Financial Sector Credit Default Swaps Surge on Writedown Fears

Includes: BSC, C, GS, LEH, MER, MS, WFC
by: Judith Levy

Credit-default swaps on the bonds of Citigroup, Wachovia and Morgan Stanley are trading at five-year highs on fears the banks might have to write down more subprime assets. Rising swap prices imply a climbing perceived risk of default. The speculation was sparked by Citigroup's announcement earlier in the week that its subprime losses could approach $11 billion (full story). Morgan Stanley could lose up to $6 billion, according to analyst David Trone of Fox-Pitt Kelton. Analysts at CreditSights project that Lehman, Bear Stearns and Goldman Sachs could lose up to a quarter of their equity. Bloomberg notes that contracts on Morgan Stanley, Goldman Sachs, Lehman, Bear Stearns and Merrill Lynch are all trading as if the firms were rated at junk level. In related news, Standard & Poor's and Moody's have issued default notices on $5 billion worth of CDOs. "The senior controlling class will typically want to get the hell out and pay themselves back, even if that means selling the underlying securities at a discount," said Arturo Cifuentes, MD at fixed-income broker RW Pressprich. Also, the Treasury-backed "superfund" intended to buy securities from distressed SIVs is failing to attract participants beyond the initial three. "As far as we can see, it appears dead in the water right now," said a senior Wall Street banker.

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