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Finance Debt Risk Rises as Bear Stearns Fuels Failure Concerns
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The cost to protect the largest financial institutions from default soared after Bear Stearns Cos.' emergency bailout stoked concerns that other companies may also be on the brink of failure.

Credit-default swaps jumped on companies from student-loan provider SLM Corp. to commercial finance lender CIT Group Inc. and Lehman Brothers Holdings Inc., signaling a deterioration in investor confidence. Bear Stearns rose to a record after JPMorgan Chase & Co. and the New York Federal Reserve agreed to bail out the fifth-largest securities firm.

``It just adds to the fear,'' said Tom Houghton, who manages $2 billion of corporate bonds at Advantus Capital Management in St. Paul, Minnesota. ``This is the worst case scenario that's playing out right now. It just raises all the fears now about counterparty risk, and it's just a snowball effect.''

Credit-default swaps tied to most banks and securities firms have doubled in the past three weeks as the slump in credit markets that began last year with collapse of the supbrime-mortgage market worsened. Bear Stearns's announcement that its cash position ``significantly deteriorated'' in the past 24 hours triggered new worries that other banks may also not be able to meet their obligations.

Because the financial institutions all do business with each other, taking sides in trades as counterparties, the risk increases that another institution may also become stressed.

`Serious Issue'
``The biggest risk that faces the financial system is counterparty risk: if some large commercial or investment bank has a serious issue,'' said Mark Grant, managing director of corporate syndicate and structured products at Southwest Securities Inc. in Fort Lauderdale, Florida. ``And here we're seeing a serious issue.''

A benchmark gauge of default risk in the U.S. and Canada, the Markit CDX North America Investment-Grade Index, reached a record 197.5 basis points today and was trading up 1 basis point at 189 basis point as of 12:39 p.m. in New York, according to broker Phoenix Partners Group.

The CDX index has more than doubled this year on increasing concern that the seven-month old credit slump may cripple some of the world's biggest finance companies.

``It's a sign of continued weakness in the credit markets,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. ``It gives credence to rumor-mongering'' because Bear Stearns earlier this week denied speculation that it was in trouble.

Bear Stearns
Bear Stearns was the 12th-largest counterparty to credit- default swap trades in 2006, according to Fitch Ratings research. Contracts linked to $45.5 trillion of debt were outstanding at the end of June, according to the International Swaps and Derivatives Association.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; an increase, the opposite.

Credit-default swaps protecting investors from a default by Bear Stearns during the next year traded at distressed levels this week as concerns grew the company was running out of money. The one-year contracts today were being bid at 1,500 basis points to investors willing to sell protection. Five-year contracts today traded at a record 730 basis points, according to broker Phoenix Partners Group, up from 675 basis points yesterday.

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.

Lehman, SLM
Contracts tied to Lehman jumped 40 basis points to 435 basis points, Phoenix prices show, the second-widest level after Bear of the five biggest U.S. securities firms.
It costs $1.65 million upfront and $500,000 a year to protect $10 million in CIT Group's bonds from default for five years, CMA Datavision prices show.

For SLM, known as Sallie Mae, it costs $1.48 million upfront and $500,000 a year.

Merrill Lynch & Co., the biggest U.S. brokerage, rose 24 basis points to 320, according to CMA Datavision in London. Contracts on Goldman Sachs Group Inc., the world's biggest securities firm, rose 25 basis points to 245. Morgan Stanley climbed 20 to 305, Phoenix prices show.

JPMorgan, the third-biggest U.S. bank, rose 45 basis points to 200 basis points, according to Phoenix.

``Today's revelation illustrates how bad things really are in the markets,'' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.
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