Australian move forced NZ’s hand

attitude to the financiers towards buying into wealth management changed — rapidly, shall we say. We went from looking at a relatively straightforward funding exercise to buy into a wealth management business, to one that involved us being hit with 17.5 per cent interest rates.”

Ward also recalls how sentiment turned after Lehman. “Apart from the collapse in share prices and utter fear that wafted in the air, it was the change in corporate behaviour towards investors,” he says. “Initially, information was difficult to obtain but eventually behind-closed-door meetings were commonplace. Investment bankers were all vying for a deal for various companies in desperate need of capital.”

Thankfully, cooler heads ultimately prevailed in New Zealand compared to some other markets, Kelleher says.

“Generally, I don’t think there was the kind of fear and panic that you would associate with something like 1987 when it was a lot more raw and immediate.”

The NZX had the dubious honour of being the first major exchange to open after Lehman’s collapse.

On Monday the 15th in New Zealand (still Sunday the 14th in the US) the local market dropped 2.77 per cent — a moderate fall compared to the 15 per cent crash on October 20, 1987.

But there was more damage to come. By the end of the week the local market had lost 6.8 per cent. By the end of the year, 18 per cent.

In total, across 17 months from a peak in October 2007 to a low in March 2009, the NZX50 shed 44 per cent.

“The difference between 1987 and 2008 is that ‘87 was the purest point of non-intervention,” says Cullen, referring to the hands-off economic policies of the 1980s. “But also, government debt-to-GDP ratios were much bigger then than they’d become by 2008. New Zealand, and Australia even more, were in a much better position to weather it.”

As to how we are placed now, Cullen sees risks on the horizon. “The big central banks have got enormous amounts of assets on the books, you’ve got enormous indebtedness,” he says.

“It’s an open question whether the central banks have the capacity to do the same trick they did post-GFC.

“I don’t think you can claim we’re It’s the end of a giant as Lehman memorabilia goes up for auction in London.

Photo / Getty Images really back to normal.”

Doug Pearce, now a director of the NZ Super Fund, was chief executive of British Columbia Investment Management in 2008 — managing US$75b in assets. In a long career in investment, he has dealt with the high inflation era of the 1970s, the 1987 crash, the Asian crisis of 1997, the tech wreck in 2000 and the GFC.

He believes we may be better placed to avoid a systemic failure now, but another correction is inevitable.

“One of things you have to look at is the length of the bull market and the valuations. Pretty well across the board, it seems high, it seems fully priced,” he says. “I think there’ll be a correction again at some point — hopefully not a crash.”

Some progress was made improve the system, he says.

“The banks are in much better shape, the regulation has improved, the stress testing has improved.” But debt remains a concern, he says.

“I believe debt levels are excessive. There are storm clouds out there for sure.

“It’s just human nature that we forget things.” to New Zealand might have avoided bailing out failed finance company investors to the tune of $2 billion if Australian Prime Minister Kevin Rudd had held his nerve after the Lehman collapse, says former Finance Minister Sir Michael Cullen. For Cullen, the defining moment of the financial crisis was the day of Labour’s campaign launch at the Auckland Town Hall — Sunday October 12.

It will be remembered as the day Helen Clark announced the Crown Retail Deposit Guarantee scheme.

It was a move that reassured New Zealanders their bank deposits were safe, as big banks collapsed around the world. But it also forced the Government to bail out investors in some higher risk finance companies — many of which collapsed for very different reasons. “That was not what was written in Helen’s speech in the morning for her delivery in the afternoon,” Cullen says. “The plan was to announce that progress was being made on a partial guarantee system.”

Cullen had been working with the Reserve Bank on a more measured guarantee scheme — one that could have avoided bailing out the likes of South Canterbury Finance when it collapsed in 2010.

“Quite possibly yes,” says Cullen. “I was not keen on guaranteeing the finance companies.” He says he was always very conscious of the moral hazard associated with providing state support for high risk investments.

But “as we were preparing for Helen’s speech . . . basically in the green room at the Town Hall . . . word came through from Canberra of rumours that Kevin Rudd was about to make a major announcement,” Cullen recalls. Hurried calls were made to officials in Canberra and at the IMF/World Bank conference in Washington.

“The people in

Washington, including Wayne

Swan, Australian

Treasurer at the time, said they knew nothing. But we got confirmation from

Canberra that

Rudd was going to be announcing a full guarantee of the Australian financial system,” Cullen says.

“So Helen, Heather [Labour chief of staff Heather Simpson] and I had a quick meeting at which my strong advice was that we had no choice but to change Helen’s speech . . . to announce that we would have a full guarantee.”

Rudd — seemingly acting unilaterally — forced their hand and put New Zealand in an impossible position. Following protocol for emergency policy decisions that close to an election, Cullen ran the idea past National’s Bill English and he agreed.

“At that point we were very worried that if the Aussies did that and we did nothing, there would a loud sucking sound of capital going from New Zealand to Australia.

“The Australian banks, and therefore fundamentally the NZ banks, were sound because they just hadn’t gotten into all those complex derivatives. I don’t know where [Rudd] got his advice from.”

In the end, the Government paid about $2b to finance company investors — including $1.58b to South Canterbury Finance, although close to $1b was clawed back by receivers. Kevin Rudd

Liam Dann