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Dr Alan Bollard on Q+A - Source: Q + A -
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ALAN BOLLARD Interviewed by GUYON ESPINER
PAUL Before this eventful weekend, the country was already
rattled by the news that our largest private finance company was
going into receivership. South Canterbury Finance was all the
news last week when it became the latest victim of the global
financial crisis that had its genesis back in 07, a crisis that's
now the subject of a book of the same name by the Reserve Bank
Governor, Dr Alan Bollard. It's a landmark book, it's the
first book by a central banker anywhere in the world working at the
time the panic began. In it Dr Bollard offers a vivid
description of how the Labour government here in New Zealand set up
its Deposit Guarantee Scheme on the fly, on the day of its campaign
launch in 2008. So when Political Editor Guyon Espiner spoke
to Alan Bollard on Thursday afternoon, Guyon started by asking
whether the scheme was conceived into shambolic or hurried a
fashion.
ALAN BOLLARD - Reserve Bank Governor
No that's the reality of what a real crisis is like, and that was a
real crisis, it had been a crisis year, it was a terrible month,
stuff was happening overseas, stuff was happening around Iceland
and Ireland and Britain and we started doing a bit of background
work on this. And then of course events really happened very
fast with the Australian Prime Minister telling us what they were
going to do.
GUYON He was on the phone to Helen Clark saying that he was going
to announce a scheme. Helen Clark was only saying that we
were going to consider a scheme at that stage. I mean the
original scheme, only the big five banks were charged entry fees,
but you'd warned about having free entry for finance companies, and
you said in your book that it could be very costly and would leave
the way open for entrepreneurial finance companies to undertake
risky investments at taxpayers' expense. I mean that's
transpired hasn't it?
ALAN Well it has in some ways but talking most recently about
South Canterbury, that was a bit of a different situation. I
mean that wasn't one that we had any particular reason to worry
about at that stage. But you know the fact is the reality is
in a nasty crisis of that sort, you haven't got much room to move,
and when you have to move you've gotta move very quickly. So
looking back I'm not sure that we could really have done anything
really different from what happened.
GUYON Well you do say that in hindsight the entry conditions
to the guarantees looked too lax?
ALAN Yeah but that's particularly relating to some of the
riskier very small finance companies, some of which have gone to
the wall since then. The issue was that if we hadn't let them
in, that was the death knell for them, the next day. That was
how long it would have taken for people to get their money out and
stick it in the banks. What we wanted to do was let them in,
but charge a realistic risk adjusted price for the real risky ones,
that's what we didn't manage to do initially.
GUYON You wish you had achieved that? That the finance
companies should have been charged some money given their risk, and
that would have meant that we wouldn't have had to have paid out so
much?
ALAN Yeah absolutely, but on the other hand the Minister had a
very important point which was, he was worried that credit unions
and building societies wouldn't have been able to afford to get in,
and that could have spelt the death knell for them, and it was very
important that's they shouldn't be left stranded. So you know
it was a no win situation.
GUYON You do write though that by early 2009, most finance
companies had entered the scheme and I'll quote your book.
You say 'knowing that they were sheltered by the taxpayer,
depositors were happy to leave their funds in what otherwise might
have been some very shaky institutions.' I mean that
created a perverse incentive, while they could have money invested
in companies which were paying a high return and yet pay
&.
ALAN Yeah we did manage to plug a lot of the gaps in following
months by getting agreement to charge for increases in deposits in
those companies, and that did happen in the sense stopped them
growing any more, but there wasn't much we could do in terms of
what was there. Now you've gotta remember of course
we'd had finance companies failing since 2006. We had a bunch
of them already hitting the wall, nothing to do with the global
crisis.
GUYON But South Canterbury Finance, obviously taxpayers will
be pretty focused on that at the moment, they just paid out 1.6
billion dollars. What concerns did you have about that
company, given that the Reserve Bank had responsibility for
regulation from 2008.
ALAN No well I can't talk about that for legal reasons, but
that's not what I'm really talking about in the book, I'm talking
about some of the one that were very clearly riskier earlier
on.
GUYON But you talked in your book about having a death watch
league table and saying it wasn't a surprise to you that Mascot had
fallen over. Did you share that death watch league table with
Prime Minister and the Finance Minister.
ALAN Oh well we had to be very careful about who we could talk
about particular institutions to, but we could talk the broad
principles of it and I mean you've gotta get real on these
things. Of course there's a bunch of finance companies that
are going to be a lot riskier than others. This is the sort
of issue that happens when you're working to a situation that in
one sense New Zealand was pushed into, once the Australians had
announced they were going to do the scheme. We had to do
something. If we hadn't then our banks were at risk. If
we had cut the finance companies out, all the finance companies
would have gone. If we'd cut specific ones out, there would
have been law suits all over the place, and there would have been
blood on the floor the next morning.
GUYON Where was South Canterbury Finance on that death watch
league table?
ALAN No well I'm sorry I'm not gonna tell you that.
GUYON Well why not?
ALAN Because I'm not divulging information that could have
been commercially sensitive, and because this matter's still
alive.
GUYON But you had that information and it says in your book
that the Prime Minister and the Finance Minister were surprised
when Mascot had fallen over. So presumably you didn't share
that death watch league table with them?
ALAN I'm telling you - we told ministers the distributions of
risks in there. We worked out the probabilities of risks,
that's been roughly accurate. We didn't talk about individual
companies for obvious reasons.
GUYON A lot of people might be confused and not understand why
it is that you're sitting over there in the Reserve Bank building
with that information. You know South Canterbury Finance is
at risk, you have a league table of companies that are going to
fall over, yet you can't tell anyone about it?
ALAN No that's not what I've said, and I haven't said that
about South Canterbury.
GUYON Well where was it then?
ALAN Well I've just said, I'm not going to tell you
that. But we had to do what a proper set of officials would
do, and that was to try and work out the broad probabilities of
default, and we probably were roughly right about those. But
that's all you can do in a situation like that.
GUYON South Canterbury Finance was allowed to go into the
Extended Guarantee Scheme in April.
ALAN This wasn't about South Canterbury. We were worried
about the New Zealand financial system. There's some very big
banks that could have caused a lot of problems by doing that.
GUYON I appreciate that, but with respect to South
Canterbury
Finance, which has just had a one and a half billion dollar bail
out from the people, including the people, watching this
programme. South Canterbury Finance in April was allowed to
go into the Extended Guarantee Scheme. Should it have
been?
ALAN Oh well that's a bit irrelevant, because the extended
scheme hasn't actually started yet.
GUYON Yes but it allowed the depositors the confidence to keep
their money in.
ALAN Well I'm not commenting on that, I'm very happy to talk
about what I wrote in the book, but this is all since the book's
been written.
GUYON Yeah but this is the very material that the book is
based on, the crisis.
ALAN In the book I say we were very reluctant to have to get
into a deposit guarantee scheme, with all the distortions and
adverse incentives that it offered. But New Zealand was
caught in a very nasty situation where it had to balance up the
possibility of not going in, and the possibility of doing it, and
the possibility of not doing it was far worse. So there's no
winners in this situation, but we did stop a bank crisis, and we
did stop a financial sector crisis. So ultimately that was a
successful scheme, not an unsuccessful one.
GUYON Before I leave finance companies, you've had regulation
oversight since 2008. Only in March 2010 have we had
mandatory credit ratings for finance companies. I mean that
seems a woeful lack of stewardship in that regard?
ALAN No actually the law went through in late 2008. The
regulations allowing for credit rating agencies after the legally
required consultation period, has taken through till early this
year. That's the reason for that.
GUYON Did you wish you'd forced them to take credit ratings
earlier?
ALAN Oh well the New Zealand system of regulation for finance
companies in the past hasn't worked and that's why government
decided to change it all. Unfortunately that's how long it
takes to get regulations through with Orders in Council. If
you don't do that properly then you just end up in court.
GUYON Let's change tack here. You've got a lot of focus
in this book, personal reflections in some respect, but of the
financial crisis, and you talk about a conference of central
bankers in Switzerland in the summer of 2007. And you talk
about a young American business academic, who took you through one
of these new complex financial products, and asked whether anyone
in the room really understood it, and it seemed the answer was
no. And you write that this was a sobering experience, and
'for the first time I confronted seriously the implications of
these financial instruments, and the damage they could do if they
were misused.' Did you voice those concerns?
ALAN Oh well I mean on the side yeah, absolutely we have a lot
of discussion about them. I mean the first thing for us
though was to work out did we have any in our system, and the
answer was no. We've been lucky, good, whatever, through
this. The New Zealand banking system hasn't had these complex
and potentially quite toxic instruments.
GUYON Sure but you've got a bunch of central bankers from
around the world who at that point realise they don't even
understand this financial product, and you say in your book that
within months of that conference, that scale of that financial
product was in the trillions of dollars.
ALAN Oh well not that particularly no. You're not
reading it quite right. But in terms of broader derivatives
yeah there were heaps of them around.
GUYON And did anyone say anything?
ALAN Well I mean I think actually Alan Greenspan's view,
probably reflected for quite a long time a general view which was
they helped efficiency in the financial system, and on balance they
probably helped stability. Now in that he was wrong, and so
central bankers' broad view was probably wrong, regulators' view
was wrong, a lot of bankers' view was wrong, and politicians' - who
caused, in some cases caused some of this - views were wrong as
well.
GUYON It just seems extraordinary to me that people of your
own standing and other central bankers from around the world, got a
very strong taste in early 2007 that there were hugely complex
derivatives and instruments that you didn't even understand, that
you didn't employ anyone who understood them, and yet we didn't
really hear about that until things started &.
ALAN Oh this case I'm talking about is somebody talking about
a new product it was thought that could be used. He's using
it to make the point which is that people didn't generally
understand the extent of Sub Prime and the ability of Sub Prime to
go toxic. But New Zealand can be responsibility satisfied and
Australia can as well, that its regulators had organised their
regulation of banks in a way that those weren't taken on
board. So that was a success story not a failure story.
GUYON I want to turn to another colourful description you have
in your book of the Job Summit in Auckland in 2009. You write
that 'the captains of industry and the leaders of the community
were having a fine time coming up with headline ideas, sometimes
backed by back of the envelope calculations'. You go on to
say that the technical quality of the ideas was limited in some
cases, but that John Key had successfully achieved his aim of
creating a positive feeling of facing the future together.
Was that a feel good exercise, the Job Summit?
ALAN Oh well it was partly, it wasn't entirely. It was
getting a lot of agreement together from a lot of different parts
of the community. So it was quite important like that.
But yeah I mean I wasn't impressed by some of the business leaders'
views of how to do policy. They were quite naïve about
that. But as you can see, you know I've written this book in as
truthful a way as I can, and I went to that Job Summit, absolutely
exhausted, and feeling quite grumpy about it, so I've cast a rather
caustic view on the thing.
GUYON Why were you grumpy about it?
ALAN Oh because I was exhausted, because of the late nights
involved in staying up trying to work out how we were going to help
protect the New Zealand economy and financial system.
GUYON And you didn't think they were achieving much?
ALAN Well you know quote me properly in there.
GUYON Well I will because you left it, you say 'I rang my
assistant and asked her to book me on an earlier flight to
Wellington feeling only slightly guilty I snuck away and headed for
the airport. I admit to an ulterior motive, back in
Wellington I headed for the stadium where I was just in time to
catch the end of the New Zealand 20/20 cricket game against
India'. I mean they are not the actions of a man who was
taking this Job Summit serious.
ALAN Oh yes they are absolutely. This is a 24 hour 7
days a week sort of operation.
GUYON And I don't have any problem, I'm sure no New Zealander
does, but you're going to the cricket, but this is a one day Job
Summit and you basically were saying it was a feel good exercise
and that you left early to go to a cricket game.
ALAN I haven't said that it was purely a feel good
exercise. As I said it brought together a lot of people
around the community, it's important you do that at the particular
time, specially at time of stress. It did that I think
quite successfully. What I have said is that I didn't think a
lot about some of the business leaders' views of how to run
policy.
GUYON And didn't think enough of it to stay for the
duration.
ALAN It had broken into specific groups, the bits that I was
related to were done. I arrived there at 6.00am that morning
- get real.
GUYON So you participated fully in it?
ALAN Well in the parts that I was involved in,
absolutely.
GUYON I just wonder though, cos that's the sort of passage in
the book that National's political opponents may well seize
upon. Did you think carefully about writing a book like this
while you still hold the position of Govern of the Reserve
Bank?
ALAN Yeah I did think carefully. I mean it is a bit
unusual while you're still running an organisation like the Reserve
Bank to do that. I thought people would be interested in
this, and you know it's warts and all, I haven't tried to cover up
any of that. Now you can get in and try and make issues about
some of that, but the fact is you've gotta look at that whole
period which is a most extraordinary period. New Zealand came
through it not too badly considering many countries. This is
just a little bit of the story of it. But yeah I had to be
very careful, and some things I haven't divulged. I've said
that very clearly at the beginning because there's some things I
can't talk about yet.
GUYON Can I just finally ask how you see some of the future
going, you've just been with central bankers from around the world
in the United States, what was the mood like there?
ALAN Oh well the mood in the United States from an economic
point of view is a bit sour at the moment. Somebody gave a
paper there that said, if you look at 100 years of banking crises
and economic crises around the world, there's some common
features. One is that it takes a decade to build up the
imbalances, and then it takes a decade to clear them.
GUYON Well we've got another decade of this?
ALAN No I wouldn't say it like that, but there's going to be a
slow grinding recovery for some countries around the world.
GUYON Does that mean in terms of the impact on New Zealand,
that you will leave the official cash rate at 3% for the remainder
of the year?
ALAN And you can wait till next week till we do our monetary
policy statement to hear the answer to that one.
GUYON Alright. Thank you very much for joining us, we
really appreciate your time.
