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Cost of Goldman Debt Insurance Soars

By Nicole Bullock, Francesco Guerrera and Justin Baer, Financial Times
Tuesday, 4 May 2010 | 11:44 AM ET
The Goldman Sachs booth on the floor of the New York Stock Exchange
Getty Images
The Goldman Sachs booth on the floor of the New York Stock Exchange

The cost of insuring Goldman Sachs’ debt against default has risen to about the level of Morgan Stanley and Citigroup, two less profitable rivals,as Goldman’s regulatory woes take a toll on investors’ confidence and its standing on Wall Street.

The risk ascribed to the bank by the derivatives markets has risen sharply following US regulators’ filing of civil fraud charges against Goldman last month.

The cost of insuring $10m of Goldman’s debt using a five-year credit default swap (CDS) is $162,000 a year, according to Markit, an 80 per cent rise from the level before the charges were announced.

Goldman’s CDSs now trade at the same level as those of Morgan Stanley, which emerged from the financial crisis in worse shape, and just below CDSs on Citi, which had to be bailed out by the US government.

On April 15, the day before the Securities and Exchange Commission’s complaint against Goldman, it cost about $30,000 less annually to insure the debt of Goldman than Citi’s or Morgan Stanley’s. The CDSs of Goldman and Morgan Stanley have not traded at the same level since October 2007, Markit data show.

At the height of the credit crisis in autumn 2008, the cost of default protection on all banks soared to levels far exceeding yesterday’s levels. As the capital markets calmed and Goldman prospered, the cost of insuring against its default was typically lower than Citi and Morgan Stanley.

Goldman, which denies the SEC’s charges, declined to comment yesterday.

Separately, Goldman yesterday revealed it had been hit by several lawsuits from disgruntled shareholders since the SEC’s charges. In a regulatory filing, Goldman said the bank, its executives and directors faced seven legal actions related to the bank’s mortgage-related trading activities.

The lawsuits allege “breach of fiduciary duty, corporate waste, abuse of control, mismanagement and unjust enrichment”, the filing said.

Goldman’s disclosure of the lawsuits contrasts with its decision not to reveal to shareholders the SEC’s formal warning in July that it intended to press civil charges. Some of the investors’ legal actions claim the directors breached their fiduciary duty to shareholders by failing to police Goldman’s mortgage-trading desk and not revealing the SEC’s probe.

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