Taking Stock 17 April 2025

WHETHER it is in governments, boards of directors, or even households, extreme stress inevitably threatens stability and leads to poor decisions.

In government, the outcome might be programmes that are poorly researched, implemented with no credible plan, and perhaps executed by people with little social or intellectual intelligence.

In households, stress — for example, loss of employment or insufficient money to meet essential costs — might result in a doomed attempt to find peace in alcohol or drugs, or even seeking a solution at the Lotto shop. It would not be unknown for stress to end in ugly biffo, broken families, general dysfunction, and jail.

But it is in the corporate world that stress leads to issues that most affect investors, an audience Taking Stock addresses.

Many of my generation will recall one simple well-known disaster that began with stress.

In the 1980s, Chase Corporation for a short while was a sharemarket hero, its directors pursuing a strategy of erecting glitzy buildings, with lots of reflective glass, in prime city areas. Many have long since been demolished.

The company was built on debt and on pumped up property valuations in the same era that bred a wide range of quite dreadful property shysters, many of whom failed, many borrowing to pay the interest on their debt, many regularly lying to the media and the stock exchange. (None exist today on the NZX.)

Towards the end of Chase’s life, the outstanding banker, (the late) John Anderson, compiled an intricate analysis of Chase, proving it was similar to an edifice built with playing cards. 

The National Bank understood Anderson’s analysis and withdrew any funding as fast as it could.

Facing cashflow deficits, losing banking support, and observing a weakening share price, Chase figured it could solve its problems by pumping up its share price, presumably anticipating that this would boost institutional confidence. 

So Chase bought Farmers which had a large, internally managed staff pension scheme, wisely invested in high-yielding bonds and in equities. 

Having acquired Farmers, Chase sold off the pension fund assets and bought Chase shares with the proceeds, hydraulicking its own share price for a very brief short period. (A cynic might wonder who was selling at the contrived prices.)

Wise institutions sold any Chase shares they held to the Farmers pension scheme, controlled by Chase.

Confidence was not restored. Cash flow remained dire. Credit was hellishly expensive and became unavailable. There was no market to buy Chase’s buildings at anything like the phony valuations.

Chase collapsed in disgrace, inevitably, as Anderson had foreseen. The abused Farmers’ pensioners lost virtually all of their pensions. There was no accountability.

Stressed, Chase had responded to panic with a quite stupid strategy which resulted in even more people losing their money, and their directors losing their credibility.

I have observed similarly stupid responses often, for example during the finance company collapses, when the likes of St Laurence, Hanover, Bridgecorp and even South Canterbury Finance (SCF) sought to glue wallpaper over gaping holes in the gib board.

SCF, one recalls, even hid a $60 million non-performing loan behind the son-in-law of a director, the son-in-law unaware of the duplicity, aimed at hiding a stupid loan.

Stress messes with the minds of directors, and politicians, and households unless it is contained by strong, sane leadership, which insists that spilt milk must be mopped up, not hidden by a mat.

One cannot think of what the universally-derided Donald Trump is doing without noting that the cause of his mindset is extreme stress.

Huge global debt, unaffordable and unserviceable in many countries, has led to idiotic behaviour in many places.

Such debt can be serviced only if the cost of debt is virtually free.

There are no roadways to cheap funding unless inflation is restrained.

So we have tariff wars, and currency wars (China devaluing the yuan), and trade wars, lurking behind them devastating real wars, with Taiwan’s future looking to be rising on China’s agenda.

Stress in global markets is hardly new.

I have argued for some years that excessive use of debt had to lead to a resetting of global asset values - the sooner, the better.

This is just one of the reasons why I oppose the buying back of one’s own capital. (Ask ANZ about this!)

Trump’s erratic ad hoc tariff policies have not been supervised by wise people.

He has shifted his rationale from reciprocity, to punishment for “disrespect”, to trade deficits, to a plan to replace taxes with tariffs, to a plan to close border issues, to a plan to stop fentanyl invasion, to a plan to stop the world from dealing with Iran, to a plan to rebuild the US manufacturing base.

My view is that this unstable president has been the catalyst for a recalibration of sharemarkets, which by any historical basis had been approaching the Dutch tulip madness of the 17th century.

Stress is growing.

It never produces excellent solutions.

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THE certainty of chaos, with the unpredictable outcome for listed securities, will again bring attention to the support, or lack of it, for all retail investors in New Zealand.

The patterns of the past will recur. That much is for certain.

As those behaviours become visible, investors will again want to know what value for them is in those who are paid to protect investors.

The protectors should begin with the companies’ directors and executive managers.

The good news is that much tougher penalties should dissuade the weak, the dishonest, and the unethical from actions that undermine investors.

Better law now exists. Useless directors, like those at Mainzeal, have been fined tens of millions, and are now, or if not should be, unusable in the well-paid roles they might seek as directors. Litigation funders have made a welcome difference. But we still seem to have many directors with no ability to understand risk.

The second layer of protection should be the trust companies, where they exist. They usually exist in unlisted securities, like property syndicates, forestry syndicates, and managed funds.

There is very little good news here. History suggests they add no value.

At least these ineffective people are now registered and regulated by the Financial Markets Authority. Surely the concept of a trust company supervising anything is demonstrably anachronism.

Read the item in next week’s newsletter to gain insight into the fallacy that trust companies perform a useful function (for anyone, including estate and trust administration). Trust companies continue to offer no value to investors.

The third defence for investors should be the auditors.

They are definitely more effective than they were at the time of the 2008 global financial crisis, when all the major audit firms displayed weaknesses, some worse than others.

In NZ I recall a rare exception. I contacted the trustee, the chairman, and the auditors of Lombard Finance in March 2008, pointing out the appalling betrayal of investors by that deceitful company.

It was toying with critically important covenants in its trust deed; worse it was behaving egregiously, covering up the breaches, with no obvious regard for the investors, by trying to hide its worst loans.

Lombard’s commercially inept and pompous chairman, Doug Graham, swatted away the breaches, in his response to my letter. (As an aside Lombard was at different times governed by two other hopeless ex-politicians, Hugh Templeton and Bill Jefferies).

The trustees, Perpetual, exhibited their third form standards by claiming they knew of no breaches. They added zero value for their money.

However, the auditor, Deloittes, responded like an adult, thanking me for my research. Within two weeks Deloittes had moved into Lombard, discovered the rot, and Lombard had been put into receivership.

Deloitte’s decisiveness was rare.

Many auditors, including Ernst Young, when it was put in to sort out South Canterbury Finance, displayed poor standards by signing off valuations that were roughly as authentic as a nine-dollar note.

Happily, the hefty penalties now imposed on auditors are delivering a better standard than before, though we might find out the degree of improvement when the 2025 market upheaval is revealed.

Please note that globally the auditor crisis is still alive. Google the audit failure with e-fisheries, an Indonesian fishing start-up which fabricated its accounts, was audited without comment, attracted hundreds of millions of dollars from world-leading fund managers, including the Singapore government,…. and then just five months ago went broke, investor money incinerated.

The fourth defence for NZ investors should be from the banks, which have covenants aimed at enforcing sensible terms and conditions on all organisations to which the banks lend.

Banks are remarkably self focussed. Equally remarkable is the banks’ group view that they have no social responsibility to other stakeholders, like unsecured creditors or shareholders.

Will the 2025 upheaval reveal any improvement in their standards?

Then we have the receivers/liquidators, whose task is to achieve the optimal result when they are called in.

They can be likened to the ambulance staff who arrive at an accident. One would sing the praises of a receiver/liquidator who exhibited the decency and devotion of ambulance staff. I hear no melodies.

On any social chart, receivers would have sat close to repossession agents, in terms of respect, after their frankly awful behaviour following the 2008 crash, with McGrathNicol setting the standard that signalled the bottom of any waste-water facility. (My view was the MN should have been prosecuted for their errors).

Very very few such people, perhaps John Fisk of PwC, Tony Maginness, Damien Grant, and previously Stephen Tubbs of BDO Spicers, have risen above the pack that I have noticed.

Finally we fall back to the regulators, currently the Financial Markets Authority.

After an astonishing period of ineptitude in the years between 2000 and 2010, when only its senior legal counsel, Liam Mason, ever seemed to understand, the Securities Commission was euthanised. Thank heavens for that. It was hopelessly governed, hopelessly led, and largely ignored the information supplied to it. Some of its appointed governors were poorly selected.

It was cynically underfunded by successive governments, a tiny excuse for its abject failure to be curious about highly improbable claims of finance companies like Bridgecorp, and financial selling groups like Money Managers, Broadbase, Vestar and Reeves Moses Hudig.

The FMA has much better governance now, and more intellectual grunt, energy and curiosity than the Securities Commission had.

Sean Hughes, a gutsy admirable man, then Rob Everett, a calm, intelligent chief executive, put the FMA on a track that has been more effective than the Securities Commission had been under Jane Diplock’s leadership (or lack thereof).

The FMA makes and enforces rules.

It is still under-funded.

The imminent messes created by the current upheaval will reveal whether the Crown has succeeded in establishing standards that really do protect investors.

I repeat that we are now in a stressed environment, historically defined by panic-ridden behaviour by boards and executives of companies that face exposure for poor decisions, poor assessment of risk, and subsequent unsignalled losses. Synlait Milk displayed examples of such panic, as did Ryman Healthcare.

Panic has previously produced tactics designed to buy time while new risks are undertaken to offset existing, but perhaps undisclosed, losses.

We should by now have a series of moats to prevent losses spreading, beginning with directors, trustees, auditors and bankers.

We do not want receivers/liquidators to be the solution, and we certainly do not want the FMA to be dragged in to deal with illegal behaviour.

The coming months will test the system as stress produces its inevitable results.

Offenders cannot simply blame Trump.

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Travel

Lower Hutt – 29 April – Fraser Hunter

Auckland (Ellerslie) – 1 May – Edward Lee (FULL)

Auckland (Albany) – 2 May – Edward Lee

Palmerston North – 6 May– David Colman

Christchurch – 7 May – Johnny Lee (FULL)

New Plymouth – 9 May – David Colman

Nelson – 12 May – Chris Lee (FULL)

Nelson – 13 May (morning only) – Chris Lee

Blenheim – 13 May (afternoon only) – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners