The California Treasury has issued a press release on Big Banks selling their bonds and betting California defaults. The vehicle which the default bets are placed are.....CDSes or credit default swaps.
State Treasurer Bill Lockyer today released data that show the top six fee earners among investment banks that sell California bonds have, since 2007, completed more than $27.5 billion of trades in a market where investors can profit by taking a dim view of the State’s credit risk.
The volume of the firms’ trades of credit default swaps (CDS) on State general obligation (GO) bonds equals 63.2 percent of the $43.5 billion of GO bonds issued by California since 2007. The $27.5 billion CDS trading figure includes buys and sells the banks completed for themselves or their clients. Those clients include hedge funds, broker-dealers, insurance companies and banks, according to information provided by the six underwriters.
While the California Treasurer finds no wrong doing, the press release highlights the great profits and gambling casino going on, betting on government defaults.
urged Congress to pass strong legislation to regulate the market for derivatives, including municipal CDS. He said legislation should make the market fully transparent. To protect against speculative trading, Lockyer said legislation also should require CDS buyers to own the underlying securities, such as bonds.
From All Gov news:
Some of the biggest financial players on Wall Street have been helping California’s government sell its general obligation bonds and municipal debt issuances—while at the same time betting against the very same bonds. By participating in credit default swaps (CDS), banks and firms like Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley have been gambling that California’s state and city governments will fail to honor their bond obligations—and that has the state’s treasurer, Democrat Bill Lockyer, upset. At the end of March, Lockyer’s office sent letters to the financial institutions asking about their CDS practices.
The bankers claim they can play “both sides of the street” without compromising their commitments to California. They can do this because of the “Chinese Wall,” a term which means one side of their business helps sellers, such as cities, unload their bonds while the other side assists buyers take risks on default swaps. To Wall Street, there is no conflict of interest with the two different efforts that critics say are at cross purposes.
Credit Default Swaps are at play in the Greece Debt Implosion.
The five-year Greek CDS spread widened to 739 basis points from 698 on Monday, according to Markit, meaning it would cost $739,000 a year to insure $10 million of Greek debt against default for five years. Portugal's five-year CDS widened to 355 basis points from 314, while Spain widened to 203 basis points from 187.
Here is what George Soros said about it:
CDS are toxic instruments whose use ought to be strictly regulated: Only those who own the underlying bonds ought to be allowed to buy them.
He is referring to the CDSes associated with MBS based synthetic CDOs, i.e. the AIG Screw Job. That said, Naked CDSes are being blamed by Greece for it's Financial Woes. While Sheila Bair recommends they be restricted, Senator Byron Dorgan has an amendment (if they are ever allowed to debate the Financial Reform bill) to plain outright ban 'em.