Thursday, January 10, 2008

financial companies CDS widens

--The worries are crystallized in the market for credit-default swaps. The annual cost of protection against the default of $10 million of Citigroup debt for five years has jumped to $94,000, up from $67,000 Dec. 31 and $27,000 in October. The cost of buying protection for Merrill Lynch debt is $164,000, up from $140,000 at year's end and $60,000 in October. The cost of Bear Stearns Cos.' default protection has jumped to around $234,000 from $76,000 three months ago. --There is even greater concern about mortgage lenders like Countrywide, which this week denied bankruptcy rumors but said delinquencies on loans it made are still rising. To purchase credit-default insurance on $10 million of Countrywide debt, investors must pay $3 million upfront and $500,000 annually. The upfront payment was $2 million Monday. A month ago, the same insurance cost $776,000 annually with no upfront payment, according to CDR. The cost of protection on debt issued by Brazil is $115,000 annually, with no upfront costs. It is $540,000 on Pakistan, also with no upfront costs. --Investors worry that additional losses and write-downs will force bond insurers and banks to raise additional capital. Another problem: More than $600 billion of corporate debt is maturing this year and will need to be refinanced. Much of it is coming from the financial sector. --Some investors argue that financial institutions could face losses in the credit-default market itself. Banks and bond insurers have written billions of dollars of the credit protection traded in this market. If defaults materialize, they will be on the hook to make good on additional debts. --Bill Gross, chief investment officer at Allianz SE's Pacific Investment Management Co., or Pimco, argues that losses on these instruments could amount to $250 billion or more if corporate defaults climb back to historical norms. Mr. Gross argues the losses will put pressure on lenders to curb lending. He has been betting on an economic downturn. • The CDX.NA.IG investment grade index, which contains 125 North American investment grade credits, closed at an all time wide yesterday and surpassed the 100bp mark in intraday trading this morning.

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