GILGANDRA Shire Council may take legal action against troubled US investment bankers Lehman Brothers as a result of a $1.5 million investment that has gone wrong.
Council’s general manager Paul Mann said legal advice wasn’t too far away and council would wait on what its solicitors said before deciding what to do.
“We can’t make a decision until we get it (the advice) back,” Mr Mann said.
“We really need to get some information. Council’s being informed of the developments and we’re just waiting to see where we go with the legal advice.”
He said $1.5 million of council’s money had been exposed to a collateralised debt obligation (CDO) through Lehman but declined to give any further details.
The multinational banking giant is being hit by the sub-prime credit crunch in the US.
Last Saturday The Sydney Morning Herald listed several North West councils it claimed had lost a combined total of $40 million in various CDOs through Lehman.
Guyra Shire Council acting general manager Keith Lockyer said council had securities investments worth $4 million managed by Lehman, which is acting as council’s broker.
He said $2.2 million of council’s money was exposed to CDOs.
“Market re-evaluations of those securities, if we were to resell them in the marketplace today, would mean we’d incur a loss of about $1.2 million because the market has dropped considerably,” Mr Lockyer said.
“We’re not proposing to sell them at this stage, with the market being depressed as it is.”
He said council hadn’t lost the $4 million because some of the investments were in term deposits and bank stocks.
“The CDOs we hold are corporate CDOs, they’re not sub-prime. They’re CDOs to do with corporate institutions,” he said.
“I don’t know where they (The Sydney Morning Herald) got (their) figures from. These figures are published every month as part of our council meeting notes. It’s public information.”
Council is working with an independent financial advisor to develop strategies to tackle the problem.
“Because that’s not a set-and-forget – we’re taking each security as an individual case in its own right,” he said.
“We’re just managing each of the investments case-by-case with an independent advisor.”
Inverell Shire Council general manager Paul Henry said of the $3.2 million exposed to CDOs, only $450,000 worth fell below the triple-A rating, which meant they were in danger of defaulting.
Council won’t be taking legal action against Lehman.
“It’s a very insignificant amount of money, in relative terms, compared to our total investment package,” Mr Henry said.
Council’s investment portfolio is worth $29
million.
“We’re still receiving our total interest entitlement. There’s been no defaults and we don’t see any need to incur legal expenses in pursuing the issue,” Mr Henry said.
“We’ll be looking at the restructuring of those existing CDOs that don’t retain the triple-A rating. We’ll obviously look at disposing of that investment at an appropriate time.”
Liverpool Plains Shire Council corporate services director Mike Urquhart said council didn’t take part in any CDOs with Lehman.
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