Citigroup, Merrill Default Swaps Rally; Goldman Eases Concerns

By Bryan Keogh and Shannon D. Harrington


Nov. 14 (Bloomberg) -- The risk of financial companies defaulting on their debt fell after Goldman Sachs Group Inc. and Bank of America Corp. stoked optimism that the nation's largest banks may have seen the worst of credit market losses.

Contracts on Citigroup Inc. declined 8 basis points to 74 basis points, according to CMA Datavision in London. Credit- default swaps tied to Merrill Lynch & Co. fell 10 basis points to about 125 basis points. Goldman Sachs tumbled 15 basis points to 80.5 basis points, the biggest drop in about three years.

Goldman Sachs Chief Executive Officer Lloyd Blankfein told a New York conference yesterday that the largest U.S. securities firm by market value doesn't plan ``significant'' writedowns from subprime-mortgage securities. Bank of America said its losses will be restricted to $3 billion next quarter and UBS AG analyst Glenn Schorr said the potential for losses at Lehman Brothers Holdings Inc. is ``negligible.''

``After several weeks of selloffs, any marginal good news helps the market,'' said George Bory, global head of credit strategy in Stamford, Connecticut, at UBS, Europe's biggest bank by assets.

Citigroup and Merrill Lynch, both based in New York, sparked a selloff of financial shares and debt this month when the firms accepted the resignation of their CEOs and increased writedowns of collateralized debt obligations and other debt backed by mortgages to people with poor credit.

Credit-default swaps tied to the bonds of the world's biggest banks and securities firms soared to the highest last week. Citigroup said it may take an additional $11 billion of writedowns on top of $5.9 billion and Merrill, the world's third-biggest securities firm, increased its losses to $8.4 billion.

Shares Rise

``There is so much negativity, so much bearishiness priced in, it's not surprising that the market takes a breather, consolidates and re-evaluates,'' Bory said. Yesterday's gains were a ``relief rally,'' he said.

Stocks of brokerage firms also rallied, rising the most since September. Citigroup, down 36 percent this year, jumped 6.9 percent. Merrill, after tumbling 39 percent, soared 7.1 percent. New York-based Lehman, the fourth-biggest securities firm, climbed 9.2 percent and Goldman rose 8.5 percent.

Contracts on the CDX North America Investment-Grade Series 9 index, a benchmark for the cost of protecting against corporate defaults, fell 6.5 basis points to 72.75 basis points in New York, according to Deutsche Bank AG. A basis point is 0.01 percentage point. A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 annually.

Credit-default swaps, contracts conceived to protect bondholders against nonpayment, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

`Good News'

``In the short term, the Goldman news was good news,'' said Scott MacDonald, head of research at Aladdin Capital Management LLC, a Stamford, Connecticut hedge fund that oversees about $21 billion. ``Until everybody gives full disclosure as to how much they have on their books, this is how it's going to be.''

Goldman's credit default swaps have declined from 105 basis points on Nov. 7, according to CMA Datavision.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Blankfein told the conference, sponsored by Merrill Lynch, that the firm is still betting that mortgage-backed securities and collateralized debt obligations will decline in value. His comments were supported by Laurence Fink, chief executive officer of New York-based BlackRock Inc. and a creator of the mortgage-backed security market. Fink said credit losses may get worse.

``I don't know when it's over, but it's not over yet,'' Fink said. ``The bottom has not been achieved.''

Too Early

The executives' outlook signaled it is too early to call an end to the slump that has roiled credit markets. Analysts have been increasing their predictions for damage from the crisis. Deutsche Bank AG of Frankfurt this week said credit losses may reach $400 billion, while Lehman last week predicted losses would reach $250 billion over the next five years.

``What's happening is subprime has basically caused just a seizure of a lot of other markets,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York, said in an interview yesterday.

Credit-default swap contracts on Charlotte, North Carolina- based Bank of America, the nation's second-largest bank, fell 8.5 basis points to 59.5 basis points, according to CMA Datavision.

Bank of America may need to write down $3 billion in debt securities because of defaults on subprime mortgages, Chief Financial Officer Joe Price told the Merrill Lynch conference.

The bank also propped up one of its money funds with $300 million because of ``uncertainty around the value'' of structured investment vehicles and may spend a similar amount on other funds, it said.

Lehman credit-default swap contracts fell 13 basis points to 134 basis points after UBS's Schorr wrote that the New York- based bank's losses ``will be a lot smaller than most peers.''