by Calculated Risk on 3/02/2007 02:06:00 PM

From MarketWatch: Bond default protection shoots up for banks

The cost of insurance against a default by top investment banks Goldman Sachs Group Inc., Merrill Lynch & Co Inc, Lehman Brothers Holdings Inc and Morgan Stanley ballooned this week, amid increased nervousness about their exposure to the shaky subprime lending market.

The trend toward more expensive credit-default swap protection for these four banks began last week and accelerated this week, said Michael Fuhrman, an institutional equities salesman for GFI, an inter-dealer broker for credit derivatives.
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On Friday credit default swaps for Goldman Sachs, the world's biggest securities firm, grew to $33,000 per $10 million in credit protection instruments, up from $26,000 per $10 million on Monday, according to GFI data.

Merrill Lynch CDS cost $25,000 per $10 million in instruments on Monday and grew to $33,000 per $10 million at the end of the week; Lehman CDS protection rose from $28,000 per $10 million in instruments to $35,000 per $10 million and Morgan Stanley CDS protection rose from $27,000 per $10 million to $33,000 per $10 million in the last five days, GFI said.

And from Bloomberg (hat tip: Brian): Goldman, Merrill Almost `Junk,' Their Own Traders Say

Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.