Lost Property: The Crash of ’87…and the aftershock
The mid‑1980s ‑ Allan Hawkins and Equiticorp, Fay and Connor slogging it out in Fremantle, Chase Corporation and mirror‑glass buildings, Bruce Judge, share clubs and investment seminars, Bob Jones, corporate jets, David Lange and Roger Douglas in harmony, Ray Smith and Goldcorp and the never‑ending rise in share prices. Olly Newland was a participant in the orgy, a second division player striving desperately to keep up with the big boys. Lost Property is very personal account of Newland’s rise and fall. In many ways it is an endearing book because Newland is an honest man and he is not vindictive. He was totally seduced by the excitement of the era and he admits it.
Newland was eagerly sought by the media, shareholders and bankers as his share price rose to dizzy heights and he loved it. When the bubble burst in October 1987 the media criticised, shareholders bailed out and the bankers wanted their money back. Newland and so many of the other heroes of the boom have spent the last seven years just trying to survive. For most of them their hour in the limelight has been very costly. Few would be willing to publicly admit their mistakes as Newland does.
There was nothing intrinsically different about the 1980s. Business and financial markets are all about cycles. They are like waves across a graph rather than straight lines: contractions inevitably follow expansions. Unemployment rates, land prices, interest rates, company profitability and house prices all rise and fall or rise and flatten out. There is very little sustainability; that is a theoretical concept rather than a real one.
Most of the time the waves roll in on a consistent and manageable basis. However, history is dotted with periods when the waves swell and entice large numbers to join in the excitement. Hill country farm prices boomed in New Zealand in the early 1980s as the banks were willing to lend excessive amounts to potential borrowers. Many of these purchasers were left in ruin as prices fell and interest rates rose through the decade. There are more than a few former kiwifruit farmers around the Bay of Plenty who would relate a similar story. However, the number of participants in these booms and busts was relatively small.
The characteristics that give a particular wave its significance and importance are the number of participants and the extent of their involvement. The sharemarket is unique because it enables a relatively large percentage of the population to participate. A few hundred dollars and no knowledge and anyone can join in. A potential purchaser of a hill country farm will require much more capital and should be able to tell the difference between a sheep and a goat.
The sharemarket and property boom of the mid‑1980s was a worldwide phenomenon but New Zealand embraced it with more enthusiasm than most. Between January 1983 and September 1987 the New Zealand sharemarket rose by 580%. Over that five year period 206 new companies were listed, mostly speculative, and 123 were delisted, mainly acquired by the new “entrepreneurs”.
A fully‑fledged boom needs a number of key ingredients and they were there in large doses during the mid‑1980s. The banking industry was deregulated by the new Labour Government, new banks entered the country and bankers fell over each other to lend to the new wave of corporate leaders. Conservative credit analysis was forgotten while young and inexperienced bankers were paid large bonuses to lend more and more of their depositors’ money.
Small‑time property operators like Olly Newland, who had spent most of their lives begging for borrowed funds, were overwhelmed by bankers queuing at their doors offering them all the money they wanted. Newland was easily encouraged: his company rapidly expanded its property portfolio with borrowed funds. Newland also borrowed heavily to buy shares in his own company. This situation was repeated many times over by other companies and their major shareholders.
The Reserve Bank was supposed to supervise the banks to ensure their lending was within prudential limits. To this end all their information on lending was sent to the Reserve Bank on a monthly and quarterly basis. This was neatly filed away to gather dust with little or no analysis. It was inconceivable that large organisations like Bank of New Zealand, Westpac, Citibank, etc would lend money without rigorous credit analysis. The supervisors at the Reserve Bank closed their eyes to the frenzy outside.
The other regulators were little better. The Stock Exchange’s structure, rules and resources were totally inadequate to deal with the hive of activity, much of it highly unethical Disclosure was inadequate and sometimes inaccurate and many companies were plundered by their major shareholders.
Accounting standards were incredibly lax and creative accounting became the norm rather than the exception. The relative performance of a company and its ability to attract further investment, is determined by its level of profitability. If a company’s profit is over‑inflated it will attract investment funds out of proportion to what is justified. The investment and property companies used every trick in the book to boost their profits. Their inflated profit levels gave the impression they were much better operators than the more traditional companies listed on the stock exchange. Thus they attracted the bulk of the lending by banks and the new funds coming into the sharemarket. Because of the poor level of disclosure the ordinary investor was deceived but the credit analysis departments in the banks should have known better.
Finally a fully-fledged boom needs some loud cheerleaders to spread the message. Olly Newland, along with Bob (now Sir Robert) Jones, Bruce Judge, Allan Hawkins, Colin Reynolds, Craig Heatley, Frank (now Sir Francis) Renouf and many, many more were very willing to spread the word. The media, particularly the newspapers and tip sheets, carried the message into every corner of the country. The gullible New Zealand Herald, which reprinted volumes of public relations spiels without analysis, and the Sunday Star, with its weekly release of hot tips, were particularly responsible. A few sober voices were heard, Shoeshine in the National Business Review for one, but they were swamped by the more positive outpourings.
October 19 and 20 1987 will have a special place in the annals of history. The impact of the worldwide sharemarket crash was severe, no more so than in New Zealand. The corporate crashes and personal bankruptcies came fast and furious. The friendly banks now wanted their money back, and they wanted it back yesterday. In the years following the crash the financial pages were filled with stories of the banks’ stupidity. A Justice Department report said that a $230 million loan from Bank of New Zealand to Rada Corporation “seems to have an air of commercial unreality about it. Not only is it seemingly devoid of appropriate record and documentation but it is characterised by disagreement between the parties as to whether it is secured or unsecured.”
In July 1988 a creditors meeting for Energycorp Investments was held in Auckland. The official assignee believed that only $4 million would be recovered from assets with a book value of $35 million. The Bank of New Zealand had lent the company $15.5 million and the official assignee said: “I’ve been amazed at the extent of lending by the BNZ ‑ and one would hope they will conduct some inquiry in their own organisation to find out how further advances were made to a company which was certainly not turning over any cash.” Four directors had salaries of $325,000 each, all had top‑range company cars ‑ BMWS, Alfa Romeos, Mercedes and Rovers ‑ and the company had a Lear jet. In 1989 three executives of Energycorp were either bankrupt or reached compromise deals with creditors for debts and personal guarantees of $55.7 million, $22.2 million and $16.7 million respectively. The three individuals had virtually no assets to support these debts and guarantees which came to a total of $94.6 million.
The overall impact of the crash on the share and property markets and the economy was enormous. At the end of 1987 there were 288 companies listed on the New Zealand sharemarket. Five years later there were only 110. Most of the missing had been placed in receivership or had quietly expired. On its very best day since the end of 1987 the sharemarket was still more than 37% below its September 1987 peak.
The property crash was just as severe. Few property companies survived the holocaust, construction companies also suffered badly and the large number of suppliers who provide the industry experienced very difficult conditions. The banks took a terrible battering as they ended up taking possession of worthless share certificates and unsaleable property. These had represented security against loans which could not be repaid. The Development Finance Corporation collapsed and the Bank of New Zealand had to be rescued twice by the Government.
The economy stood dead in its tracks until 1992, like a rabbit caught in headlights. The banks wouldn’t lend, there was minimal investment, unemployment figures soared and a thick cloud of pessimism hung over the business community. A heavy price was paid for the excesses of the mid‑1980s.
And it will all happen again, maybe not today or tomorrow but certainly in the next decade or two. Auckland will be the catalyst as it was in the 1980s. As with the west coast of North America, Texas, Florida, Australia and some of the Asian countries, particularly Hong Kong, Auckland has a strong speculative culture. There is a vigorous emphasis on wealth and the flouting of this wealth. The recent arrival of moneyed immigrants from Asia just adds to this cocktail.
At present there are at least four mini‑booms bubbling along; investment plates, phone cards, inner‑city apartments and residential housing and sections. According to the promoters of the investment plate market, the A plate sold for $277,875 in midyear. The promoters also claim that single‑number plates are now worth $350,000 each compared to $200,000 a year ago and the Hong Kong 9 plate sold for NZ$3,250,000 earlier this year. These are figures that will excite any speculator; all that is needed is a rush of new participants and the investment plate market will soar into the stratosphere.
However, it is still the sharemarket and property market that have the best potential to boom, although art, gold and other assets cannot be completely discounted. Shares and property are respectable, banks will accept them as security and the media give them fairly wide coverage.
The continuing drive to deregulate the economy and to let markets make the economic decisions has increased the possibility of boom and busts. The free‑market economist Milton Friedman always highlighted Hong Kong as one of the best examples of a market‑driven economy. Hong Kong had major sharemarket booms in 1973‑74 and again in 1985‑87 and it has had countless property boom and busts over the same period.
Banks build up deposits from customers which they must lend out. The cycle fluctuates between low‑risk, low‑margin lending to the higher‑risk but higher‑margin loans. Following the sharemarket and property crashes there was a sharp shift from the latter to the former. But memories are short, staff turnover in the banking world has become much greater in recent years. The new owners of the revitalised Bank of New Zealand recently announced they expected strong loan growth in New Zealand over the next few years.
The Reserve Bank is going to stop supervising the banking system. A new act calls for greater disclosure by the banks so that customers and financial analysts, rather than the supervisory division of the Reserve Bank, will determine whether the banks are acting sensibly or not. Given the complexity of bank prospectuses only a chosen few will really understand whether the banks are being prudent.
Stock Exchange regulations, accounting practices and inside trading rules have been strengthened in the past few years but our regulatory regime is still closer to the lowly regarded and speculative market of Vancouver than the conservative City of London. The philosophy of the regulatory regime is that markets should be policed by the individual investor rather than a regulatory authority. Fine in theory, but how many investors have the time, knowledge and financial resources to fill such a role?
And finally the media. It would be nice to say that the media will view the phenomena with a more critical eye the next time around. The few older and wiser heads who have not been seduced into the soft world of public relations will cast a cynical eye over proceedings. However, the young and inexperienced hacks will undoubtedly be seduced by the puffy talk of spin doctors over a few bottles of wine and a long lunch. The electronic media may play a more important role next time around. Make sure Lost Property is within easy reach when the sunny days return again. Remember Newland’s advice, never trust bankers and leave some profit for the other person and you will not become the victim of the next crash.
Brian Gaynor is an independent Auckland investment analyst.