The death of Washington Mutual Inc. has set off alarm bells in the credit default swaps market for other banks, as Wachovia Corp. and Morgan Stanley saw the spread on their default contracts widen sharply Friday as investors looked to insure themselves against or bet upon another bank failure.
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The financial blog AcrosstheCurve comments:
Wachovia cash bonds have dropped by 20 points today. The CDS is trading
with points up front...One corporate bond salesperson opined that
Golden West Financial, which Wachovia acquired, looks very much like
WAMU. ... This can not continue. The system is eating its young.
Credit default swaps on Wachovia's debt traded at an up-front cost of
24.5% the sum insured, or $2.45 million paid up-front to insure $10
million in debt for five years, CMA Datavision told Reuters.
Morgan Stanley's default swaps also showed that investors were jittery especially after the Financial Times reported the bank lost nearly a third of assets in its prime brokerage last week, as hedge funds pulled hundreds of billions of dollars out after Lehman Brothers Holdings Inc. bankruptcy.
Credit default swaps are a measure of how likely the market thinks the issuer may default on its debt. - George
White
See Across the Curve blog post
See Reuters story
See FT story
