Bill Lockyer, Furious That California Is Riskier Than Kazakhstan, Sends Angry Letters To Goldman et al About State CDS Trades; (Or The Greek CDS Scapegoating Campaign - Animal Style)

Tyler Durden's picture

Do you see what happens Larry when you sell CDS on California? You get a Greek-style scapegoating campaign. Cali's State Treasurer Bill Lockyer, exasperated at his impotence to sell $2 billion in GO bonds, has resorted to the last option: sending angry missives and trying to make a media circus out of it. It is now all Goldman's fault that California is bankrupt, just because it dares to make a market in Cali CDS. Ring a bell? It worked miracles for Greece, whose bonds are now tumbling a day after everyone said Greek issues were resolved. Also, we 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.

From Bill Lockyer's letter, attached below:

Dear Mr. Blankfein:

I write to request information about your firm's market activities related to credit default swaps on municipal bonds in general, and State of California general obligation (GO) bonds specifically.

The State never has defaulted on a debt service payment in its history. Small wonder.

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.

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, Croatia, Bulgaria and Thailand. The perception of risk could adversely affect the price of our bonds when we go to market. That makes the CDS market important to our taxpayers. That is why I want to fully understand the municipal CDS market in general, the market for California CDS, and [Goldman's] role in these markets.

[and much more ridiculousness]

*With apologies to In-N-Out purists. What Lockyer should do, instead of following G-Pap retarded startegy of scapegoating and focusing on what is completely irrelevant even as his state burns, is nationalize the hamburger chain and IPO it (using Goldman of course). That would immediately resolve all budget problems the state has through the year 3000.


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Ripped Chunk's picture

Yea, and citizens have always paid their mortgages. It's a great investment.

Mercury's picture

If the solvency of California is such a good bet Lockyer should be able to convince CALPERS to write those CDS contracts to satiate hungry speculator demand.  I mean you can't lose right? Keep collecting those taking candy from a baby!

Put some money where that mouth is Bill.

Miles Kendig's picture

I am sure that CALPers and many other state investment vehicles would love to make several markets themselves, including default.  All sorts of things could be done differently with that kind of market position.  Too bad the same doesn't hold true for the government of the state of California where Hobson's choice rules the day.

greenfire's picture

"Hungry speclator demand" for such a wise and time-tested innovative financial product.  LOL Yes sireee, something that never existed ten or fifteen years ago, but now we must certainly provide the product that satiates the demand, no matter how ill-advised or destructive to society as a whole.  Heck, there's profit to be made by way of fees and such, and you don't even have to get all icky and sweaty like most work. Yep, keep it up guys. Y'all are on the cutting edge.  Something to really be proud of and tell your grandkids about.  Welcome to the great casino at the heart of the church of greed.  Never consider the CEO who makes 600 times his workers pay, but sock it to the poor and working classes that struggle and die becasue of austerity measures.  After all, the bond markets demand it.

Mercury's picture

-CA is having trouble paying it's bills because, as far as anyone can tell,  it's outstanding obligations are greater than it's incoming revenue.

-Because of this situation there is greater, not a lesser likelihood of CA defaulting on the interest and/or principal payments it owes on it's outstanding bonds.

-CDSs are a way for CA bond holders to hedge against default and yes, it is also a means by which speculators can take the other side of that hedge or bet on a default.

-The CDS market has become popular in recent years because the government protected duopoly of Moody's & S&P have failed miserably in doing their job vis-a-vis keeping on top of increasing credit risk.  CDSs have a much better recent track record in terms of conveying accurate information about default risk than the rating agencies do.

-If CA officials truely believe that the CDS market has got it all wrong and that there is no real increased risk of the state defaulting, they should take advantage of the situation (since they could use the cash and all) and write or encourage related or sympathetic parties to write that insurance themselves and pocket the premiums.

-That CA spends beyond it's means (it's real problem) does not have anything to do with the CDS market.

That's as simple as I can make it without resorting to sock puppets.

hedgeless_horseman's picture

That letter is suitable for framing.

Love your argument, Mercury.  Stop making sense.

My guess is that the yield rally in munis is just getting started.  Put your rally cap on and your glove over your nose and buy those CDS.

ZackAttack's picture

I think he needs to demand war reparations from Mexico.

Cognitive Dissonance's picture


I think it's the other way around. If Cali doesn't pay Mexico protection money, those big bad drug dealers will surge over the border and invade LA.

Please go directly to Hollywood to collect the $200 Billion. Do not stop in San Diego for tacos and beer.

Miles Kendig's picture

The current toll is far higher than 200b CD.  Far higher. 

Cognitive Dissonance's picture

OK, then half the invading force can stop for tacos and beer, since the payoff will be even higher.

Taco Bell is on me boys. But you still gotta pay for your own beer and broads. :>)

Miles Kendig's picture

Actually, if you dig a little deeper you'll discover that the horde already has those markets covered through the third derivative, played a variety of ways..  Hence the mad dash to meet the terms of conversion.  :-D

caconhma's picture

Just wait. He might do it after all.

Do not forget, CA has the largest in USA illegal mexican population enjoying very generous welfare, school, medical, and other endless state benefits. I even do not mention about all this endless fraud.

As a side note, I own CA GO bonds paying me 8.5% during the last 27 years. They never missed a payment. But later last year, I tried to sell them. My broker told me "no bids". I will continue to collect my payments...

Cognitive Dissonance's picture

How many years left on that gold mine? With no bids, it sounds like no one wants to sift through the tailings. Seriously, are they 30 year or 40 year (or possibly more) GO bonds?

At 8.5% you've received three times your initial investment in interest payments so far. If they go toes up, will you consider yourself as having done well?

caconhma's picture

About my CA muni bonds. 

I got then in 1983 when R. Reagan was our President and PV was our FED Chairman. Originally, they were 12.5% muni and were AAA MBIA insured. 7 years ago,  70% of them were called back with a good premium. The rest were reissued as 8.5%. They are good until Aug. 2023. They were originally 40 years bonds.

No major complains so far. I am just stating the facts.

Cognitive Dissonance's picture

I understand you're not complaining. Neither would I. Can the reissued bonds be called?

Like I asked, if they were to go toes up and default, would you consider the entire experience to have been worth it. I'm not being sarcastic here, just talking to an investor who is holding shaky paper and wondering how the investor feels about the possibility of default. I would appreciate if you let me know your thinking.

I bought a very small amount ($10,000) of GM bonds 10 years ago (knowing they were a bit shaky) and of course you know where they are now. I received 7% for each of those ten years so I figured I just about broke even on the entire mess (not considering inflation or I would be crying in my pillow) and I get to write off the loss.


carbonmutant's picture

Theoretically they could draft a Welfare Reparations Bill...

I'm just not sure whether they should send it to Washington DC or Mexico D.F.

deadparrot's picture

Never defaulted, maybe, but you did pay your employees with IOU's for a while. That's certainly not something to be proud of.


Rainman's picture

Well at least the IOUs finally got paid with interest. Illinois just let's the bills accumulate in the in-basket.......$ 9 billion at last count.

hbjork1's picture

Blankfein hasn't been releasing public statements lately.  I would imagine he has to be at least a little concerned about the number of entities finally, one way or the other, putting Goldman in their crosshairs. 



Ripped Chunk's picture

He and the wife have been in Paraguay overseeing the furnishing of the ranch.

carbonmutant's picture

Wow, you can raise your credit rating by sending angry letters to 85 Broad St. NY. ??

glenlloyd's picture

comical, truly comical. Clearly the problems in CA are of someone elses making.

Segestan's picture

 Mr Lockyer is right , but wrong to expect honor amonst thieves.

Missing_Link's picture

How is he "right," exactly?  I think most of your fellow readers would beg to differ.  Anyone who knows anything about California knows only too well that it's far less creditworthy than Kazakhstan or Greece.

And (just in this one rare case) you can't fault Goldman for betting against Cali.  It's a no-brainer trade, and has the added benefit that it just might force California to confront its insane fiscal policies sooner rather than later.

Segestan's picture

Fine, but GS made money at both ends. Do you think California got into this mess without seeking professional advice? They are thieves.

MsCreant's picture

Quit picking on Kazakhstan. They at least had a team in the Tour de France last year. They took both 1st and 3rd! US does not have its shit together to do that. Kazakhstan has their shit together more than California, bad reference point.


swamp's picture

California's tour de france winner is a convicted child molester!

Mad Max's picture

This is fucking hilarious.  The banana-republic US state vs. the vampire squid.  This might be the first time in my life I've felt even the slightest hint of possible receptivity to feeling a twinge of compassion for Golden Sacks.

Unfortunately, comedy aside, this and last Friday's Waxman/Stupak witch hunt against AT&T and other companies that made legally obligatory SEC filings in response to their disguised tax bill health care "reform" bill would seem to indicate a rapidly accelerating game of political grandstanding to demonize businesses engaged in lawful (and in the case of the SEC filings, mandatory) conduct.  That, in turn, puts the whole nation three steps closer to banana republic status.  No wonder Obama is friendly with Hugo Chavez.  In this kind of environment, any stock trading at a PE above 3 seems overvalued.

Mercury's picture

Seriously, ZH should revive Celebrity Death Match...


This week!...

Banana-Republic California vs. The Vampire Squid!


MsCreant's picture

Could Calfiornia take them by just defaulting on all their Squid related liabilities?

Cognitive Dissonance's picture


Announcer # 1 - "You know Nick, acid can be very hazardous to your health."

Announcer # 2 - "Tell me about it. I barely made it through the 60's myself."

I can relate to that statement.

Village Idiot's picture

Regular visitor to the In-N-Out chain. Family owned,and hugely successful.  Nationalizing the company and offering state sponsorded franchises could do it for California.  It would serve In-N-Out right - I have been trying to buy a franchise for years. Mr. President, please give me a few stores.

non-anon's picture

Another reason they call it the state of fruit and nuts. Oh, and Moonbeam Brown wants to be governor.

swamp's picture

I know Jerry from the 70's. He's Jesuit educated and no dummy, and in many ways not main stream, hence the moonbeam logo.

BoyChristmas's picture

Its no wonder kids grow up pissed off when they find out grown-ups lie in such stupid ways.

Cognitive Dissonance's picture

What? Grown ups lie? Does that mean that the man porking mom isn't Santa Claus?

Dad, mom's got a secret.

BlackBeard's picture

WOOOO In-N-Out Burger I like!

When everyone realizes the retard in charge is too busy blaming others for his shit and not taking responsibility and fixing the problem, Cali's credit spreads will widen and the CDS' will go higher..higher..and higher...


agree with madmax....well stated

barthezz's picture

same letter, same circus.. boa, jpm, gs, c,..

Jo's picture

Who starts a letter 'I write' or 'I am writing'?

I mean, seriously, you just don't do it.

Howard_Beale's picture

Ahhnold Schwarzenegger
The Governantor of Calickflornia

Mr. Satan
Chairman of the Board & Ceo
Goldman Sachs & Co.
85 Broad St.
New York, NY 10004

Dear Mr. Satan,

In reference to my lacky, Billy Locked-ears letter to you, I would like you to respond as soon as possible. Your answer should be what I want to hear or I will be forced to Hollywood CGI your current address and send you straight to hell in 3-D IMax. Don't misunderestimate the power of the Governator.

I belief Calijfornial is the gradest state in the nation. We have buildings we can sell and our IOU's are second to none.

Terminator of all Satans


Miles Kendig's picture

And if you good people of Calickfiornia entrust your state government to me I promise to restore fiscal sanity and stability and end this ruinous age of special interest governance.   bwwaahaaahaaa.  Thanx Howard!

MsCreant's picture

I know it's just a fantasy, but I really want to see the movie Howard. Ahhnold kicking Lord Bank Fiend's ass around the movie screen, and then throwing him into the pits of hell would be pretty cool. I'm thinking the folks who did the film on Sparta, was it called "300?"

Howard_Beale's picture

I think we rework the Terminator straight to the banksters who have superpower robots that try to destroy Ahhnold, but he crushes them one by one and then moves on to Bernanke, Geithner, lobbyists, congressmen, senators, et. al. All in 3-D Imax glory! In the end, the people are freed from the clutches of the evildoers and the corporate person is no longer allowed.

Yup--one big fantasy.

Miles Kendig's picture

Sounds like the grist for a contemporary novel on the summer "must read" list for vacationers.