Lex on Muni CDS

Always eager to deflect blame for fiscal lapses, state officials have pointed the finger at a small but growing market for municipal credit default swaps. There is no evidence, however, that banks are acting as anything but bond market facilitators. The first and loudest protests have come from – surprise, surprise – the state with the highest CDS prices, California. Treasurer Bill Lockyer has expressed indignation that prices imply California is riskier than many developing nations. With its intractable deficit, dysfunctional politics, powerful unions, inability to devalue and taxpayers who can decamp to states with lower taxes and better services, the CDS market may be right.