24/09/2008 - 22:00

Worse yet to come on sub-prime – IMF

24/09/2008 - 22:00

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LITIGATION funder IMF Australia believes the worst of the sub-prime crisis impact in Western Australia is yet to come, with "a simmering pile" of non sub-prime collateralised debt obligations potentially adding to investors' woes.

Worse yet to come on sub-prime – IMF

LITIGATION funder IMF Australia believes the worst of the sub-prime crisis impact in Western Australia is yet to come, with "a simmering pile" of non sub-prime collateralised debt obligations potentially adding to investors' woes.

IMF WA executive director, Hugh McLernon, said while the situation was messy following the collapse of US investment bank Lehman Brothers, investors with CDOs still had options available.

Mr McLernon declined to disclose what action could be taken, but encouraged investors to understand the structure, terms and potential shift in value of investments backed by pools of credit derivatives.

"In the current economic climate it is entirely possible that these synthetic CDOs will result in a massive movement of value away from investors and towards the banks connected with the issuers which created them," he said.

Japanese bank Nomura Holdings is set to acquire Lehman Brothers Australia, the bankrupt Lehman franchise in the Asia-Pacific region.

The deal does not include any trading assets or liabilities.

Despite the acquisition, Mr McLernon said uncertainty for WA investors remained.

He warned churches and charities affected by the sub-prime crisis to be more proactive than local governments in dealing with the issue. "I think the councils up until now have just held their hands over their eyes in the hope all this would go away," he said.

With more than 30 local governments across Australia holding sub-prime investments, Mr McLernon anticipates a larger number have other CDOs in their investment portfolios.

Many high-risk investments were issued by Lehman Brothers Australia, formerly Grange Securities, which in some instances acted as advisers to the investors it sold CDOs to.

That has been the catalyst for litigation from Wingecarribee Shire Council, which has filed a $59 million claim alleging it was misled by Lehman Brothers Australia.

The City of Albany is also considering legal action, however the council believes its non sub-prime CDOs and bank-subordinated debts are safe following the Lehman Brothers collapse. It invested $6.4 million through Lehman Brothers Australia, of which $500,000 was in the sub-prime market, $3.4 million in other CDOs and $2.5 million in Australian bank-subordinated debt.

The City of Melville has been the hardest hit WA council, with the value of its CDOs plummeting from $21.2 million to $11.5 million.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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