Councils Try To Recover Losses

Sydney Morning Herald

Wednesday September 17, 2008

Wendy Frew, Sunanda Creagh and Brian Robins

NSW councils trying to recover hundreds of millions of dollars invested in complicated, high-risk US investment products have begun writing down the value of their investments and are preparing to cut spending on major infrastructure, including roads and footpaths.

Legal action by some of the councils to recover the money also was in doubt yesterday following news that the American investment bank Lehman Brothers intended to file for bankruptcy.

A government-commissioned report published in April found NSW councils had a combined exposure to collateralised debt obligations and capital guaranteed products of $1 billion. Some of those investments were made with Lehman.

The State Government had demanded councils seek independent advice to clarify the extent of their exposure and advise the Government as soon as possible, said the Minister for Local Government, Barbara Perry, yesterday.

However, the Local Government Association president, Genia McCaffery, said the State Government had contributed to the financial pressures facing local government.

"A lot of councils, because of rate pegging, are under great financial pressure and when a council is under great financial pressure it goes looking for alternative sources of income," Cr McCaffery said.

Last year Wingecarribee Shire Council began legal action against Lehman Brothers Australia over its losses. As many as 23 other councils were considering a class action.

But the council was yesterday unclear whether the case could proceed because the Australian subsidiary was not bankrupt.

Manly Council's general manager, Henry Wong, said the council had invested about $4 million in collateralised debt obligations, of which about $500,000 was invested in a Lehman product.

"We have written it down to about $100,000 but no one knows what the real market value is and no one is interested in buying these products," said Mr Wong, adding that the council was not ruling out joining a class action against the bank.

"That money was earmarked for day-to-day expenditure in the future. Projects ranging from a footpath to a road could be affected but at the moment it's too early to say, really," Mr Wong said.

Port Macquarie-Hastings Council also has seen the value of its Lehman investments drop dramatically.

"It's not anything that will affect the short-term budget but that money was there to fund future programs," said the council's chief financial officer, Shane Ryan.

"If there were some capital losses that would mean a reduction in future capital expenditure ... the likes of road projects and major infrastructure projects," he said.

Business - Page 25

© 2008 Sydney Morning Herald

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