The residents of Tumbarumba, an outback town in the foothills of the Snowy Mountains, have little contact with the exotic world of structured debt. But at one point this year their local council had invested close to 70 per cent of its investment portfolio in collateralised debt obligations.

Tumbarumba is not alone. Dozens of Australian councils, charities and a public hospital operator invested heavily in high-risk CDOs actively marketed by Grange Securities, a fixed-income specialist owned by Lehman Brothers, the US investment bank.