Chiding Mr. Market

The great state of California apparently had some difficulties peddling its general obligation bonds. In late March, however the state finished selling $6.54 billion of general-obligation bonds, surpassing its original goal of $4 billion.
The Wall Street Journal reports that the sale was the nation’s largest ever long-term general-obligation deal, and the third-largest tax-exempt offering in U.S. history. The Journal cited the office of state Treasurer Bill Lockyer for that proposition, while noting that California’s credit rating is the lowest among the 50 states. I’m pretty sure the latter observation derived from the Journal’s own research and not from Lockyer’s press release.
Lockyer was bragging then, but now he’s got a beef with the market’s judgment on the quality of his handiwork. Perhaps it is a leading indicator, perhaps a sign of the times. The Financial Times reports that Lockyer has fired off a letter to Goldman Sachs and other banks. In his letter Lockyer kindly explained the nature of credit default swaps to Goldman Sachs et al. and complained about the markets’ commentary on the quality of California bonds as revealed in the relative pricing of the credit default swaps:

Credit default swaps (CDS) amount to insurance against default. Yet, despite the security-plus backing of California GOs, and our spotless record of paying our debt on time and in full, market participants actively buy and sell credit default swaps (CDS) on our bonds. In fact, my office has information that indicates CDS on the State’s GO bonds may rank No.1 in dollar value among all municipal issuers. We also have information that indicates your firm, which sells California GO bonds, may participate in the municipal CDS market.

That was Lockyer clearing his throat. Lockyer was just warming up to complain about the judgment rendered by the market on California’s general obligation bonds:

Data reported in the news media and other sources show that the prices, or spreads, on California CDS wrongly brand our bonds as a greater risk than those issued by such nations as Kazakhstan…

The Financial Times asks where Borat is when you really need him: “Maybe Bill Lockyer ‘not make benefit glorious state California’? Taking a page out of Greece’s playbook, the peeved treasurer of America’s largest state fired off letters this week to the chiefs of Goldman Sachs and other banks questioning their marketing of credit default swaps on California’s debt.”
Addressing the gist of Lockyer’s complaint, the FT rises to the defense of Kazakhstan’s financial standing compared to that of California: “The real Kazakhstan, although not problem-free, looks fairly solid compared to California and many other states – a fact that should spook investors in America’s $2,800bn municipal bond market.” A letter from Lockyer to the FT is undoubtedly in the mail.
ZeroHedge’s pseudonymous Tyler Durden suggests another path of inquiry for Lockyer: “[W]e can’t wait to uncover, just like in the Greek case, that the biggest buyer of Cali CDS is PIMCO, CalPERS, TCW, Western, Oaktree, or some other California-based fund. Now that would be even funnier than Cali considered a more worthless ‘asset’ than Kazakhstan. At least their potassium deposits are best in region.”
Although slightly beyond his jurisdiction, Canada also beckons Lockyer. The Financial Post reports that the Canadian dollar reached parity with its American counterpart this morning, “as investors looked to park their cash in the fundamentally-sound loonie amid troubles in Europe.” Not to mention the troubles in parts south of the border.
Via Instapundit.


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