Sandy Maier was put up as the man who might restore SCF. This he failed to do, but at the time of his appointment as CEO he had some powerful backers. When Maier and his wife wrote their $60,000 report on SCF in December 2009, they did so armed with the KordaMentha report and with Forsyth Barr’s input. They interviewed various SCF staff and Maier had an IT man analyse the loan book, but the couple did not seem obviously equipped to rescue the company. A deep understanding of SCF’s malaise would have taken more time and involved rather more knowledge than the Maiers could bring to this highly specialised task.
Few saw Maier’s report or regarded it as highly relevant, but it led to Forsyth Barr’s recommendation, supported by the Crown, that Maier be offered his extraordinary one-year contract. His appointment enabled FB and the new board to clear the path, expelling Nigel Gormack and Graeme Brown and putting an end to their plan to reinstate SCF with the possible help of Hubbard, Kerr and Treasury.
FB in November 2009 had written a remarkably detailed paper to the new directors, outlining their individual tasks almost as though FB had accepted responsibility for the future of SCF.1 Presumably Treasury accepted this. Maier bought into the plan. I had never seen an investment banking plan offer such instructions to a board of directors, but the SCF directors were new and were in the FB camp. To my knowledge, Maier had never managed a finance company in his career, and had certainly not restored a broken finance company.
The SCF executives upon whom Maier would depend were Baxter and Gloag. Baxter had picked up the Maiers from Rydges Hotel in Christchurch in December 2009 and had driven them to and from Timaru. Throughout the two-hour car ride Maier was busy on his cellphone, talking to Paviour-Smith and conducting other business related to his power company directorship. Baxter has good hearing.
He found no reason to hope that Maier would understand the problems or the solutions and found no common ground with the two Americans. Most certainly the couple were not regarded as ‘royalty’ by the SCF executives or staff. It must have been unpleasant for all.
Within months Maier was to destroy Baxter’s Face Finance, demanding the cash flow from its loan book, and selling off FF loans to the banks, undermining the relationships FF had with its clients. The receiver finished off the destruction of FF, flogging off its remaining loans at around 80 cents in the dollar, to a competitor.
Face Finance in 2010 was a diamond in SCF’s treasury of mostly fake jewellery. It had around $15 million of shareholders’ funds, an excellent loan book, wedded clients and was probably saleable at a multiple of its nett profits. Baxter by then owned 15 per cent, Tim Murphy, who had bought out Allott, 10 per cent. In effect, Baxter watched as his major asset, worth to him many millions, was blitzed, to become worthless within a few months.
In June 2009 Baxter had been summoned to Timaru by SCF directors and asked to take over as CEO immediately from McLeod. After the meeting, McLeod was retained, and was not sacked until November. Briefly Gormack then presided, Baxter helping him. Next came the American Maier, but with no obvious agenda or ability to rebuild SCF. Baxter might have concluded that Maier simply wanted cash flow to give him the time to sell SCF.
Kevin Gloag similarly failed to find faith in Maier. The American’s frequent use of strange metaphors and riddles did not strike a chord with Gloag, a simple, blunt communicator.
Indeed, Maier’s riddles perplexed a wide audience. Examples of his verbal gymnastics were evident in his comment to the New Zealand Herald’s journalists that ‘my job (at SCF) was to dance as quickly as I could and do triage’. When his rescue attempt finally had failed, he told the Herald that ‘sometimes you lose a patient’.2
Maier desperately needed Gloag to remain his link with the broking network. Gloag made it clear he was leaving. SCF sought to change his mind with a 40 per cent salary increase. Money was not the driver of Gloag’s discontent. He received exactly one pay day at the increased amount but recalls with humour that his unpaid holiday entitlements were calculated at the new rate. He left in May 2010 without any send-off, having told Maier that the American was trying to put lipstick on a pig, rather than fixing the problems.3
Maier later told a Christchurch meeting how much he regretted Gloag’s resignation. Clearly he found it distressing, as he could not bring himself to ring Gloag and farewell him. Gloag left with his holiday pay and the knotted stomach that resulted from his certainty that SCF had lost its chance of recovery.4
I respected his decision to leave. Gloag wanted clear air. He left to cut down trees on his property. Four months later he joined our business and is now a partner, admired for his knowledge, work ethic and integrity. His wife Sonja stayed on at SCF, ultimately in charge of the funding team until the receiver mercifully released the staff, paid the bonuses and changed the locks in September 2011. Sonja also works for our firm and is an admired and competent administrator.
Maier lost his key executives at an inconvenient rate. He chose to hire the public relations firm Star Public Relations, with whom he had often worked. Star supplied manpower to SCF and sought to attract the investor funds he needed to survive for long enough to find a buyer. It is hard to imagine any PR firm gaining support and credibility in capital markets. The PR firm’s contribution was to seed articles in media outlets such as the New Zealand Herald. Maier was depicted as a champion of financial engineering. The SCF chapter of his career would not have added to any previous successes. Perhaps it was Star which dreamt up ideas like flying planes with SCF banners over sports grounds, or trying to flatter influential brokers. Something much more substantial was needed than giving away candy bars, one of the sugar rushes proposed by someone.5
SCF needed a credible plan. It needed an experienced chief executive to work all day and every day inspiring the team, displaying long-term achievable plans, and gaining the support of those who mattered: Treasury, Hubbard, staff, investors and capital market leaders. Most of all, it needed Treasury’s commitment to restore SCF. It had none of these.
Maier himself seemed to have little support from Treasury. Perhaps it had lost its enthusiasm for the project when Hubbard dismissed the Project Rome plan and the $250 million recapitalisation programme failed. Perhaps Treasury lost hope because Hubbard’s behaviour with Aorangi Securities had cast such a worrying shadow over his reputation. Whatever the cause, Maier had started with an uphill task.
My view was that the best external finance company CEO for the job would have been Phil Herbert, a previous general manager of UDC, more recently admired for his role in salvaging Speirs Finance, a grossly under-capitalised family finance company in Palmerston North. Herbert’s job at Speirs was to climb a mountain without boots. But he succeeded in rescuing the company by applying simple and transparent finance company principles, mixed with commercial acumen and honest communication. Many finance company CEOs in that era were pleasant, socially skilled people who simply could not cope with the global crisis of 2007–8. They generally reverted to type or perhaps simply succumbed to the temptation to offer misleading information and unworthy solutions. Herbert was a refreshing exception with real experience and knowledge.
The year of 2009 was a dreadful time in the capital markets even for the highly skilled. For example, I had been deeply affected by the collapse of Strategic Finance, whose chairman and former CEO Jock Hobbs was someone I admired; I had taken his analysis of Strategic’s true position as gospel. I continued to believe Hobbs was let down by others, including Allco HIT, the Australian raiders who bought Strategic a year or so before it expired. It is hard not to link Hobbs’s fatal illness with the horror he must have endured as others lied and cheated. He died in his fifties of leukaemia.
Other CEOs posed as trustworthy but proved under pressure to be more focused on protecting their assets inside family trusts than retaining their dignity and integrity. Perhaps it is true that many financiers measure success by the accumulation of wealth rather than real achievement. Monetary success need not preclude decency, integrity and social responsibility.
Herbert had exhibited those qualities. Baxter, Brown and Gloag could have run SCF if there been long-term support from Treasury. Herbert knew far more about the sector than Maier. Perhaps Maier never really believed he could restore the company. He had a one-year contract to restore value or minimise the Crown losses. He certainly put in the hours, regularly sending out emails in the small hours.
To be fair, it must be said that without support at the highest level, without a modern network, without any real knowledge of the underlying assets, Maier was harpooned before he started. From the outset he sought liquidity by pleading for investor support and by demanding that SCF lenders recover as much of their hopeless loans as quickly as they could. He sold liquid assets, including tens of millions of listed bonds and shares. He sold at whatever discount was necessary. He wanted cash flow to buy time. Lost value was a lesser problem for him. He dismissed the value of time, in restoring values. He was on a short-term mission.
He sold loans, like the $18 million loan to PGG Wrightsons that Hubbard had made to help out the company after a failed deal had cost it a huge sum. This loan was not impaired and had an attractive return, perhaps 15 per cent, yet it was hocked off to the banks at an ugly discount. Many other loans were discounted, some to the ANZ, some for whatever price a distressed market would offer.6
Clearly this was a costly strategy, perhaps forced upon Maier by Treasury’s failure to see how much worse the taxpayers’ losses would be if Treasury refused to fund the investors who wanted to be repaid. Treasury was going to repay all debenture investors under its guarantee. The cost to Treasury of advancing some of this payment by a few months was measurable in shekels. The cost of money to Treasury was barely 4 per cent per annum. Advancing money six months earlier would have cost 2 per cent.
Discounting assets by anywhere between 10 per cent and 50 per cent to gain the funds to repay investors was financial insanity. Treasury enabled this to happen. Clearly Maier felt he had no alternative but to give away what, in effect, was Crown money. He blustered and cajoled to gain new deposits and persuade people to renew, often breaking the unwritten protocols that an experienced broker like Gloag would never flout. His rewards were pitifully small if measured by the investors’ response. He talked about ‘phenomenal’ levels of new money and being ‘swamped’ with cheques, but such hyperbole must have referred to one or two days of unusual mail volumes.7 The incoming money was mostly at modest and declining levels, as Gloag would reveal. By discounting assets and encouraging the inept lenders to retrieve impaired loans, Maier minimised the total returns and antagonised some SCF-funded developers who were fighting in a stressed world to complete their projects.
At some stage the NZ Super Fund and the ACC were at least discussing a rescue plan. Ngai Tahu was in some sort of discussion; certainly interested in learning more about SCF’s valuable assets, like its land at Belfast.8 Maier was approached by Ngai Tahu and immediately after resigning from SCF became a director of Ngai Tahu’s investment company, a position he appears to have relinquished only in recent months.9 He must have managed his obvious conflict of interest well.
By April 2010, Maier had clearly abandoned the idea that SCF could be restored, and with Paviour-Smith’s help had set about a sale. A partial offer from an Australian company, Shearwater, might have been too exploitative to be considered. Shearwater wanted to inject several hundred million and pay out Kerr, and probably saw the payback as being the fees and the ability to acquire distressed loans at a low price. The promoters of the Shearwater deal also well understood the value of Helicopters NZ, Scales and Dairy Holdings.10
Clearly, Allan Hubbard’s empire was in crisis. Maier had accepted a formidable task. Some of the media were enthusiastic about Maier, fed by public relations handouts. He ‘has a reputation as the most skilled corporate fix-it man in the country’, raved the New Zealand Herald’s Liam Dann in August 2010. He ‘frankly appears to have worked magic just to keep [SCF] alive this far’.11
My own experience of Maier in 2010 was rather different.
In late April 2010 my son Edward and I attended a sixty-minute presentation from Maier and his chief financial officer in the Wellington boardroom of lawyers Bell Gully. What we heard left me stupefied. The information I had been asked to believe was utterly different from what I had expected to hear. Edward, then twenty-eight and with five years’ experience as a financial adviser for our company, was also stunned. Edward is bright and knows the difference between right and wrong, and is now a well-informed adviser, well able to penetrate corporate-speak.
Maier knew that I, like him, was fifty-nine, and that I had had a thirty-five-year career in financial markets. I had known SCF, its board and its executives for many years. He knew that by 2010 my knowledge of SCF was detailed. His was not. He probably did not know that Hubbard for some time had been mailing to me documents of the plans to strengthen SCF.
Many were confidential reports on which Hubbard had written. He chose to share those reports with me either to relieve stress, or to show me the potential solutions, or in some cases to display his frustration with others. He sent me an SCF restructuring plan for my comment in January 2009, liquidity reports on a regular basis, copies of emails between various parties (Paviour-Smith, Kerr, Shearwater people, Treasury), copies of Forsyth Barr papers, board minutes and minutes of meetings with outside parties, such as the meeting with Shearwater in June 2010.12 He did not request that I regard these papers as confidential but I chose not to publish them, preferring to use them to my clients’ advantage through the improved knowledge of my understanding of SCF’s problems. The issue of ‘insider’ information did not arise as I did not trade my securities nor release information.
As Edward and I walked in silence to my car to return to our Paraparaumu Beach offices after meeting Maier, my first thought was that Maier must have had some special agreement in his briefcase that allowed him to speak with impunity. Had the government agreed to bankroll a new bank based on SCF’s good assets, allowing all SCF’s investors to be fully repaid? Did he already have an agreement with a foreign buyer to ensure SCF’s survival? What the American had said, in summary, was widely reported later in the media. He believed:
None of this optimism was ever matched by the reality of what time was to uncover.
Maier concluded by asking us to encourage our clients to support SCF by renewing their debentures. SCF needed new investments for the recovery plan Maier said he had hatched. And thanks for coming in to meet with him. Appreciate the time. He was now off to talk to other market participants and spread these thoughts, accompanied by his contracted chief financial officer, David Jarman, previously CFO of Provincial Finance.
Maier had asked me to lunch as part of a campaign. He knew that our broking/advisory company had roughly two thousand clients with SCF investments. We were SCF’s third biggest sharebroking supplier of funds behind Forsyth Barr and Craigs. I wanted Edward to join the lunch meeting and form his own assessment. I thought he would offer a useful second opinion.
As it turned out, Maier had forgotten to book a lunch venue so after wandering around looking for a quiet café we agreed to forget the social chatter and the food and to borrow the boardroom of Bell Gully, SCF’s well-paid legal advisor. On the drive into Wellington I had summarised for Edward what I believed to be true about SCF and what I expected Maier to address:
The Crown needed to buy time so SCF could collect more of its property loans, enabling the company to benefit from the potentially valuable assets such as the dairy farms, the Helicopter company and Scales. Otherwise, SCF was headed for a disaster that would cost the Crown hundreds of millions. So, what I expected was a plan supported by the Crown that would ensure no investor was left short. I expected to hear that Treasury would stop the discounted asset sales and instead offer to repay the retiring debentures. Discounting the best assets was simply giving away Crown money. A child could see that. Surely the Crown would not allow such stupidity to continue.
Our meeting in Wellington was the first and only meeting I had with Maier. We had spoken often on the telephone following his appointment in December 2009 as a contracted CEO. His was a most unusual task. He was neither an employee nor a director but an external contractor, with none of the obligations of a director or an executive staff member (nor the rights). He had agreed to try to rescue SCF for $100,000 a month, plus the rumoured $5 million bonus. This was to be his ‘collection’ year at the tail-end of his career. Some might have described him as a receiver or even a statutory manager. I think he saw himself as an investment banker.
I asked others in the market why he had been chosen and why he had accepted. The responses varied. Most thought the potential bonus seemed relevant. Clearly, Maier felt the reward was enough to offset the risk of failure and any subsequent effect on his reputation. Hubbard told me his advisers Forsyth Barr had nominated the American, and that Treasury and the Reserve Bank had approved the appointment and the bonus structure.
The new board had read Maier’s report and installed Maier, replacing the interim CEO Gormack. Maier’s report was necessarily rushed and superficial, based largely on information provided by SCF’s technology wizard, Gavin Hawke, who had produced figures on loan arrears, rewritten loans, and historical relationships between arrears and write-offs. Maier concluded SCF had a ‘hole’ of $400 million, according to two who read his reports.13 Within weeks this calculation must have been drastically revised, as SCF reported that for the December half year to 31 December 2009, the write-offs were barely half of Maier’s figure. Ironically, Maier’s figure later proved to be understated, not overstated.14
By December 2009 Hubbard’s voice was becoming irrelevant. He had been sidelined. FB, Maier and the new board seemed to be in control. Treasury, as guarantor, was effectively the SCF shareholder. From the outset, Hubbard intensely disliked Maier and disliked losing control; he told me Maier was ‘about eighty’ and thought the American had no relevant ability or experience. I believed he had no experience in running a finance company. Neither did the new board or FB, in my view.
Yet I was much more optimistic than Hubbard. I recalled that Maier had been the statutory manager of the once Crown-owned Development Finance Corporation, which collapsed after the 1987 sharemarket crash. Maier, then fresh from an unremarkable stint as CEO of the short-lived New Zealand branch of the American merchant bank Citibank, had won some praise for minimising the Crown losses when DFC collapsed. I was aware of the praise but unaware of any details. Since then Maier had ceased to take executive positions but had had some consultancy roles and had found some directorships. One significant appointment was to the board of the Crown-owned power generator Mighty River Power. He was to retire from this role before the sale of the state asset. His retirement was not opposed by the organisers of that issue. He had also chaired GeonGroup Holdings, a company which tried (and failed) to rationalise the printing industry.
Maier has a white beard and ample confidence, and had one credit to his career that I regarded as potentially relevant to the SCF task. In the early 2000s he had co-written a report with a friend, former DFC executive Keith Sutton, which reached the pointed and prescient conclusion that Hanover was a potential disaster, waiting to crumble because of related-party, high-risk loans.15 The report had been binned by an inept board but I had given him credit for reaching a conclusion that was not obvious to the others who had access to the Hanover files, such as its sycophantic directors, the trustees and the auditors. His report had deserved to be published. I respect whistle-blowers.
So, when he rang me around Christmas 2009 to tell me of his new appointment, I was optimistic and encouraged him, offering my support. We agreed to meet from time to time. I thought the appointment would define his career and might restore mana and wealth to a man who moved in expensive circles but whose visible income potential was modest by Auckland standards. Living between Great Barrier Island and a mainland apartment in Devonport suggested high costs requiring high income.
I imagined that Maier must have had some political capital in the Beehive and credibility with Treasury and the major banks. That view turned out to be over-optimistic. The 1980s was a long time ago. Few knew much about the American, and even fewer liked his style of communication. In my experience this was a strategy that risked being seen as disguising lack of knowledge.
When Maier rang me, he acknowledged that I had a good deal of insight about SCF’s past successes and its current problems, and that my firm had clients with much-needed goodwill for Hubbard and SCF. Indeed in 2008, when the Crown had guaranteed all SCF’s debenture investors, our clients had nearly $70 million invested in SCF debentures and secured bonds, and $2 million in the perpetual preference shares. The debenture and bond figure rose to $90 million by the end of 2009 as our clients accepted that the government guarantee meant there was no risk in using SCF’s debenture offers or its bonds.
I agreed to help Maier by promoting the use of all Crown-guaranteed securities, and until our meeting in Wellington in April 2010 our firm continued to support his unknown plan. As long as the rate was satisfactory, the opportunity for our clients was obvious.
Between December 2009 and May 2010 Maier had become rather suspicious of me, no doubt correctly identifying that I was analysing SCF’s renewal rates and liquidity position, had long-term connections with the business, and had access to Hubbard. When Maier gave me an incorrect figure, I would quietly point out that he might be misinformed and should check with staff.
I came to meet him in April 2010 hoping to hear of some real progress in his rescue attempt. News of real progress was overdue. But what Maier said was at odds with what I thought I knew. One of us was clearly misinformed. One of us did not understand the real issue. Perhaps one of us was expected to believe a version contrived to deflect questions about a plan, because of the need for confidentiality.
I told Maier that what he was telling me was simply not correct. I explained that even if 60 per cent of his assets were producing 15 per cent returns but 100 per cent of his liabilities were costing 9 per cent, then there was absolutely no income left to cover costs or normal bad debts. SCF was not breaking even. It was losing at least millions every month, possibly tens of millions. ‘You should never repeat again what you have just told me,’ I said, failing to hide my dismay. ‘The words are misleading. Wrong.’ ‘You have a funny way of doing maths,’ Maier replied.
I have never discovered what he meant. Arithmetic is either right or wrong. I recall my words. I used them later that day during a National Radio interview. The best case I could put for Maier was that his obvious lack of current knowledge about finance companies had led him to make a mistake. In hindsight, I doubt that his focus was on the company’s performance. As I saw it, he was clearly focused on selling it, not restoring it. But perhaps, I thought, Maier had some undisclosed knowledge about an imminent solution that would make his errors irrelevant. Perhaps he had a buyer lined up.
If my response to him was rude, things got worse that day as he repeated his claims to key players in the market. First New Zealand Capital’s director of fixed interest, Graeme Beckett, simply scoffed at Maier’s presentation. Beckett said Maier’s response was a rant. Capital market leaders are thick-skinned. They are not influenced by rants or locker-room language. They know that rants stem from stress. Beckett rang me to say FNZC would not be responding to Maier’s request for client funding support.16
Maier marched on with a diminishing line of followers. That day he issued a statement to the stock exchange, repeating the claims about ‘break-even mode’ and a ‘bright future’. He spoke to the media, using similar words.17 My sense of foreboding grew. I wondered if those in charge of the rescue attempt – Maier, Forsyth Barr, Treasury, the Reserve Bank and the government – knew so little about finance company management that they couldn’t see the dangers of Maier’s approach.
Maier needed the support of the best and most influential people in the market; he was at risk of destroying confidence, credibility and trust. Again I wondered whether all those in charge of SCF must know something that I did not. An alternative was that all of them were operating in a thick fog and did not seem to understand the problem. A third alternative, by far the least likely or palatable, was that the public was being left uninformed while the rescuers ran around, if not in full panic, certainly in a desperate quest for a miracle solution.
As time has shown, the truth is that by 30 April 2010 the recapitalisation programme was all but abandoned as too hard. The Shearwater offer was still on the table, Kerr was still keen to stay in the discussion, but the most likely outcome could not be discussed with anyone. A subsidised sale was now the best hope. The parties in charge were not ready to disclose this.18