Banks Bet Against U.S. Cities, States

Amidst growing pessimism about the financial condition of U.S. cities and states, investors are increasingly buying financial instruments that essentially allow them to short sell - or bet against - cities and states, says a Wall Street Journal report.

Offered by banks like JP Morgan, Bank of America, and Citigroup, the so-called municipal credit default swaps can be used by investors to bet that insurance contracts protecting holders of municipal bonds will default.

Some states say the derivatives not only scare away potential buyers of municipal bonds by creating a perception of risk, but ultimately drive up states' borrowing costs. Others contend that the instruments are traded too thinly to affect municipal bond markets or a state's credit rating.

The California treasurer is just one of a number of state treasurers that have launched a probe into the sale of these derivatives and the sale of municipal bonds by big Wall Street firms that might reveal "speculative abuse of CDS in the muni market," says one regulator.

Comments

[Steve Magruder]

10:41 AM on 04/29/2010

They have my city of Louisville pictured. Go ahead and target my city. If you want war, make my day. We already know what banks have in mind for drowning our city in endless debt (to be paid in tolls) to fund the ruinous, gargantuan Ohio River Bridges Project. Yes, we read Taibbi's "Looting Main Street" and we're bracing ourselves. The war is joined.

[senorlou]

08:10 AM on 04/29/2010

We need our government to throw these guys in jail yesterday. They're ruining our entire society with their greed.

[runfastandwin]

08:15 PM on 04/28/2010

Why is this not illegal? I can't see how it helps any entity manage risk, it's more like a bet. And who will pay off when they lose? Are they holding enough reserves to cover losses?

[Tennessean]

07:01 PM on 04/28/2010

Put your money in a local bank or credit union with at least a 3-star rating on bankrate.com. Take your money out of big banks. They're all betting against you. But most of all, save your money; stop living on credit; refuse to buy on credit. Pay off your cards, your car, pay extra payments on your mortgage. The BIG CRISIS is coming; don't doubt it. It's coming. Be prepared for it by living debt-free.

[senorlou]

08:11 AM on 04/29/2010

Awesome advice. Living small helps too. Bling bling is lame.

[Peter007]

03:12 PM on 04/28/2010

If Goldman Sachs is betting against your city, I'd advise you to leave. They are seldom wrong in their predictions.

[ProvokedExpression]

01:35 PM on 04/28/2010

I understand the anger directed at Wall Street but there are several actors in this drama who should be targets too. City and municipal spending has been out of control. If they didn't spend as much they wouldn't be on the verge of defaulting. I am an out and out liberal but I also believe that budgets should be balanced and fiduciary promises cannot be made without considering the possible consequences. The way public finances are handled is ridiculous and must be stopped. In fact I think the unfairness in all this is the fact that banks are allowed to bet on failure of cities while common folk aren't. Everyone should have equal dibs at this market.

[haljett]

04:36 PM on 04/28/2010

You are right on the money about the spending. I live in a small city that's essentially a mile square and the things they spend money on and the amount of waste is criminal. But it doesn't seem to matter because "it's not their money".

[karen1p]

12:33 PM on 04/28/2010

13 Bankers opens with a quote from Obama to the bankers...."My
administration is all that stands between you and the
pitchforks."

Perhaps, Mr President, you should step aside....

[senorlou]

08:12 AM on 04/29/2010

LOL. If Obama puts Blankenfein behind bars for a couple of life sentences, his approval will be in the 70s for sure.

[DI-1957]

12:21 PM on 04/28/2010

The State Gaming Commissions got exemptions for/to the gaming laws for these CDO's. It means they saw it for what it was, a bet, just like a casino. At least in a casino there is regulation and oversite.

[karen1p]

12:13 PM on 04/28/2010

Yesterday when I went in to BofA to close the last of my big bank accounts (I had to wait for a recurring bill to stop their taking.) All of the people involved with my closing of these accounts were like, "Why are you closing the account you have had with us for 16 years?" I asked them if they had been watching much C-SPAN lately? The one teller said, "But, Ken Lewis is no longer our CEO!" I said, "Ohhhh, who did they hire to replace him, a choir boy, I'm sure?" That pretty much shut them up.

[senorlou]

08:13 AM on 04/29/2010

I've got nine more car payments with B of A and then never again. I'm in a credit union now. Much, much better service.

[artgurrl]

11:42 AM on 04/28/2010

Isn't this kind of betting against our own cities, counties and country and counting on its failure considered treasonist? I really don't think our founding members of this country really counted on our own people betting on and hoping for our country to fail for their own financial gain. Wow, have we really leaped head over heals from Predatory Capitalism into a new kind of Cannibalistic Capitalism now?

[karen1p]

12:36 PM on 04/28/2010

I don't think our founding fathers would have approved of a LOT of what goes on in their "democracy."

[senorlou]

08:14 AM on 04/29/2010

It should be illegal, and people who engage in this should be charged with treason. You're right.

[guveqzero]

10:58 AM on 04/28/2010

The Banks and Bankers doing this should be prosecuted. At the very least, any bank shorting a US community should not be allowed to conduct business in the US.

[quintus]

10:47 AM on 04/28/2010

And this is the profession that our best and brightest can't wait to enter? The level of stupidity and ignorance, not to mention avarice, speaks volumes. Not a shred of ethics or decency either.

Short selling America's efforts to succeed, to pull itself out of the nose dive these i.diots were critical in causing! And they're keyed to make money off of THIS as well?

[unite4change]

10:26 AM on 04/28/2010

The credit card companies are betting against us too. They make profits if you can or can't pay your bill, and they even get to sell your debt after it has been written down.

[unite4change]

10:24 AM on 04/28/2010

And some of us wonder why the world doesn't trust us.

[sunshine14]

10:11 AM on 04/28/2010

Who really are the real Americans? 10s of thousands of companies who gave away American jobs, took their repubs Tax cuts, the largest in history, done by reconciliation 2 times in 2001 2003 which was given freely, was defined by republs to create jobs, now being paid off, for by all middle class hard working American citizens for generations to come? Repubs stimulus package? That produced what? When is enough greed enough? Socialism for the rich?
banks? fraud on top? Took ones home? Took ones jobs? Keep them under educated? cheap labor? Sad sad. When is, enough greed enough?

[progressivegreg]

10:47 AM on 04/28/2010

Hate to be a cloud today Sunshine, but the answer is NEVER. I was talking with a friend about some super rich people who live in our community and I asked when is it enough? His answer floored me, but made so much sense, "it's not about money at that point, the money is how they keep score" I fear he's correct.

[bthechangeyouseek]

11:59 AM on 04/28/2010

Assumed power and prestige.

[linlu]

12:59 PM on 04/28/2010

I have been arguing that the to understand the ultra rich, you just need to play Mafia Wars or just about any other game on FB for a few months. Once you get up in ranks, the money doesn't matter, it really is just an achievement - the same is true when you're so rich you can't spend it all. At that point, you look for ways to gamble with your money, since it's the only 'fun' left to have with money.