Top 10 at 10: First Step 'mis-sold'; Looming finance company problem; Fonterra's debt issues; Dilbert

Here's my Top 10 links from around the Internet at 10am. I welcome your additions in the comments below and please send any suggestions for Tuesday's Top 10 at 10 to bernard.hickey@interest.co.nz There are no teamwork award programmes at interest.co.nz Just free instant coffee. 1. John Kidd at McDouall Stuart Securities writes in the Sunday Star Times that the government has a delicate task to exit the retail deposit guarantee without unnerving the finance company sector. He says uncertainty about the extension of the scheme beyond October next year is already putting a dampener of new lending.

How the Crown is able to unwind the scheme while ensuring minimal disruption to financial markets will be one of the government's key policy challenges over the next few months, and probably years. Irrespective of how exactly this unfolds, the ongoing silence from policymakers on how they propose to deal with the October 2010 expiry is already resulting in serious and increasingly urgent concern among lenders and those that rely on funding for their businesses. If the current uncertainty continues, ironically it will be the guarantee scheme itself that ends up presenting a continuity threat to domestic credit markets and, ultimately, the speed with which the real economy is able to recover.

2. A Money Managers franchisee will allege to the Commerce Commission that Money Managers, controlled by Doug Somers-Edgar, mis-sold mezzanine loans to conservative investors, Rob Stock reported in the Sunday Star Times. Money Managers has denied the mis-selling. First Step made several large loans to interests related to Somers-Edgar.

Former Money Managers franchisee Martin Visser claims Money Managers' advisers were not kept properly informed about the loans that backed the First Step trusts or how risky they were, and were not sent prospectuses for the product, even when changes were made, of which they should have been aware. Visser, who was given a loan from one of the trusts to buy a Money Managers' franchise and has been bankrupted as a result, says he has nothing now to lose from speaking out. In his complaint, he told the Commerce Commission: "Advisers were told that a key advantage of First Step was that, because of the nature of the First Step structure, a problem loan could not flow on from one deposit trust to another. This is how First Step was communicated by advisers to clients. Advisers pay a minimum of 35c per dollar earned to Money Managers for the latter to perform the appropriate due diligence and to market an investment in a clear and truthful manner. "We were given the impression that there were four distinct mortgage trusts. It turns out that 40% of the book of investments was in two large and risky investments: Geotherm and Club Finance."

3. Rob Stock at the Sunday Star Times also reports that Boston Finance, which is in moratorium, has warned investors that its exposure to Blue Chip properties means its previous promise of repaying all the debentures will be difficult to achieve.

Boston's latest financial report in June warned its loan tie-ups with Blue Chip threatened even bigger write-offs. "Litigation is currently before the high court regarding the status of apartment sales made by companies within the Blue Chip group," it said. "A number of these apartments form the security for loans made by the company. Should the outcome of the litigation be in favour of the apartment purchasers, further impairment provisioning is likely to be required."

4. Westpac has matched NAB in Australia by slashing its fees for overdue accounts and dishonored payments, the Sydney Morning Herald reported. NAB's offshoot here, BNZ, did the same. Will Westpac do the same here? We suspect so. 5. Brian Gaynor has a detailed look at Fonterra's need for capital reform in his NZHerald column and concludes Fonterra needs external capital. However, Gaynor is a fund manager and no doubt would love to see the NZX include Fonterra. His comments on debt are interesting though.

As at January 31 the group had retained earnings of only $14 million and the other equity component of its balance sheet had a deficit of $602 million. This mainly comprised a negative cash flow hedge reserve of $825 million. Thus, at the end of January, Fonterra had total interest bearing debt plus overdraft of $8213 million and total equity of just $3790 million. Although the co-operative had $751 million of cash and cash equivalents the debt to equity ratio is far too high, particularly as the share component is not permanent. Fonterra's debt levels are a major concern in an environment where banks are cautious and already have full exposure to the New Zealand agriculture sector.

6. The American economy is as rooted as the poor Volvo in this video below. It has to be said. This piece on how to game the 'Cash for clunkers' scheme in America is frankly painful. Under the scheme, car owners hand in their old clunkers to a new car dealer and get a US$4,500 rebate on a new car. It has been a runaway success because it's one of the few bailout packages available to ordinary Americans. Over US$30 billion has so far gone to bankers in the form of bonuses. HT Anonymous To qualify for the rebate the car dealer must then destroy the engine of the car so it can't be used again. Here below is the officially mandated instructions and demonstrations on how to destroy the engine. So here we have the US government encouraging people to destroy the engines of otherwise workable cars so consumers can borrow more to buy cars they probably don't need. America believes it can be bailed out of its troubles. No wonder the Chinese are nervous about the US$1 trillion they have locked into a failing economy.

The prescribed and approved method of disabling a car according to law involves replacing the engine's oil with sodium silicate, more commonly known as liquid glass. When the car is run with a mixture of water and sodium silicate the liquid quickly evaporates and the solids are left behind, causing most of the oiled surfaces to seize and break. As you can see in the video below, the results are fairly horrific. You can actually hear this car scream. In fact, if you watch all the way, you'll see it spout up its last bit of oil before it breathes its last breath.

7. Ric Toscano at Pacific Capital Associates points out the apparent easing of the slump in the US housing market in recent months may just be the usual Spring/Summer bounce and they may be much more to come. His chart is ominous. HT Juha

The price decline this time around has been substantially larger -- an outcome that was unsurprising based on the comparatively vast overvaluation of homes coming into the 2005 bubble peak. But while it may feel to some like this price decline has gone on forever, it has not yet endured nearly as long as the 1990s version.

8. US Treasury Secretary Timothy Geithner was doing the Sunday talk shows on the weekend softening up US voters for higher taxes to try to repay these monster deficits. the WSJ reported. This is the problem. At some stage living standards have to drop to account for the higher debts. There is no cost-free out of this. Bursting bubbles cannot be fixed with more hot air.

Speaking on ABC News's "This Week," Mr. Geithner declined to rule out tax increase for families earning less than $250,000 a year as a way to reduce the deficit. Asked if such tax increases were an option, he said, "We can't make these judgments yet about what exactly it's going to take and we're going to get there." "We have to bring those deficits down. And it's gonna, it's going to be difficult -- hard for us to do, and the path to that is through health-care reform," he said. "But that's necessary but not sufficient. We [are] going to do some other things too."

9. Here's the next landmine to go off inside the US financial system. The New York Times has an excellent piece on an insurer called Capco that faces claims of US$11 billion but has just US$150 million to meet them. It wrote insurance policies that 'protected' big fund investors from failing institutions. Real Black Swan stuff. HT Felix Salmon

Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase andWells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much about its finances.

10. Barry Ritholz at The Big Picture points out about 1.5 million Americans are likely to 'exhaust' their unemployment payments, some of which are due to expire after 18 months or so.

Tens of thousands of workers have already used up their benefits, and the numbers are expected to soar in the months to come, reaching half a million by the end of September and 1.5 million by the end of the year, according to new projections by the National Employment Law Project, a private research group