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Bail-out calls as crash leaves councils in $200m hole

Posted by seumasach on September 15, 2008

Chris Merritt, Legal affairs editor | September 16, 2008

The Australian

THE NSW Government was under pressure last night to bail out local councils that stand to lose a total of about $200 million in the bankruptcy of US investment bank Lehman Brothers.

The bankruptcy has left the councils with little prospect of recovering any money they had invested in securities marketed by Lehman that turned out to be almost worthless.

More than 20 councils around the nation, led by Wingecarribee in the NSW southern highlands, launched litigation against Lehman Brothers after a NSW government inquiry revealed in April the councils were facing a $200million loss.

The losses arose because the councils invested in Lehman products known as collateralised debt obligations (CDOs) that had been hit hard by the sub-prime crisis in the US.

The NSW Local Government Association and the state Opposition called on the Government to bail out councils whose losses arose from investments that had complied with guidelines.

The Opposition said the losses arose through a failure by the councils concerned and the state department of local government.

“The department did not set proper guidelines for councils. The Government, along with councils, has to share the responsibility,” local government spokesman Chris Hartcher said.

He said the NSW Government needed to stand behind the councils because they now appeared to have no chance of recovering their money in court.

Local Government Association president Genia McCaffery endorsed the Opposition’s call.

“When councils have complied with the state government guidelines for investments, we support the call for the Government to step in and pay compensation,” Ms McCaffery said.

Without a bail-out the councils would be left to recover their losses by raising property rates and reducing services.

The impact of any action by the councils would depend on their individual exposure to CDOs. Wingecarribee Council had been hoping that the court case against Lehman Brothers would allow it to recover some of the $29million it had invested in CDOs.

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