Goldman Sachs made a $35 million bet in the credit derivatives market against California, the biggest issuer of U.S. state debt, the Financial Times reports.
The trade was the biggest such bet placed in the past few years by Wall Street banks that underwrite the state’s bond sales, according to information that the banks provided to the state.
This year, California began an inquiry into credit default swaps trading by its six major underwriters, who have earned $215 million of commissions on its bond sales since 2007.
However, California state treasurer Bill Lockyer said the effect of CDS trading on California bond prices was not significant enough to cause concern “at this time” and that the banks themselves have not bet against California debt “to any meaningful extent.”
The data provided by banks suggest proprietary trades were small.
In 2008, Goldman’s proprietary trading desk entered into four CDS trades, three of which remain open, “as part of the management of its overall portfolio”, the bank said in a letter to Lockyer.
Goldman says it stopped making proprietary bets on municipal bonds in 2009. Citigroup bought $5 million of CDS on California last year and then sold $5 million this year.
Both banks say the CDS trades were small compared with their exposure to California debt.
Goldman Sachs, which is facing a big Securities and Exchange Commission lawsuit, may be in hot water with California Public Employees' Retirement System, Reuters reports.
The pension fund wants to know why Goldman said that, its "investment Banking Division is not known by the firm to be the target of a formal investigation" when in fact the firm had already been informed about the SEC suit.
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