The recent collapse of Lehman Brothers and the subsequent financial crisis has had far reaching consequences for many organisations and government bodies worldwide. Australian local government bodies, many of whom were encouraged to invest in collateralised debt obligations (CDOs) which were often promoted as having little financial risk, have not escaped these consequences.
The US government's recent Emergency Economic Stabilisation Act 2008 (Rescue Package) could potentially increase the value of Lehman sponsored CDOs. This E-Alert looks at the Rescue Package and what it may mean for Councils who have invested in Lehman sponsored CDOs.
The Rescue Package provides the US Treasury Secretary with up to US$700 billion to buy illiquid or troubled assets from financial institutions. Broadly, the Rescue Package aims to restore liquidity, stability and confidence in the financial system, to decrease uncertainty, and to reduce the amount of financial loss that would otherwise be suffered as a result of the financial crisis.
A fundamental part of the Rescue Package is the "Troubled Asset Relief Program" (TARP). TARP allows the US Treasury to purchase "troubled assets" with the possibility of selling them back to the market when their market value has increased. The US Treasury is also investigating other methods of alleviating pressure on illiquid mortgage backed securities like CDOs.
It is likely that many of the Lehman sponsored CDOs held by Councils would qualify for support under the rescue package. If the US Treasury buys or supports the CDOs, it is likely that there will be an increase in value in the CDOs. In addition. it is believed by some industry experts and others that if the Rescue Package achieves its aim of restoring liquidity, stability and confidence in the financial system, the market value of Lehman Sponsored CDOs and other troubled assets should increase over coming years.
Some Australian Councils have recently received some good news in relation to their investments in Lehman's Federation Notes – it is understood those Councils will recoup the original amount invested, plus interest, due to the sale of assets backing the product.
In a further development overnight, the US Federal Reserve has announced two new steps to help unfreeze US credit, committing up to $US800 billion. $US600 billion of that money will be used to purchase debt issued or backed by government-chartered housing finance companies (such as Freddie Mac and Fannie Mae) and the balance to support consumer and small business loans. Although it is unlikely any of the Lehman sponsored CDOs will directly benefit from this new initiative, the positive impact that the improved rescue package is likely to have on the economy should benefit investors in Lehman sponsored CDOs, if only indirectly.
It seems Uncle Sam is trying to help Australian Councils (although perhaps not intentionally!). What happens in reality, however, remains to be seen.
Exceptional Service Award Winner | 2007 BRW-St George Client
Service Awards
Australasian Legal Business 2008 Fast 10 Law Firms
EOWA Employer of Choice for Women 2004 - 2008
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.