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No evidence that Wall Street improperly drove up California's borrowing costs

As state's bond yields rose, so did the price of credit default swaps against the bonds. But the swaps' effect was "not significant enough to cause concern," state Treasurer Bill Lockyer says.

June 05, 2010|By E. Scott Reckard, Los Angeles Times

Releasing a second round of findings from his probe of an obscure Wall Street market, California Treasurer Bill Lockyer reiterated Friday that there was no evidence Wall Street had improperly driven up the state's borrowing costs.

Early this spring, Lockyer began looking into the market for so-called credit default swaps. The yields on the state's existing general obligation bonds had surged when California's fiscal problems flared this spring. At the same time, the price of swaps written against the state's bonds had climbed, benefiting holders of that insurance-like protection.

Lockyer wanted to know whether the yields rose — suggesting that the state would have to pay more in interest the next time it borrowed — because speculators in the swaps market were fomenting unwarranted worries about the state. He also wanted to know whether the six giant Wall Street banks that underwrite California's bonds had themselves bet against those same bonds.

The treasurer sent two rounds of questions to the banks — Bank of America Corp.'s Merrill Lynch unit, Barclays, Citigroup, Goldman Sachs Group, JPMorgan Chase & Co. and Morgan Stanley.

Lockyer said the firms' responses to his follow-up questions confirmed his preliminary conclusion that the swaps market's effect on the yields of California bonds was "not significant enough to cause concern at this time."

He also said the banks themselves had not bet against California general-obligation bonds "to any meaningful extent."

Uncertainty remains, Lockyer said, about how often the banks facilitate their clients' "naked" purchases of California credit default swaps — deals done solely to bet against the state's bonds and not as a hedge by investors who own the securities.

The Wall Street firms told Lockyer they didn't know what motivated their clients to buy California credit default swaps.

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