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Feds Investigating Whether Banks Sold Government Securities While Betting Against Them

May 18, 2010

Like I said in my other posts — I recently went into a large banking institution that recommended government securities i.e. municipal bonds.  I thought to myself, the only reason is that the banking institutions think that the government will have to bail the banks out and need money to finance U.S. government debt. 

Maybe the Feds should not only be asking whether the banks engaged in these actions in the past, but whether these activities are continuing.

By Michael McDonald

From Bloomberg/ Business Week

May 14 (Bloomberg) — Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among 10 banks Massachusetts is targeting in a probe of trading of municipal credit default swaps, according to the office of Secretary of State William Galvin.

The state’s securities division sent letters today to 10 underwriters of municipal bonds, asking them to detail their trading of credit-default swaps linked to state and local government bonds they’ve underwritten in Massachusetts since 2003. Recipients have until May 28 to respond. The letter asked each bank to “identify the entity that purchased CDS from your firm for each Massachusetts state or municipal bond offering.”

The other banks are: Morgan Stanley, Citigroup Inc., Deutsche Bank AG, Wells Fargo & Co., Barclays Plc, UBS AG, and both Merrill Lynch and its parent, Bank of America Corp., according to Michael Maresco, assistant secretary of state.

The probe follows a similar inquiry in California, where Treasurer Bill Lockyer asked banks to say whether they bet against the state with credit-default swaps. The U.S. Securities and Exchange Commission is also exploring conflicts of interest for banks that sold municipal bonds and bet the securities would fail, the Wall Street Journal reported, citing people familiar with the matter who it didn’t name.

Banks Respond

Bank of America will “work with Massachusetts officials to provide the information they need,” said Bill Halldin, a spokesman for the Charlotte, North Carolina-based company.

Deutsche Bank, based in Frankfurt, doesn’t have a municipal underwriting business, Ted Meyer, a spokesman in New York, said by e-mail. He declined to comment on the letters.

Goldman’s Michael DuVally, UBS’s Doug Morris, Morgan Stanley’s Jennifer Sala and Barclays’ Kristin Friel, all in New York, declined to comment.

JPMorgan’s Justin Perras and Citigroup’s Danielle Romera- Apsilos, in New York, and San Francisco-based Wells Fargo’s Elise Wilkinson, didn’t immediately return calls.

–With assistance from Catarina Saraiva in New York. Editors: Ted Bunker, Mark Tannenbaum.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net

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