Claim on the cards

Claim on the cards

City of Swan chief executive Mike Foley said the local government was one of the councils in the class-action suit.

He said in September 2008 the City’s collateralised debt obligation (CDO) holdings with Lehman Brothers Australia was $9.7 million (including the Federation CDO of $500,000).

In total, the original face value of the City’s claim, as part of the class action against Lehman Brothers, was $9.2 million. This takes into account that the Federation CDO, worth $500,000, was paid out in full.

With certain securities maturing, the current face value of the claim is less, based at $7.8 million.

The face value does not represent actual losses as not all CDOs have defaulted, so the calculation of loss is open to interpretation.

While the City took a conservative approach in 2008 and 2009, the losses to date are $3 million.

This is broken down as follows; Kalgoorlie – $70,000 (sold for $430,000); Bluegum – $500,000 (CDO defaulted); Scarborough $1.5 million (CDO defaulted); Parkes 2A – $500,000 (CDO defaulted); Torquay – $500,000 (CDO defaulted)

The City of Swan is party to the action known as the Belmont Group of litigants.

The litigation relates to S&P’s granting of triple and double-A ratings to eight CDOs. The new claim follows separate rulings late last year by the Federal Court in cases against Lehman and S&P involving complex financial products sold in Australia.

In this claim, the investors will allege the ratings given to the CDOs, the value of which plummeted during the global financial crisis of 2007 and 2008, were made without a reasonable basis.

The investors, which were almost exclusively investing public funds to facilitate public works and community services, required high ratings by an independent, objective ratings agency for any investment they contemplated.

As representatives of investors in the claim, the City of Swan (WA) and a NSW council, will allege that S&P falsely represented that its credit ratings of the CDOs were objective, independent, uninfluenced by any conflicts of interest and reflected S&P’s true opinion regarding the credit risks posed to investors.

Their lawyers will also argue that S&P did not have reasonable grounds for concluding that the CDOs should be assigned triple and double A ratings.