Zeno Swijtink
05-07-2010, 06:12 AM
Six California underwriters pressed again on CDS (https://www.reuters.com/article/idUSTRE64467920100505)
(Reuters) - California's treasurer wrote to six of the state's top underwriters on Wednesday requesting information on whether they or their clients are using credit default swaps to "bet against the state's credit."
The letters from State Treasurer Bill Lockyer to Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley follow letters he sent them in March expressing concern that spreads on California CDS are mispricing the state's credit risk and inflating interest costs.
CDS are used to hedge against default risk or to speculate on credit quality.
In his latest letter, Lockyer requested information on the extent to which the underwriters "are using CDS to bet against the state's credit" and the extent to which they "are helping their clients use CDS to bet against the state's credit," a statement from his office said.
The letter also requests information on the extent to which the underwriters "facilitate speculative trading of California CDS (by parties who have no actual exposure to the state's bonds or other forms of credit)," the statement said.
"Speculative CDS trading helped create the conditions that caused the nation's economic meltdown," the statement added. "Speculative trading of municipal CDS, such as California CDS, runs the risk of increasing taxpayers' borrowing costs on bonds if such trading creates an unjustifiably negative perception of an issuer's credit."
Lockyer has long maintained that California debt is a safe investment despite the low credit rating on its general obligation bonds.
California's general obligation bond rating hovers just a few notches above "junk" status, which Lockyer says unfairly adds to the state's borrowing costs because the state has never missed debt service payments.
He has also stressed to markets that debt service payments are by law a top state payment priority.
Fitch Ratings and Standard & Poor's rate California's general obligation debt A-minus and Moody's Investors Service rates it A1, reflecting concerns about the state's complex budget process and the accompanying nasty and lengthy political struggles, and a persistent failure by state leaders to match spending with revenue, which allows deficits to appear year after year.
(Reuters) - California's treasurer wrote to six of the state's top underwriters on Wednesday requesting information on whether they or their clients are using credit default swaps to "bet against the state's credit."
The letters from State Treasurer Bill Lockyer to Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley follow letters he sent them in March expressing concern that spreads on California CDS are mispricing the state's credit risk and inflating interest costs.
CDS are used to hedge against default risk or to speculate on credit quality.
In his latest letter, Lockyer requested information on the extent to which the underwriters "are using CDS to bet against the state's credit" and the extent to which they "are helping their clients use CDS to bet against the state's credit," a statement from his office said.
The letter also requests information on the extent to which the underwriters "facilitate speculative trading of California CDS (by parties who have no actual exposure to the state's bonds or other forms of credit)," the statement said.
"Speculative CDS trading helped create the conditions that caused the nation's economic meltdown," the statement added. "Speculative trading of municipal CDS, such as California CDS, runs the risk of increasing taxpayers' borrowing costs on bonds if such trading creates an unjustifiably negative perception of an issuer's credit."
Lockyer has long maintained that California debt is a safe investment despite the low credit rating on its general obligation bonds.
California's general obligation bond rating hovers just a few notches above "junk" status, which Lockyer says unfairly adds to the state's borrowing costs because the state has never missed debt service payments.
He has also stressed to markets that debt service payments are by law a top state payment priority.
Fitch Ratings and Standard & Poor's rate California's general obligation debt A-minus and Moody's Investors Service rates it A1, reflecting concerns about the state's complex budget process and the accompanying nasty and lengthy political struggles, and a persistent failure by state leaders to match spending with revenue, which allows deficits to appear year after year.