THE DIRECTORATE

Evening Post, Issue 29, 4 February 1935, Page 13

THE DIRECTORATE

STATE APPOINTEES

"TRUSTEE INVESTMENTS"

"In the pamphlet it is stated that four out of the seven directors of the Corporation shall always be; State appointees, and in addition that there should be a Treasury representative ex officio on the board. •

"In an institution such as this it is only reasonable that "the directorate should comprise 'representatives both of the shareholders and of the bondholders. When ..the Corporation commences business the. State will be a very large bondholder—if not the only bondholder—and on that ground it is reasonable for the State to.nominate a substantial proportion of the directors. The proposals contemplate, however, that eventually the State may hold no bonds and that' these will all be in the hands of the investing public. The committee, suggested that State appointments should be diminished progressively as the State disposes of its Mortgage Corporation bonds, and should cease altogether when the State has disposed of the whole of its holding.

"The Minister stated that a system of election by, possibly, thousands of bondhplders : whose names and addresses were not on record presented such difficulties that it was not pos-sible-to devise a-workable scheme. That such difficulties are insuperable .we are unable to agree. -The Minister conceded that the bondholders should have representation on the: board and has suggested that while the nomination should remain in the hands of the Crown, a certain proportion of the board members should be bondholders. Nomination by the Crown, in our opinion, would be quite unsatisfactory, and we repeat that there are. 11.0 insuperable difficulties in devising a system of election by bondholders. BONDS AS TRUSTEE SECURITIES.

"In his pamphlet, Mr. Coates writes: 'The bonds will be ; trustee ' investments and' will fully merit that status.' We are unable, to agree with that assertion. -...■.-..

"(a) The present Trustee Act empowers trustees to' advance against freehold land up to two-thirds of the value of the land. In practice many trustees do not lend up to the full statutory authority. Even under this provision, trustees have not always succeeded in preserving trust capital. ■How. can bonds representing advances up to 70 per cent, of the value of the mortgaged property. be regarded as sound trustee securities?

"(b)"" According to the pamphlet the Gorpbratibri has authority also to lend (and that without limit) ■ against security over stock and chattels. Such loans, of course, never have been an authorised trustee investment.'

"If it is seriously: intended to use this power the value of the bpnds will be correspondingly, discounted by investors, and they should most certainly not be designated 'trustee' security. Lending money on the security of stock and chattels is' a highly specialised" class of business and one of; the most difficult and complicated' forms of. mortgage lending, and it should be left to those who have the facilities for dealings with their borrowers and securities, and who have bought their, experience in such; dealings. -.• ■ : STOCK AND CHATTELS. "The' committee was informed that it was not intended to'lend on stock and.chattels except1 to the Corporation's own' mortgagors whose lands were mortgaged to it. The committee would, go further. It holds the opinion very strongly that this : form of lending should not be within the province ofi the Corporation,-, except, that the Corporation should have power.to take slock and- chattels securities from-its own mortgagors who are in default.

"(c) If'bonds are to qualify as a trustee investment, then ' • '

"(a) There should be'a fixed period for redemption:. The "pamphlet was silent, on this .point,, but- the committee was informed that the bonds would not be perpetual, and that probably they, would -be issued with varying maturity dates. ' - ■ .

"(b): The bonds should remain relatively stable in value and should be readily realisable in emergency. It seems likely that the bonds will fluctuate in value with varying interest rates, particularly after capital in the country is freed, and confidence is restored.

"In the ■ opinion of the committee these bonds will not find favour as trustee investments. Even if the suggestions of the committee, above, are met, mortgages representing advances up to the very high figure of 70 per' cent, of the value of the security, even with the additional protection afforded by the capital and reserves of the Corporation (equivalent to a comparatively small percentage of the Corporation's liabilities) wll, not be regarded by trustees as 'gilt-edged' securities. " •

VALUATIONS. i The committee is gravely concerned at the difficulties—difficulties which it regards as insuperable—of creating a competent staff to deal with valuations. Even under our present system, with its great advantages of reciprocal personal knowledge of and contact between borrower and lender, valuation is the most difficult problem. We have been struggling for years to try to find a really sound basis of valuation, but even on the small scale of private operations there is always a difficulty about the basis of valuation. The.committee doubts whether the Corporation will be able to secure early a sufficient and' efficient staff of valuers to deal,with the volume of business that will fall on it from the start. Hopelessly interlocked with the question of a basis for valuation is the question of the personal efficiency of the individual mortgagor. "The pamphlet proposes that valuations be based on actual production results. If everyone were equally competent then nothing more would need to be said. It is a commonplace that one farmer, owing to superior ability, can make a comfortable living on a farm on which many another' would starve. "Actual production is not the only test to be applied. The valuer must take into account the personal ability of each mortgagor and the quality of the stock at his disposal. .The committee doubts whether any system of valuation can be devised which .will

adequately discriminate between the 1 competent and the incompetent i farmer.- The best judge of a farmer's competence is the existing mortgagee, i or his representatives, who have an : intimate experience of the farmer's : working of his property and of his > general character and ability. i PERSONNEL OF DIRECTORATE. ! "If this legislation is going to be enacted, the committee calls attention '. to the imperative need for the. Gov-j eminent, to obtain the best possible j men not only as directors of. the Cor-|, poration but as its chief executive officers: If the general public is to have any confidence in the proposals, then it must be satisfied that the administrators -of the scheme are men of integrity, thoroughly capable by reason of previous training of taking an impartial and enlightened view of . the matters coming before them, and not having any personal interest. "A very grave difficulty arises in connection with the taking over of the securities of existing Government lending departments. At the outset, the whole board of the Corporation will be appointed by the State, and that board will have to negotiate the contract,to be made' with the State in regard to the taking over of these securities.- The State will, in effect, therefore, be both vender and purchaser. Whatever the personal qualification of the board. members, the conflict of interest makes absolutely independent judgment impossible. SUSPENSE ACCOUNT. "The very involved proposal under which the Corporation. will take ovev all the current mortgages of these Government Departments at their nominal amounts, giving bonds to the State 'for a safe proportion' and 'accepting contingent liability' for • the remainder, appears to the committee to ■be merely postponing the issue. Further, the committee is in some doubt as to how a 'safe' proportion' is to be fixed. •. "Will this 'safe proportion' be fixed by the board appointed by the State? Why bury the losses of existing State lending, departments for many years? What effect will such an arrangement have on the appraisement by investors of the bonds of the Mortgage Corporation? What will be the position if events prove that too high a proportion of the mortgages has been taken over by the Corporation as 'safe'? From the phraseology of Mr. Coates's pamphlet, the committee judges that the ' intention is . that the initial amount of this suspense account will, constitute the State's maximum contingent liability. The committee is very strongly qf opinion that the State's responsibility in regard to existing mortgages should not be qualified in any ■way whatever, and that any and all losses arising from these mortgages must be borne by the State..

"Unless the securities it is proposed the Corporation shall, take over from the State can be finally valued by an independent tribunal at the time of taking over, and on a basis prejudicial neither to the State nor to the Corporation, the function of the Corporation in regard to these securities should be that of an administrator and not that of. a purchaser. The committee is Strongly of opinion - that this whole proposal, of a suspense account is unsound.