South Canterbury Finance company went into receivership this week. The company owes $1.6bn which is a huge sum of money. It was a sad day for the company which had worked hard to stop this from happening. There are a number of interesting things about this company.
First it is the second largest finance company in New Zealand and the debt of $1.6bn is the biggest debt that a New Zealand finance company has ever had.
Second, the government has agreed to use taxpayer money to take control of the company. Two years ago, the government decided to guarantee investments in finance companies and banks. This means that if a finance company is bankrupt, the government will pay back investors. They will not lose their money.
Listen to July 24th 2008 for more about finance companies in trouble.
Also listen to Oct 15th 2008 for more about the government guarantee for finance companies.
This company, SCF, was started in 1926. In the 1950s, a Timaru accountant Alan Hubbard, bought most of the shares in the company. He wanted to lend money to farmers in Canterbury although today many other businesses borrowed money from this company, including property developers. When the property market was in trouble, SCF was in trouble too.
Alan Hubbard made a lot of money in the last few years but he is a generous man and gave millions of dollars to many organisations. He is very popular in Timaru because of the good work he has done for people. He and his wife live in an old house and he drives an old VW car. They do not live a life of luxury. He is now 82 and not in good health. He had to give up working in this company recently but he still has a lot of shares in the company. He will lose all his money because shares are not covered by the guarantee.
Questions
1. Investors who put their money in a finance company instead of a bank can expect higher interest but there is a higher risk. Should the government pay back these investors?
2. When investors get their money back in the next two months, what will they do with it? Will this be good for the economy?
3. One CEO of a company recently took his family on a long expensive holiday after the company went into receivership. How do investors feel when a CEO of a finance company in receivership still lives a life of luxury?