European banks Lehman Brothers’ collapse struck at the heart of the global financial community but the investment bank’s demise was felt as far away as Tumbarumba, a sleepy hamlet in the foothills of the Snowy Mountains in New South Wales, where municipal councils, charities, hospitals and universities face significant losses.
Those losses are hampering local communities, starving councils of funds to invest in playgrounds and drainage systems and depriving charities of resources to protect the underprivileged.
A group of close to 70 parties that were sold A$1.2bn ($1.04bn) worth of collateralised debt obligations from or through Lehman Brothers Australia have launched legal proceedings in an attempt to recover their investments.
IMF, a litigation specialist, is spearheading a campaign to recover nearly A$670m for the local authorities. Their problem is that the carcass of Lehman Brothers Australia only contains assets of A$130m to A$240m. IMF may yet pursue other Lehman entities, including the investment bank’s European unit which facilitated the sale of CDOs into Australia.
In hindsight, CDOs seem a wildly inappropriate investment for Australian councils. They carried investment grade ratings but were poorly understood and did not provide a big enough return considering their risk profile.
At one point in 2007, Tumbarumba had invested close to 70 per cent of its entire investment portfolio in CDOs.
Lehman admitted that in some cases the CDOs it sold breached councils’ investment guidelines and agreed voluntarily to buy back some of the product.
Michael Foley, chief executive of Swan council, the largest local authority in metropolitan Perth, said CDO investments that supported its cash reserves had been written down.
“These reserves had been established to fund the replacement of rubbish bins, machinery, trucks and infrastructure such as drainage, buildings, and play equipment,” he said.
Although the council does not need funds “immediately”, it has had to consider new financing sources such as debt. He says difficulties are on the horizon as the council’s population swells by up to 150,000 people in the next 20 years.
But Swan council’s problems are not as acute as those suffered by churches and other local authorities.
“They invested funds required for their immediate cash flow,” said Mr Foley, adding that some were contractually required to build infrastructure for which they will not have the necessary funds.
“Many councils have . . . had to significantly cut their capital programmes and therefore replacement and new infrastructure, like parks and leisure centres, will have to be delayed for many years or not built at all.”
