"Investments not worthless," says Council
COFFS Harbour City Council has hit back at claims it is facing losses from the subprime meltdown, following a Sydney newspaper website's claims that councils across Australia are facing a $2 billion black hole of potentially worthless investments.
The Sydney Morning Herald's BusinessDay identified more than 150 government, private and charitable institutions that have purchased collateralised debt obligations (CDOs), with Coffs Harbour rating a mention.
A spokeswoman from Coffs Harbour City said the article made reference to council 'having losses of $39 million'.
In fact, the article claimed Coffs Harbour was 'sitting on' a portfolio of CDOs worth $39 million, which BusinessDay claims are 'potentially worthless' since the subprime meltdown. A council spokeswoman said council has invested in CDOs with 'high quality investment grade names' and not subprime investments, and that the current face value of its CDOs is $16.13 million with a market value of $9.551 million.
Acting General Manager Jason Gordon said council would hold onto these investments until they matured or it made economic sense to sell them.
“We will not be selling these investments at this time when the market is facing a downturn,” Mr Gordon said.
“These are just paper values and do not signify real losses.”
However, National Australia Bank announced last month that it was writing down the value of its CDO portfolio by 90 per cent – or $1 billion – due to the high probability of a loss on the investments.
BusinessDay claims most of the councils that hold CDOs are yet to make write-downs and thereby concede they will incur losses.
“Their problem is the market for CDOs no longer exists – there are no buyers, although many councils claim their CDOs are still producing income and therefore remain a viable investment,” BusinessDay's Michael West said.
Mr Gordon said council is earning attractive returns from its CDOs on a quarterly basis, with $21 million of interest gained from overall investments in the past three financial years.
“Council is confident that it will see the full value of all its investments.”
But Mr West has a tip for evaluating the exposure of council investments. “When someone tells you they have not made a loss, assume that a loss is not a loss until the auditors and the board of directors deem it to be a loss,” he said.