Fears of Further Writedowns Push Up Financial Sector Credit-Default Swaps

A surge in credit-default swaps in the banking sector suggests that the risk of default among big banks and securities firms is perceived to be rising as analysts boost their estimates of the banks' subprime losses, Bloomberg reported Tuesday. Citigroup contracts rose 12 basis points to 91 basis points Monday, their sixth record high this month. Contracts on Bear Stearns shot up 23 basis points to a six-year peak at 173 basis points. The rises coincide with new forecasts among analysts that subprime writedowns at banks and brokerages will grow beyond the current $50 billion. Goldman Sachs forecasts that Citigroup's losses will grow to $15 billion in the next two quarters, and CreditSights estimates that UBS AG may have lost up to $9 billion on CDOs. Goldman Sachs economists also said the credit crunch could force banks to cut lending by $2 trillion, a prospect that raises the specter of a broad economic downturn as delinquencies rise among home borrowers with poor credit. "There's still a lot more uncertainty to come," said Tim Backshall, chief strategist at Credit Derivatives Research. "We understand the risks now, but we don't know how to measure them yet." Nine out of 50 economists polled by the National Association for Business Economics in late October place the odds of an economic contraction within the next 12 months at 50% or higher. In September, five out of 46 made that forecast. "Third-quarter results were supposed to settle the markets as banks came clean about their risk exposures, but the opposite was true, as the markets fretted that writedowns were not sufficient," CreditSights wrote in a November 18 report.

Sources: Bloomberg
Commentary: Goldman Slaps Citi With a ‘Sell’ • Financial Sector Credit Default Swaps Surge on Writedown Fears • Skeletons in the Closet: Credit Default Swaps and Housing
Stocks to watch: C, BSC. ETFs: IAI, RKH, KCE
Earnings call transcript: Citigroup Q3 2007, Bear Stearns F3Q07

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.