The Treasury should have carried out far more due diligence on South Canterbury Finance before it was approved for the Crown's Retail Deposit Guarantee Scheme, the High Court has been told.
Former chief executive Lachie McLeod and former directors Edward Sullivan and Robert White face 18 charges brought by the Serious Fraud Office relating to the $1.7 billion collapse of the company in 2010.
The Timaru court was told on Tuesday that the Treasury introduced a Retail Deposit Guarantee Scheme to stop the flight of New Zealand money to Australia in 2008 - an election year.
Treasury director John Park, a former manager of the Government Retail Deposit Guarantee Scheme, said New Zealand was forced to follow Australia's lead in quickly introducing a scheme to shore up the country's financial institutions during the global financial crisis in late 2008.
"In the ordinary course of business, you wouldn't enter into a guarantee arrangement on the basis of the information we were provided with - you'd undertake extensive due diligence, given the nature of the contingent obligation that you're entering into.
"We didn't have time for obvious reasons - we were attempting to deal with a crisis that was very fast-breaking."
Mr Park said South Canterbury Finance's eligibility for the retail deposit guarantee scheme was measured by its investment statements, prospectus, annual accounts and credit rating. He said the Treasury and the Reserve Bank placed an enormous reliance on the accuracy of the information provided by the company's directors.
He conceded the shortfall was "enormous". The receiver managed to recover one billion dollars in assets but honouring the guarantee cost the taxpayer more than $600 million.
Labour Finance Minister Michael Cullen delegated the management of the scheme to the Secretary to the Treasury while the general election was in progress, Mr Park said.
"There was an election in process, so the delegation enabled the scheme to kick off, if you like, process applications and make decisions on applications without being impacted at all by the normal conventions that operate during and post an election."
Accuracy of evidence questioned
The accuracy of a Crown witness's statement was called into question. David Jarman, a former chief financial officer at South Canterbury Finance was giving evidence on Tuesday.
Mr Jarman said on Monday he was concerned that the company's December 2009 accounts did not include accurate disclosures which, in turn, meant information being used in the company's prospectus was also inaccurate.
The prospectus was the document the Treasury relied on when it decided in 2008 to include the failed finance company in the Government's Retail Deposit Guarantee Scheme.
Under cross-examination on Tuesday morning from Pip Hall, QC, Mr Jarman said on Tuesday he had never interviewed or questioned the directors involved in the transactions.
"So you would accept wouldn't you that your evidence concerning those transactions lacks some context, in the sense that you are providing a view or opinion of what occurred and what it means only with the benefit of hindsight," Mr Hall asked
"That's correct," Mr Jarman replied.
Mr Jarman said his evidence had been edited at least three times since he gave his witness statement to the Serious Fraud Office.
Mr Hall said Mr Jarman's witness statement was different to the information in hand-written notes he took at South Canterbury Finance's board meetings.