Every day it seems we are being greeted with more gloomy news in the finance sector.
Last month Hanover Finance announced it was freezing payments to its 13,000 investors, leaving them potentially $500 million out of pocket.
This was a significant development. After around 24 other finance companies had gone under, Hanover continued advertising for new investors using ex-newsreader Richard Long as a presenter and claiming they were rock solid. Since then, the bad luck stories have started to emerge, highlighted by a heart-wrenching account in Monday’s Waikato Times of a local sports person who needed the money deposited with Hanover for an operation in Australia.
This definitely won’t be the last bad story we hear on this.
From the outside the whole thing looks like a business model built on foundations of sand, owned by people who have looked after themselves before investors. What happens next will determine whether or not Eric Watson and Mark Hotchin have foundations of more solid stuff than the business they own that has been taking money off hard-working Kiwis.
As far as the business model goes, my simple view of it has been that money deposited over the last few years has been called on by households for a variety of reasons including the fact that they are feeling the pinch in a tighter economy. The money they originally deposited was used as second tier lending for developers and the like who have been cashing in on the property boom and stretching themselves as a result. All very well when the economy is on the up. The problem is that the finance companies have been caught in a double pincer movement. Some of the high risk developments they have been financing have fallen on hard times, as have many of the households who made deposits. So at the same time as households have made a call on their money, the borrowers have hit a few speed bumps and the bottom line is that the foundations of sand are starting to slip. It’s a perfect storm.
As far as the business model goes, the Hanover case is not a lot different to all the other finance companies that have fallen by the wayside. What made it particularly sickening was that around the same time as the news of the payments freeze broke, National Business Review published its rich list and there in all their glossy glory were Eric Watson with his $400 million plus fortune and Mark Hotchin with his $200 million.
I am sure that all the Mum and Dad investors would have been delighted to read about Mark Hotchin’s $20 million plus mansion in Paritai Drive, along with all his other trappings. It would also have been heart warming to read about Eric Watson’s shareholding in companies such as Warriors and Bendon along with his jet setting lifestyle.
They would also be really thrilled that both owners managed to take a few million each in dividends over the last couple of years.
As they survey the wreckage of what they have created, these two rich listers need to remember the saying “Cometh the hour, cometh the man”. They have both built successful business empires and have created wealth and jobs for many. We have to remember that. And neither of them would have set out to create such a disaster. But the fact remains that having all their flash lifestyles published for all the world to see is nothing short of humiliating for all the people whose hard earned cash is now at risk. Watson and Hotchin might be able to spend $30,000 on a party but to some good honest Kiwis, that amounts to a lifetime of saving.
It’s time for these people to stump up and prove to us all that they are built on a different substance to their business model. They need to throw away the contracts, forget about what they are legally bound to do and pull out every stop and leave no stone unturned to return the good faith that was shown to them when those 13,000 investors entrusted them with their money.
It might leave them a few million down when the next rich list is published but at least reputations will be intact. It will be up to them to assess the relative worth of a reputation verses material wealth. Cometh the hour, cometh the man. It will be interesting to see what comes of this. |
