Below we highlight the credit default risk for Lehman (LEH), Merrill (MER) and Morgan Stanley (MS) as measured by the prices of their 5-year credit default swaps (CDS). These swaps are measured in basis points and represent the cost per year of insuring against default for the next five years. We chose these three because they are currently the highest priced in the global bank and broker arena. As shown, default risk has declined dramatically since late February/early March when financial markets seemed to be on the brink of collapse. While they are sharply lower from their peaks, swap prices remain high.
Interestingly, stock prices for LEH and MER have once again moved lower over the past couple of weeks, even as default risk has fallen. Stock prices for each of these companies were much higher when CDS prices were at similar levels in early 2008.
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Posted by: Sajal | April 18, 2008 at 05:44 AM