The cost of protection on some of the world’s largest dealers surged on Friday as uncertainty grew over the US government’s $700 billion plan to purchase devalued assets from financial institutions.Wachovia, currently the subject of buyout speculation, saw its five year credit default swaps (CDS) spreads balloon to 1020.4 basis points from 786.7bp on September 25 according to Bloomberg data.
The cost of protection on Morgan Stanley, which along with Goldman Sachs applied to the US Federal Reserve to become a bank holding company on September 22, soared to 1020.4bp by close of trading on Friday, up from 786.7bp the day before. Meanwhile, Goldman Sachs’ CDS spreads, which traded at 365bp on September 25, moved out to 448.8bp.
Bank of America, which bought Merrill Lynch in a $50 billion deal on September 15, saw its CDS spreads widen to 160.8bp on Friday, from 145bp the day before. The cost of protection on JP Morgan rose from 125.8bp to 155.8bp over the same period.
CDSs referencing Citi widened to 325bp on Friday, from 210bp on Thursday, while the cost of protection on insurance giant American Insurance Group, which last week signed the terms of an $85 billion loan with the Federal Reserve, widened to 1171.1bp by the end of Friday from 1101.7bp, the day before.
In Europe, CDSs on Barclays widened to 217.9bp from 177.5bp on September 25, while the cost of protection on the Royal Bank of Scotland rose to 225bp from 198.8bp. CDSs on UK banking giant HBOS – set to be taken over by domestic rival Lloyds TSB - widened to 291.7bp on Friday from 261.7bp the day before. The cost of protection on Lloyds TSB, rose slightly from 179.2bp to 183bp.
The cost of protection on HSBC, which announced plans to cut 1,100 jobs on Friday, rose, from 97.8bp on Thursday to 102.3bp.
As talks to sell all or part of its business stalled last week, pan-European financial services group Fortis saw its CDS spreads widen dramatically from 271.7bp on Thursday to 666.7bp at the close of play on Friday.
Meanwhile, as speculation mounted over its future, CDSs in UK bank Bradford & Bingley finished last week at 1383.2bp, up from 650bp on September 22. The bank was brought under public ownership of the UK government on Sunday.
As part of that deal, B&B's retail deposit book and branch network business was sold to Spanish banking giant Santander. The cost of protection on Santander stood at 122.3bp on Friday, up marginally from 115.7bp the previous day.
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