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City's Position on Investment Issue

Published Date: 16 September 2008, 03:12 PM

The City of Melville’s former investment advisors, Lehman Brothers, filed for chapter 11 bankruptcy yesterday (Monday, 15 September 2008).

Little is still known about the full extent of the Lehman Brothers bankruptcy at this stage, however, although the City of Melville does not have any direct investments with Lehman Brothers, they do appear as one of the names in a number of the Collaterised Debt Obligation (CDO) investments owned by Council. 

Acting Chief Executive Officer Marten Tieleman said the City would not speculate on the impact of this event on rates and the future financial status of the City of Melville until further information is available. “These CDO investments form part of the long term reserve funds of Council and will not affect day-to-day operations,” he said. “The City will continue to work with its current investment advisors to protect the City’s investments and the best interests of its residents,” he said.   

As at the end of August 2008 the estimated value of the Councils CDOs was $11.5m compared to a purchase price of $21.2m.

The Lehman Brothers situation will no doubt result in a credit event being triggered in respect to the CDOs they appear in. If a credit event is triggered it will decrease the credit support available to the CDO structure. However, the City is not aware of any other investments other than its CDOs that are directly affected by the collapse of Lehman Brothers.    

“The best case scenario for the City of Melville is to recover one hundred per cent of the cost of the CDOs,” Mr Tieleman said. “At this stage, despite a number of credit events, none of the City’s CDOs have defaulted, so we continue to receive income from our investments.”   

The City also received monthly market valuations of the CDOs from Lehman Brothers and it is expected that this service will cease.  “We will need to source alternative valuers,” Mr Tieleman said.

While it has been reported that Lehman Brothers are trying to sell off key business units, this will not affect the City of Melville, as the repayment of Council's investments does not depend on the outcome of Lehman Brothers bankruptcy. The City of Melville’s CDO investment products are independent of Lehman Brothers, with the relevant funds kept in a custodianship by the Citigroup Bank.  

The CDO structures will only be affected by their exposure to a broad range of international companies and a credit event happening with several of them. This will not result in the default of a CDO itself, however, should the City start to see a number of other major corporations experience credit events this may impact severely on the value of the CDOs.

Information on the City of Melville’s investments will be kept up to date on the City’s website, for more information click here.

Lehman / financial meltdown

Posted by Bob Hay at 17 September 2008, 09:03 AM
Perhaps the financial wizards in the Council Building can let us know why our hard earned money isn't invested in Australian companies instead of helping to keep shonky American Banks and lending institutions afloat for so long.
Is the Council prepared to supply our local papers with a detailed list of any other investments, in the shaky world of American finance? This meltdown has been predicted for years in the so called 'Alternative Finance' websites and publications and if our Council experts are unaware of these, I suggest that they are unfit for the positions they hold and should be sacked.

Lehman / financial meltdown

Posted by Director Customer & Corporate Services - Marten Tieleman at 18 September 2008, 08:58 AM
It's important to note that the City of Melville invests in Australian investment products. These include Deposits with Australian Authorised Deposit Taking Institutions (ADI's) as well as the Collaterised Debt Obligation investments. All investments have some exposure to international markets.

Detailed listings of the City of Melville's investments are included in the Council agenda each month & published on this web-site - follow the links from this article or using the search function type in investments. http://www.melvillecity.com.au/about/corporate-information-documents/investments/investment-overviews

As a result of these actions detailed information has been available to the local press & public for quite some time.

The services of the City of Melville's former investment advisors, Lehman Brothers Australia Ltd, were terminated in December 2007.

Regards - Marten

Investments and rates

Posted by Robert McNab at 18 September 2008, 09:53 AM
Who was the CEO when these lnvestments were made and why were they made. The $20 million should have been given back to the ratepayers with lower rates.

Investments

Posted by Chris Lawrence at 18 September 2008, 10:09 AM
And I use that word loosely. The council has known for some time that the products that it purchased were not suitable for the depositing of funds for the municipality. There needs to be a number of people who take responsibility for these poor decisions at both the councillor and Management levels. I do not believe that any of the Ratepayers of the City of Melville payed their rates so that part time amateur investors could wipe out such a significant amount of Community Money. As for the spin on this website with its “everything is fine” and that there is a degree of independence from Lehmann Bros. WHO CARES these CDO’s were worthless when Lehmann Bros were in operation last week the fact that the company has gone into bankruptcy is irrelevant. The face value of these CDO’s will have to be written off by the Council and the loss realized. WHO PAYS for this ?

Lehman/finance

Posted by Bob Hay at 18 September 2008, 02:34 PM
I think what'll happen here is, nothing will happen. The Ratepayers will be told to 'get over it' and 'move on'.

LehmanBrothers / Financial Meltdown

Posted by Bob Hay at 22 September 2008, 08:36 AM
For your information I've emailed the Melville City Herald re their 20th September edition page 11, where, unknown to me they picked my email off this website, which in itself is bad enough, but to misquote me is worse. I made no mention of sacking Coucillors and I've requested them to contact you with an apology.
Bob Hay.

Failed Investments

Posted by Steve Oh at 23 September 2008, 01:46 PM
I think the Council has to be more transparent than it is. I wrote to the Community letters last year when news filtered through that the Melville Council had some $3 million invested through Grange Securities at the time. Shortly after I had an unsolicited reply from a Melville Council executive explaining how the investment was made and in a nutshell reassuring me that all is in order.

The nagging question is why invest overseas when in the last few years except the last two WA and Australia had seen unprecedented economic times. Why werent the investments made at home? Obviously the investment mechanisms and policies of the Council badly needs reform and as a ratepayer I would like to see more transparency and accountability.

In fact beyond a certain amount invested anywhere the ratepayers should be informed and every investment decision has to be properly documented and justified. Ratepayers ultimately bear the brunt of the financial fiasco and those who made those decisions must be held accountable.

It isnt good enough for Council to whitewash the fiasco or be evasive or even misleading. For example it isnt honest to suggest Council will consider litigation when we all know that is an euphemism for sorry we're not going to get our money back.

At the end of the day somebody botched it and ratepayers will have to carry the cost of their mistakes. Anyone can make mistakes but if Council had not been prudent there is no excuse. I would also like to be reassured that there was no hanky panky involved.

A reform and review of Council procedures and policies is badly needed.

City's Investment Issues

Posted by Greg Marshall at 23 September 2008, 01:47 PM
I note from the CoM's website that the level of CDOs was/is by far the the greater proportion of the City's wouldbe investment.
What was the expected rate of return on these investment vehicles, prior to the failure, when compared to the then 60-90 day Bank Bill rate or at worst the Cash rate available through the City's Bankers best deposit?