A timely reminder to all fixed interest investors here in New Zealand that credit ratings are not the sole criteria to determine what an allowable investment should be. Several Australian local government municipalities and councils have been caught holding CDO investment securities that have considerably diminished in value. Investment losses have resulted. Several councils are considering legal action against Lehman Brother's Australian subsidiary, Grange Securities. Grange Securities sold a Lehman-originated CDO sub-prime mortgage product called “Federation” to dozens of local councils throughout Australia .

The councils were attracted to the enhanced yield securities that carried an investment-grade (above BBB-) However, with many councils there was clearly no limit stipulated in their investment policies to control and restrict the proportion of structured/CDO type securities in their total fixed interest investment portfolios. A November valuation by Grange Securities marked the Federation CDO down in value by 84%! In NZ investment policies for Councils would not allow CDOs. APRM would recommend to private sector investors that any CDO type securities must be credit-rated above “A” and total CDOs held cannot be more than 10% or 15% of the fixed interest portfolio.

A small Australian council called Tumbarumba (an outback town at the foot of the Snowy Mountains ) had 50% of their investment portfolio in CDOs and the General Manager did not consider this too much! It was not just small/naïve councils who have suffered losses, in Sydney both Woollhara and Manly councils have lost money as well. Some of the CDOs sold and managed for the councils by Grange Securities were outside investment policy mandates because the maturity dates were too long.

Grange Securities sold hundreds of millions dollars of CDO securities to the councils, which has now sparked an investigation by the NSW State Government. Wingecarribe Shire Council near Sydney commenced legal proceedings against Lehman Brothers in December, claiming that Grange Securities (now Lehman Brothers Australia ) failed to act in the council's best interests and engaged in misleading and deceptive conduct whilst serving as a financial adviser and promoting the Federation CDO at the same time. Sounds familiar! - to those investors in NZ contemplating suing retail financial advisers for putting them into Bridgecorp debentures.

In response, Lehman Brothers Australia state that the councils were suitable investors into CDOs because they were recognised as “sophisticated wholesale investors who have responsibility for their own investment decisions and due diligence” The Aussies are not on their own, four towns in Norway have had their investment funds wiped-out by complex CDOs designed by Citigroup.