NSW local government investment in CDOs : a corporate governance perspective

Abstract

This research was motivated by the losses that New South Wales (NSW) Local Government Authorities sustained by investing in Collaterised Debt Obligations (CDOs). The extent of the losses was identified in the Cole Report (2008) which highlighted that NSW councils had lost $200 million from investments in CDOs. Councils are charged with managing public funds and losses such as were reported suggested that there were problems in the way investments were being managed. This research has focused on the decision-making processes that led to investments in what were eventually termed toxic products. There are two main components of this project. The first related to the policies governing investments by NSW local councils. These policies were used as a method of governing the investment practices of councils. The types of products that NSW council were allowed to invest in were stipulated by the Minister for Local Government via the Minister's investment orders. These orders in the late 1990s became more liberal and began allowing investment in rated products. This change also coincided with the removal of reference to the 1925 Trustees Act from the Minister's orders and the associated requirement to protect capital. This leeway opened the door on more aggressive investment practices by local councils. The Minister's orders were a governance tool to control aggressive investment behaviour but when rated products became allowed investments the governance of investments resided in the validity and security of the ratings bestowed by the rating agencies. The second component of this research investigated how investment decisions were made in practice. This process was investigated through a multiple case study approach. Interviews were conducted with three coherent multi-sited ethnographic groups of participants. First, individuals external to councils who had specific knowledge of the investment decision process and background of councils. The second and third groups were individuals within councils involved in the decision making process. The second group were council officers from councils who chose not invest in CDOs and the third group were council officers from council which invested in CDOs. Both components of this research were analysed through the lens of Bourdieu's (1977) Theory of Practice framework. Using this lens the factors that influenced decision making were segregated into fields, capital and habitus to determine which factors were most significant. The results indicated that investment policies issued by the Minister were complied with. Therefore as a governance mechanism the Minister's orders are successful. The difference lay in how those policies were applied and how willing the individual councils were to take on risk products. That willingness was governed by the habitus of the organisation and by the positive and negative investment experiences of each. The decision process was also influenced by a variety of other factors, including advice from investment professionals, the nature of the general manager and finance manager, communication with other finance professionals and whether those making the decisions believe capital protection or investment returns were a priority. Financial investment decisions within the local government community were made within a multi-faceted environment. Those responsible for making the decisions were faced with abiding with the Minister's orders, the investment policy and habitus of their respective councils, advice from a variety of sources including investment investors and the expectations of the community. At the same time they needed to have the skills to understand complex investment products and what and how ratings were applied to them. This complex mash of information and requirements meant that investment decisions were made, while simultaneously evaluating a diverse range of factors.

Date of Award	2013
Original language	English