CDS Spreads for Citigroup, Capital One and American Express are Skyrocketing

[SOS]

This chart shows the latest CDS spreads for several leading American banks:

http://baselinescenario.files.wordpress.com/2009/03/us-bank-cds-march-5-2009.pdf

What it means:

The price of a credit default swap is referred to as its “spread,” and is denominated in basis points (bp), or one-hundredths of a percentage point. For example, right now** a Citigroup CDS has a spread of 255.5* bp, or 2.555%. That means that, to insure $100 of Citigroup debt, you have to pay $2.555 per year.

**November 2008

Today the Citi spread is 580 bp, Amex is 652 and Capital One is 526. All up from around 100 last summer.

Interpretation by economist Simon Johnson:

The credit default swap market is a modern Delphic Oracle. And after major statements such as yesterday, it’s worth pausing to reflect on, and argue about, what it really means.

Thursday’s statement, to me, was about US banks.

The risk of default for US banks, according to this market, is rising back towards levels not seen since mid-October. That is striking enough - but remember what has changed since then: (1) the G7 promised not to let any more systemic banks fail, (2) Treasury has provided repeated recapitalization funds on generous terms, and (3) the Fed offers massive, nontransparent funding to anyone in distress. How can it be that the credit market still or again feels the risk of default rising so sharply and to such high levels?

The most plausible interpretation is that people expect the government will force the conversion of junior bank debt into equity. The treatment of private preferred shareholders at Citigroup, last week, is seen as the harbinger of further losses for investors.

In a comprehensive systemic clean-up approach and complete recapitalization approach, debt-equity swaps** could potentially play a sensible role, particularly in countries without the fiscal capacity to sustain guarantees of all bank liabilities. But if they are done in chaotic crisis mode - as the government appears to be signalling - the additional damage to confidence around the world will be huge.

The events of mid-September 2008 were traumatic and awful to behold. I saw that trailer and I don’t want to see the movie. But it is exactly into that scary future that we now head.

It’s never too late to change policy, to make a difference, and to turn things around. But it is already very late.

http://baselinescenario.com/2009/03/06/whatever-did-the-cds-market-mean-by-that/#more-2785

** debt/equity swap: a refinancing deal in which a debt holder gets an equity position in exchange for cancellation of the debt

Looks like March is going to be an interesting (and perhaps historic) month on Wall Street...

[marmar]

1. I give $hiti two weeks before either complete nationalization or collapse......

n/t

[seemslikeadream]

2. Two weeks ago I posted Citi was history

And would be gone within a month

[David Dunham]

4. If Citi fails, we are in a real depression. Obama will not let it.

Citi's failure would mean that all of the banks in the US and around the world that are closely tied to it would very likely fail as well. The US government will not let it collapse.

[seemslikeadream]

7. We are in a Real Depression

And it will be the greatest of greats


4800 soon enough

[seemslikeadream]

11. borrowing to pay debt is not really paying down debt?

[SOS]

5. Looks like you were right

"Washington plans for big bank failure"

http://money.cnn.com/2009/03/06/news/dodd.fdic.fortune/index.htm

[seemslikeadream]

8. I bet I am right about the 4800 too

I posted that a couple of months ago

[SOS]

10. I think you are exactly right

If the steady growth rates in the Dow of the 1950s, 60s and 70s had continued in a straight line we would be at about 4800.

[seemslikeadream]

9. borrow as much as $500 billion from the government to shore up the deposit insurance fund.

and AIG has NO money to cover the losses to come, FDIC

[dixiegrrrrl]

13. The linked story is extremely troublesome,

very clearly written, also.

Disturbing.

It essentially outlines the unavoidable domino failure of the biggest banks,
followed by the key financial programs of the FDIC, Treasury, Fed.
Nothing standing between the economic tidal wave and our lives but a wall of freshly printed and worthless paper.

[dkf]

3. What would happen if they changed the mark to market rules?

Is that the only thing that would make a difference already?

[napi21]

6. If Obama's "save forclosure plan" works as he intends, this problem

with CDS's will correct themselves. Most lenders can't see a bottom to the falling housing value market, and they're afraid of further exposure. If the housing market bottoms out, those lenders will KNOW their total exposure and know approximately how much of their "insured" CDS's are at risk. Things will begin to improve from that point.

[yourout]

12. Capitol One just tried to raise my Business card rates from 8 to 18% on...

cards I have had for almost 10 years.

I used them as a line of credit and alway made the payments but carried a balance so they got their $150 bucks a month or so in interest.

Now they will get none as my bank is going to set me up with a line of credit at around 8 percent.

The dumb basterds are slitting there own wrists.