Huffpost Business

Banks Bet Against U.S. Cities, States

Posted: Updated:

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.

Around the Web

States Bristle as Investors Make Wagers on Defaults -

Stock Lending and Short Selling news and regulations ...

Calif. Probe Finds No CDS Trading Irregularities

California Watch: CDS Trades Not A Concern For Cal GO Bonds

Goldman/Wall Street Profiting From Housing Market's Collapse, Erosion of ...

Wall Street Bets on Cities and States Failing

Does it matter if Goldman shorted Lehman stock?

How Goldman Double Dealt California Bonds