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Simon Burnett
From Chapter 21, The largest ponzi scheme
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“Then the banks got in on it. They turned their tellers into financial planners, pretended to be independent and sold the middle classes financial plans with asset allocation recommendations, which over-weighted the investors with—guess what?—the bank’s products. Look what a mess that has got the ANZ into with ING.”—Accountant and shareholder advocate Bruce Sheppard
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Incredibly, ING bought at least one CDO—and possibly more—in 2008. When I asked Jansen nearly six years later—and five years after ING decided to fold the funds—why this bulletin did not warn investors that the market had hit a major crisis, he answered: “We knew CLOs were different and we were right, they have since recovered.”
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Compare that with this comment by Michel Tilmant, ING Groep’s Amsterdam-based chief executive: “People congratulated us that we hadn’t invested heavily in toxic assets like subprime mortgages, CDOs, CLOs, like so many others did.” Tilmant was explaining why the global impact of the 2007-8 credit crisis on the group as a whole was limited.
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. . . The ANZ gave the impression of not even having a research department. On February 19, a Dunedin adviser, Steve Horn, told a client that, while there had been “some difficult financial events...the current recommendation is to hold your position and wait for a recovery in the market.”
. . . . ANZ added encouragingly that, “ING has shown considerable expertise in the investment of funds in this asset class.” And: “...The management of the funds is not in question, indeed a number of sensible changes to the assets mix has been made in recent times.”
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From Chapter 22, The trap snaps shut
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“Here was my ability to buy a house gone, just like that.”—Napier RIF investor Kerry Jex-Blake
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On March 13, 2008 ING froze the funds. None of those “sensible changes to the asset mix” had been effective. The freeze locked the investors onto the plunging toboggan, cutting access to their own money.
The squirming began. Lieberman described the move as “a prudent action,” adding that it was “not an indication of credit quality.” . . . ING explained that it froze the funds because it could not raise the cash to pay for withdrawals. Why not? Because, it said, “liquidity” had deteriorated and it was therefore unable to sell assets to raise the cash to meet “an unusually high level of withdrawal requests”. Those assets, said Paul Bedbrook, the funds’ trustee, in a letter to investors, could neither be valued nor sold “at appropriate prices.”
So here again was the wonder of non-existent “liquidity” deteriorating. ING had been snared in its own trap.
. . . . I tried to obtain Giannoulis’s “full or accurate story.” In vain. I put several questions to him by email in 2014 and 2015, when I offered to send him the text of this book to read and allow him give his version of events, but received no reply.
In 2016, I reached him by phone. In a call punctuated by long silences, he complained that the media had not asked about the “underlying causes” of the funds’ failure. Yet when I asked about his “full or accurate story,” he said the case was a long time ago and was unable to recall if it had appeared anywhere.
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When I put it to him that ING’s fund managers gave the impression that they had no idea what they were doing, Giannoulis did not answer. After a long silence, he said he did not want to comment further. I would have liked, again, to have offered him the text to read and comment on; to ask why he had not volunteered to outline to a reporter the “underlying causes” (he had been in periodic contact with the media); but, then I realized the phone had gone dead.
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From Chapter 23, A letter arrives with a DVD
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“You scrimp and save and live without luxuries so that some finance companies can lose it all. That’s how it feels.”—Southland ING investor
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The ANZ remained unable to communicate. Paul Milsom told the Nelson Mail’s Simon Bloomberg that, “All we keep getting are these bizarre letters from a department called ANZ Wealth that don’t say anything. That’s like a red rag to a bull. For a start, it should be ANZ poverty.”
Then the ANZ stopped sending letters. In October, Morrison was no longer with the bank. The exact circumstances of his departure are not known.
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From Chapter 24, ING drops its guard
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“I took the advice of an ANZ financial adviser to invest my mother’s money in this Regular Income Fund which was described to me as a ‘low-risk fund.’ I now feel completely gutted.”—Ashburton RIF investor Alison Quinn
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Lieberman declared that, “we strongly value being open and honest with all of our investors.” But, with the ship firmly on the rocks, he decided in June it was time to abandon the bridge. A “once-in-a-lifetime opportunity” came along that “was too good to pass up.” He ended with a nice line, saying that, “ING NZ has done a phenomenal job of servicing its customers.”
It depends what “phenomenal” means. He did not mention either the DYF or the RIF, which by the end of June had lost 42 and 43 percent of their value in just under a year—it might have been much more as those were only ING’s dealer-supplied guesses. The full extent of Lieberman’s “phenomenal job” would soon become apparent.
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From Chapter 25, ING kills the funds
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“I enjoy coming in each day and analysing the market and economic development overseas. Putting all that to work so we can make money for our clients is the key.”—Philip Houghton-Brown, strategy and qualitative manager, ING (NZ), 2005
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“Only those managers with proven expertise and long-term intentions remain in the market.”—ING (NZ) chief executive Marc Lieberman, March 10, 2006
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On December 10, 2008 ING announced that, far from waiting for the “upside” it had been talking about for 18 months, it wanted to wind up both the DYF and RIF.
, , , the collapse of the DYF and RIF seemed to elevate ING to some heroic level of achievement. On New Year’s Day 2009, an article in the Sunday Star-Times extolled ING’s achievements in “back-to-back victories in the two rival fund-manager-of-the-year awards” from Fund Source and another from Morningstar.
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“Chief investment officer Philip Houghton-Brown…. could be forgiven for feeling like a man on top of the world,” said the article, which read like a handout from the ING press department. Houghton-Brown said, “It’s a great honour really. We are just thrilled with it. It recognizes the calibre of the team here.”
. . . Eighteen months later, a headline in the same paper above a report on Robin Grieves’s findings told a different story about ING’s “calibre”: “Report exposes frozen fund flaws—a lack of expertise.”
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From Chapter 26, A protest group takes shape
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“The bank, and the investment advisers it employed, were able to exploit vulnerable investors who no doubt thought that, while the sharemarket might well deceive them, banks, surely, would not do so. But this one did.”—Tony Molloy, QC, to Parliament’s commerce select committee, December 15, 2010
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[Frozen Funds Group activist Andrew] Davidson came out of his corner punching hard. After reading a report on January 19, in which Giannoulis was again quoted as saying that the DYF and the RIF were at the higher-risk end of the ING range of investments, he responded tartly: “If this is so, why was this not disclosed to investors when they entered the funds?” Exactly.
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From Chapter 27, Mystery ‘research reports’
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“I did it because I thought New Zealanders had a really rough deal out of financial services, didn’t trust them, and rightly so.”—Rebecca Thomas, explaining why she left ING in 2006 and founded her own managed funds business.
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Where are these reports? Cox did not identify them. None have come to light. I tried without success to find some. I later asked Cox by email if he could identify them, but received no reply (see Appendix 2). I asked Jansen if he could identify the reports. He ignored the question and, instead, said, “Plenty of research saying the CLOs will hang in there and they did.” (See Appendix 2)
It is remarkable that, in a major crisis, ING(NZ)’s managers say they DID read reassuring reports they are unable to identify yet DID NOT read a nine-page power-point style presentation entitled “Risk Management” issued by the group’s person in charge of global risk management.
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From Chapter 28, ANZ and ING go into hiding
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“ING...were so easily stitched up. I could forgive them [but] it was the spin, bluster and bullshit that followed while they tried to get retail investors to pay for their incompetence. That is unforgiveable.”—Norman Stacey, director, Diversified Investment Strategies
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You might think that ING, a firm that, in the year to June 30, 2007, collected NZ$8.4 million in management fees from the DYF and another NZ$2.7 million from the RIF might feel some obligation to come and face live questioning. But no. The would-be masters of the universe had lost their swagger.
Becker did not turn up. Giannoulis did not turn up. Nobody from ING turned up. Sainsbury said ING had been repeatedly invited to appear but had declined and, instead, sent a letter in which Helen Troup said the funds were “not immune from market forces, and understood how stressful the situation was for investors.” Not only did the ANZ not turn up, it did not reply to the invitation.
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. . . Gareth Morgan aired his views in his trademark Mike Tyson style. About the ANZ, Morgan said: “It’s not just an Australian bank. This bank has a New Zealand board. It’s headed by Sir Dryden Spring, who doesn’t seem capable of coming down out of his boardroom and facing the people of New Zealand, who are being fleeced…” The frozen funds affair was an example of “very lazy directors.”
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From Chapter 29, The flying brigade
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“And those subprime loans were the backbone of collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) that were packaged by Wall Street and sold to banks and other financial investors all around the world on the basis of their ‘investment grade’ ratings. Of course, the ratings were a sham.”—Norcross, Georgia, asset manager Caldwell & Orkin, November 2007
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As the plane straightened up for its approach run, I seethed over two remarks for what I saw as their patronizing vacuity. One was in a letter I carried dated March 24, 2009 from Joy Marslin telling me that, “While I do not accept that the Diversified Yield Fund (DYF)
was an entirely inappropriate investment for you...” The other was ANZ National chief executive Graham Hodges’s “highly rated instruments” blather. Neither seemed to know what had happened.
Someone please take both of them to the press cuttings library and put them in touch with Alan Greenspan and Lew Ranieri.
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. . . The protesters were now coming from everywhere in the country, and they kept on coming. Annette Goulter, of Blenheim, said, “The ING offer is a disgrace. I personally take great exception to being bullied by ANZ/ING. How dare they behave as they are doing and what are they trying to hide?”
Goulter, in her 60s and retired, was classed by an ANZ adviser as a conservative investor and was recommended the DYF. “I did not understand what a CDO was, but I trusted my ANZ adviser...We were only given very sketchy information and this meant we had to trust ANZ/ING.”
From Chapter 30, On to the picket line
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On May 15, forty people demonstrated outside the ANZ branch in Hereford Street. TV, radio and print media turned up. Christchurch membership doubled in a week to 100.
There was more banking cloak-and-dagger stuff. John Readman reported that, “We also had a couple who called themselves Dick and Judy Jones who contacted me right at the start of this group, asked to be included on my email update list, never showed at the initial meeting and then advised me by email that they were taking a 2-year caravan sojourn in Australia and requested that I keep them up to date with everything going on. Yeah right!”
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From Chapter 31, The tension mounts
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“We firmly believe in the value of good financial advice and recommend you discuss these ideas with your financial planner on a regular basis.”—Paul Butler, managing director, funds management, ING
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The nervousness was reflected in increasing hyperbole: The FFG was accused of moving close to blackmail, of being a rent-a-crowd, of resembling Al Qaeda, and of making “inflammatory claims while purporting to be the voice of reason.” The abuse was great for morale. The protesters’ morale.
. . . One headline that gave us a good laugh was in the Dominion Post: “Don’t blame us for loss, says ANZ”.
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From Chapter 32, The denial continues
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As the summer of 2009 gave way to a mild autumn that was sympathetic towards demos, the ANZ still seemed oblivious to what had happened despite the torrent of information pouring in. The global financial media burst with analyses. On January 24, the Economist remarked that, “of all the financial instruments to have failed, newfangled collateralized debt obligations (CDOs) have turned out to be among the most devastating”. It referred to the feebleness of models used by agencies to rate them, and to their “baffling complexity”.
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. . . The Nelson Mail reported on March 31 . . . that: “ANZ National yesterday denied that the investors were misled, saying in a statement that credit ratings from independent rating agencies Standard and Poor’s and Moody’s were used to determine the risk profile of both funds. Based on these ratings, the DYF was marketed as moderate risk and the RIF (Regular Income Fund) as low to moderate risk.”
That is a remarkable admission of incompetence. The ratings inadequacies had been well publicized since long before the funds were even established. The raters were not, as the ANZ claimed, independent because they were paid by the banks that issued the CDOs.
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As Howard Marks, who knows a bit about investing, said, “Running a bond portfolio from ratings is nuts.”
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From Chapter 33, ‘Biggest floating craps game of all time’
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The ANZ tactics descended further into farce. On December 9, the bank’s head of wealth, Joy Marslin, wrote to one complainant, saying: “In the circumstances, we believe the DYF was a product in which it was appropriate for you to invest and in the amounts you actually invested....”
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If she had read Lew Ranieri’s opinion in Fortune magazine the same day she might have felt obliged to apologize to the un-named complainant for the bank’s blundering and, instead, offer full compensation plus interest.
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. . . He told Fortune’s Shawn Tully that the securitization juggernaut had spun out of control. “I do feel guilty,” he said. “I wasn’t out to invent the biggest floating craps game of all time, but that’s what happened.”
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From Chapter 34, Nothing unusual on Lambton Quay
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The Dominion Post, Wellington’s daily newspaper, apparently saw nothing unusual about a bunch of elderly people picketing a branch of the ANZ day after day. It sent nobody along to ask why. During the campaign, the FFG spoke several times to the Dominion Post, but it was just not interested in hearing the Frozen Funders’ case.
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Gerard Prinsen told me: “I rang and emailed the Dompost a few times, but unlike the New Zealand Herald’s two journalists, and the Sunday Star Times’ journalist, Dompost never got back, and never took notice of our press releases. I contacted one Dompost journalist a few times directly, but it came to nothing. After a while, I gave up on them.”
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. . . Friday, May 29. The same suit rushed out again, ready for battle, and told one of us to “stop molesting people”. There was a sharp exchange of words, and I told him if he didn’t like what we were doing he should “ring the cops”. He said he would do just that. We waited for another half an hour or so, but the police did not come. Pity. An arrest would have been great for the cause.
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From Chapter 35, Tales of anguish
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“We understand that the recent performance of the DYF might lead you to believe that the product was in fact higher risk than you understood it to be; however risk is inherent in any investment.”—Joy Marslin, head of wealth, ANZ, rejecting a married couple’s application for ‘additional compensation’ after the collapse of the CDO-based fund in which they had invested in on the bank’s advice
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“Nobody wants to officially acknowledge the worthless nature of these things”—investment broker and author Peter Schiff talking about CDOs in July 2007
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From Chapter 37, Explanations that weren’t
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“When I went to my ANZ branch to sign papers, I saw the adviser who had sold me the DYF. Her back was to me. I muttered to my wife, ‘She can thank Christ she’s a female. If she’d been a man I would splash her all over the fucking office.’ She heard me, because her shoulders stiffened. When she turned to grab the signed documents, she was shaking and her face was as white as a corpse.”—
Frozen Funder talking to the author
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A day later, an article appeared in the New Zealand Herald in which, under a crosshead, “HOW IT WENT WRONG,” Jansen gave a fuzzy account to reporter Tamsyn Parker. He mentioned neither “CDOs” nor “subprime”; neither the ubiquitous opacity nor the massive illiquidity built into the funds, nor the dubious valuations; nor did he explain why ING did not pull out investors in the second half of 2007 as the credit world collapsed.
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Instead—despite the well-publicised fallibility of the ratings—he quoted S & P’s default estimates. He made a vague reference to the funds having “some money, around 14 per cent before the credit crisis, invested in residential mortgage-backed securities”; and blamed the funds’ failure on an “unprecedented” situation
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. . . Kamakura’s Donald van Deventer believed that traders who invested in CDOs and CLOs based on ratings alone should be severely punished by their boards and by the regulators.
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. . . CDOs did not collapse from the general financial crisis, as Troup seemed to be saying. They were a major cause of it. The drawn-out collapse of the funds in 2006 and 2007—before the crisis—was visible. They might have survived if they had consisted of a sensible mix of tradable bonds, loans, and stocks instead of madcap items from the Frankenfinance laboratory.
ING now turned to the fraught task of appeasing those angry investors at the road show.
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From Chapter 38, The black envelopes
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“The Commerce Commission report suggests neither ING nor the ANZ gave adequate consideration to what would happen should the funds fail. ING was aware, but seemed not to care.”—the opinion of Sue Newberry, Associate Professor of Accounting at the University of Sydney
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John Readman takes up the story. “I collected a bunch of handwritten letters addressed to ING that were written in the thematic format of ‘Here’s what you did to us and now here’s what we’re going to do to you.’
“I put them all into black envelopes, tied them in a bundle and, at the first opportunity I got during the meeting, I approached the desk (without asking) did a brief, loud rant about the [legal] waiver being blackmail and tossed them on to Helen Troup’s desk, saying, ‘Here’s some black mail for you.’ Brian Edwards did a rave about having an orderly meeting, which prompted me to get on my feet again and say that’s just what they want.”
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Readman was escorted back to his seat by a security man. “He stood over me and I told him to get out of my face, at which point he threatened to fill me in. I looked him in the eye and told him that I would love him to try, and he backed off.”
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From Chapter 40, ‘Enough evidence’ for criminal prosecution
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After spending more than two months locked up with ANZ, the Commission finally reported. The findings, published on June 22, 2010, exposed a catalogue of blundering—the risks were not disclosed, due diligence was inadequate, managing was not professional, investments were bought blind, the risks had increased over time, analysis of returns was so flawed that ING could not even know how it made money, investors were misled to stay in the funds from June 2007 when the crisis accelerated.
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ING was not only incapable of managing the funds but also found to be prima facie criminally negligent.
“The Commission believes it has sufficient evidence to commence criminal and/or civil proceedings against: ING(NZ) and ANZN for contravention of sections 10, 11, 13(a), 13(b) and 13(e) of the Fair Trading Act in relation to the conduct and representations made in marketing and promotional documents for the Funds….”
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The Frozen Funds File said: “ANZ stood accused of criminal behaviour.”
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From Chapter 41, The ANZ keeps strutting
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Acting ANZ chief executive Steven Fyfe said the bank did not agree with all the Commission’s views, but did agree it was in the best interests of investors to avoid a lengthy court process. “We apologise to those investors who felt we had misinformed them. Our priority has always been to assist investors, which is why we made available more than $500 million before this settlement,” Fyfe said.
This “priority… to assist investors” might have been more credible if someone at the ANZ had picked up the financial press occasionally. This might have snapped the bank out of its ignorance and prompted it to stop ING from throwing other people’s money into Lew Ranieri’s “biggest floating craps game of all time.”
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. . . The FFG made it known it wanted ING’s role as a default KiwiSaver (a long-term, government-backed savings scheme run by approved private companies.) provider examined. Financial writer David Chaplin took a dim view of this, calling the campaigners “sore winners”. He suggested that they “received pretty reasonable compensation in the circumstances” and, having run “a truly brilliant” campaign, now wanted “blood on the floor.”
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One reader objected to Chaplin’s description of the compensation as “pretty reasonable”: “If you think this, please send/invest $100 and I will send you back $60. Oh, by the way, that’s only after I ignore your screaming for your investment to be returned, for a year.”
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From Chapter 42, Come into my parlour, beckons CLO Mark II
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The man who had been in charge of ING’s funds, David Jansen, quoted the CLO comeback as evidence that CLOs were respectable investments and thus justified the way those dead funds had been managed. He insisted to me that CLOs had “fully recovered and are not the evil beasts you make them out to be. If ANZ/ING hadn’t repaid investors; they would have got most of their money back, anyway, by waiting a few more years…”
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. . . New Zealand fund manager Norman Stacey said, “I believe Jansen’s claim is delusional bullshit...Had the value of holdings rebounded to any significant portion close to par, ANZ et al would have shouted it from the rooftops…Sadly, Jansen’s romantic fantasy captures the arrogance of the whole debacle—those involved are...still in denial of wrongdoing.”
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From the Epilogue: The root cause—contempt
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“Meaningful consideration of investor protection legislation is impossible without first identifying the culture of the New Zealand market that has treated investors as prey”—Tony Molloy, QC, to Parliament’s commerce select committee
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The obvious conclusion is that both the ANZ and ING allowed their judgment to be clouded by obsessions with money and delusions of invincibility—which got them into the pickle in the first place. They seemed to believe that investors could be fed Santa Claus stories for ever and a day. As a result, neither the ANZ nor ING showed even the glimmerings of an imaginative solution that might have ended this shabby, drawn-out affair before it snowballed into a major spectacle.
. . . The chairman of ANZ National, Sir Dryden Spring, a knight of the realm, did not see fit to make a single public announcement on the frozen funds.
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. . . Some ING managers were hired by the ANZ. An ANZ web site presenting its “investment team” in August 2016 showed five former ING managers, including head shots and potted biographies listing educational qualifications and previous employers. In no case was the name ING mentioned.
The entire scandal was summed up succinctly by Dennis Catchpole—who handles money for Catholic mission work in Papua New Guinea and who lost church money in the DYF: “I don’t trust anybody any more. Now I invest directly.”
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© Simon Burnett