Bloomberg News

Morgan Stanley Credit Risk Plunges as Optimism Grows on Europe

October 12, 2011

Oct. 12 (Bloomberg) -- The cost of protecting against losses on Morgan Stanley debt plunged to the lowest level in three weeks as European leaders signaled progress in halting the region’s sovereign fiscal crisis.

Credit-default swaps on Morgan Stanley, owner of the world’s largest retail brokerage, fell 35 basis points to a mid- price of 358 basis points as of 4:30 p.m. New York time, according to CMA data. That’s equivalent to $358,000 to protect $10 million of debt for five years and is down from as much as $650,000 on Oct. 4.

Investor confidence in the credit of Morgan Stanley is rebounding as European Commission President Jose Barroso called for support for crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to alleviate the debt crisis. The cost to protect the debt last week reached the highest level in three years amid concern that Europe’s fiscal imbalances would infect bank balance sheets globally.

“It’s a case of extreme volatility,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail. “The market is using Morgan Stanley credit-default swaps as a derivative for EU sentiment.”

The cost of buying protection against a default of New York-based Morgan Stanley has dropped below that of Italy’s banks for the first time in more than two weeks. Contracts on Italy’s Intesa Sanpaolo SpA are trading at 365 basis points, and UniCredit SpA swaps are at 370, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

U.S. Bank Swaps

Credit-default swaps on Bank of America Corp. fell 28 to 335 and those on JPMorgan Chase & Co. eased 11 to 134. Contracts on Goldman Sachs Group Inc. declined 20 to 301, the CMA data show.

A benchmark gauge of U.S. corporate credit risk fell for a second day, also reaching its lowest level in three weeks. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 4.3 basis points to a mid-price of 130.3 basis points as of 5:07 p.m. in New York, according to index administrator Markit Group Ltd.

The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has dropped from 150.1 on Oct. 3.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

--Editors: Pierre Paulden, John Parry

To contact the reporters on this story: Mary Childs in New York at; Shannon D. Harrington in New York at

To contact the editor responsible for this story: Alan Goldstein at

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