The largely ignored second question was whether the guarantee was under-priced for no good public interest reason. It is clear now that it was knowingly under-priced. On 10 October 2008, officials put a ball-park $1.6 billion figure on the cost of a wide-ranging retail deposit guarantee.There was none. Bryce nails it in the conclusion:
Officials proposed charging risk-related fees to those taking up the guarantee offer. An additional reason was the fear that deposits would otherwise move perversely from low-risk banks to higher risk non-banks.
Yet from 12 October the government determined to offer retail deposit guarantees with no charge to non-bank deposit-taking institutions. Given the known condition of those institutions this was a major expenditure decision.
On 15 October 2008, the Treasury estimated that the chosen guarantee scheme could cost between $462 million and $945 million. In the fully-audited Crown financial statements for 30 June 2009 the liability was estimated to be $0.8 billion. (The eventual losses from South Canterbury Finance were larger than were implicit in this calculation, but this is a case of being wise after the event.)
So what justified the failure to charge a fee commensurate with the anticipated losses? The Auditor-General's report is largely silent on this question. It euphemistically observed that "the Minister [of Finance] preferred a flatter fee structure". Well, what was the public interest justification for this preference?
In short, an awful precedent has been set for taxpayer bailouts for investors who have chased higher returns and the question of whether there was a good reason for the failure of the government to price risk accurately has yet to be answered satisfactorily.That New Zealand's Occupy-Wall-Street emulators haven't focused their attention on this debacle speaks to their economic illiteracy.