Don’t look now but market sentiment on the banking industry is falling again.
Fortune reports that the cost of insuring against the default of big banks (via credit-default swap) like Bank of America and Citigroup has jumped 17 percent this month after falling in April and May. Now that could mean it’s just a normal correction—and the index is still about 40 percent lower than the peak in March—but it certainly bears close scrutiny and Fortune does well to point it out. The mag reports that bank stocks are also down about 20 percent from their most-recent high.
Fortune reports that the worries are less about the banks collapsing—hard to do with all the trillions in government support in the market—than about years of malaise.
Given the extensive government support for big financial firms, ranging from Treasury loans to Federal Deposit Insurance Corp. debt guarantees, investor worries about the banks now focus less on their collapse than on anemic profit growth and gnawing credit losses.
The question I have with the story is over its numbers:
Accordingly, CDR’s counterparty risk index, or CRI — which measures the cost of insuring against default on a basket of the 14 biggest derivative-dealing banks — recently hit 178. That means it costs an investor $178,000 annually to protect $10 million worth of bonds against default for five years.
That’s up from $135,000 earlier this month, when the CRI hit its lowest level since the collapse of Lehman Brothers and AIG in September.
That’s a 32 percent increase in the cost of the CDS, not 17 percent as Fortune reported.
Whatever, it’s good the magazine tips readers off to the change in sentiment brewing in the markets.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.