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California Banks: Who Are They Working For?

by Laura Flanders

Does it seem right to you that a state's ability to stay afloat should be the stuff of secretive betting pools? That's just what's happening. While states like California struggle to pay their bills, traders are gambling, by buying credit default swaps, on the fate of our biggest state, and that's just half the story.

The very same banks that sell and profit off  the swaps, at the same time underwrite and price the state's assets -- their municipal bonds. That means that even as JP Morgan Chase, Barclays, Goldman Sachs and Citigroup deal out the bonds that the state issues to raise cash, they're making money, separately, on the risks involved. They get their fees coming and going.

It's the same double-dip banking-and-betting scenario that's accused of bringing Lehman Brothers down. What's being done? In Europe, after Greece came dangerously close to sucking itself down the debt-swap sinkhole, EU leaders called for stiff regulations, and they're doing it now; reining in the derivatives market and demanding far greater transparency.

New laws proposed here, however, hardly put a dent in the way derivatives are handled. And anyway, the federal government's primary solution is to keep on selling bonds to help desperate states raise money. Debts keep on rising, debt- buyers keep on profiting and state services keep on shrinking.

California's state treasurer, Bill Lockyer, finally wrote to the big banks this week, asking for clarification. California has a right to know -- and so do we, as the insurer of last resort: Just who are the banks working for?  In case you didn't notice, taxpayers are the all-round losers here. It's we who are taking on everyone's risk -- the states' as well as the banks' -- and it's our services that keep getting cut, regardless! Isn't citizenship lovely?

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