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NSW Local Government Investment in Cdos

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NSW Local Government Investment in Cdos NSW Local Government Investment in CDOs: A Corporate Governance Perspective A thesis submitted in fulfilment of the requirements for the award of the degree of Doctor of Philosophy By Gregory Evan Jones. Bachelor of Commerce (Accounting and Business Management) University of Tasmania Masters of Accountancy-Research University of Wollongong From University of Western Sydney School of Business 2013 Dedication For my wonderful wife Hazel; In recognition of her generous love, support and encouragement (and forbearance). i Acknowledgements Page I wish to thank my supervisors Associate Professor Anne Abraham and Associate Professor Phil Ross for their generous assistance and allocation of time. Anne’s enthusiasm and interest provided me with the impetus to continue when things became difficult, and the direction when events began to overwhelm me. Our working relationship has developed into a friendship that I hope will continue. Phil’s support and assistance throughout the process, particularly in relation to contacts within the Local Government community is greatly appreciated I also wish to thank Dr Graham Bowrey and Dr Ciorstan Smark for their advice and assistance and for being willing to listen to my complaints (and plying me with coffee). It is with an enormous amount of gratitude and appreciation that I would like to acknowledge the love, support, patience and encouragement given to me by my wife Hazel and my children, Lachlan, Rachel and Amy. Their generosity in allowing me to devote time to this research is greatly appreciated and highly valued. Additionally I would like to thank the individuals who generously gave of their time and consented to be interviewed for this research. Without their participation this research could not have happened. ii Statement of Authentication The work presented in this thesis is, to the best of my knowledge and belief, original except as acknowledged in the text. I hereby declare that I have not submitted this material, either in full or in part, for a degree at this or any other institution. … …… (Signature) iii 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. iv 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. v TABLE OF FIGURES ........................................................................................................................... X TABLE OF TABLES ............................................................................................................................ XI ABBREVIATIONS ............................................................................................................................. XII KEY TERMS .................................................................................................................................... XIII CHAPTER 1: MOTIVATION AND TYPE OF RESEARCH ......................................................................... 1 1.1 MOTIVATION ................................................................................................................................... 1 1.2 RESEARCH QUESTIONS ....................................................................................................................... 1 1.3 METHOD OF ENQUIRY ....................................................................................................................... 2 1.4 REASON FOR FOCUS ON NSW............................................................................................................. 2 1.5 LOCAL GOVERNMENT AUTHORITY DISTRESS ........................................................................................... 8 1.6 THESIS OUTLINE ............................................................................................................................... 9 1.6.1 Chapter 2 ............................................................................................................................. 9 1.6.2 Chapter 3 ........................................................................................................................... 10 1.6.3 Chapter 4 ........................................................................................................................... 10 1.6.4 Chapter 5 ........................................................................................................................... 10 1.6.5 Chapter 6 ........................................................................................................................... 11 1.6.6 Chapter 7 ........................................................................................................................... 11 1.6.7 Chapter 8 ........................................................................................................................... 11 CHAPTER 2: THEORETICAL FRAMEWORK........................................................................................ 12 2.1 INTRODUCTION .............................................................................................................................. 12 2.2 RESEARCH PHILOSOPHY ................................................................................................................... 14 2.2.1 Research Framework ......................................................................................................... 15 2.2.2 Ontological Assumptions ................................................................................................... 16 2.2.3 Epistemological Assumptions ............................................................................................ 19 2.2.4 Methodology...................................................................................................................... 21 2.3 THEORETICAL PERSPECTIVE ..............................................................................................................
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