More than two years after the subprime crisis froze world credit markets, local government councils, the Commonwealth Bank and even council workers' superannuation accounts have been dragged deeper into the morass of financial loss and legal recrimination.
Councils, charities, churches and state authorities have already been stung by losses on about $2 billion of toxic debt instruments sold to them during the boom years.
The collapsed investment bank Lehman Brothers alone sold $1.2 billion of complex financial products called collateralised debt obligations, which have already fallen 50 per cent in value.
Now, 12 NSW councils are bringing actions against Local Government Financial Services, the body that invests council workers' superannuation, for misleading and deceptive conduct and breach of fiduciary duty.
LGFS bought $45 million of financial products called ''Rembrandt'' and then sold them on to the councils, including Bathurst, Oberon, Ryde, Parkes and Orange. They returned just seven cents in the dollar.
In turn, the LGFS is preparing cross claims against credit ratings agency Standard & Poor's and the investment bank behind the products, ABN Amro.
An action against Standard & Poor's, upon whose ''AAA'' recommendations councils and other investors relied when buying the financial products, would be unprecedented.
Ironically, S&P issued a press release yesterday afternoon announcing LGFS had been placed on ''CreditWatch Negative'' due to concerns over the legal claim by the 12 councils.
''The irony does not escape me,'' LGFS chief executive Peter Lambert told The Age. S&P declined to comment.
Mr Lambert said he could not understand why S&P was taking action against LGFS on the basis of potential lawsuits, rather than considering its financial status, which he said was comfortably capitalised.
''We have close to $600 million in council investments. We purchased $45 million worth of Rembrandts (in November 2006), which were bought to on-sell to councils who were interested in high-yield products. They imploded during the course of the global financial crisis.''
Mr Lambert said he managed to sell $18.5 million Rembrandts and was left holding the balance.
Separately, another group of councils in NSW, Tasmania and Western Australia are taking legal advice on possible action against the Commonwealth Bank over about $120 million of credit instruments called Oasis, Pure and Paladin, which are now virtually worthless. They carried AAA and AA credit ratings from Standard & Poor's.
About seven councils have signed up with insolvency law firm Piper Alderman to pursue the Commonwealth, although the investment losses may extend to as many as 40 councils.
The councils claim the bank took advantage of its long-term relationship with them to sell them financial products that have now turned out to be mostly worthless.
