California Gives Thumbs Up to CDS Underwriters

Considering the disaster of AIG, this is one of the few times where the news actually sounds downright positive about swaps:

SAN FRANCISCO — California’s big underwriters make markets in credit default swaps on the biggest municipal issuer’s general obligation bonds, but they don’t seem to be betting against the state.That’s the conclusion an investigation by California Treasurer Bill Lockyer into the emerging municipal CDS market. Lockyer last month demanded that six big banks — which collected a total of $215 million in underwriting fees from the state since 2007 — explain their participation in the market for California CDS and its impact on the state’s borrowing costs.

The six banks — Bank of America Merrill Lynch, Barclays Capital, Citigroup, Goldman, Sachs & Co., JPMorgan, and Morgan Stanley — told the state they traded California CDS with a notional value of $27.5 billion from 2007 to March 31, 2010.That’s enough to insure 63.2% of the $43.5 billion of bonds the state issued during the period, or 39% of the state’s $70.4 billion of outstanding GOs at the end of fiscal 2009.

Bank of America has numerous legal problems and issues and only dodged a further bullet by co-operating with the government, Chase has been in the thick of it for sometime now, Goldman Sachs, well is Goldman Sachs, add to that the fact that Merrill Lynch and Morgan Stanley have also been name in the same civil suit that was launched 2 years about abuses in the muni-bond industry. In regards to a CDS, which is often connected to but not the same as a CDO, the Bond Buyer lays out this rather swift explanantion:

A credit default swap is an insurance policy against default by a bond issuer. They’re common in the taxable bond market but a relatively new phenomenon in the municipal marketplace, where bond insurers traditionally played the role of guarantor of muni credits.The seller of a CDS contract agrees to pay the buyer the par value of a bond in the case of default.Theoretically, the CDS market helps investors reduce the risk in their bond portfolios and could reduce their anxiety about buying the bonds issued by California — the lowest-rated U.S. state.

In a nutshell it might help states like California keep their borrowing rates down, since investors would have less risk, hence charge lower intrest.