Tenterfield Shire Council is amongst more than 60 councils across the state to feel the sting of the Lehman collapse on Wall Street, but Mayor Toby Smith is quick to point out that at his stage it's only a paper loss.
He said, "Council has made provision for doubtful debts of $977,347 as at June 30, 2008 although the CDOs guaranteed by Lehman Brothers Australia directly currently stand in the order of only $250,000."
In plain terms, the council could lose $250,000 but with market uncertainties and a number of financial advisers predicting a bounce, it may not suffer any loss at all.
The council had invested funds in Grange Securities which was taken over by Lehman Brothers Australia.
Councillor Smith explained, "Back in 2005 when it was difficult to receive over three per cent on investments Council decided in good faith to invest in Grange Securities for returns of in excess of seven per-cent.
"Council was assured all investments placed by Grange Securities are approved investments in accordance with orders issued by the Minister for Local Government and complied with section 625(2) of the Local Government Act.
"Everything possible that can be done is being done to ensure the return of both Council's investment principle and interest as soon as possible."
He said that like any organisation the council was concerned with the global problems facing organisations worldwide. Lehman Brothers Holding Inc., based in America, has filed for Chapter 11 Bankruptcy while Lehman Brothers London has appointed receivers.
"It is not known what impact the actions taken overseas will have on Lehman Brothers Australia," Councillor Smith said.
"However, council staff are attending a meeting in Sydney this week with other New South Wales councils and hopefully this position will become clearer after these discussions."
Solicitors acting for Tenterfield Shire have arranged the transfer of Tenterfield Shire's investments funds previously operated by Lehmans into a custodial service trust under the control of Tenterfield Shire in conjunction with the ANZ Bank. The solicitors have also been given authority to lodge a proof of debt in relation Lehman Brothers Holdings Inc.
Tenterfield Shire originally placed $5 million of its investment funds in an individually managed portfolio with Grange Securities in October 2005 for a six months trial period. This was extended in May 2006 when advice from local government peak bodies confirmed its highly secure standing. Problems became apparent when Grange Securities was taken over by Lehman Brothers Australia in January last year.
Councillor Smith said that some $1 million had been returned from the original investment package and since June last year all interest received had been paid direct to the council rather than being reinvested.
"Of the $4 million invested, only $2.5 million is in the form of CDOs, with floating notes making up the balance of the amount," Councillor Smith said.
At the ordinary September meeting the council agreed to have a financial consultant review the extent of its remaining holding with a view to getting a market valuation and recommending a course of action for future dealings with the investments. A report from that review is expected to be considered at the next ordinary meeting of Council.
The new General Manager, Don Ramsland, indicated that the new council would be also reviewing its investment policy at the October meeting with the aim of ensuring surplus funds were always placed in a diverse range of highly secure investments.
Mr Ramsland said, "Although the Lehman Brothers investment is not due to mature until 2011, Council has other funds totalling more than $8 million immediately available to allow day to day operations to continue normally."
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