Amazing, Watson and Hotchin Do it Again

[essence]

I read the following article this morning with interest.

Why on earth should we (the general investing population of NZ) invest in shares and finance companies???

The investors in property-related finance companies were like lambs to the slaughter.

A number of recent developments, including the massive write-down of Allied Farmers' Hanover loan book, illustrate once again that many of our finance companies ended up like little more than giant Ponzi schemes.

Investors were presented with positive financial accounts, consistent with our accounting standards, which encouraged them to invest in finance companies that were only able to repay investors if they attracted new borrowings when borrowers defaulted.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10630196

So now the Government in all it's wisdom, wants to remove building depreciation and up GST.

This is only going to drive out investment in this sector.

IMHO, members of the TWG believe that that money from property will be re-invested in the share market or into managed funds.

It won't happen.

We've seen the share market crash and the debacle of the finance market collapse of the last two years. People will either not take the risk and invest in these markets or they'll put their into "safe" bank deposits.

[Davo36]

Amazing, Watson and Hotchin Do it Again

In this article by Brian Gaynor in today's herald, he describes how Hanover was similar to a ponzi scheme and what's more, Eric Watson and Mark Hotchin are doing the same thing with FAI Money (formerly FAI Finance)

Brian Gaynor: Hanover house of cards doomed to fall

By Brian Gaynor
4:00 AM Saturday Mar 6, 2010

The investors in property-related finance companies were like lambs to the slaughter

Expand Mark Hotchin and Eric Watson established and operated a finance company for which investors continue to pay a huge price - and they are still raising money from the public. Photo / Dean Purcell

A number of recent developments, including the massive write-down of Allied Farmers' Hanover loan book, illustrate once again that many of our finance companies ended up like little more than giant Ponzi schemes.
Investors were presented with positive financial accounts, consistent with our accounting standards, which encouraged them to invest in finance companies that were only able to repay investors if they attracted new borrowings when borrowers defaulted.
The Companies Office, Securities Commission, accounting profession and independent directors were asleep at the wheel as many investors lost a major percentage of their life savings.
Owners of these finance companies, particularly Mark Hotchin and Eric Watson, are still issuing woefully inadequate investment statements and prospectuses as they continue to borrow money from the public.
Why are these businessmen still able to raise money from the public without fully disclosing their involvement in failed companies?

Ponzi schemes are an investment proposition whereby the promoters announce unrealistic returns and repay loans, or interest on these loans, from contributions made by new investors.
Many of our property-related finance companies involved interest on loans being capitalised and this interest was only received by the finance company when loan principals were repaid.
Take, for example, a finance company with $500 million of interest capitalised loans to property developers and $500 million of debenture borrowings from the public at an average interest rate of 8.5 per cent a year.
This finance company has to pay annual interest of $42.5 million on these debentures yet it may receive no interest on its property development loans unless they are repaid, which is often not the case.
Thus, in this simple example, the finance company would have an annual cash deficit of $42.5 million and interest on debentures, plus any redemptions, could only be paid out of funds contributed by new investors.
This large cash deficit was concealed by accounting policies that allowed companies to accrue, or take into account, interest over the duration of a loan rather than when interest was paid. Thus finance companies would show that they had received interest when they hadn't and reported a profit even though they had a substantial cash deficit from operating activities.
To make matters worse, dividends were then declared out of these non-cash profits and paid out of newly acquired debenture funds.
Thus the interest on debentures, the repayment of debentures and the dividends paid to the owners of these finance companies were all sourced from new debenture money.
This result, while unintended, has the same effect as a Ponzi scheme, and Ponzi schemes are quickly shut down by most competent regulators around the world.
In addition, it appears that a number of owners of finance companies sold properties to developers at vastly inflated prices and these purchases were 100 per cent funded by a finance company owned by the vendors.
In other words, investors in property-related finance companies were like lambs to the slaughter. They didn't have a chance, particularly when the property development market collapsed and most developers couldn't repay their loans or the capitalised interest on these loans.
Allied Farmers' announcement this week regarding the Hanover loan book reconfirmed the dire situation in which finance company investors have found themselves.
As the accompanying table shows, the original gross value of the Hanover loan book acquired by Allied Farmers was $527.2 million.
Before the Allied Farmers acquisition this portfolio incurred a write-down of $220.6 million relating to specific bad debts. Under New Zealand IFRS accounting rules there was a positive $72.1 million adjustment, representing the present value of the capitalised interest.
There was also a small positive net adjustment of $17.5 million for support packages supplied by Hotchin and Watson minus loans realised before the changeover.
Allied Farmers announced on Monday that the portfolio has been written down by a further $220.7 million, from $396.2 million to just $175.5 million. This latest write-down is largely due to Hanover, not Allied Farmers.
The first $20.7 million write-off represents a decrease in value approved by the Hanover board before the assets were transferred.
The next $56 million is essentially a reversal of most of the $72.1 million IFRS positive adjustment for the present value of the capitalised interest as most of this interest will not be paid. There has also been a $27.9 million write-down in property, mainly Five Mile next to Queenstown Airport, an Australian property write-down of $16.8 million and a whopping $99.3 million impairment on Kawarau Falls.
The latter is Nigel McKenna's massive development on the other side of Queenstown Airport where Stages 1, 2 and 3 are all in receivership.
Allied Farmers has a $19 million second mortgage over Stage 1, which is considered to be worthless, and a second mortgage of $73 million over the yet-to-be started Stage 2. The latter is behind Fortress, a tough US funder that doesn't grant any favours to holders of second mortgages.
Hanover investors received 72c for every 100c of secured deposits in the form of 3.4794 Allied Farmers shares at 20.693281c each. These shares will rise and fall with the value of the Hanover portfolio and this week's asset write-down had a big impact on Allied Farmers' share price.
Hotchin and Watson established and operated a finance company for which investors continue to pay a huge price.
But the most extraordinary development is that Hotchin and Watson are still raising money from the public through FAI Money, formerly FAI Finance, and its accounting policies and disclosures are just as poor as Hanover's.
FAI traditionally offered secured and unsecured personal loans but its latest prospectus reveals that the board and shareholders have decided that the company may now engage in the provision of property development and property investment finance to the property development/investment sector.
The prospectus also reveals that FAI's accounting policies on interest are exactly the same as Hanover's. In other words, interest capitalised on property developments is accrued over the course of the loan instead of being recognised when it is received.
In addition, KPMG was the auditor of Hanover Finance and is the auditor of FAI Money.
But, more importantly, there is no disclosure of the Hanover debacle and the role Hotchin and Watson played in this.
A great deal of emphasis is placed on FAI's Credit Committee, which comprises the CEO, credit manager and an independent member of the board.
But neither the CEO nor credit manager are listed in the Company Directory section and David Henry, who is FAI Money's only independent director, was the chairman of Hanover and doesn't appear to have much property development expertise.
FAI's investment statement, which is the most widely used document by investors, is also woefully inadequate as it doesn't include a list or description of directors and executives.
It also contains only vague comments about the company's approach towards property lending.
New Zealand has minimal investor protection with the exception that public issuers must fully disclose all important issues. This is based on the premise that investors can then make fully informed and rational investment decisions.
In light of this, why have Hotchin and Watson not been required to disclose in the FAI offer documents that they made a complete hash of Hanover Finance and have caused considerable hardship and financial distress to individuals who invested in that company?
* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.
By Brian Gaynor | Email Brian

Source: http://www.nzherald.co.nz/business/n...0630196&pnum=0

[CJ]

The prospectus also reveals that FAI's accounting policies on interest are exactly the same as Hanover's. In other words, interest capitalised on property developments is accrued over the course of the loan instead of being recognised when it is received.

My guess is that they are required to follow this treatment by the accounting reporting standards.

However, it does seem weird that they can just continue doing exactly what they were doing before. The question is, who would invest in the company. Surely people have heard their names enough to know not to invest in their company.

[Perry]

You wish to question the old aphorism?
"There's one born every minute."
.

[donna]

SST has article on what Mark Hotchin is up to - not in NZ - in Hawaii living it up large!

News item made the front page - SST went to Hawaii and tracked Mark and his family to a wonderfully expensive resort area - Kahala Beach Estate - where he is paying over $40,000 a month to rent a flash pad.

Caught unaware by the SST reporter - Mark made a mad dash for the indoors leaving his wife to carry the can. When asked how the holiday was being funded - her reply was "we don't have to justify where we get our money or what it is spent on to anyone".

I have to say - NZ still seems to be prime for the picking. We are just too trusting, is that a geography thing? Or a population thing? Our banks know we are pushovers and aim to lump more personal debt on us (another article in this week's SST) - and we are way too smitten by celebrity-like characters and throw our $$ at them only to end up worse off while they continue to live the high life where nobody knows their name.

Just my two cents worth.

Source of the Hotchin article on SST

Cheers,

Donna

[Hec]

Wish we had these kind of Case studies in the 5th and 6th forms at high school, and the maths associated with them.
Would have served me way better than Hamlet and other strange characters.

Am sure many of the said lambs would have found nicer paddocks to graze....

Hec

Hec

[speights boy]

Exactly Hec,

Show the huge difference between compounding interest on a credit card debt and compounding interest on bank savings, and how much that Fiji holiday will really cost on credit as opposed to saving for it.

Teach people what investment questions to ask, and why they should often just say no thanks.

Of course even with education some people still show no personal responsibility.
On their heads be it.

SB

[donna]

I think NZ is a great feeding ground due to it's remoteness. It's easy to get away when the going gets tough - churn and burn, then get the hell out.

Of course we have examples close to home too (in the property investment space) with Mark Bryers leading the list of most infamous.

Cheers,

Donna

[frazzledfozzle]

How can these people get away with it?
I don't understand how they can lose all their investors money and be living the high life?
How does that work?
Frazz

[freezinhot]

How can these people get away with it?
I don't understand how they can lose all their investors money and be living the high life?
How does that work?
Frazz

With a clever array of trusts, high profile lawyers and shady deals.

FH

[Perry]

Do they all check out how
it's done, with others? E.g
MB?

One can fairly wonder out
loud about the words justice
and law. And the W'gton
woodenheads who piously
speak of such things.

But, I guess it's quite hard
to protect folks from their
own naivety - even for the
socialists: red or blue, plus
the new blue hued: brown.
.

[spaceman]

Yeah but you gotta LOL...

My guess is that they are required to follow this treatment by the accounting reporting standards. .....

Accounting reporting standards may indeed require it..... BUT

Thus finance companies would show that they had received interest when they hadn't and reported a profit even though they had a substantial cash deficit from operating activities.

I'm no accountant but my dear old granny told me not to count my chickens before they hatched.... call me old fashioned, call me iresponsible but saying I've received something when I actually haven't ...ummmm that'd be lying.

Cheers
Spaceman
.

[Hec]

Hey Spaceman,
no, thats creative misperception of the accounting variety.
Note: the people the subject of this post never told those pork pies, they paid someone else to do that therefore its not their fault................... in their eyes.
Hec

[Bob Kane]

When the Star-Times arrived, Hotchin ran inside, leaving his wife to deal with questions over how the holiday was being funded.

"We don't have to justify where we get our money or what it's spent on, to anyone," was all she had to say.

Told that many Hanover investors were furious with her husband's displays of wealth, and the no-expense-spared holiday in the Hawaii sun, she said: "I don't care what anyone says." She then threatened to call local police.

Go girl!
"Let them eat cake."
I'm not sure why Mark is building new houses in NZ as he'll never be welcome anywhere in the country.

[fatfishandchipman]

…were only able to repay investors if they attracted new borrowings…

No, these companies are not “like” Ponzi Schemes – they are Ponzi Schemes.