Broker Default Risk

Below we highlight historical default risk for JPMorgan (JPM), Lehman (LEH), Morgan Stanley (MS), Merrill (MER), Goldman (GS) and Citigroup (C) as measured by their 5-year credit default swap prices. 

After peaking in March during the Bear Stearns (BSC) blowup, default risk for banks and brokers declined sharply but still remained elevated when compared to normal historical levels.  As questions about Lehman and other firms have returned in recent weeks, default risk has begun to rise again, with Lehman and Merrill seeing the biggest increases.  While the price of Lehman's stock is now very close to its closing lows of March, default risk still remains below its March peak. 

However, the spike is still disconcerting.  The rankings of default risk from lowest to highest are JP Morgan, Goldman Sachs, Citigroup, Morgan Stanley, Merrill Lynch and Lehman.

Comments

[CreditTrader]

The disconnect is simply due to the underlying backstop that the Fed put into the market. This has spread across much of the financials universe where we now see equity levels modestly cheap to where CDS would imply them to be BUT I do also note that implied vol is considerably too low among these names relative to their CDS levels - so a long delta-hedged Put versus CDS protection position should pay out well and also i would expect equity to underperform as the firms are forced to use equity issuance rather than debt/hybrids as Tier 1/leverage ratios come under pressure...love to hear your thoughts...

[bearfund]

No one on this list will ever be allowed to fail. The proper hedge against a long position in one of these IBs is short the dollar. The Fed will print to get these guys out of trouble.