Bloomberg News

Credit Swaps on Bank of America, Goldman Sachs Jump on S&P Cut

November 30, 2011

Nov. 29 (Bloomberg) -- The cost to protect debt issued by U.S. banks from Bank of America Corp. to Goldman Sachs Group Inc. jumped after Standard & Poor’s lowered their long-term credit ratings as it revised criteria for the banking industry.

Credit-default swaps on Bank of America, which were little changed before the announcement, increased 16.9 basis points to 478.8 and those on its Merrill Lynch & Co. unit climbed 24.1 to 524.9 as of 4:46 p.m. in New York, according to data provider CMA. Contracts on Goldman Sachs increased 8 to 403.6.

S&P lowered its ratings on the banks to A- from A as Europe’s sovereign-debt crisis deepens, in a move that may be costly for the banks. Bank of America said in a regulatory filing this month that it may have to post $5.1 billion of additional collateral and termination payments on its trades were it to be downgraded one level by rating companies.

“The European sovereign and banking system stress no longer has borders,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “A stone splashing in the European pond causes big ripples in the U.S. as well.”

Contracts on Citigroup Inc. increased 9.2 basis points to 306.8 basis points and swaps tied to Morgan Stanley’s debt added 6.2 basis points to 506.9, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Contracts linked to JPMorgan Chase & Co. increased 3.8 basis points to 171.

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: John Parry, Alan Goldstein

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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