On Monday morning, those of us who are on the county council’s audit and economic scrutiny committees attended a seminar on treasury management (TM) in local authorities. The speakers were two consultants from Sector, the council’s TM advisors. It was very illuminating, though restricted in time as a result of members’ other commitments that afternoon. Much of the detail of the methodology of ranking both sources of loans and destinations of investment had to be skated over.

The Sector people tacitly accepted that too much weight had been given in the past to investment ratings given by Fitch, Moody and Standard & Poor. Their revised methodology brings in more factors, such as credit-default swaps (CDSs), financial instruments which were largely unknown to the general public until the aftermath of the Lehman Bros collapse. CDSs are basically means of insuring against default on debt incurred by large companies and even states. Because they can be traded, their price shows what the international markets think of the insured’s credit-worthiness. Keeping an eye on these and other factors gives Sector an early warning ahead of a formal downgrade by the credit-rating agencies.

Investment decisions are still not an automatic process and require judgment on the part of the council’s financial staff. They also need to heed their TM advisors’ weekly bulletins. There is a salutory story of an English local authority who did not regularly check their fax machine. When the Icelandic bank investments started going sour, their TMA sent a warning, on a Friday, which was not brought to the attention of  the finance director who made a multi-million pound Icelandic investment on the following Monday.

What worries me is that people may forget, at the top of the next business cycle, lessons learned during the Icelandic banking crisis, just as booms and busts in the housing market, like that of the late 1990s, are habitually forgotten. That said, it seems that the Icelandic banks may not have been so underfunded as it appeared at the time, and that both markets and governments over-reacted. As our finance director has pointed out, those auditing firms brought in to handle the distribution of the banks’ funds have made a lot of money out of the process.

All in all, a very worthwhile exercise which we, especially new councillors like myself, would have benefited from two years ago.

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