The SEC is investigating whether Wall Street banks used their own money to bet in financial markets against muni bonds that they had sold, the Wall Street Journal reported, citing people familiar with the matter.
The regulator, which has launched a preliminary inquiry into the matter, is examining trades of municipal credit default swaps (insurance-like derivatives that provide protection against issuer defaults) that allow investors to short municipal bonds.
The fact finding probe, notes the Journal, will allow the investigation to explore potential conflicts of interest by banks that sell municipal bonds and then poise themselves to profit if those bonds fail, and also decide whether the activity was properly disclosed to bond buyers.
The muni bond issue is also being investigated by some states, including California, the nation’s biggest bond issuer.
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