By Angela Dorizas
Maitland City Council has potentially misled constituents on its exposure to financial investments tied to the US sub-prime crisis.
The NSW Department of Local Government (DLG) is now taking a closer look at the council's investment portfolio in response to differing accounts of the number of collaterlaised debt obligations (CDOs) the council held.
Maitland Council first issued a press release just one day after the release of the Cole Inquiry into local government investments, claiming to have had no exposure to CDOs and asset-backed securities.
The Cole Inquiry was set up following huge paper losses by some NSW councils from investments linked to the US sub-prime mortgage market.
The press release, dated April 3, 2008, stated Maitland City Council had “no exposure to structured financial products such as collateralised debt obligations that appear to have impacted negatively on the investment portfolios of a small number of Councils in New South Wales”.
But the council’s own statement of investments for the period ending March 31 contradicted this claim. It listed four CDOs, one credit linked note that included CDOs, and an asset-backed security classed by some financial analysts as a CDO. The report did not include the market value of these products and only one, Momentum CDO, was specifically listed as a CDO.
An anonymous fixed interest market analyst said Maitland City Council had consistently held CDOs since 2004, as shown in council papers.
“They are a laughing stock in the financial industry, as you would be when you write stuff like that,” he said.
“But I don’t think it would be the council that would do that. There is nothing in it for them. My guess would be that they have been lied to, not the ones doing the lying.”
Maitland City Council group manager of finance and administration, Graeme Tolhurst, told GovernmentNews the press release was based on "present information" provided by the council's financial adviser, the Perth based company Oakvale Capital.
“I’m just saying it was the advice we had at the time,” Mr Tolhurst said.
“The advice we received was what was in the press release.”
Unlike some other NSW councils, Maitland chose not to publish on its website reports from Oakvale.
GovernmentNews approached Oakvale to ask what advice it issued to the council following the Cole Inquiry.
“We don’t discuss individual council portfolios or advice – that is all subject to contractual agreements,” said Oakvale Capital divisional director of asset consulting, Brian Lamarrre.
“We report and advise regularly to all our council clients. That is all I can really say in that regard.”
Despite the original advice given, the council eventually changed its position on investments. In the week following the local government election and three days after US investment bank Lehman Brothers filed for bankruptcy, the council started admitting its involvement in CDOs.
On 18 September 2008, general manager of Maitland City Council, David Evans, told a local newspaper, the Maitland Mercury, the council had one investment linked to Lehman Brothers, Macquarie’s Generator Income Note, but had not lost money in the collapse. Mr Evans also admitted that council was monitoring “several” council investments “linked to the circumstances of the US sub-prime and CDO situation”.
At the first meeting of the new council on October 14, Maitland’s statement of investments also included the market value of its CDOs. This revealed an overall paper loss of about $1.7 million in market value and indicated that two investments, Momentum CDO and Credit Linked Enhanced Asset Repackagings (CLEAR), had a Standard & Poor's rating of BB and CCC+ respectively and were at risk of defaulting.
Prior to this meeting, it was unclear how much Maitland councillors knew about the extent of the council's exposure to CDOs.
However, in the lead-up to the local government election on September 13, Maitland attorney and mayoral candidate, Kellie Tranter, grew concerned about the conflicting accounts of council investments and raised the issue with councillors Ray Fairweather and Wendy White.
On 11 September 2008, the two councillors held a private meeting with Mr Evans and Mr Tolhurst to discuss council's investment portfolio.
“They went through it with us and we left the meeting, I think, pretty much concerned about two of those CDOs, but for the others we were given an assurance that they were fairly safe,” Cr Fairweather said.
When GovernmentNews asked the re-elected Mayor of Maitland, Peter Blackmore, what he knew about council’s CDO investments he said the council no longer held any.
“We got out of those CDOs,” he said. “I'm certain that we got out of six.”
The DLG is now investigating the extent of council exposure to CDOs and the US credit crisis.
DLG Deputy Director General, Ross Woodward, told Government News the Cole Inquiry received a submission from Maitland City Council, but it listed only two CDOs.
"What they told us was that they were expecting exposure to two CDOs at that stage, with a total of $1 million exposure," Mr Woodward said.
"Providing the information to us should have simply been a matter of picking up reports that already go to the councils, so it should not have been anything additional to that.
"We are happy to have a closer look and see whether or not there are other things they haven't notified us of."
Mr Woodward said if council had inaccurately its investments to the DLG it would raise alarm bells over council governance and reporting.
"We would be concerned about any council that reports certain things to us if they are inaccurate," he said.
"Some of these are fairly complex issues and so some councils have come back to us and said they have now found that there might be more than what they had notified to us. As long as they notify us and keep a regular dialogue with us that is okay.
"They should have also been reporting on these to the public. That is what we require as well."
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