Bank and Broker Default Risk

At Bespoke Premium, we created an index that measures default risk for the global financial sector based on CDS prices for a number of banks and brokers. We highlight this index on a regular basis so members can keep a close eye on the numbers, which are very important to follow in the current market environment.

Below we highlight a table of the current CDS prices for a number of global banks and brokers along with the recent change in their stock prices. The CDS prices represent the cost per year to insure $10,000 worth of debt for five years (or 10,000 euros for European firms). As shown, default risk for Citi (C) and Bank of America (BAC) are up by far the most year to date at +200%. Not surprisingly, their stock prices are also down the most. American Express (AXP) and Wells Fargo (WFC) have had the 3rd and 4th biggest spikes in default risk at around 140%. However, AXP is down much less than Citi, BAC, and WFC this year.

On the positive side (if you can call it that), Deutsche Bank (DB), Goldman Sachs (GS), and Morgan Stanley (MS) have seen the smallest rise in default risk in 2009, with Morgan Stanley rising the least at 14.57%. Morgan Stanley is also the only company on the list whose stock price is up this year (7.11%).

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Comments

[TheAvenger:]

What can be read from the fact that ING has one of the lowest CDS yet it also has one of the largest drop in the share price ? Thanks for any insight about this…

Mar 09 10:45 AM

[MattZN:]

Why are you using CDS's as a measure of default risk? CDSs are instruments traded only by speculators with extremely low volumes, which makes their prices nearly meaningless as a measure of anything worthwhile.

-Matt

Mar 09 10:57 AM

[William S:]

Very interesting, I always appreciate your articles.

Thank you!

Mar 09 11:17 AM

[BDHPlayer:]

What I find interesting about these numbers is that BCS and ING have lower CDS rices thatn JP Morgan. If you look at the preferred stocks of these companies, they are yielding in the area of 40% per year.

Which market is right?

Mar 09 11:25 AM

[Rohan C. Pease:]

Credit Default Swaps are a great measure of Default risk. They are by no means perfect, however they give good guidence of a firms risk. CDS represents the insurance premium of protecting a company's debt from default. Look at the CDS spreads for Bear Stearns and Lehman Bros. weeks before their takeover/Bankruptcy. Divide C/JPM CDS and there is a 2.6x greater chance they will default, JP Morgan is well capitalized, C is not. Also CDS give great insight into counterparty risk, would you rather trade/bank with Citigroup or JP Morgan considering that you had investments exceeding the FDIC limits.

Mar 09 02:21 PM

[jstratt:]

Thank you Bespoke!

Today became the day I reentered the financial sector buying stocks of JPM, USB and BK all of which are on the world top 50 strongest bank list.

I held off on WFC even though they were the highest rated if I remember correctly. The reason I held off is that Bespoke and other financial data seems to question WFCs strength.

In fall 2007 I concluded we were entering a financial crisis and liquidated all financial holdings such as C, AIG, CFC and BAC. It may not be the bottom but it does seem like it is an attractive time for the strong to seperate from the weak financial players.

Mar 09 04:25 PM

[PROXIMO:]

I'm wondering the same thing. Maybe someone can shed some light.


On Mar 09 10:45 AM TheAvenger wrote:

> What can be read from the fact that ING has one of the lowest CDS
> yet it also has one of the largest drop in the share price ? Thanks
> for any insight about this…

Mar 09 04:49 PM