COFFS Harbour City Council made headlines this week after it was revealed it has lost $8.8 million over five years in a 'high-risk' investment.
The local council was one of a number of NSW councils to have been hit by collateralised debt obligations (CDOs), which have defaulted, since the start of the Global Financial Crisis in 2007.
The council currently has $4.7 million in CDOs, which have mostly defaulted and are now worth just $892,308.
It said whilst approximately 4% of the 2008 portfolio value has been lost since the GFC, the losses have been reflected in the council's investment income accounts.
"These losses have not impacted on the levels or purposes for which the original funds were to be used by Council," the council said in a statement.
"Even over the two years in which the GFC severely impacted investment values, Council has achieved positive investment income returns, inclusive of reductions in investment values.
"Council's investment returns were excellent in the years prior to the GFC and have totalled $24.225 million over the last four years.
"Current investments are made in compliance with Ministerial guidelines and are chiefly invested in ADI term deposits or senior debt of major banks.
"Legal action is continuing in relation to investments distributed through Lehman Brothers, with a potential for recovery of some losses experienced in relation to these investments."
In simple terms, CDOs promise to pay cash flows to investors in a prescribed sequence, based on how much cash flow the CDO collects from the pool of bonds or other assets it owns.
If cash collected by the CDO is insufficient to pay all of its investors, those in the lower layers (tranches) suffer losses first.