California Treasurer Calls for Ban on Municipal CDS; Warning Sign for California Munis?

 |  Includes: AKP, BCK, BCL, BFC, BZA, CMF, EIA, EVM, ICS
by: Rubicon Associates

On the tape (here):

California Treasurer Bill Lockyer said he wants regulators to prohibit municipal credit-default swaps [CDS] because of concern that investors may use the instruments to manipulate the market and cost state taxpayers.

Lockyer, 69, said he would ban credit-default swaps, a type of derivative used to protect debt-holders against default, if he had the authority. He’s called on regulators to adopt capital-margin requirements to reduce leverage and to prohibit the speculative use of credit-default swaps -- the trading of debt-insurance contracts by investors who don’t own the securities.

Just a thought, but you wouldn't be worried about CDS if you could fiscally manage your state. Best quote:

I’m perplexed because I don’t know why anyone would buy CDS. I understand why people hedge, but if you are hedging against default risk, every serious analyst says that the likelihood of California debt default is zero.

Disclosure: No positions