CDS spreads widen further following bailout delays

Credit default swap (CDS) spreads on financial institutions widened on September 23, as uncertainty grew over the US government’s plans to purchase $700 billion of devalued assets from financial institutions.

The Credit Derivatives Research Counterparty Risk Index, which averages the five-year CDS spreads of the 15 largest credit derivatives dealers, rose to 305.0 basis points yesterday, from 269.1bp on September 22.

Following the announcement of the rescue bill, CDS spreads initially tightened significantly on Monday. But as Congressional leaders pushed for changes to US Treasury secretary Henry Paulson's plan, they began to widen.

The cost of protection on Goldman Sachs, which along with Morgan Stanley applied to the US Federal Reserve to become a bank holding company on Monday, widened to 382.5bp yesterday, from 279.6bp the day before, according to Bloomberg. CDS spreads on Morgan Stanley also widened, reaching 512.9bp yesterday compared with a closing level of 415bp on September 22.

Meanwhile, the cost of protection on insurance giant American International Group (AIG), which has just signed the terms of an $85 billion loan from the US Federal Reserve Board, moved out to 990.9bp from 941.6bp.

CDSs referencing Citi rose to 227.1bp from 185.4bp and CDSs on Bank of America, which bought Merrill Lynch in a $50 billion deal on September 15, widened to 142.5bp from 134.2bp.

The cost of protection on Washington Mutual, which saw its financial strength rating cut to E by Moody’s Investors Service on Monday due to concerns over the firm’s ability to cover mortgage losses, soared to 4503.1bp on September 23 from 1772.5 the day before.

In Europe, CDSs on Barclays widened marginally to 153.3bp yesterday from 144.2bp on September 22, while the cost of protection on the Royal Bank of Scotland rose to 173bp from 156.7bp.

CDSs on UK banking giant HBOS – set to be taken over by domestic rival Lloyds TSB - widened to 235.8bp on September 23 from 228.3bp the previous day. The cost of protection on Lloyds TSB, meanwhile, rose slightly from 150.8bp to 157.9bp.

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