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Tuesday
Jun192018

Losses On (Derivative) Financial Instruments

These losses (or occasional gains!) are the result of a previous administration (Barriball's) deciding to re- enter the remarkably dangerous gambling activity of guessing future interest rates, and thus 'second-guessing' the market in order to secure long term borrowing.

The 'gamble' relates to the fact that once in, it is almost impossible to get out, unless interest rates go 'through the roof,' and then the 'instruments,' or rather 'paper,' has value that enables you to pass them on at a profit. While they carry inherent risk they have to be 'rolled over' to avoid incurring huge losse because they have a market value far lower that than 'face' value.

I well remember the smartly dressed young operator who came to tell the Council in 2007 all about the wonderful world of 'derivative financial instruments' that would secure our Council's future, and forget about the reality of the New Zealand borrowing market. Yes indeed, it was wonderful story - distinguished by falsehoods, and a totally unrealistic understanding on the part of our staff, let alone bemused councillors, of the risks involved in so-called 'hedging.' 

The last time I investigated our Council's involvement, the market was being run by Price Waterhouse - read their explanation of the 'definitions' in the second post below to understand the true meaning of 'obfuscation.' They undertook - probably still undertake the six-monthly re-valuations that feed into our Council accounts. It was a 'hairy' operation at best where they stood to lose nothing, but their clients stood (stand) to lose millions.

Here is a post from 2011 that explains what it was all about

Followed by this one from 2013.

These posts are worth reading just to get a handle on the losses we know about, and how we became involved at the outset. I intend to seek further information on the 'year on year' performance since their inception. After all, light on these matters is always beneficial, if disturbing to some - our Council was by no means the only one 'sucked in.'

The Budget revision on 15 May revealed that this year's Council Annual Report will disclose at least another $300 to $400k loss on these remarkable bits of paper. There will be more to come - that is clear, unless interest rates go ' through the roof,' which is of course not beyond the realms of possibility given how this Government is spending our money, and the Unions 'cash-in' on the election dividend.

I will be watching the draft Annual Report with great interest to double check the full extent of the full year loss. It could be much greater than has been revealed to date. It is interesting to note that the Council budget paper itself has dropped the 'derivative' moniker - far too controversial.

 

 

 

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