Citigroup Credit Default Swaps Jump; Reminiscent of Fannie Mae/Freddie Mac
Tuesday, February 24, 2009 15:48
The Dow Jones reports that the cost of protecting Citigroup’s (C) subordinated debt against default rose to distressed levels Tuesday amid widespread uncertainty over what new government involvement in the banking giant would entail. Credit default swaps on Citi’s subordinated debt are trading at 8/11 points up front, according to Phoenix Partners Group. That means traders must pay a fee between $800,000 or $1.1 million, plus an annual $500,000, to protect $10 million of subordinated debt against default for five years.
That’s a substantial increase from earlier levels. On Monday, it cost $723,000 a year for five years, according to data from Markit. On Friday, the annual cost was $732,500, the record high until Tuesday. The cost of protecting Citi’s senior bonds is also elevated, but not in points up front. The credit default swaps on the senior debt are quoted at 485 basis points, from 468 basis points Monday, according to Phoenix Partners Group and Markit.
In case of default, creditors with subordinated debt wouldn’t get paid until after senior debt holders were paid in full. The widening of the subordinated credit default swaps is reminiscent of the move in Fannie Mae (FNM) and Freddie Mac’s (FRE) comparable swaps in August, before the government announced its plans to recapitalize the troubled housing finance agencies. Market participants feared the subordinated debt holders would be wiped out – but they weren’t. Payments on subordinated debt continue under the government conservatorship.
Source: Dow Jones Newswire
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Ed says:
February 25th, 2009 at 1:09 pm
There’ll never be an end to Bob Rubin’s special brand of handiwork and the cost to you and I. What he and ‘ole Sandy pulled at Citi makes Made-Off’s spree look like a rounding error… It begs the question: exactly why is it that the real Citi Slickers, Bob and Sandy, are able to totally skate so far?