The New South Wales Government knew 10 months ago many local councils were failing to comply with rules around their financial investments.
However it took until yesterday for the state government to announce an investigation into the investment strategies of all 125 councils.
It came as a number have admitted losses from their exposure to the low doc mortgage crisis in the United States.
Local Government minister Paul Lynch said he will ask for details about councils' investment in Collateralised debt Obligations (CDOs) linked to the sub prime fallout.
Platinum Asset Management chairman Michael Cole will lead the review, in which councils will be required to provide details on the type of investments they have, how they make investment decisions and how monitoring takes place.
Most of the products under scrutiny are issued by Lehman Brothers-owned Grange Securities, which is also a major investment adviser to local councils.
A Department of Local Government circular sent on 27 November 2006 said a survey revealed many councils were failing to review their investment policies regularly.
It said a number were also investing through third parties that sat outside of legislative requirements.
"It is apparent that some councils are not adhering to the current Ministerial Investment Order regarding the investment of funds," the circular said.
"The onus for investments is to be on the preservation of capital rather than the rate of return."
It said councils should not misinterpret credit ratings as an implicit guarantee of an investment.
CDOs are complying investments under the current ministerial order, the Local Government Authority of NSW said.
Councils are attracted to Grange's CDO products because of their above-market rates of returns.
In July Reserve Bank governor Glenn Stevens warned that local councils may not understand the risk and gearing in CDOs.
In a client update on 23 August Grange Securities managing director Glenn Willis said all CDOs in its portfolios continue to perform according to their terms.
News Limited reported that Grange's business development manager for local government David Rosenbaum and its head of fixed income Michael Clout left the company this week.
