Why are you helping people short my bonds, Cali treasurer asks banks

...........also Bill, CDS will allow you to buy protection on your own debt today effectively locking in your future cost of borrowing at today's prices, if you follow the lead of some state controlled entities in Greece. Possibly in your letter you should ask for quotes from the banks and compare prices ?

Terrifc "Dear Bill" note from Fishknife! A dazzling moment of clarity which politicians, especially those with ambitions for higher office like Lockyer, hate.

Dear Bill

The banks' answers to your question will be incomprehensible after they have been through legal compliance, corporate communications and so on. So allow me to give you a simple answer to your clear question.

Credit default swap trading will, on average, lower the interest cost on your debt, by increasing the pool of potential investors and - because it provides a hedging tool - lowering the risk of holding California bonds.

However, it will also increase the level of scrutiny on the actions taken by your office and by California's legislature, because many more smart people will have an interest in analysing California's credit risk.

You might not like this. It means that every decision you make, every Senate compromise and every proposition that gets passed by voters will be analysed in detail. Any whiff of backsliding in your efforts to get California's budget back on track will quickly result in high credit default swap spreads, lower GO prices, and therefore higher interest costs. In short, the electorate and politicians of California remain in control, and the decisions you take continue to determine the cost of borrowing.

Only more so.