01/10/2008 - 22:00

Lehman legal action possible

01/10/2008 - 22:00

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THERE have been calls for changes in local government following last week's appointment of administrator, PPB, to Lehman Brothers Australia.

THERE have been calls for changes in local government following last week's appointment of administrator, PPB, to Lehman Brothers Australia.

Outspoken Kalamunda councillor Frank Lindsey has accused councils of having their heads in the sand over their exposure to high-risk securities, known as collateralised debt obligations.

The eastern suburbs councillor's concerns have been echoed by Hugh McLernon, WA executive director of litigation funder IMF, who said victims of the sub-prime crisis in WA, including churches and charities, had put their "hands over their eyes in the hope all this would go away".

Although the Shire of Kalamunda does not have exposure to CDO investments, it is one of six councils to own local government waste disposal initiative the Eastern Metropolitan Regional Council, which has $10 million invested in Lehman's Federation CDO.

CDOs are a mixture of investment securities - including mortgages to people with no or poor credit histories - of variable risk that are sold on the premise of higher the risk, higher return from the CDO.

Mr Lindsey said although EMRC's figures showed unrealised losses of $4.1 million for the past financial year in regards to its CDOs, he believed that figure was more than double that.

"What the EMRC's annual report will not show is that as a result of the bankruptcy of Lehman Brothers, the parent company of Grange Securities (LBA) through which the EMRC invested funds into sub-prime securities, the EMRC in fact faces unrecoverable losses which are likely to amount to $10 million," he said.

Administrators Steve Parbery and Neil Singleton were last week appointed to LBA just days after the unit of the bankrupt Lehman franchise in the Asia-Pacific region was sold to Japanese investment bank Nomura Holdings.

Mr Parbery said with more charities and churches now revealing the extent of their exposure to the sub-prime crisis and showing an interest in possible legal action, any litigation against LBA by councils would become a long and drawn-out process.

The Uniting Church of WA has revealed about 5 per cent of its $80 million investment portfolio is made up of CDOs, although WA Business News understands none is linked to sub-prime securities.

"Whilst we're a little concerned, we're not worried," Uniting Church of WA associate general secretary resources Robert Locke said regarding developments last week.

Silver Chain Nursing (WA) finance general manager Michael Bowd said the organisation "departed" from a CDO investment six months ago, "but it had no sub-prime exposure and it was not underwritten by LBA".

The University of Western Australia has $7 million in unlisted CDO investments through LBA, representing less than 0.5 per cent of its total investment portfolio.

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