WHAT MIGHT HAVE BEEN: THE 1990 PYRAMID RESCUE

WHAT MIGHT HAVE BEEN: THE PAINLESS RESCUE OF THE PYRAMID GROUP

The Pyramid Building Society and its subsidiaries Geelong Building Society and Countrywide Building Society were Australian building societies, headquartered in Geelong, Victoria, which collapsed in 1990 with debts in excess of $A2 billion.

The Victorian Government ultimately provided financial assistance equivalent to 25 cents in the dollar to depositors but not to shareholders - although most of the latter had not realised that they were not conventional depositors.

The final cost to Victorian taxpayers of this rescue was over $A900 million. The funds were raised through a three cents per litre levy on petrol - an impost which lasted for five years. It is not clear why motorists in particular were made to pay for something which had nothing to do with them.

This cost could have been avoided entirely if the authorities had seen fit to adopt a market-based proposal put forward by Nick Renton in an opinion piece in the Age on 1990-07-06, reading as follows:

PATIENCE TO SALVAGE MOST OF WHAT'S LEFT IN PYRAMID

The Premier has agreed to put taxpayers' money at risk in a limited rescue of the Pyramid depositors. It now becomes feasible to look at the best means of building up from this base so that as much as possible is salvaged from the wreck in the best interests of both depositors and the community.

First, a look at the background:

Some depositors need immediate access to liquid funds.

Others do not require cash at once, but have a pressing need to know what is going to happen, and when, so that they can arrange their affairs accordingly.

Arrangements to make an early (?) payment of 20 to 25 cents in the dollar to everybody "wastes" resources by giving too much to those without an urgent need for cash, and too little to those (such as persons making progress payments for a house) who really require a much higher percentage.

An orderly realisation of assets will produce higher prices than a series of forced sales (particularly having regard to the current economic climate).

A limited resumption of trading by the group would, however, produce even better results.

Liquidation, as now envisaged, would destroy the goodwill element inherent in the branch network and the large customer base, as well as the jobs of the loyal Pyramid employees.

There is also enormous local support for the three affected building societies. It would be a pity not to capitalise on this valuable intangible asset.

These factors suggest that a special "scheme of arrangement" on the following lines would be feasible:

The societies would become a single publicly owned company run by an independent board of directors.

Each $100 deposit would be converted into 80 shares and $20 deposit.

The holders of such shares would also be given the renounceable right to subscribe for further shares on a 1 for 1 basis, at an issue price of, say, 15 cents each.

Both the shares and the rights would be listed on the stock exchange.

These arrangements might need special legislation from the Victorian Parliament and an appropriate dispensation from the stock exchange committee. However, unlike the Premier's proposal, they would not involve any additional burden on taxpayers and they would create the potential for higher rewards for patient investors.

Implementation of such a scheme would restore confidence and would create full and immediate liquidity for those depositors requiring it. Firstly, they would be able to sell their shares and/or the rights for cash on the market. Secondly, the new money coming in from the proceeds of the new share issue would provide a ready means of meeting withdrawal requests.

On the other hand, depositors wishing to back the enterprise could just hold on to their shares and take up their rights. Brand new investors would step into the shoes of those existing investors wanting to quit. The shares would benefit from the future growth of the reconstructed entity and would thus have appeal to equity investors.

The Reid Murray winding up commenced in 1963 and is still not complete in 1990. If under Mr Cain's proposals depositors were to get their money back at an average rate of 20 cents in the dollar in stages over five years then at 15 per cent interest this is the equivalent of 72 cents in the dollar immediately. If repayments can be made faster than this, the value may be higher - say 80 cents in the dollar.

On such an assumption each $100 of existing deposit would convert, in the first instance, into $80 worth of securities, namely 80 shares trading at 75 cents each ($60) together with a $20 deposit on the same terms as their existing deposit.

After a 1 for 1 issue at 15 cents the shares would be worth 45 cents each and the rights would change hands at about 30 cents each. (80 "old" @ 75 cents = $60; 80 "new" @ 15 cents = $12. Total = 160 @ 45 cents = $72.)

Every $20 of call or fixed term deposit would then be backed by $80 worth of existing assets and $12 of new cash.

At the same time, the relatively modest burden of additional funds being raised, $12 per $100 of existing deposit, or less than a year's interest, would be within the reach of many current Pyramid group supporters.

If desired, the deal could be sweetened further. For instance, undertakings could be given to the effect that the opportunity for investors to convert some of the shares back into fixed interest paper, or get a partial capital return, would be provided when circumstances permitted.

Of course, a solution on the above lines is not as good as if the disaster had not occurred in the first place. The reality of an unexpected capital loss would still be there, but at least life could go on and the damage and trauma would be minimised.

POSTSCRIPT

A reader wrote:

Some very interesting comments on what the government should/could have done after the event. I've always wondered what the government should/could have done before the event. In your expert opinion, what degree of responsibility should be borne by the elected government of the day for the Tricontinental and Pyramid collapses?

The reply was:

The prime responsibility for the Pyramid collapse must be sheeted home to its board of directors. (Similarly for Tricontinental, Estate Mortgage, Trustees Executors and Agency, Stanhill, Reid Murray, Mineral Securities, H G Palmer, Royal Insurance, Occidental, Ansett, Associated Securities, Westmex, Adsteam, Bond, Budget, Pan Pharmaceuticals, Harris Scarfe, One.Tel, HIH and many others.)

But the Pyramid investors who failed to recognise that a higher than normal return also implied a higher than normal risk must share some of the blame for their own misfortune. Admittedly, some just supported a local Geelong institution and were not primarily acting out of greed. Many trusted the society's principals because they were prominent in their church.

The Cain Government's responsibility was relevant in at least three areas:

Weak regulation.

Treasurer Rob Jolly and Attorney-General Andrew McCutcheon issuing a joint statement four months before the collapse: "There is absolutely no reason to be concerned that depositors' funds are at risk."

Failure after the collapse to institute a sensible rescue operation.

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