Investment and advisory firm Lehman Brothers Australia is negotiating a settlement deal with the 30-plus Australian councils it sold sub-prime investment securities to last year.
WA Business News can reveal that Lehman Brothers Australia, formerly known as Grange Securities, has proposed to exchange the high-risk sub-prime securities, called collateralised debt obligations (CDOs), for bank issued notes.
The Lehman business in Australia is owned by giant US banking group Lehman Brothers, which was one of the main issuers of sub-prime investment securities.
Under the proposal, Lehman will buy back the Federation CDOs at their market value, currently as little as 10 cents in the dollar, and will issue councils with the bank issued notes, which have an expected maturity date of 10 years.
CDOs are complex investment securities backed by high-risk real estate loans, and have plunged in value in line with weakness in the US mortgage market.
Lehman began making the proposals several weeks ago to 10 Western Australian councils and more than 20 other municipalities across Australia which bought Federation CDOs, but the firm denies it was a move to fend off legal action.
Lehman Brothers head of legal and compliance in Australia, Shaun Ansell, said while the proposal is a solution for councils expecting a full return on investments negatively impacted by the sub-prime market crunch, "you can never give assurances" with investment returns.
"We're making this proposal to put the matter behind us, it makes sense for councils to look at it," he said.
The City of Albany has already knocked back Lehman's offer, preferring to sit tight and watch how legal action against the investment firm pans out in NSW.
"At a special meeting last week, the council considered a restructuring offer from Lehman Brothers related to the sub-prime investments and decided not to proceed with the offer as presented," Albany Mayor Milton Evans said.
The Lehman move comes as litigation funder IMF (Australia) Ltd this week revealed it is investigating whether to take group action against Lehman Brothers Australia over the sale of sub-prime investments to local councils.
IMF, the largest litigation funder in Australia and the first to be listed on the Australian Securities Exchange, provides funding for legal claims worth more than $2 million.
IMF's WA executive director Hugh McLernon said churches, charities and councils have lost tens of millions of dollars investing in CDOs provided by Lehman Brothers.
"The clear fact is they [councils] have invested monies in CDOs which have current values well below the market values when they invested," Mr McLernon said.
Local councils in WA caught up in the sub-prime collapse include Swan, Geraldton, Melville, Albany and Cockburn.
WA's Department of Local Government distanced itself from the crisis when it blew up last year, refusing to launch an investigation or to audit the state's local governments for investing ratepayer funds in high-risk schemes.
In August 2007, it emerged that 35 councils across Australia had a combined $25 million invested in Lehman Brothers' Federation CDOs, which had promised an annual return of 7.16 per cent to investors.
Almost one year on, millions of dollars has been wiped off the value of the complex securities.
Mr McLernon said CDOs generally have a life of about five to seven years, which presented a conundrum for councils - either take the risk and hold the CDO until maturity, or sell it at a substantial loss.
The City of Melville invested $3 million in Federation CDOs in May 2007 on the advice of its investment portfolio manager, Lehman Brothers Australia, but was released from the investment when the council discovered it breached its investment policy.
In September 2007, the City of Albany began looking into the feasibility of taking legal action against Lehman Brothers Australia for introducing Federation CDOs into its investment portfolio.
Just before Christmas 2007, Wingecarribee Shire Council in NSW resolved to take legal action in the Federal Court of Australia against its independent investment advisor, Lehman Brothers Australia, in regards to its $3 million Federation CDO investment.
Woollahra Municipal Council in NSW is also taking action against the firm.
Albany mayor Milton Evans said the council had employed law firm Minter Ellison to watch the eastern states' actions and advise the council of the outcome.
He said Albany's $500,000 Federation investment now had a market value of just $50,000, "although it is paying its full interest".
The City of Swan has also been caught in the sub-prime web, with $500,000 invested with Federation CDOs. It is in talks with IMF about the possibility of legal action against Lehman Brothers Australia.
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