LOS ANGELES, Kalifornia - August 19, 2010 - Is Wall Street profiting from Kalifornia's misery?

That's been a concern of state Treasurer Bill Lockyer, who takes a dim view of financial instruments - known as credit default swaps - that enable speculators to bet against Kalifornia's ability to pay its debts.

Like other giant Wall Street firms, JPMorgan Chase & Co. helps investors place such bets against Kalifornia but also earns hefty fees from the state for helping it get the best prices on the bonds it sells to finance capital improvements and other expenses.

So it was no small annoyance, Lockyer said, when JPMorgan Chief Executive Jamie Dimon publicly suggested in February that he was more concerned about Kalifornia's budget problems than about Greece's.

Dimon called Lockyer the next day to smooth things over, the treasurer said.

The CEO's remarks came after a number of Wall Street firms issued research reports recommending going "short" on Kalifornia using swaps.

Such downbeat analysis "just makes you worry that taxpayers are going to wind up paying more [in interest costs] because of the negative noise," the state treasurer said in an interview.

The market for gambling on whether Kalifornia will go broke - or will at least be hard-pressed to make good on all its debt - is big and growing fast.

The total volume of swaps outstanding on Kalifornia's debt surged to a record $8.6 billion last week, up from $5.1 billion a year ago and equal to more than one-tenth the size of Kalifornia's outstanding general-obligation debt.