Credit Default Swaps Of Goldman Sachs, Morgan Stanley and BofA Amongst Most Expensive

October 07 00:00 2011

New York, October 7 ( – Wall Street giants may have got a taste of their own medicine as the price of Credit default swaps against the debt of major banks like Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BA) is skyrocketing. Not too long bank, these banks were making a fortune peddling credit default swaps against the fall of other corporations, most notably real estate trusts.

The price of a CDS against Morgan Stanley’s debt has risen sharply from 49 basis points to 643 basis points. This means that the investor has to pay $643,000 upfront now and in case Morgan Stanley defaults on its debt they will be paid back $10 million. Similar is the case with Goldman Sachs, whose CDS have risen from 24 basis points to 403 basis points. Bank Of America also faces similar woes as its stock CDS price rises from 37 basis points to 490 basis points.

A credit default swap is a derivative instrument in which the seller of the CDS has to pay the buyer a certain amount in case the organization in question defaults on its debt. It is a form of insurance except for the fact that the customer does not have to hold the underlying asset.