SAN FRANCISCO — State Treasurer Bill Lockyer Monday sent letters to six major underwriters of California bonds, asking them to provide his office with information about their activities in the credit-default swaps market.
The request for information stems in part from continued media attention to CDS pricing for California, according to Lockyer spokesman Tom Dresslar.
“Nobody should be betting any money on whether California’s going to default,” he said. “It doesn’t make any sense.”
The letters went to six investment banks: Bank of America Merrill Lynch, Barclays Capital, Citi, JPMorgan, Morgan Stanley, and Goldman Sachs.
Goldman’s role in California CDS swaps has been in the public eye since a 2008 story by ProPublica and the Los Angeles Times. They reported that Goldman Sachs had prepared marketing materials advising institutional buyers to buy CDS protection against a California default, even as the firm was a major underwriter of the state’s debt.
“Data reported in the news media and other sources show that the prices, or spreads, on California CDS wrongly brand our bonds as a greater risk than those issued by such nations as Kazakhstan, Croatia, Bulgaria and Thailand,” Lockyer wrote in the letters, which were identical except for the addressees. “The perception of risk could adversely affect the price of our bonds when we go to market. That makes the CDS market important to our taxpayers.”
Lockyer added that he is making the information request with “no preconceived notions.” The firms were asked to reply by April 12.
“Our first step is to gather the information,” Dresslar said. “Once we gather the information we’ll analyze the responses and go from there.”
Questions asked of the firms include: the extent of their trading activity in the municipal and California CDS markets, including market-making activity, their roles as brokers or facilitators of California CDS trades, and the volume of California CDS trades; the kinds of marketing and credit analysis information they distribute to clients about California and muni credit default swaps; their view of how the CDS market for California has affected the state’s borrowing costs; and their outlook for the future of the municipal and California CDS markets.