MORE than 100 local councils, charities, churches, hospitals and nursing homes across Australia are sitting on a $2 billion black hole after buying subprime investments structured by Wall Street banks during the bull market but which are now potentially worthless.
A document leaked to BusinessDay revealed that Lehman Brothers is managing tens of millions of dollars in funds for Victoria’s community, education and health sectors, much of it invested in high-risk financial instruments now potentially worthless.
BusinessDay has identified more than 150 government, private and charitable institutions that bought complex financial instruments such as collateralised debt obligations (CDOs). There have been few buyers for CDOs and similar structured finance products since the subprime meltdown this time last year that sent global financial markets into a tailspin.
The $2 billion in investments identified by BusinessDay pertains only to funds under Lehman Brothers management. Lehman acquired boutique local bank Grange Securities two years ago and Grange had been the biggest player in the CDO market, having undertaken a strategy of selling the product to local government, charity and semi-government agencies.
As Lehman was acting as “agent” to most of its council and charitable clients, it not only sold the products, it also managed them for clients, and in some cases “churned” the CDO portfolios by 200%, 300% and 500%.
In other words, the bank bought and sold the products between its clients and earned commissions on the sales, according to sources close to the councils.
Interesting game played by Lehman, but that’s not the point. Sorry, but pardon me, communities, charities invested in high-risk financial instruments? High-risk instrument, pardon me? Charities?