California Treasurer Bill Lockyer wants to know whether big banks that help sell the state’s bonds could be driving up interest rates on those securities via trading of so-called credit default swaps.
Lockyer late Monday sent letters to six of the biggest Wall Street banks asking for details on their activities with credit default swaps, contracts that are a way to buy insurance against debt default.
California’s severe budget woes naturally have raised questions about the state’s long-term fiscal health, and that has been reflected in higher costs to insure California general obligation bonds against default via the swaps market.
At least, that’s how Wall Street tells it. But Lockyer worries that there could be something else going on. If speculators are pushing up the cost of swap contracts -- hoping to stoke fears about California’s ability to make debt payments -- that could force the state to pay higher yields to issue new bonds to nervous investors.
The treasurer isn’t alleging that that’s what is happening, but he wants the banks to tell him whether that’s a possibility -- and whether the banks, all of which have managed debt offerings for the state, also could be hurting the state by trading in the swaps market.
California just last week wrapped up a bond sale that raised $3.4 billion to fund infrastructure projects. The deal was handled by Citigroup and Bank of America. They received Lockyer’s letter on Monday, as did Barclays Capital, Goldman Sachs, JPMorgan Chase and Morgan Stanley. None of the banks had any immediate comment.
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