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Ignore denials: State exposed to subprime |

Ignore denials: State exposed to subprime
  • Malcolm West
  • September 6, 2008
  • Page 1 of 2

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.

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