City council caught in global economic crossfire

BY PATRICK BILLINGS
The global financial crisis is now being felt in the City of Sydney, where a $4 million stake in investment bank Lehman Brothers is looking vulnerable.
“Given the collapse of this bank it is unknown at this stage how much of the $4 million direct investment will be recovered,” a council spokesperson said. “Council is still seeking financial advice.”
The 158-year-old investment bank filed the largest bankruptcy in history last week with debts of $613 billion.
While a public relation spokesperson said it was business as usual for Lehman Brothers Australia, within hours of the bank folding, its UK operations went into administration and the Australian Stock Exchange suspended the Australian arm of the former Wall Street giant.
The global credit crunch has also impacted on other council investments. The City of Sydney has been forced to write down the value of securities, known as collateralised debt obligations (CDO), from $10.5 million to $5.72 million.
“Like other investors, the city has not been immune to the credit crisis which has impacted financial markets throughout the world,” the spokesman said.
CDOs are a highly complex form of investment. Although some experts have labelled CDOs “financial weapons of mass destruction”, many NSW councils invested heavily in them.
The Department of Local Government said the credit crunch’s impact on NSW councils is not fully known but reports have estimated losses of up to $400 million.
“We are telling councils to seek independent financial advice about the state of their investments,” said Local Government Minister, Barbara Perry.
While the DLG is responsible for the finances of local councils it is now distancing itself from their financial woes.
“Individual investment decisions by council are a matter for them,” said Mr Perry.
President of the Local Government and Shires Association of NSW, Genia McCaffery, is demanding the State Government assist those councils under financial pressure.
“The councils that invested in Lehman’s did so within ministerial guidelines, so the LGSA supports the opposition’s call urging the State Government to step in and provide assistance,” Ms McCaffery said
Executive director of the Sydney Chamber of Commerce, Patricia Forsythe, said councils with low revenue are investing in risky investments to increase their income.
“Whilst it is a relatively small exposure for a council with reserves as large as the City of Sydney, it highlights the broader issue that many councils in NSW are weak financially,” she said. “The NSW Government needs to review its guidelines on investment.”
Several NSW councils are now lining up to sue Lehman Brothers although The City News understands the City of Sydney will not be pursuing legal action.
“The city’s exposure to Lehman Brothers is relatively small and will have no impact on the city’s capital works projects, service delivery or rate structure,” the council spokesman said, adding that the city’s investment portfolio of $427.6 million continues to provide “strong returns”.
Rate payers can breathe another sigh of relief as the $30 million that council invested in Bankwest appears more secure after its UK parent company, HBOS, was bailed out by Lloyds TSB which bought the troubled bank last week.