"We could see things going pear-shaped overseas and there were concerns, I knew in the financial markets too, about Fonterra... it's big, is it going to be okay?
"Fonterra had no money....this was on the back of a huge $7.90 (kg milksolids) payout to farmers (2007-2008 season)."
Fraser said the response from Fonterra's top management to ministry officials' approaches was "nothing to see here, move on".
Fonterra declined to comment for this story.
For Fraser, alarm bells really went off when Fonterra secured a large loan in British sterling, and "they paid a fortune for it".
"Fonterra only borrowed in US dollars because that's what it traded in. It told us straight away that Fonterra couldn't access credit in US markets."
Fonterra's balance sheet at the time allowed it minimal room to run up more debt, he said.
Fraser said he and colleagues began meeting each week to review Fonterra's situation and options. A list of possible "quick" trade sales of Fonterra assets emerged.
On it were Tip Top and Fonterra's South American assets.
The concern, said Fraser, was that Fonterra, created from an industry mega-merger in 2001 by special legislation to be a national export champion, may have to be bailed out if its balance sheet deteriorated. The Labour government legislation allowed the merger to get around Commerce Commission opposition to the merger.
That fear consolidated when ministry officials were visited by a Fonterra senior executive, Fraser said.
"He said things aren't good. He said we're stockpiling because we don't know where the bottom of this market is. He said we've no idea and if it gets much worse we are going to start running out of money."
Fraser said the situation with Fonterra's balance sheet arose, and remains a problem, because it's "basically a postbox".
"All this milk comes in (to it) in the spring flush, it all gets shipped, then a tsunami of money comes in from overseas, then it gets paid to farmers and Fonterra clips the ticket on the way.
"Because they were stockpiling, a big chunk of those money flows basically stopped. At the same time the money markets were frozen."
Fraser said he briefed new finance minister Bill English on the situation, suggesting much of the problem was Fonterra's "lack of balance sheet separation".
"Where does Fonterra's balance sheet stop and farmers balance sheets start, given the (milk) payout subordination? I said if international markets don't recover and Fonterra continues to stockpile, the amount of money coming in will get substantially less.
"Our short-term concern was they would get some money coming in but with payout subordination, Fonterra's obligation to the banks would get paid but what about farmers' payment to the banks? This was about the same time we were starting to worry about dairy debt which had gone from nothing to $20-30 billion (with conversions and dairying expansion)."
Another concern for government officials was how long the packaging on the stockpiled powders would last before the huge collection had to be written down, and then written off Fonterra's balance sheet, Fraser said.
Fortunately for Fonterra, prices on GDT started rising into 2009, credit lines eased, and the company started clearing the huge stockpile, he said.
"It was by the skin of the teeth though."
Fonterra's current financial squeeze, which saw it declare its first ever net loss last month, is attributed by industry watchers to it having no real retentions-from-earnings policy, as well as loss-making investments in China.
The $20 billion revenue farmer-owned cooperative has a new chairman and chief executive who last month undertook to hold a review of Fonterra's strategy, assets and investments.
