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Herts County Council: An Icelandic Misadventure

How would your ideal local government invest your public money in the credit crunch? Investing £28 million in an Icelandic Bank just before it crashed, probably wouldn't be at the top of your list.

PriceWaterhouseCooper's (PWC) January 2009 report entitled, 'Hertfordshire County Council Review of Treasury management procedures' portrays a gloomy view of Hertfordshire County Council's (HCC) financial administration. The report examined the errors that led HCC from July to August last year, to invest £28m in Icelandic banks. They have raised important questions on how public money is being invested and used by our local government.

Last year Hertfordshire County Council faced an extremely difficult situation; how do you make desirable investments in a risky financial climate and also protect public money? Their solution was to carry out thorough rating checks on all possible investments. The policy from the previous financial year was to only use a singular credit rating system (Fitch). The new policy for the next financial year would be to use 2 other credit rating systems (Moodys, and Standard and Poor).

The new policy would assess banks by using the lowest rating from all 3 credit reports. Any bank that received a low rating would be permanently removed from a list of possible investments. Unfortunately, Hertford County Council did not follow these procedures.

PWC in their report clearly explain the decisions and steps that led such a large amount of money to be so unwisely invested. Icelandic banks, before the crash, were seen as safe and profitable investments and it is unsurprising that HCC were interested in the Icelandic bank, Landsbanski. But, In January and February of last year, Moody gave Landsbanki a negative credit rating. HCC ignored the new information because the new policy had yet to come into effect. HCC continued to only use their original single credit rating system, which did not view the Icelandic Bank as a possible risky investment.

In April 2008, the new policy of using 3 credit rating systems was implemented. But due to administrative errors, HCC did not revaluate their list of possible investments using the new policy. If all 3 credit rating systems had been efficiently used, Landsbanski would have been seen as having a low credit rating and would have permanently been removed from HCC files.

In April-May 2008, two credit rating systems viewed Lansbanki as a risky investment and HCC did not make any investments with them during this period.

But in May 2008, a subsidiary of Lansbanki, the Heritable Bank, received a positive rating from a single credit rating system. HCC in that summer made multimillion investments with the Icelandic Bank. PWC concluded that if HCC had applied their own policy, Lansbanki would have been removed from all lists of possible investments in February 2008.

PWC report also criticised the administration of HCC, each investment required two signatures from independent members. In 28 cases, they only found a singular signature.

Even though it is greatly encouraging to read that Herts County Council changed investment policies to deal with the current financial situation and did attempt to safeguard public money. But it is deeply worrying that Herts County Council were unable to follow administrative policies, and checks that should have been carried out weren't. This report does not provide evidence that the current Council will be able to cope with the economic downturn.

You can read the full report by PriceWaterHouseCooper here

Is the Conservative led Council efficiently managed?

Do you have any personal experiences of bad administration in Herts County Council?

What policies would you implement to cope with the financial crisis?

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