltdown of the worlds financial system and of New Zealands with it. The crisis prompted the New Zealand government in October 2008 to guarantee peoples financial deposits promising, in effect, to repay anyone who lost money if a bank or finance company went bust.

New Zealand had been forced into the deposit guarantee scheme by Australia. In 2008 people throughout the world had lost confidence in banks and finance companies. The banks no longer trusted each other. Their customers were beginning to smell the fear. In early October Australia indicated that it would guarantee all bank deposits, a decision that put New Zealand on the spot. If it didnt guarantee New Zealand banks and finance companies, Kiwis would take their money across the Tasman.

The Labour government, four weeks away from defeat by National, had to act quickly. When the Australian government unveiled its guarantee scheme on Sunday 12 October, New Zealand promptly announced a similar scheme here. It had basically been designed that day, according to a later report by Auditor-General Lyn Provost. Officials had thrown together a scheme which brought a massive and unprecedented change to the finance system.

The Opposition backed the scheme. Cullen had told National leader John Key and shadow finance spokesman Bill English what the Labour government was going to do, and they had agreed. Without the deposit guarantee scheme, Key said in August 2010, there would have been a run on these New Zealand financial institutions, and they would have gone broke. Key would sometimes in the heat of battle blame the later troubles on Labours scheme. But it was Nationals too.

It had always been recognised that the guarantee was dangerous, providing a kind of get out of jail free card for reckless moneylenders. Because their funds were safe from panic withdrawals by investors, entrepreneurs felt freer to take risks and seek adventure. Since investors funding was reliably available, the financier could gamble. And this, as it transpired, was what Hubbard and South Canterbury Finance elected to do.