• California State Treasurer Releases CDS Data of Top Fee-Earning Investment Banks Underwriting State's Municipal Obligations
  • May 4, 2010 | Author: Darren M. Cooper
  • Law Firm: Alston & Bird LLP - Washington Office
  • Last Thursday, California State Treasurer Bill Lockyer released data obtained from the top six fee-earning investment banks (Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley) that underwrite the state’s municipal bond sales, indicating that, since 2007, the six investment banks were involved in trading an aggregate of $27.5 billion in credit default swaps (CDS) on California's state debt, an amount representing 63.2% of the $43.5 billion in general obligation (GO) bonds issued since 2007.  The trades included both buy-side and sell-side trades the investment banks completed for themselves and for a variety of clients, including hedge funds, banks, insurance companies and other broker-dealers.

    The investment banks provided the data in response to Treasurer Lockyer's request late last month seeking information about the investment banks' trading activity in the municipal CDS market in light of "concern[s] about banks selling the State's bonds on one hand, and on the other hand betting against, or facilitating bets against, those bonds."  The investment banks provided the following specific CDS volume figures since 2007:

    • Bank of America Merrill Lynch - $2.1 billion; gross face value as of March 31. 2010 - $1.7 billion; net face value as of March 31, 2010 - $39 million

    • Barclays - $2.5 billion; gross face value as of March 31. 2010 - $2.5 billion; net face value as of March 31, 2010 - $1 million

    • Citigroup - $3.3 billion; gross face value as of March 31. 2010 - $1.7 billion; net face value as of March 31, 2010 - $49 million

    • Goldman Sachs - $8.8 billion; gross face value as of March 31. 2010 - $3.9 billion; net face value as of March 31, 2010 - $17 million

    • JP Morgan  - $1.4 billion; gross face value as of March 31. 2010 - $1.5 billion; net face value as of March 31, 2010 - $97.4 million

    • Morgan Stanley - $9.4 billion; gross face value as of March 31. 2010 - $1.9 billion; net face value as of March 31, 2010 - $38 million

    Based on an analysis of the information by the California State Treasurer's office and outside financial advisors, Mr. Lockyer stated that the following "preliminary conclusions" were reached:

    • "The CDS trading's effect on bond prices is not significant enough to cause concern at this time";

    • The data suggests that the "banks themselves, during the period covered, did not bet against the credit quality of California GO bonds": and

    • "More information is needed to determine the extent to which the bank's clients who have not California credit exposure have placed speculative bets with California CDS, and the extent to which the banks have facilitated those bets."

    Going forward, all 86 firms in California's bond underwriter pool will be required to file quarterly reports that provide detailed information on their CDS market activity.