Bailout saga pushes CDS spreads ever wider

After another tumultuous 24 hours that saw talks stall on the US government’s $700 billion plan to purchase devalued assets from financial institutions and the forced closure of Washington Mutual, credit default swaps (CDSs) for major dealers continued to widen.

Washington Mutual was shut on Thursday by the federal Office of Thrift Supervision (OTS), with the Federal Deposit Insurance Corp. (FDIC) named as receiver for its assets. Before the close of play, JP Morgan had paid the FDIC $1.9 billion for WaMu’s banking operations, including part of the liabilities for its affected mortgage portfolio.

“With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the OTS stated. Five year CDSs for WaMu, which on Monday were trading at 1772.5 basis points, had moved out from 5266.3bp at close of play on Wednesday to 6055.4bp yesterday.

JP Morgan, which acquired Bear Stearns in a similar government-supported initiative in March, saw its spreads narrow to 125.8bp from 133.3bp after its involvement with WaMu was announced.

Meanwhile, there have been contrasting fortunes for the two investment banks that applied to the US Federal Reserve on Monday to become bank holding companies. The cost of protection on Morgan Stanley, which was 415bp on Monday, had moved to 786.7bp by the end of Thursday from 772.5bp the previous day. Goldman Sachs, however, in which Warren Buffett’s Berkshire Hathaway will buy a $5 billion stake, saw its CDS spreads tighten to 365bp on Thursday from 384.6bp. The cost of five year protection in Goldman Sachs was 279.6bp on Monday.

Bank of America, which bought Merrill Lynch in a $50 billion deal on September 15, also saw its CDS spreads narrow to 145bp on Thursday from 148.3bp the day before, having traded at 134.2bp on Monday.

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 1107.7bp by the close of trading on Thursday from 1003.5bp, having been 941.6bp on Monday.

CDS spreads for most of the major European banks remained relatively stable yesterday, but there will likely be some significant movement on Friday as the effect of events Stateside filters through the market. Many eyes will be on HSBC, which announced in a statement it was to cut 1,100 jobs worldwide. HSBC’s CDS spreads widened to 97.8bp on Thursday from 90.8bp on Wednesday.

See also:JP Morgan acquires Washington Mutual
CDS spreads widen further following bailout delays