With numerous private sector organisations from major banks to superannuation fund managers, investment firms and various listed corporations directly and indirectly affected by the US sub prime mortgage melt down, a report commissioned by the New South Wales Government has found that losses to Local Government from their investments is minimal.
The Cole review surveyed the State’s
152 councils and found that losses represented just 3.5 per cent of all Local Government investments. The Government had commissioned financial industry figure Michael Cole to review council investments in financial products – known as Collaterised Debt Obligations (CDOs) – linked to the
US sub prime mortgage market.
“The downturn in the US sub prime mortgage market is a global crisis affecting international financial institutions, not just NSW councils,” said the Minister for Local Government, Paul Lynch. “When the Government became aware that the decline in the US sub prime mortgage market may have exposed some Councils to potential losses, we acted quickly to establish the Cole review.”
As a result of the Cole review, the Iemma Government will now introduce more rigorous standards to further protect ratepayers’ money, with the Government implementing all eight recommendations from the Cole Report.
“The recommendations will assist Councils in protecting ratepayers’ money from risky investments,” Paul Lynch said. “Councils must act responsibly with public funds.”
Councils in NSW are able to invest money in a limited number of forms that are set out in a Ministerial Order. The Order does not specify investment products. It refers to forms of investment such as public debentures or securities, bank, building society or credit union interest bearing deposits, and securities with a credit rating determined by agencies.
The Minister said that the Cole review found that some companies promoting products like CDOs to Councils had also acted as advisors, potentially creating a conflict of interest.
“The Government will act to bar manufacturers and distributors of investment products from acting as advisors to Councils,” he said.
He said the Cole Report also found rating agencies were slow to react in downgrading some securities that had exposure to the sub prime market.
The Cole Report recommendations are:
- tightening permissible investment products
and clarifying some existing definitions - grandfathering existing investments that are
excluded by the changed regulations - barring the manufacturers and distributors of
investment products from acting as
investment advisors to Councils - suspending until December 2009 Councils’
ability to make any new investment other
than through TCorp or in land, cash, bonds
or other Councils - ensuring Councils are more fully aware
of their obligations by requiring a signature
demonstrating understanding of the
investment requirements - issuing an investment policy guideline for
Councils in addition to the existing guidelines.
