New Zealand might have avoided bailing out failed finance company investors to the tune of $2 billion if Australian Prime Minister Kevin Rudd had held his nerve after the Lehman collapse, says former Finance Minister Sir Michael Cullen.

For Cullen, the defining moment of the financial crisis was the day of Labour's campaign launch at the Auckland Town Hall — Sunday October 12.

READ MORE: 'A period of fear and greed' - Lehman crash remembered in NZ

It will be remembered as the day Helen Clark announced the Crown Retail Deposit Guarantee scheme.

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It was a move that reassured New Zealanders their bank deposits were safe, as big banks collapsed around the world. But it also forced the Government to bail out investors in some higher risk finance companies — many of which collapsed for very different reasons.

"That was not what was written in Helen's speech in the morning for her delivery in the afternoon," Cullen says.

"The plan was to announce that progress was being made on a partial guarantee system."

Cullen had been working with the Reserve Bank on a more measured guarantee scheme — one that could have avoided bailing out the likes of South Canterbury Finance when it collapsed in 2010.

"Quite possibly yes," says Cullen. "I was not keen on guaranteeing the finance companies."

He says he was always very conscious of the moral hazard associated with providing state support for high risk investments.

But "as we were preparing for Helen's speech ... basically in the green room at the Town Hall ... word came through from Canberra of rumours that Kevin Rudd was about to make a major announcement," Cullen recalls.

Hurried calls were made to officials in Canberra and at the IMF/World Bank conference in Washington.

"The people in Washington, including Wayne Swan, Australian Treasurer at the time, said they knew nothing. But we got confirmation from Canberra that Rudd was going to be announcing a full guarantee of the Australian financial system," Cullen says.

"So Helen, Heather [Labour chief of staff Heather Simpson] and I had a quick meeting at which my strong advice was that we had no choice but to change Helen's speech ... to announce that we would have a full guarantee."

Rudd — seemingly acting unilaterally — forced their hand and put New Zealand in an impossible position.

Following protocol for emergency policy decisions that close to an election, Cullen ran the idea past National's Bill English and he agreed.

"At that point we were very worried that if the Aussies did that and we did nothing, there would a loud sucking sound of capital going from New Zealand to Australia.

"The Australian banks, and therefore fundamentally the NZ banks, were sound because they just hadn't gotten into all those complex derivatives. I don't know where [Rudd] got his advice from."

In the end, the Government paid about $2b to finance company investors — including $1.58b to South Canterbury Finance, although close to $1b was clawed back by receivers.

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