Investment Approach

Like many other organisations and businesses, back in 2007, the City had invested in credit (money) market related investments. Initially these investments had high credit ratings of AA and above but they have since been affected by the downturn in the global credit markets, precipitated by the sub-prime mortgage crisis in the United States.

Contrary to media reports:

  • the City does not have any funds directly invested in the sub-prime market
  • the City does not invest in or trade on the share market.

The City has always sought to take a conservative approach to its investments. Residents and ratepayers can be assured the City is taking the necessary steps to mitigate against further losses, and where possible will recover any losses that may be incurred should any of its investments fail.

Investment Overviews

You can find out further information from the Investment Overviews below.

CDO Investment Update

The following provides an update on the Collateralised Debt Obligation (CDO) investments purchased by the City back in the period 2004 to 2007. 

In 2007, the City, on the advice of Grange Securities, later Lehman Brothers, had $21.2m invested in CDO products.

The Council policy of the day had the Policy Objective to “provide guidelines with respect to the investment of surplus funds which ensure that the returns on funds invested are maximised within levels of risk that are commensurate with the need for security of public monies”.

The stated Investment Objectives were:

  • To take a conservative approach to investments, but with a focus to add value through prudent investment of funds.
  • To have investment funds achieve an overall return of the UBSWA Bank Bill Index plus 0.35% on a rolling twelve month basis after fees.
  • To achieve a high level of security for the overall portfolio by using recognised rating criteria.
  • To maintain an adequate level of diversification as detailed in Section 6D of this policy.
  • To have ready access to funds for day to day requirements, without penalty.

The Statutory Compliance requirements were that all investments were to be made in accordance with:

  • Local Government Act 1995 – Section 6.14
  • The Trustees Act 1962 – Part III Investments.

Of the $21.22m capital invested, the City has received the following back:


From the CDO investments that matured or were sold


From accrued interest at date of sale or maturity on the above CDO investments


From recoveries achieved to date as a result of legal actions against Standards and Poors and Lehman Brothers Australia

Further recoveries are still expected

= $22.74m



Litigation funders fees and direct legal fees paid

= $18.36

Net return after fees


Interest earned on the $21.22m

= $22.83m

Sum total received

The original funds invested in the CDO’s were Reserve funds and therefore there was no direct impact on rates. Any recovery of investment losses restored the balances of those Reserves and the City has never sought to cover the losses by increasing Rates

The History

Grange Securities (later Lehman Brothers Australia), were recommended as one of three preferred and well-respected financial investment firms by the Western Australian Local Government Association, as selected by an advisory panel of a top tier, independent accounting/investment advisory firm.

The investments undertaken, either directly by City Officers, or indirectly by Grange Securities as the City's then appointed investment advisors and funds managers, met the City's conservative criteria and were reported in detail to the Council and the Community on a monthly basis. 

Mortgage or asset backed investments and other interest bearing securities were required to maintain a minimum AA- rating and Managed Fund a minimum of A- or better.  AA+ to AA- investments are classified by the international rating agency Standard and Poors (S&P) as possessing “A very strong capacity to repay” and A+ to A as having “A strong capacity to repay.”

All of the investments had been awarded high A to AAA credit ratings by the various ratings agencies and were therefore suitable for inclusion in the investment portfolios of institutions governed by the Local Government and Trustees Acts.

Unfortunately, the investment outcome was very different from the investment goal. This was due to an unforeseeable Global Financial Crisis combined with questionable practices by the major US investment banks (since the subject of litigation) and flaws in the ratings agencies credit rating methodology used for CDO's.

Class Action

Along with approximately 90 similarly affected local governments, churches and charities, the City participated in a class action against the investment advisory and funds management firm Grange Securities (later to become Lehman Brothers Australia) as well as one against the international rating agency Standard and Poor's (S&P), who provided their top of the range credit ratings to the products being used by Lehman Brothers Australia.

The class action was successful on both counts and in his decision regarding the collateralized debt obligations, Justice Rares of the Federal Court, found that Grange Securities, a wholly owned subsidiary of Lehman Brothers, breached its fiduciary duty and engaged in misleading and deceptive conduct in placing highly complex collateralized debt obligations in the portfolios of councils. 

The action against S&P , was also successfully settled, for their role in incorrectly awarding the A to AAA credit ratings to the CDO investments, which in turn made them highly suitable for acquisition by risk averse institutions, like the more than 90 local governments, universities, charities and superannuation funds who purchased them.  Lawyers claimed the S&P ratings model and methodologies were flawed and grossly under-estimated the true risks of default and if claimants had known the true risks they would not have invested in these products.

Further information

Reporting to the Council and the public is provided on a monthly basis in the Investment statements report, which is available on the City’s website. These reports relate to both current investments, and reporting of the performance of historical investments including the individual CDO’s is available from the City’s website. 

Current status

Changes have been made to the Councils investment policy in relation to authorised investments that shall be limited to Australian currency denominated:  

  • Deposits (including Flexi / 30 day at call Deposits) with Authorised Deposit-Taking Institutions;
  • Deposits with Authorised Deposit-Taking Institutions (ADIs) as defined in section 5 of the Banking Act 1959 (Commonwealth) with a S&P (or its equivalent) credit rating of BBB or higher (subject to overall limits) and the Western Australian Treasury Corporation (WATC), for a term not exceeding 3 years;
  • Bonds that are guaranteed by the Commonwealth Government or a State or Territory and which have a maturity term not exceeding three years.

The Policy prohibits:

  • Derivative based instruments;
  • Principal only investments or securities that provide potentially nil or negative cash flow; and
  • Stand alone securities issued that have underlying futures, options, forwards contracts and swaps of any kind. (Note this includes Collaterised Debt Obligations)
  • The policy also prohibits the use of leveraging (borrowing to invest) of an investment.

To date, final distributions and dividends from liquidators have not been finalised.  These actions deal with the various CDOs as a pool of funds and as such the final returns on individual investments that are the subject of these actions will not be disclosed by the liquidators.

When the final distribution is received the City will provide an update on the final financial position relating to these investments.

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