The Victorian ALP caucus yesterday forced the Premier and Cabinet to provide a Government guarantee to cover about $1300 million in funds of unsecured depositors in the failed Pyramid group.
The move, announced after the caucus meeting yesterday by the Premier, Mr Cain, provides a payment of between 20 and 25 cents in the dollar to depositors as soon as possible. It is not known when depositors with the Farrow Corporation building societies, Pyramid, Countrywide and Geelong, can collect the rest of their savings.
Neither Mr Cain nor Government officials could answer questions yesterday on details of the plan.
No one knew the potential cost to taxpayers of the decision to back the unsecured depositors. The promise to provide the early payment is expected to cost between $260 million and $325 million. It is not known what share of this, if any, will be borne by taxpayers.
Mr Cain could not be specific about the cost of the plan, the period in which payments to depositors would be made, or the process.
On the cost, he said: “Nobody can answer that at this stage… because we don’t know what can be salvaged from Pyramid and what the ultimate result will be from Pyramid.”
Mr Cain could not indicate what the cost of the 25 per cent early payment would mean to the next budget. The early payment is likely to require credit from banks to be repaid when assets are liquidated.
Reaction to the proposal was cautious:
- The news was welcomed at the Geelong office of Friends of Pyramid, but while some were calling for celebrations, others were urging caution. Last night, Friends of Pyramid released a letter sent to Mr Cain which demanded clarification that all unsecured depositors would receive 100 cents in the dollar. Class action against the Government would continue until assurances on this and other matters were received.
- The executive director of the Victorian Council of Social Service, Mr Robert Hudson, said that although the Government’s guarantee was welcome, it would lead inevitably to increased taxes in this year’s state budget.
- Farrow Corporation’s chief executive, Mr Bill Farrow, welcomed the Government’s move, but said the group would study the proposal overnight “before deciding whether we can make further comment”.
- The Government-appointed administrator, Mr Ken Russell, of the accountancy firm Coopers and Lybrand, is expected to issue a comprehensive statement today on the Farrow saga.
- The State Opposition called on Mr Cain to resign.
It is possible that the Government’s guarantee could end up costing it nothing.
Although on face value the liability of between $1300 million and $1400 million of depositors’ money represents $325 for every Victorian, an orderly liquidation of Farrow assets could meet the full amount, requiring no Government subsidy.
Should the administrator raise close to the face value of the $1400 million of mortgages that are secured against lenders owed $900 million, the Government’s potential liability would fall to $900 million. This would fall further after subtracting whatever is raised from the sale of the remaining $1100 million of mortgages.
But depositors may still have to wait several months, even years, to get most of their original savings, which will not earn interest in that time and the value of which will fall in real terms be-cause of inflation. They will also be expected to pay income tax on the interest credited to their accounts in the run-up to the Farrow collapse.
The guarantee plan, which was initiated by two Socialist Left MPs, goes further than the Cabinet position reached on Monday to guarantee up to 60 per cent of depositors’ funds. It is believed the Treasurer, Mr Roper, had privately argued strongly against the proposal to guarantee all the funds of unsecured depositors.
Mr Cain said yesterday: “We are going to ensure that the depositors, the people who put their money into Pyramid as ordinary depositors, are looked after.
“No matter how long it takes, that $1.3 billion is assured, is what I’m saying.” The 20 to 25 cents payout depends on whether the secured creditors, mainly banks, agree not to seek an immediate liquidation of the Pyramid group of building societies.
Late yesterday, the four main banks had agreed to this, and a meeting with merchant banks will be held today. An immediate liquidation would cause a “fire sale”, with assets selling for less.
The Government has been under intense pressure in the past week to support Pyramid depositors, particularly in Geelong, which has been hardest hit by the Pyramid group failure.
The caucus meeting did not overturn Cabinet’s decision. Unusually, no Cabinet position was put to the caucus meeting. The entire caucus supported the motion for the guarantee. It was moved by Mr Tony Sheehan, MLA for Northcote, and seconded by Mr Theo Theophanous, MLC for Jika Jika, both Socialist Left members. But the final motion was put in the name of the Premier.
Despite yesterday’s motion being put by MPs from the Socialist Left, the decision to guarantee deposits has angered senior left-wing union figures, and seems likely to face criticism at a meeting of the Socialist Left executive today.
At yesterday’s caucus meeting, Dr Gerard Vaughan, MLA for Clayton, criticised lack of leadership over Pyramid. Dr Vaughan complained that no Cabinet position had been put to the caucus.