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One market analyst has questioned the government guarantee of FAI Finance.
FAI Finance, owned by the troubled Hanover Group, is one of 15 finance companies to receive a government guarantee for its retail deposits.
Hanover Finance investors pulled the Hanover Group from the brink of receivership in December, agreeing to a five-year moratorium that involved a debt restructure plan and the appointment of paid independent directors.
In July last year Hanover Finance froze over $500 million of investors' money citing deteriorating market conditions and loan non-repayments.
Hanover shareholders Mark Hotchin and Eric Watson agreed in December to put $90 million in assets to help recapitalise the company.
Brian Gaynor of Milford Asset Management says, based on the track record of Hotchin and Watson, the government's guarantee of FAI Finance is "appalling".
"When the government announced the guarantees back in October last year it set out certain criteria. It talked about the acumen and the ability of the people running the company. They talked about the companies that were going to be given be given those guarantees were going to have to be important to the New Zealand financial system," he says.
Gaynor says government officials he has spoken to have little concern over the guarantee as the company has not had any criminal history of fraud.
"My complaint about that is we set the bar so low in this country...given what has happened to a lot of individuals who invested in companies associated with the Hanover Group," says Gaynor.
"That a Hanover Group company should be given a government guarantee because effectively it gives [them] a huge ability to be able to raise more money and to grow and to make more money for the two shareholders."
Gaynor says it is arguable that FAI Finance has met the criteria the government has set out, such as the past record of the individuals running the company.
He also expressed concern over the lack of independent directors on companies the government guarantees.
"If we were to start giving guarantees to companies where you don't have a number of independent directors, once again we're setting a very low standard," he says.
Gaynor says the government guarantees need to be consistent with
the new rules that are due to come in for finance companies.
