BANKS, AMERICAN

The Hon. R.I. LUCAS (15:38): I seek leave to make an explanation before asking the minister representing the Treasurer a question about the US subprime crisis.

Leave granted.

The Hon. R.I. LUCAS: Over the past two weeks there have been a series of stories in the Melbourne Age in relation to exposure to the US subprime crisis. On 16 August, the journalist Michael West wrote:

More than 100 local councils, charities, churches, hospitals and nursing homes across Australia are sitting on a $2 billion black hole after buying subprime investments structured by Wall Street banks during the bull market, which are now potentially worthless.

He went on to explain that the particular financial instruments he was talking about are referred to as CDOs (collateralised debt obligations), and he explained that the CDOs were created by investment banks which bundled thousands of US subprime home mortgages and sometimes even car and credit card debts into a complicated derivative security. They were marketed as a safe investment akin to a bond. The mix of the underlying home mortgage assets (bricks and mortar) was designed to minimise risk to the investor. In most cases, the banks that structured them acquired AA and AAA credit ratings from Standard & Poor's or rival credit ratings agency Moody's Investor Services by paying a fee.

In that article, he went on to say that New South Wales and Western Australia are the states most affected, followed by Victoria, South Australia and, to a lesser extent, Queensland. Mr West indicated that the information he had was that South Australia had been exposed to losses from these particular investments.

On 6 September Mr West wrote another article under the heading 'Ignore denials: state exposed to subprime'. The articles states:

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.

The Treasurer was asked a question late last year on the issue of exposure to the subprime mortgage market. He said:

At the time of the collapse of the US subprime market in mid 2007, Funds SA, through the two specialist managers, had no direct exposure to US subprime mortgage investments.

Indeed, that is exactly the same response that the Victorian government gave when it was first asked about its exposure; that is, no direct exposure to the US subprime mortgage investments. Mr Foley went on to say:

Since this time, and after the significant fall in prices, Funds SA's specialist managers have selectively purchased several securities containing diversified pools of assets, including mortgages. Securitised mortgages are an established component of the international fixed interest market, accounting for approximately 20 per cent of the value of all securities. These investments are rated AAA but do contain an indirect exposure to US subprime mortgages, heavily protected by appropriate credit insurance.

That description used by the Treasurer could be a description of collateralised debt obligations, as described by Mr West in his series of articles in the Melbourne Age. Finally, I do note that in response to the articles by Mr West some of the agencies named have denied any involvement in the subprime mortgage market, but a number of agencies listed by Mr West have acknowledged their exposure; and, indeed, there is a class action claim currently being organised against Lehman Brothers, as we speak. My questions are:

1. Does Funds SA have any exposure to CDOs or any similar structured financial instrument? If so, what is the level of the state's exposure through Funds SA to those particular financial instruments?

2. It is not just Funds SA that manages funds in South Australia. The Public Trustee, WorkCover and a number of agencies control and manage their own funds. So do any agencies other than Funds SA have exposure to collateralised debt obligations (CDOs) or similar financial instruments and, if so, what is the level of the state's exposure through those particular agencies?

The Hon. P. HOLLOWAY (Minister for Mineral Resources Development, Minister for Urban Development and Planning, Minister for Small Business) (15:44): I will refer that question to the Treasurer and bring back a reply.