What if, after years of alleged inaction against some of the country’s greediest charlatans, the investment watchdogs savaged a poodle or, worse, a lovable labrador?

That’s how it’s starting to play in the case of Allan Hubbard.

What if, just as it was starting to turn its fortunes around and show signs of a credible bail-out and a return to something like normal trading, South Canterbury Finance is felled as collateral damage by the actions of those watchdogs?

SCF’s double-notch downgrade to B-minus after the statutory management is just what the Timaru finance company’s turnaround boss Sandy Maier didn’t need at exactly this moment, having just toured the country giving investors an update on SCF’s improving fortunes.

The cynics who govern the talkback blogosphere will assume this was a dastardly plan to lull people into a false sense of security ahead of Hubbard’s bombshell; that Maier would have known the statutory management was coming and got in first.

Rubbish.

Maier and Hubbard are as surprised as anyone to find themselves here.

And what if, as a result of these Crown agency actions, the Crown’s retail deposit guarantee scheme ends up having to pay out SCF investors, which would more than double the $60 million-ish paid out so far from the identified potential liability of more than $800 million?

On the one hand, you can see why they’re doing it. On the other hand, you think, what a tragic target.

Irrespective of whether or not the intervention is justified, the statutory management is a tragedy for Allan Hubbard, in a way that the downfall of Rod Petricevic, for example, is not even remotely a tragedy for anyone but Rod, and even he’ll probably still have somewhere nice to live.

Nor can the decision to act in some way be faulted on the evidence. Unsecured lending to one’s self using funds tagged for first mortgage-grade investment is an ugly look, at the very least. Yet there is a tragic whiff of closing the door after the horse has bolted while simultaneously persecuting an honourable, if old-fashioned and possibly slightly befuddled old man in the process.

There is an even more tragic whiff of irony if one looks at the proposed changes to the Securities and Securities Markets Acts, discussion documents for which were released to a collective media yawn yesterday.

One of the big areas of coming reform is to make it easier for so-called “sophisticated” investors to be exempt from the disclosure provisions of both acts, because they are judged not to need the prospectuses, investment statements and other protections afforded to the so-called “Mum and Dad” investor.

Take a look at the proposed criteria, and then think about the 407 high net worth individuals who lent $98 million to Hubbard’s Aorangi Securities.

And then think about whether, if these proposals had been law when Hubbard took their money, he would be in anything like as much hot water as he is today. After all, this whole saga started with a complaint from an investor who deposited funds without sighting a prospectus.

The intention of the proposed reform is “to facilitate ‘private offers’ to investors who do not require all the protections of the act because they are sophisticated or related to the investor,” says the Ministry of Economic Development discussion paper, released by Commerce Minister Simon Power, for whom securities law reform is a vital plank in the bigger plan to restore faith in New Zealand’s capital markets.

Among the qualifications of a sophisticated investor are “individuals making investments of $500,000 or more, relatives, and personal friends and close business associates”.

At least some of the wealthy lower South Islanders who have dealt with Allan Hubbard over the past five or more decades, and who will have had funds in Aorangi, will also have become close business associates and friends, and have been sophisticated to the extent that they were dealing with substantial personal wealth.

These reforms suggest, in other words that far from being old-fashioned, Allan Hubbard has been caught out for being ahead of his time. These reforms are as much about making investment simple and allowing responsible, competent individuals to accept risks with their eyes open as they are about creating ever-greater layers of dubious protection for retail investors.

When you look at it like that, there are even echoes of Alan Hawkins and the Equiticorp collapse. While he served time for other, more serious offences, among the laws Hawkins broke as he tried to save his empire during the 1987 sharemarket crash was to buy shares in his own company.

It was illegal at the time, even though there were plans on the books to legalise what is, today, a regular and uncontroversial occurrence.

I’m biased, of course. While I’ve never met Allan Hubbard, he has been a part of my family’s lore for a long time. His company, Aorangi, bears the name of my grandfather’s old house at St Leonards. It was P.O. Smellie who gave Allan Hubbard the job that launched him.

So I’m willing to believe Hubbard, if he has done wrong, has done so with the best of intentions and with every intention of honouring every single penny he owes if it comes to that.

There’s something awful about watching him grind in the gears of a machine that wasn’t working when Hanover, Bridgecorp, Strategic and all the rest were going belly-up.

It is somewhat ironic that the announcement of New Zealand’s entry to the world of trading ‘dark pools’ coincided to the very day with a speech given by Senator Ted Kaufman in the US Senate about his concerns about dark pools, particularly when associated with High Frequency Trading or HFT. His speech developed ideas expressed by Mary Shapiro, head of the SEC on May 20th to a Senate subcommittee – Shapiro’s testimony included the following:

“I believe the markets exist for public companies to raise capital, to build businesses, and create jobs and they exist for investors to support that activity. And those are the number one and number two purposes of markets. And everything else from my perspective has to be put into the context of those two goals.
“The SEC needs to explore whether bids and orders should be regulated on speed so there is less incentive to engage in this microsecond arms race that might undermine long-term investors and the market’s capital-formation function. The markets have to serve that function for companies to raise money, create jobs and allow the economy to grow…We are also looking at whether and to what extent pre-trade price discovery is impaired by the diversion of desirable, marketable order flow from public markets to dark pools.”

My own experience as a proprietary trader in both the New Zealand, Australian, and London markets during the 90s gives me some insight into both the benefits and the potential disadvantages of a dark pool platform. There was many an occasion when I would have been extremely pleased to have had the advantage of trading anonymously – when the trade size was simply too large for the market so that alert competitors knew within the hour that you were probably trying to digest a massive position. I can assure you that trying to hide a position say four times the daily turnover and quietly work the trade into the market is largely impossible, and often resulted in the total destruction of your personal P&L, such that three to four weeks (and sometimes months) of good profitable trading was destroyed in an hour and one minute. Once the market saw the trade posted you were immediately in the ‘being kicked’ position and would remain there sometimes for weeks. But then everyone got their turn.

In Australia you had one hour to report large off-market trades, and on many occasions this was simply not sufficient time to deal with the overhang before everyone knew that the trade had taken place. Believe me, we all analysed these big trades very carefully and it was very easy to work out what had just happened – you could do the sums on a bit of paper, although even then some firms had developed ‘back-blending’ programmes to work out the residual balances. It was particularly galling to be accosted by another trader in the after hours watering hole with an extremely accurate description of your dilemma, and a week later given an equally accurate update.  So I certainly comprehend the attraction of the ‘dark pool’ for the large block trader.

However there is no doubt that removing these trades from the NZX platform will have the impact of reducing even further the modest turnover of the exchange and increasing the likelihood of dangerous volatility. One of the critical aspects of the large institutional presence in a market is that they provide a stabilising influence, particularly on the bad days – in fact if they are dealing in size they will be deliberately buying into weakness or selling into strength, using the public’s shorter-term horizon to their advantage. Take this away and the market will find all it’s participants on the same side of the trade, with far greater volatility the result.

This is made considerably worse when the market is dominated by HFT algorithm trading, or as Shapiro put it, a microsecond arms race. This is clearly what happened in the US markets during the crazy 15 minutes on May 6th and continues in individual stocks on a daily basis. What happens next as the US has found out is that public participants lose their faith in the market because they get shafted in the time it takes to blink. People simply won’t remain as equity investors if the volatility is so wild that any next moment might be a fatal one.

So for Sam Macqueen, co-head of Liquidnet Australia, to say “its activities would increase trading in securities listed on the New Zealand Exchange, helping it to retain and increase overall market liquidity” is a self-serving misrepresentation of the global experience. Surely by definition if the REAL market wasn’t there to accumulate from and distribute to then it would be impossible to trade at all unless the exact opposite intention existed within the institutional dark pool platform. This is generally not the case in my experience and creates the need for risk-taking brokers in the first place. Liquidnet is after the cream, but cares not a jot about the milk.

So consumers are feeling more chipper, and might start spending again, says the latest Westpac McDermott-Miller survey of consumer confidence.

A net third of those interviewed for the June quarter survey are saying now is a good time to buy a major household item, the most positive score in that category since September 2005, while the numbers saying they’re worse off than a year ago has fallen to a net 14%, compared with a net 22% in the March quarter.

Things have looked rosier off and on for those measures over the last decade, but the upturn is strong.

More striking is the fact that opinions are not only now evenly balanced on whether New Zealand has five good years ahead of it, but also that this outlook is stronger than at any time in the past decade.

This major improvement is driven in part by the unexpected discovery that there’s demand for our food after all, as the developing world continues to grow while the importance of the sclerotic “old” western economies is on the wane, at least for now.

Adopting a traditional approach to economic soothsaying, this latest survey is good news not only because people feel more optimistic, but also because optimism is assumed to be code for “spending more.”

That’s why Westpac senior economist Donna Purdue says of the latest confidence survey, “this is great news for the New Zealand economy” because consumer spending has been the “weak spot” in the recent sluggish recovery.

But in the new age of austerity, is this really such a good thing?

If Reserve Bank Governor Alan Bollard is right, it’s a problem if New Zealand households only tighten their belts for a year or two when the chips are down, but break out the plastic for a credit-fuelled splurge once the dust clears.

As Westpac says in its commentary on the latest confidence survey: “We expect the RBNZ to be somewhat surprised by the strength of today’s result.”

In its latest Monetary Policy Statement, issued earlier this month, the RBNZ anticipated households would undertake a “period of consolidation with growth in consumer spending slowing over their forecast horizon,” based on the assumption of a major, long-lasting behavioural shift away from spending in favour of saving. Static house prices are just one sign of this, but as Bollard himself asked this week: how deeply entrenched is the shock to the wallet of the last two years?  Have we really turned over a new leaf, or are we all just waiting for the banks to start lending again to anyone who can fog a mirror?

If the global financial crisis taught anything, it’s that everyone with access to credit overdid it in the decade through to about 2007, and that simply feeling better about life doesn’t axiomatically mean everyone should or even will start spending again.

In fact, if they do, a sharp kicking from some sort of global fiscal karma is the most likely outcome.

In the debt-soaked economies of Europe, this threat rests most heavily with governments, which borrowed more than the human mind can comprehend to get the world through its last bout of credit-inspired indigestion, and should be knuckling down to a decades-long process of unwinding the fiscal stimulus unleashed.  Trying to do the same bailout again any time soon may not prove possible.

However, government debt is not the issue in New Zealand, where Bollard says foreign lenders are giving credit where it’s due for keeping a lid on spending and steering New Zealand through the global recession with less damage than elsewhere.

No, the danger here is the very high level of private, foreign, and especially household debt, and the extent to which that debt is being financed mainly by foreign-owned banks rather than other capital sources.

“Financial markets and credit rating agencies use a range of indicators to form their assessment of a country’s viability or fragility,” Bollard said.  “At the moment most of the focus is on sovereign debt and the fiscal accounts.

“However, as the recent credit downgrade of the government of Spain showed, overall external indebtedness can play a role in this.  New Zealand is one of the very few developed counties with net external liabilities so high.”

In other words, it’s fine to feel better about life, but it’s nowhere near time to come off the diet: the kind of advice which anyone who’s ever tried to stick to a diet will tell you is more in the realms of wishful thinking than achievability.

And the trouble with that is that while Bollard’s may be wishful thinking, he’s also right.

Unless the diet continues, with a slower-growing, weaker domestic economy persisting for some years to come, New Zealand remains highly vulnerable to the next big and all too likely world economic shock.

Been getting a few things wrong lately.  The latest was a report written on Tuesday afternoon for Thursday publication, punting that NZX would win the contract to run the new electricity derivatives market for the local market platform owner, EnergyHedge.

Tragically, on Wednesday afternoon, EnergyHedge plumped out of the blue for ASX instead. This caused quite a stir, given the NZX is meant to be at the heart of the tripling in capital markets size predicted by Capital Markets Development Taskforce chairman Rob Cameron not so long ago.

And the fact that even NZX thought it was in the bag.

My story published Thursday was wrong, but at least everyone else was surprised too.

In eight years as a Press Gallery reporter, I consistently misjudged election outcomes, and was particularly blind-sided by Winston Peters in 1996.  I could have sworn he campaigned against Jim Bolger, so it was all a bit of a shock when he picked Jimbo as his mate after weeks of dallying.

These days, of course, we are the worldly-wise ones, watching indulgently as the Poms get to grips with their first coalition government in a decade.

So, anyway.

Don’t take any notice of predictions from me, but also: don’t expect an interest rate rise next week.

And if there is one, I am forearmed with another prediction: it will be the last for a while.

The economy is fragile, but there is a recovery and some optimism among businesspeople, those employers of extra staff, buyers of cars, warehouses, commercial office space, and fuel.

Not helping is Europe, which is definitely worth being scared about.  That’s Global Financial Crisis Mark 2 if it all falls apart.  The good news is it probably won’t.  But then, who’d have thought Lehman Brothers, Bear Stearns and others of that age could have failed?

So investors are cautious.

On the other hand, the economies of Asia – which New Zealand is closest to – are where the action is now.  Europe could derail the world economy because of its size relative to the rest of the world, but we could cope if it just atrophied.

And if Asia, Australia, North and South America, and southern Africa keep growing, is that really such a problem long term, practically speaking, for us?  Not really.  In fact, we’re in a good part of the world for once.

After several weeks of incessant rain, there is also a good chance we will become water-rich thanks to global warming.  Better dust off the thinking on inter-generational immigration policy.

So New Zealand sits on the cusp of enormous opportunity, much of it in the consumption by huge populations of slightly wealthy neighbours that can, for the first time, invest in their personal and their family’s nutrition. A bit of calcium doesn’t go astray, and that’s what we’re really good at making.

In that sense, 100% Pure New Zealand, for an Asian food consumer – that is, our biggest food customer – is readily associated with safe food, whereas the wealthy tourists who will come from Europe for decades yet will believe the green hype without batting an eyelid.

“You’re pushing an open door,” the head of sustainability programmes for Marks & Spencer, Mike Barry, told the Environmental Defence Society this week.

A pity then that he also crushed hopes of European mass market consumers actually paying more for sustainably grown food.  They won’t and, not unreasonably, they expect producers to do it for them.  New Zealand had done well on debunking the “food miles” argument, but the value of that was in markets kept, rather than made more valuable.

Not much help if you’re farming sheep – our crappest value animal for products sold in global quantities – to produce lamb roasts for the M&S spring rush and hoping Mr and Mrs Miggins will pay a bit more for an environmentally friendly hunk of meat.

Not that any of that has any bearing on the short-term obsessions with growth and inflation that reach their six-monthly apogee next Thursday, with the Reserve Bank of New Zealand’s quarterly Monetary Policy statement.

For ages, all media commentary and interpretation of RBNZ smoke signals has said rates will rise from their historic low point of 2.5% this month – that is, next week.

So it was striking that New Zealand Institute of Economic Research principal economist Shamubeel Eaqub this week suggested there was no need to raise rates before September, such is the fragility of the domestic economy.

It’s a shaky time, but at least the sun came out on Friday.  My pick would be no rates hike next week, but maybe in six or 12 weeks time, if the world keeps its act together.

• There will be no Smellie Sniffs the Breeze next Friday.  The column will resume on Tuesday mornings from June 15.