WHILE leading banks and insurance companies around the world have conceded billions of dollars in losses on their structured finance holdings arising from the credit crisis, the Victorian Government has clung to the line that it has "no direct subprime exposure".
That none of its agencies owns a home mortgage in Milwaukee misses the point. The credit crisis moved beyond "subprime" residential mortgages in the US last year. It has since engulfed myriad structured finance products that once boasted prime AAA and AA ratings, and for which there are at present no buyers.
As revealed by The Age, hundreds of local councils, charities, churches, government agencies and super funds across the nation — including Victoria — are exposed to losses as a result of buying these products from financiers such as Wall Street investment bank Lehman Brothers (then Grange Securities).
The Age has now identified a number of Victorian agencies — including Northern Health, Western Health, Gippsland Ports, East Gippsland TAFE, Benalla & Memorial Hospital and the Metropolitan Ambulance Service — which hold or have held synthetic CDOs (collateralised debt obligations).
The "referenced" assets underlying these securities include securitised bonds issued by US subprime mortgage providers and monoline insurers such as Countrywide and Washington Mutual. To take one example, Countrywide now faces Chapter 11 bankruptcy and US federal probes by both the FBI and the corporate watchdog, Securities & Exchanges Commission (SEC).
There is now no market for these products although they continue to deliver distributions to their holders and these holders are, in many cases, yet to take write-downs.
In this light, the stubborn denials from Premier John Brumby and his Treasurer John Lenders have proven ever more hollow as evidence trickles in from various Victorian government agencies exposed to losses from this strain of fancy structured products alone.
Initially, the state was said to have had an "extremely limited" exposure to subprime that was "non-direct", then there were said to be "no direct subprime exposures". A few days later came the concession from the First Mildura Irrigation Trust that it had been "impacted by the US subprime market problem" thanks to its CDO holdings. The position was tweaked once again. "Direct exposure to subprimes in the Victorian Government is limited to the First Mildura Irrigation Trust," said the Treasurer.
Then the Shepparton News broke the story that Goulburn Valley Health owned $2 million worth of CDOs.
Today, having identified the actual securities held by various agencies last year (most of which are still held and some of which have been "restructured" with the assistance of Lehman into lower-yield securities), we can take the story further.
Northern Health held "Omega" and "Beryl" CDOs arranged by Banque Nationale de Paris and Lehman Brothers as part of a
$5.5 million portfolio with Lehman. It confirmed this week it still held CDOs, and said they were "most likely to be redeemable at full face value at maturity (in 2012 and 2014)".
According to internal client documents seen by The Age, Western Health had $8 million exposure to Corsair, Federation, Helium, Omega and Zircon CDOs arranged by JPMorgan, Lehman, Merrill Lynch, BNP and Lehman respectively.
Western Health declined to confirm which investments had been held and said it had struck a confidentiality agreement with Lehman. It did not deny that it held CDOs.
According to documents seen by The Age, Gippsland Ports held a $2 million portfolio with Lehman that included Corsair and Zircon CDOs. Gippsland Ports declined to comment.
Benalla & Memorial Hospital held $1.5 million in Corsair, Helium and Zircon CDOs. It confirmed it held CDOs and had since "restructured" its portfolio.
Ambulance Victoria confirmed that it held $7.5 million in CDOs and FRNs (floating rate notes) via Metropolitan Ambulance Services. These included the Helium, Herald (arranged by RBC) and Magnolia (arranged by CSFB) series of CDOs.
East Gippsland TAFE held $4 million in Omega and Zircon CDOs and confirmed it still held CDOs.
All of these holdings, combined with the well-documented exposures to CDO of FMIT and Goulburn Valley Health demonstrate that, despite Government denials, Victoria is exposed to losses from subprime and, more to the point, the credit crisis, just like all the other states and most developed countries in the world.