MFS - what a mess

"I guess MFS in New Zealand won’t exercise its option to buy assets like Vestar from the Australian company."

Why would anyone want to pay to buy Vestar? It is a company that gave lousy investment advice losing it's clients hundreds of millions. It then promised to pay them back and it will now renege on this promise. Who would pay one cent for this company. It must surely now go bust as no-one will ever use them for any investment advice.

The Australian financial Review and the Australian have provided the most interesting titbits in regard to the ongoing saga.
After reading today's articles in regard to City Pacific picking over the carcase of MFS,I'm rather negative in regard to what crumbs NZ investors will get back.
Ken Swain of Vestar Southland recently expressed the opinion that a company with the market capitalisation of MFS could not just disapear.
Well it appears that will in fact happen.
There is much talk about the number of finance companies which may be left in due course.
I would suggest that there should be similar discussion in regard to how many people who call themselves ''financial planners'' might be left.
From what I have seen,some may well be consider cashing up and emigrating somewhere far away from NZ.
The major sharebrokers,who have had at the worst only Provincial as their only finance company exposure,appear to be gaining market share.

I agree with your financial planner comment, I would think some of them can't leave fast enough, but as for sharebrokers, not entirely true there Lone Ranger. Some of these so called Brokers have flogged the Pins Securities through their client portfolios like there was no tomorrow. Take ABN which owns 50% of Absolute Capital Limited as reported on good returns today - flogged Pins out to clients and now what are they worth - $0.51. This is a debt security that is suppose to be liquid and provide a fixed income return until maturity - anything but, suspended interest payments and totally illiquid. Also, remember the Feltex saga...

I suspect that there is one very big difference between ABN etc. advising clients to invest in PINS, and a financial planner doing the same for Bridgecorp:

1. I very much doubt that any ABN client has more than 5% of their portfolio in PINS, compared with some financial planners who put 20%, 50% or 100% of their clients' cash into Bridgecorp.

2. PINS has been affected by market conditions which nobody could have foreseen even 12 months ago. Many fixed income securities worldwide are suffering frm illiquidity at the moment.

3. By contrast it was blatantly obvious to anyone with half a brain that Bridgecorp, C+M and the like were heading for the cliffs 2 years or more before they went under.

4. PINS, Fortress etc have to mark current values of the underlying assets to market. If finance companies had to do likewise, the debentures of those left would now be trading at 30c/40c in the dollar. Just look what's happened to the share prices of the quoted finance companies.

5. PINS has capital protection at maturity, so investors will at least get their original capital back.

6. Let those financial advisers who didn't put clients into the ING CDO funds cast the first stone.

7. If sharebrokers are found to have acted aganst their clients' interests through either dishonesty or incompetence, they can be named, shamed, fined and barred from practicing as a sharebroker. Just how many dodgy financial advisers are there who have been thrown out of the IFA??

In the end it's the nature of investing that if you want higher returns you have to take risks, and sometimes those risks don't work. Even the best advisers don't always get it right. But if you build a properly diversified portfolio then this should not be a problem.

However, what really has been sickening is the number of so-called advisers who had absolutely no diversification in their client fixed income portfolios and who quite obviously selected debentures purely based on the rate of commission paid.

Personally, I'd go to a sharebroker every time. Why not go for properly regulated advice from a properly qualified adviser if you have the choice?

Barrington Smythe yet again provides a concise and accurate analysis.
I recently viewed two portfolios of around $1 million.
One is with Abn Amro and consists of a mixture of equities and interest bearing investments.There is nothing startling in the portfolio,with a range of equities which appear to be soundly selected,and the fixed interest portion containing only St Cant and Marac in terms of finance companies.
There had been $10,000 invested in Feltex shares,which was only a minor portion of the portfolio.
The other is with Vestar,and is consists entirely of finance company investments as per their standard template.
So far,It appears that the 10% in Bridgecorp will recover between 19% and 63% of the capital sum-----The 10% in Provincial will recover 90%---The 10% in Capital& Merchant Finance may recover up to 59% over time--The 10% in Property and Finance Securities now looks like 100%---The 10% in MFS Pacific Finance we await with baited breath,but with the vultures picking the skeleton in Aussie,and lots of dodgy transactions,I would expect somewhat less than 100% of capital.The rest of the template is ''watch this space''
I looked at the list of members of the IFA practising in my district.I counted 60% belonging to firms which have failed finance company inmvestments.I cannot give an opinion on the other 40% as I have not seen portfolios from them.
There is talk of formal qualifications.In this respect I can tell you that from what I have seen, a financial planner with a university qualification gives no extra assurance to the investing public.
Like Barrington,I would go to a sharebroker over a financial planner.
I think that sharebrokers have learnt from the type of dreadful advice I received from them in the 1980's,as a number of them also nearly lost the shirts off their backs..
By comparison,many of the planning companies and finance companies were not in the industry at that point.

I admire those who add creedance to their comments by using their names.

What concerns me is; as the investing public, corporates and advisers (sharebrokers, planners, accountants or lawyers) struggle to digest and assess more and more revalutions of doubtful and bad debt, revalueing of securities and corporate balance sheets worldwide let alone calls for greater diligence by stock exchange regulators, company management and directors, accountants and auditors some are comfortable to cast the first and subsequent stones and provide judgement.

No adviser can be completely without sin they must be concerned for their clients and themselves as to if and when a greater confidence will return to the world sharemarkets and economies and have they made the best decisions for their clients.

A visit to the United Kingdom ASSOCIATION FOR ACCOUNTANCY AND BUSINESS AFFAIRS website where:

AABA patron is the Rt. Hon. The Lord Paul of Marylebone.

AABA trustees are: Professor Christine Cooper , Mr. Jim Cousins MP, Professor Colin Haslam , Professor Richard Laughlin , Dr. Austin Mitchell MP , Professor Prem Sikka and Professor Hugh Willmott .

then try a visit to their Audit page it links you to enough news stories and professional comment to have conspiracy types realing. Website is not pretty or flash, those involved appear credible (Universities such as Kings College, Royal Holloway, Cardiff) and the international perspective on the quality of financial information and integrity of advisers and traders is something in this environment should be required reading even just to ensure you can debunk it and justify ignoring these type of concerns and are able to cast stones now and later.

Barrington Smythe must be proud he recognised 2 years ago Bridgecorp and C+M were about to fail. If I had foresight as astute as Barringron Smyth I would be making a fortune short selling stocks. Just a moment, didn't two well respected research companies give Bridegcorp an investment grade rating within the last several years ?


Barrington Smythe also suggests if share brokers are found to have acted against their clients’ interests through either dishonesty or incompetence, they can be named, shamed, fined and barred from practicing as a share broker. A read of NZX Discipline decisions shows me a great deal of fining, a great deal of name suppression and a great deal of no barring. I have also read the IFA disciplinary decisions, also a great deal of fining, unlike NZX Discipline - a great deal of naming and like the NZX Discipline a great deal of no barring. A read of the discipline results for Doctors, Nurses, Solicitors, Police shows not all professionals are as saintly as share brokers.

I agree with Barrington Smythe why not go for properly regulated advice from a properly qualified adviser if you have the choice? Many Financial Planners are properly regulated and properly qualified.

Sadly, you can't short sell a debenture or a company which trades on Unlisted.

All I had to do to see what was coming in Bridgecrp/C+M was read the full prospectus and see the trend in cashflows and related party borrowing, see how much the owners were rippng out in fees and dividends ($4.5m in one year by the owner of one of these companies, about the same as Theresa Gattung) and also the paragraph about the Lloyd's Insurance which clearly stated that the max payout in any year was $20m and the max cover on an individual loan was about $4m. Hardly worth it when both companies had loans of well over $50m to single counterparties.

Both companies also had very low equity (i.e. the owners didn't/wouldn't/couldn't put up their own money to protect the debenture investors). This fact, combined with very large single loans, meant that a default on a large loan would wipe out the equity and leave the companies insolvent. That ain't rocket surgery.

If Mr. H has been reading the press lately he will know that Bridgecorp's rating was in fact paid for by Northplan/Vestar, not by Bridegecorp. A rather unusual arrangement? I would say so. Given that the rating was paid for by an adviser I also wonder how many non-Vestar advisers ever actually read the research, how many had even heard of PIR before the rating was announced, and how many thought to ask PIR how long it had been in business and what its record was in terms of getting research ratings right.

I'm aware that regulation is on the way for financial advisers, but not that it already exists. If it does, it's still optional; it's not compulsory to be qualified or regulated, and in any case it's interesting that many of the financial advisers recommending Bridgecorp and C&M were CFPs and even included former Financial Advisers of the Year or runners-up in that award.

I didn't suggest that all sharebrokers are paragons of virtue; every industry has its bad eggs. At least sharebrokers have to sign up to a code of conduct which is legally enforceable. In the end the proof of the pudding is in the fact that to my knowledge, the only failed finance company recommended by sharebrokers was Provincial, and this was the hardest failure to spot in advance.

Barrington Smythe once again tells it like it is.
Bridgecorp was the subject of continual jokes between myself and localsharebrokers.
Anyone I EVER came in contact with who had money in Bridgecorp,I told to take it out.
Petricevic if I recall correctly had a corporate jet in the 1980's.
Compare his personal profile with that of Alan Hubbard.
I am unaware of Abn Amros or Forsyth Barr having client moneys in any failed finance companies except Provincial---which caught us all unawares due to change in the nature of its lending policies.
There are easily accessible media articles back as far as 2002 giving negative vibes on Bridgecorp.
I just cannot understand why so many financial planners[there are a long list of them I have seen] put clients' moneys into this company.
I have seen portfolios with three and five year Bridgecorp investment terms--Bizzare.
By comparison,Capital & Merchant finance I have seen unused by any planner outside the two mentioned on its website.
I suspect that Vestar has a very large sum of client moneys invested in C & M.
I conclude that when I see a $1 million portfolio with $100,000,and a $2 million portflio with $170,000 for example.
Why would anyone want to invest in a new boy on the block like this when you have a number of soundly based finance companies which could be used in preference ?
What credible ratings did either of these companies have ?
Absolutely none that I was aware of.
It comes back to you scratch my back and I will scratch yours.

Any advisor that defends the decision to place client monies into a company like Bridgecorp using "credit rating" as an excuse doesn't cut the mustard.
The real motivation was the bro pure and simple with scant regard for the client's needs. These people shouldn't be in the industry.

Says it all

http://www.asx.com.au/asxpdf/20080220/pdf/317k8dhvswx1bb.pdf

I assume you have read Vestar's four page letter of 15 February 2008 to its clients.
I found this extract interesting-----
''----The auditors of the company,the companies office,the trustee,and the management of the company each have a role to play.
From the information now being made available by the receivers,Vestar is conducting its own analysis to determine if all of the parties responsible in the management and governance of those finance companies were in fact acting correctly. "

Genius!! Carry out your research AFTER the company has gone under. So THAT'S why Vestar/Swains/Northplan call themselves 'the fixed interest experts'.

I wonder if Vestar is including itself in its analysis of the governance and management and behaviour of the parties responsible?

Two to three years ago Swains and Northplan were marketing their 'Star' fixed interest system, which took the clients' money, put it into Bridgecorp, C&M, MFS, Boston etc., took the commission, AND charged an additional 1% per annum to 'manage' the portfolio.

If that's 'acting correctly' then I'm a banana.

Those affected might like to review the portfolio agreement. Might be a case of "secret commissions" if indeed a brokerage was taken and not rebated while collected a management fee.
A small piece of legislation but carries tons of bite.

There must be a TV Breakfast Spot coming up on the MFS Saga.
I was asked to take part,but unfortunately a business associate gave it the thumbs down due a historical relationship he had with Vestar.
I see MFS Boston featuring in the Sunday Times.
As with MFS Pacific Finance,it is interesting to look at the various ways renumeration can be gleaned from the public.
However I must say that in regard to Sharebrokers,when I see a 1% ''management'' being charged on a large fixed interest portfolio where virtually nothing happens in a year,it has led me to take the matter up with the broker and to suggest that they should do a bit more to earn their keep.
I am always suspicious of anyone who earns their living through a remuneration package which is wholly or partially commission based.
That includes bankers.

Yes, TV One, Business Breakfast, 0625, Monday.

The news that City Pacific has declined to proceed with the purchase of MFS' financial arm will give further cause for gloom to NZ investors.
Both City Pacific and MFS are outfits which are new boys on the block who have risen in the upward cycle of the last 10 years .
Interesting to read that City Pacific boss Phil Sullivan was bankrupt in the late 1980's and has some pending court cases brought by investors alleging that a development company he had sold property investments to them at overinflated prices and hyped up rental returns.
Sound familiar?Read it all in the Couriermail.com.au.
So MFS will need an alternate buyer.
I note that MFS are writing off $80 million in Goodwill.
How much did they pay for the financial planning firms which comprise Vestar ?
Amounts in the region of $75 million to $90 million are debated.How much is the Vestar Business now worth ?
I was talking to someone today who was lucky enough to get his $100,000 out of MFS Boston.
Unfortunately his $100,000 with MFS Pacific Finance is not due until late March 2008.
I did a search on real estate owned by the Vestar guy who put his portfolio together,and as I expected it is tied up in trust.
Sensible planning.
You can do what you like in this country,end up in The Big House but as long as your assets are secured well in advance,who cares.
NZ is littered with plenty of such examples.
No maybe I'm overstating the position.
Probably the only thing you can't due is to grow a large crop of marijuana on your property for resale.
Now it does annoy me that these people do not tend to pay income tax on the proceeds,but I guess that was one of the reasons GST was introduced--At least the Revenue gets something when they spend it up.
That may get your property confiscated by the crown,regardless of ownership.[Lawyers reading this blog can correct me on this if they wish]
But things like losing investors' money--No problem-You get to keep your securely own assets.

Yesterday's Sydney Morning Herald detailed that City Pacific"s shares had been placed on a trading halt,following a 58% decrease in its share price.
There are fears that it is close to collapse.
We can but hope that MFS Australia can find another prospective buyer for its financial services arm---but at what price ?
What crumbs are going to be left to repatriate to NZ ?