Subprime Crisis To Hit Charities

The Age

Saturday August 16, 2008

Michael West

AUSTRALIA'S biggest banks have shrugged off the subprime crisis with little more than a dent in their billion-dollar profits, but many charities, churches, children's hospitals and local councils have been infected.

According to information obtained by The Age, hundreds of organisations across the country own subprime products with a collective exposure of up to $2 billion.

Metropolitan Ambulance Service and the Victoria Teachers Credit Union own the products, which Wall Street investment bank Lehman Brothers marketed.

The exposure reflects the assets managed by just one bank, albeit the most prolific in selling risky "derivatives" such as collateralised debt obligations (CDOs).

While Commonwealth Bank announced a $4.8 billion profit this week and is yet to experience pain other than a rise in funding costs and a slowing in demand for loans, National Australia Bank said last month it would take a $1 billion, or 90%, write-down on its CDO portfolio. With profit running at $1 billion a quarter, it can afford to do this.

The likes of the St Vincent de Paul Society (with its $8.9 million in funds with Lehman - the bulk in CDOs), the Starlight Children's Foundation, the Boystown charity for underprivileged children, and the Anglican, Baptist, Uniting and Catholic churches do not have that luxury.

The CDOs were marketed with traditional Australian names such as Federation, Tasman, Parkes, Flinders, Kokoda, Kiama and Torquay.

Although NSW and Western Australia are the most heavily exposed to potential losses, Victoria has its share of councils, charities and super funds with CDO exposure.

The Victoria Teachers Credit Union has $17 million in CDO-laden assets with Lehman, regional hospitals agency Western Health ($8 million), Central Victorian Invest ($4.5 million), Benalla and District Memorial ($1.5 million), Baptist Union of Victoria ($1.5 million), East Gippsland Council ($9 million), East Gippsland TAFE ($4 million) and Hume ($10.9 million).

The figures are from Lehman funds under management late last year, but they will not have changed much as CDOs have been virtually unsaleable since the onset of the credit meltdown. Still, most of their owners are yet to take a write-down, many claiming there is no impairment as distributions are continuing.

Given the NAB write-down and the fact there is now no market for CDOs, their reluctance may soon turn to capitulation.

The Age believes about 20 councils have signed up for a class action lawsuit against Lehman through law company Piper Alderman. The suit is yet to be filed in court, but they are preparing a claim for misleading and deceptive conduct and may join an existing action by Wingecarribee Council in the NSW Southern Highlands.

Wingecarribee claims it was misled by Lehman on several fronts and that Lehman had a conflict of interest in acting as agent and principal, selling the products and managing them on behalf of the councils.

Wingecarribee claims the products were more risky than Lehman had represented and that it was told there would be a secondary market in which to sell them. Lehman, in fact, bought and sold them between councils and other clients, earning significant fees.

Lehman said it was not aware of the class action and declined to answer questions on the issue of CDOs and its clients.

"Lehman Brothers will vigorously defend any legal proceedings . . . where we do not feel there is merit," it said. "Lehman Brothers denies the claims Wingecarribee Council has made in its statement of claim filed with the Federal Court."

© 2008 The Age

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