Bloomberg News

Goldman Leads Rise in Credit Risk After JPMorgan Profit Decline

October 13, 2011

Oct. 13 (Bloomberg) -- Goldman Sachs Group Inc. led increases in the cost of protecting the debt of U.S. companies on renewed concern that Europe’s fiscal crisis will continue to derail the economic recovery and after JPMorgan Chase & Co. reported a drop in profit.

Credit-default swaps on Goldman Sachs added 39 basis points to 340 basis points, according to data provider CMA. Contracts on JPMorgan climbed 8 to 142 and those tied to Morgan Stanley, owner of the world’s largest retail brokerage, increased 29 to 387, the data show.

A benchmark gauge of U.S. corporate credit risk rose from the lowest level in three weeks after JPMorgan said revenue at its investment-banking unit fell 13 percent from the second quarter amid concern that Greece would default and the U.S. economic recovery was stalling. That overshadowed a report that applications for unemployment insurance payments in the U.S. fell more than expected.

Credit-default swaps on the biggest U.S. banks tend to swing with market sentiment, acting as a “bizarre bellwether,” Bonnie Baha, head of global developed credit group at DoubleLine Capital LP, which has $17.5 billion in assets under management, said in a telephone interview from Los Angeles. “I still don’t get a sense that this is over yet in terms of the bank and finance risk out there.”

Contracts on Citigroup Inc. increased 22 basis points to 250 basis points and contracts on General Electric Co.’s finance arm General Electric Capital Corp. added 32 to 275. Those on San Francisco-based Wells Fargo & Co. climbed 7 to 140.5.

Six Largest Banks

Even with today’s rise, contracts tied to the debt of the six largest U.S. banks have decreased to 270 basis points from 360 basis points on Oct. 4, CMA data show, as European leaders signaled progress in stemming the region’s debt crisis and investor concern eased that bank balance sheets would be infected by sovereign defaults. That’s equivalent to an average of $270,000 to protect $10 million of debt for five years.

JPMorgan swaps have dropped from 185 and Morgan Stanley credit swaps declined from 650 basis points during the period.

JPMorgan said third-quarter earnings fell to about $3.1 billion, or 73 cents a share, not including a 29 cents accounting gain, from $4.71 billion on the same basis a year earlier, the New York-based company said today. Net income was $4.26 billion, or $1.02 a share, compared with the average per- share estimate for adjusted earnings of 92 cents in a survey of 30 analysts by Bloomberg.

Company Risk Gauge

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 2.3 basis points to a mid- price of 132.6 basis points at 4:56 p.m. New York time, according to index administrator Markit Group Ltd.

The index, which typically rises as investor confidence deteriorates and falls as it improves, snapped two days of declines after dropping from 150.1 on Oct. 3.

Investor confidence in company creditworthiness dropped even as applications for unemployment insurance payments decreased 1,000 in the week ended Oct. 8 to 404,000 Labor Department figures showed. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey.

Credit-default 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, Mitchell Martin

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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