Credit-default swaps on the Markit iTraxx Financial Index increased 4 basis points to 75, according to JPMorgan Chase & Co. prices at 9:30 a.m. in London. In Tokyo, the Markit iTraxx Japan index of 50 investment-grade companies rose 7 basis points to 91, Morgan Stanley prices show.
Banks worldwide have written down or lost more than $386 billion since the start of 2007 because of the credit crisis. Merrill said in its last quarterly filing that a one-step downgrade would require it to post an additional $3.2 billion of collateral on over-the-counter derivative trades.
"Banks can't afford to neglect their ratings," said Jim Reid, Deutsche Bank AG's London-based head of fundamental credit strategy.
"Downgrades force them to post fresh collateral on derivative trades."
Morgan Stanley, the second-biggest US securities firm by market value, was cut one level to A+ from AA-, S&P said yesterday in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest.
Goldman Sachs Group Inc, the largest of the group, was affirmed at AA-. The outlook on all four New York- based companies remains negative, S&P said.
End of rally
The cuts mark the end of a rally in the cost of protecting bank debt from default, Bank of America Corp analysts led by Jeffrey Rosenberg in New York wrote in a note late yesterday. A trade betting that bank debt would outperform corporate credit was closed by the Charlotte, North Carolina-based bank on May 23, the analysts said.
"We closed out most of our tactical financial risk relief rally trades," the Bank of America analysts wrote. "What is left of our tactical trade recommendations reflects a more bearish outlook for credit."
The Markit iTraxx Financial index fell from a record 160 basis points in March after the Federal Reserve backed the takeover of New York-based Bear Stearns Cos. It dropped to as low as 53 on May 19.
Credit-default swaps, contracts conceived to protect bondholders against default, 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. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 7 basis points to 477 on Tuesday, according to JPMorgan Chase & Co.
The Markit iTraxx Europe index of 125 companies with investment-grade ratings climbed 3.5 basis points to 87. A basis point on a credit-default swap contract protecting
