CDS on California Bonds - much less than on Greece and California, the lowest-rated U.S. state, has an A1 ranking far higher than Greece which is A3 - would appreciate an explanation
Morgan Stanley led trading in California default swaps with $9.4 billion of transactions since 2007, Lockyer said. Goldman Sachs, which is being sued by the U.S. Securities and Exchange Commission for fraud linked to derivatives, was second with $8.8 billion. Citigroup was third with $3.3 billion. Goldman Sachs denied misleading investors as the SEC charged.
‘Best Served’
“Morgan Stanley is an active market maker in all sectors of the CDS market, as we are an active participant in all areas of the debt markets,” Jack DiMaio, a Morgan Stanley managing director, said in a letter to Lockyer. “We believe the state is best served by underwriters that understand these markets, their development and interaction, and can market the state’s bonds in a manner that achieves the lowest cost for each bond sale.”
Goldman Sachs Chief Executive Officer Lloyd Blankfein said that trading in credit default swaps has had “little or no effect” on California’s borrowing costs, given the size of the debt market. He said trading in the securities may increase as the state sells more Build America Bonds, the taxable debt marketed to investors who frequently buy corporate bonds.
“We believe, however, that the California CDS market will remain relatively small in size compared to the bond market, and thus will not be a driver of California’s borrowing costs,” Blankfein wrote to Lockyer. “The primary drivers of California’s borrowing costs will be the state’s management of its credit, budget and debt.”
Contracts Value Gains
While California has never defaulted on its debt, the swap contracts have risen in value as the state wrestled with fiscal stress. The cost of California 5-year credit-default swaps has risen 17 percent since Oct. 26 to $187,000 to protect $10 million of bonds, according to data compiled by Bloomberg.
California, the lowest-rated U.S. state, has an A1 ranking on general obligations, six steps above non-investment grade, from Moody’s Investors Service. The state gets an A-, four rungs above speculative, by Fitch Ratings and Standard & Poor’s. Legislators are trying to close an $18 billion budget deficit for the next 14 months.
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