Wednesday, May 17, 2006

Of state secrets, leaks and private relief...

I don’t know if neo-neocon passes this way at all, but her series on whistle-blowers and breakers of state secrets would fit here very nicely indeed.

If we go back to 3 May (2 May trading reports) we find this was the general mood
The New Zealand sharemarket opened in mildly positive territory this morning as Telecom took a breather from the pre-result jitters experienced...

Telecom is expected to post a lower third quarter profit on Friday, as its troubled AAPT unit and the looming threat of regulation overshadow...
(How prescient was THAT!!)

The story broke that evening / next day

The Government announced tonight that it would require the local loop to be unbundled and other changes to provide faster and better broadband...

Shares in Telecom, by far New Zealand's largest listed company, were smashed down 10 per cent in New York trading this morning, following the...

And -
The value of shares traded on the New Zealand sharemarket today was more than three times normal levels as investors rushed to sell off top stock Telecom. After the market closed yesterday the Government announced it planned to end Telecom's monopoly of the local loop network....

And so on, through to this morning -
Michael Ryan, the Budget leaker who rocked the Government to its core, worked in the heart of the Beehive and his identification yesterday spurred two leading public servants to offer their resignations.

The chief executive of the Department of the Prime Minister and Cabinet, Maarten Wevers, for whom Mr Ryan worked as a messenger, and the Secretary to the Cabinet, Diane Morcom, offered their resignations to Prime Minister Helen Clark over the breach of security.

She refused to accept them.

Helen Clark said the two were devastated by the revelation "but I am not prepared to see those careers destroyed by the calculated dishonesty of a low-level employee".

"There can be no suitable explanation or excuse for that.

"It was gross and disgraceful dishonesty and such a person cannot continue in the public service."

Is it just me, or are there others who are detecting a
distinct note of relief behind the anger being expressed by
the Government? To be fair, John Armstrong did in his column a few days after the actual event.

If Mr Ryan had not, "for reasons known only to himself",
chosen to breach Budget secrecy I can but wonder what the
reaction would have been Friday morning after the Budget was

Would the Budget have included an estimate of the impact
that "unbundling" might have on the sharemarket? Were there
processes proposed to ameliorate the impact? Whose "fault"
would have it been when the sharemarket lost two billion
dollars on Friday morning?

I can but wonder because those truths will never ever be
known. And oh how easy to blame a poor bike riding old erk
for the leak, and the consequential sharemarket losses.

NZ Herald, you and all of the rest of the media have done
yourselves no favour with the way in which this has been
reported. Your approach has been far too simplistic. The
real question has been ignored.

And for those with CCD (Compulsive Conspiracy Disorder) have there been any sightings of golden parachutes around Wellington in recent days?


Dave Justus said...

I don't understand the point of this post.

Are you claiming that Ryan did a good thing by leaking this? Are you claiming that he is a fall guy and wan't really the one responsible?

Obviously ending a monopoly will result in the monopoly holding company being less valuable. Do you think it was a mistake to end this monopoly or a good thing?

As for 'the real question that has been ignored' what is that question?

The probligo said...


In very simple terms...

1. The Budget (formally read yesterday afternoon) included a section which breaks Telecom monopoly on the local loop.

2. The Cabinet report giving approval to that part of the Budget was leaked to Telecom by a "messenger", Ryan.

3. As a result of the news that Telecom was losing that monopoly, the share market value of the company fell by some $2 billion.

The question that the media should have been asking is -

What mechanisms did the government have in place to avert or minimise the sharemarket sell-down, or to advise Telecom in advance of the Budget?

If you really want to fire a conspiracy then the thought that Ryan was "suggested" or "instructed" to deliver in return for a comfortable living for the next ten years is tempting.

This one change and its potential consequences was going to be a major political headache for the Government. It explains in some respects the reticence of the government to "heavy" Telecom on a variety of changes in the past, including unbundling.

If the report had not "leaked", and it was intended to advise Telecom in advance of the unbundling change, how much notice would have been given, bearing in mind Telecom's responsibility to advise the sharemarket and (advisedly) request suspension of trading in Telecom shares until after the Budget? The absolute minimum would be 24 hours.

There is a remote possibility (if you suffer CCD it is stronger) that Ryan is the fall guy - for the government.

Finally, only two commentators I have read have made the point - if Ryan had not leaked the report, then Canny Cullen would have been wearing the noose. As it stands, the media is full of the "terrible deed" and not looking past it to "what should have happened".

Unbundling? It was a mistake to leave it out of the original privatisation of Telecom; pure and simple.

Now? It is not too late.

Dave Justus said...

I think that without evidence, of which there seems to be none, alleging conspiracy is pretty out there. From the article you quoted, executives at Telecom were prohited for trading their shares during this time period in any event, due to a quarterly report coming out.

So I don't think there is even any evidence that someone who knew about this in advance profited from it.

Why should the Government try to minimize the damage to Telecom shares? Their decision made the company worth less, so it is natural that their shares would decrease. Advising the entire public (as was planned) of this decision at the same time, rather than just advising Telecom seems much more fair and would prevent any insider trading.

The share market sell down seems to me to be entirely appropriate in light of this decision. Planning to inform Telecom ahead of time would seem to me like a bad idea.

As to the more general question of whether this should have been done at all or not, I certainly don't know enough about this to say. Your answer doesn't inform me any however.

Out of curiousity, what would you have the Government do to prevent this loss of value, presuming that they still wanted to break the monopoly? I can't think of anything they could do. Requesting a suspension would not prevent this from happening as far as I can tell.

The probligo said...

Dave, everything that you say is pretty danged accurate, except that you ignore one point.

Imagine, just for a moment, if your Congress were to pass law (effectively what will happen over unbundling) which had the effect of wiping say 15% off the value of the Dow.

The "damage" that I have been referring to is not just the direct effect, there would have been a major perceptual impact on public opinion, a political impact that the government might have been eager to minimise.

"Look what the B*****S have done to the value of my shares!! I have lost THOUSANDS!!"

Dave Justus said...

I certainly don't know a lot about the New Zealand financial situation, but if a reduction in the price of one company knocked 15% off your exchange it seems to me that you have bigger problems than regulation or deregulation.

I would think that this had been rumored ahead of time, not that the decision had been made or which way it was going to go for sure, but that it was being considered. It seems surprising to me that at least some of the price adjustment had not been made before this 'leaked.'

Regardless, it is difficult to say how I would respond to a government decision that knocked 15% off the DOW. If, I felt that the decision was the right thing to do (I honestly can't think of anything that would knock 15% off AND be the right thing to do) I wouldn't be angry at the Government for this. If I thought it was wrong (nationalizing things or something like that) then I would be angry, both at the action and its negative effects.

In general I expect that I would support the Telecom deregulation, but that does get into a technical analysis of which I don't have the details. Sometimes a Government sponsored monopoly is the best choice.

The probligo said...

Dave, my comment was intended to concentrate solely on the political ramifications and the budget.

Truth is that the government has waved a flag at the unbundling problem so many times in the past (and that is both left and right governments) that every time the subject comes up the response from the stockmarket had become more like "Yeah, right! Wolves again.".

The last time that "Snips" Cullen had voiced the unbundling option was back in February (if I remember right) and no word since then.

The total capitalisation of Telecom is about 20% of the total NZ stockmarket. the 15% movement was an exaggeration on my part... Yes, we are a small nation.

On the actual unbundling question, I am of two minds. I look to the possibilities and see a very big "YES" in bright gold lettering. Then I look in the direction of our electricity supply and see the consequences of the "privatisation" and the effects on supply development there is an icicle encrusted "Oh, DEAR!" all along the horizon.

Truth is that Telecom have gotten themselves into a considerable bind on advancing technology.

When broadband first started out, there were two competing trials put in place, one by Telecom and the other by a private company. The upshot was a series of legal battles taken by Telecom to stop the competitor's trials. The justification for the actions was directly connected to the local loop protection and the fact that the competitor was promoting VOI technology taking the local loop "out of the loop". Because of the "local loop protections" built into the legislation that privatised Telecom, they won every time and financially crippled the promoters of the opposing trial.

To make matters worse, Telecom had by then invested quite a considerable sum in "over the wire" broadband - technology that was already being overtaken in the US particularly by new solutions.

The competitor was promoting a wireless solution which was both cheap and (generally) effective. (I don't know that everybody realised how affected that technology could be by weather conditions.)

Perhaps with the right decisions being made now we can look to really effective and cheap broadband in the not too distant future.

Dave Justus said...

One company being 20% of the index is pretty scary, regardless in my opinion.

Of course, I expect that the effect is lessened by a fair ammount of foreign investment. With an index that small, I would expect that most investors and pension funds have quite a bit of overseas investment, so even if your 15% wasn't an exaggeration, it wouldn't have the effect that a 15% drop in the DOW would here.

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