Council CDOs lose rating

Gosford Council is still denying it has lost money in its Lehman Brothers investments, despite news that Standard and Poor's has withdrawn its rating on CDOs held by the council.

"Some of our CDOs are affected, but at this point we have not lost any principal," council's director for corporate services Mr Nic Pasternatsky told last week's council meeting.

"At the moment, our CDOs are providing a return."

It was also claimed last week that councillors had not been told of the risk involved at the time they decided to make the investment.

Former deputy mayor Mr Trevor Drake told the ABC's 7.30 Report: "At no stage were we told that there was any risk as such.

"It was a financial management portfolio. There was no discussion of risk.

"First thing I read about CDOs was when we struck the problems.

"I remember receiving a circular or someone sent me an email about CDOs, and that's when I sat down and read through them and realised how risky they were.

"My understanding was that the money was handed over to Grange [Securities] to invest on behalf of council, and they'd report back to council, and we got a monthly report as to where the Grange investments were up to and how they were doing and how many per cent they'd made," Mr Drake told the 7.30 Report.

At last week's council meeting, Cr Peter Freewater asked whether any of its investments were affected by the Standard and Poor's decision.

According to the report, the agency has withdrawn its ratings on 104 "global synthetic CDO tranches".

"One hundred and four global synthetic CDO tranches rated by Standard and Poor's have counterparty exposures to Lehman Brothers Holdings Inc," the report stated.

"Following Lehman's bankruptcy, we have monitored these CDOs and actively sought updated information on the status of these CDOs, but to date, have received limited or no information that we consider meaningful.

"Consequently, we are withdrawing the ratings on all 104 synthetic CDO tranches, as we believe there is no longer sufficient information to maintain ongoing surveillance on the affected CDOs."

Mr Pasternatsky said "some of" council's CDOs were affected by the loss of ratings support for 104 listed CDO tranches that had counterparty exposure to Lehman Brothers.

"What this announcement illustrates is that the rating agencies have dramatically reviewed their assessment of CDOs."

Mr Pasternatsky said council bought the CDO investments based on their AAA rating at the time.

"The current Minister's Order precludes us from investing in CDOs and thus relying on rating agencies."

Mr Pasternatsky was not conceding a loss because "I cannot predict the future; it depends on credit events occurring with respect to companies included as part of a CDO tranche".

Last week Peninsula Chamber of Commerce president Mr Matthew Wales repeated his claim that, despite Gosford Mayor Cr Chris Holstein's assurance "our money is safe", council stands to lose almost $50 million of ratepayers' and developers' funds.

Transcript, 7 Jul 2009 7.30 Report, ABC Report, 19 Jun 2009 Standard and Poor's Council minutes, 7 Jul 2009 Nic Pasternatsky, Gosford Council Email, 30 Jun 2009 Matthew Wales, Peninsula Chamber of Commerce