The California state treasurer has won praise from Breakingviews for his attempt to learn more about trading practices of big banks when it comes to credit default swaps (CDS news) on California municipal bonds (bond market news). Bill Lockyer has written to six big dealers, requesting information, noting that he has no preconceived notions of what they do and how that affects the market for California bonds.

Breakingviews writes that this approach "makes more sense than calls for an outright ban on CDS or on unhedged positions in these securities. Also sensible is the separate on-going toughening up by regulators of collateral and capital requirements for derivatives, including CDS instruments." The banks have an opportunity here to carefully explain--and publicize--how they can issue muni bonds and make markets in them, and at the same time take short positions and market short positions via CDSs to their clients. This is not unlike the situation that Goldman Sachs (NYSE: GS) is in with some of its CDS moves. 

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