A decline in the price of credit default swaps on Tuesday indicates that the perceived risk of default by big banks has receded following encouraging words from Goldman Sachs and Bank of America. Goldman CEO Lloyd Blankfein said the bank -- the largest securities firm in the country in terms of market cap -- does not anticipate "significant" subprime writedowns, and Bank of America said it does not expect losses for next quarter to exceed $3 billion. Further fueling optimism was a comment by UBS AG analyst Glenn Schorr, who said he expects losses at Lehman Brothers to be "negligible." "After several weeks of selloffs, any marginal good news helps the market," said George Bory, global head of credit strategy at UBS. A recent selloff in the financial sector was triggered by announcements of collosal writedowns by Citigroup and Merrill Lynch on CDOs and other mortgage-backed debt. The resignations of both firms' CEOs contributed to investor foreboding about the state of the sector, and prices for credit-default swap contracts surged. Following the new, more positive indications, they dropped 8 basis points to 74 for Citigroup, 10 basis points to 125 for Merrill, and 15 basis points to 80.5 for Goldman, their steepest fall in three years. "There is so much negativity, so much bearishiness priced in, it's not surprising that the market takes a breather, consolidates and re-evaluates," said Bory. Contrasting sharply with trader optimism were the words of Laurence Fink, CEO of asset manager BlackRock. Fink expects credit losses at banks to increase. "It's going to get a lot worse," he said. "Many institutions don't understand what the credit crunch is going to do to earnings."
Commentary: Financial Sector Credit Default Swaps Surge on Writedown Fears • Major I-Banks Near 'Junk' Status -- Bloomberg • Financial Sector Write-Downs: Don't Be Seduced Into Holding the Bag
Stocks to watch: C, MER, GS, BAC. ETFs: IAI, RKH, KCE