By Ian Mckendry

WASHINGTON (MNI) – Credit default swaps trading is not
“significantly” effecting bond prices according to findings by
California Treasurer Bill Lockyer.

“Lockyer said taxpayers have a right to know about the firms’ CDS
activities,” the California Treasurers office said Thursday.

Lockyer wrote a letter March 29, 2010 to six large underwriters of
California general obligation bonds asking for information on their
market activities.

Lockyer was concerned that if CDS swap prices reflected an overly
negative outlook on California’s credit worthiness it could drive up the
costs for future borrowings.

In response Bank of America, Barclays, Citigroup, Goldman Sachs,
J.P Morgan, and Morgan Stanley provided information on their market
activities involving California CDS which said that they had complete
$27.5 billion in CDS trades since 2007.

“In reality, as information provided by the banks confirms,
expectations of actual default play little or no role in most municipal
CDS trades,” the Treasurer’s office said.

California’s budget problems have been well documented, with the
state facing a $19.9 billion budget gap in 2011 to 2012 according to a
state proposed budget in January.

Stanford University in an April report estimated the states’
largest three pension funds have a half trillion dollar funding
shortfall.

“We expect California’s taxable general obligation (GO) bonds to
continue to trade wide relative to other states’ GO credits until
longer-term spending cuts and or tax increases are implemented to bring
projected budget gaps down to more reasonable and manageable levels,”
Barclays said in a presentation that was submitted to Lockyer.

With the advent of Build America Bonds in 2009 through the American
Recovery and Reinvestment Act, the pool of municipal bond investors has
grown, and with it, so to is expected the market for CDS.

“We will remain vigilant in protecting taxpyers’ interests. The
potential for harm exists, and the danger will only grow in the evolving
municipal bond market,” Lockyer said.

The Treasurer’s statement said his office will require all the
State’s underwriters for file quarterly reports providing information on
their CDS activity.

“Look out when Wall Street says it’s looking out for you,” Lockyer
said.

** Market News International Washington Bureau: 202-371-2121 **

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