By Abigail Moses and Shannon D. Harrington
March 30 (Bloomberg) — The cost of protecting corporate bonds from default rose as concern grew that Treasury Secretary Timothy Geithner’s plan to remove toxic assets from bank balance sheets may not be enough to save some from collapse.
Credit-default swaps on Citigroup Inc. approached a record reached earlier this month, and contracts on Bank of America Corp. reached new highs. Geithner yesterday said some banks will need substantial government aid, in addition to the toxic-asset program. Contracts on General Motors Corp. priced in a greater chance of default by the automaker as the Obama administration said bankruptcy may be the best option for GM and Chrysler LLC.
The growing potential for a bankruptcy by GM and Chrysler and concerns that banks will need greater government intervention are increasing fears that debt holders won’t be spared losses amid government efforts to stabilize the industries.
“There is a risk that the U.S. banking system and many others are insolvent,” said Philip Gisdakis, a Munich-based credit strategist at UniCredit SpA. “This plan does not necessarily help to avoid nationalizations.”
Some banks will need substantial government aid in addition to the federal program that will buy as much as $500 billion of illiquid assets, Geithner said yesterday on the ABC News program, “This Week.”
Analysts at Credit Suisse Group AG in New York are more confident that Geithner’s plan will prove to be sufficient. It “puts us in the ninth inning of the financial crisis,” interest-rate strategists Dominic Konstam and Carl Lantz wrote in a note to investors.
Credit-default swaps protecting against a default by New York-based Citigroup climbed 16 basis points to 618 basis points, according to CMA DataVision. Contracts on Charlotte, North Carolina-based Bank of America jumped 22 basis points to 400 basis points.
Credit-default swaps, which are used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. 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.
Contracts on the Markit CDX North America Investment-Grade Index Series 12, linked to 125 companies in the U.S. and Canada, climbed 5.5 basis points to 188.5 basis points as of 8:45 a.m. in New York, according to Barclays Capital. An increase typically signals a decline in investor confidence.
Swaps protecting against a default by Detroit-based GM rose 2.5 percentage points to 79.5 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $7.95 million initially and $500,000 annually to protect $10 million of debt for five years.
Contracts on GMAC LLC, the auto and home lender that received a $6 billion government bailout after the housing crisis and plunging auto sales left it on the brink of bankruptcy, climbed 3.5 percentage points to 31 percent upfront, Phoenix prices show.
GM Chief Executive Officer Rick Wagoner was forced out after the Obama administration decided he was unable to craft a plan to save the automaker. Bankruptcy may ultimately be the company’s best chance, according to an Obama administration official who spoke with reporters and declined to be identified.
In London, the Markit iTraxx Crossover Index of 45 companies with mostly high-risk, high-yield credit ratings increased 20 basis points to 930, the highest in more than a week, according to JPMorgan Chase & Co.
Credit-default swaps on the Markit iTraxx Financial Index tied to 25 European banks and insurers climbed 8 to 175 and the subordinated index increased 16 to 321. The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 6 basis points to 170, JPMorgan prices show.
In Tokyo, the Markit iTraxx Japan index rose 25 basis points to 412 basis points, according to prices compiled by Bloomberg.