CDOs

Media Release

4 September 2008

At a time when many local councils seem to have been caught up in the fallout from the subprime mortgage crisis and might be heading into financial strife I thought it might be important to have a look at what Maitland Council's position might be in that respect.

When you look at the information that is available, and what seems to be missing, it all has something of an Argentinian aura.

First came concern that in October 2007 the Council's independent auditor reported that "...Council's investment security is dependent upon future global events of which there is significant uncertainty....". (Uh-oh....) http://www.maitland.nsw.gov.au/news/ViewNews.aspx?id= 318

Next came relief mixed with a strange disquiet when I noted that Maitland Council issued a press release on 3 April 2008 saying it had no exposure to structured financial products such as collateralised debt obligations. (Phew....)

Then I was referred to Council's Statement of Investments as at 31 July 2008.

We have already seen some of our major banks write down the value of their CDO portfolios rather savagely because these "assets" aren't worth anything if you sell them today and they still won't be worth anything if left to maturity.  If those institutions have accepted that such assets will barely be saleable --nobody wants or will want a complex derivative product whose underlying assets were US mortgages and vehicle and credit card debts all packaged in high yield securities -- shouldn't all holders be doing the same?

It's worth noting that in July this year it was reported that the US financial regulator found that some firms which rate investments were paid to determine credit ratings of products by the companies issuing those securities. http://news.bbc.co.uk/2/hi/business/7496599. stm

The ratepayers of Maitland should be asking:

• Having regard to Council's Statement of Investments at 31 July 2008 would Council please confirm whether its investments include any direct or indirect investment in CDOs?
• If so, how much money has been so invested?
• Could we please have a valuation of Council's investment in those assets on a mark to market basis before the Local Government election?  That is to say, if Council sold those investments today what would they get for them?