Councils Lose More Than $300m on Sub-Prime Market

SYDNEY—Councils in NSW have lost more than $300 million in investments on the back of the sub-prime mortgage crisis in the US, a new report shows.

Former chair of State Super, Michael Cole, conducted a report into council investments into financial products known as Collateralised Debt Obligations (CDOs) - which are linked to the sub-prime mortgage market.

Mr Cole's assessment, carried out at the request of Treasurer Michael Costa, has found local governments had lost an estimated $200 million from CDOs by January, and that would have only increased since.

"Total write-offs may be globally approaching $500 billion," Mr Cole told reporters.

"The damage to NSW's council investment portfolios is probably something over $300 million and probably most recently would have deteriorated further, possibly even approaching $400 million."

Mr Cole said many of the losses are yet to be realised, and while not a threat to any council's viability, some individual councils may experience severe financial hardship.

Gosford Council alone is estimated to have lost $23 million, Newcastle $12.6 million, Port Macquarie Hastings $10.7 million and Wingecarribee, in the Southern Highlands, $10.4 million.

Mr Costa said while there were "significant problems", the extent of investments exposed to the sub-prime market was not as bad as had been anticipated.

He said councils should not simply rely on ratings agencies to make their investment decisions and local government had a fiduciary responsibility to gain further expert advice.

The NSW Government will implement eight recommendations made by Mr Cole, including changing the policy guidelines for councils and tightening which products local governments can invest in.

This includes a suspension until next year of councils' ability to make any new investments, except in the NSW Treasury Corporation (TCorp), land, cash, bonds or other councils.

The Government will also remove any conflict of interest by banning manufacturers or distributors from acting as investment advisers to councils.

Top 10 estimated potential losses by NSW councils whose investments have been exposed to the US sub-prime mortgage crisis.