JPMorgan’s Eminence Seen Fading in Default Swaps

JPMorgan’s advantage over its Wall Street peers is fading in the eyes of credit- derivatives traders as fines and regulator probes hobble profits while firms from Citigroup Inc. to Morgan Stanley rebound.

Credit-default swaps traders are demanding 16 basis points less to protect against losses on JPMorgan bonds than the average cost to insure debt of the bank’s five-biggest U.S. rivals, according to prices compiled by Bloomberg. The gap, a measure of the bank’s credit strength relative to its competitors, has narrowed from an average 80 basis points since 2008 and 152 in April 2012, the month before JPMorgan disclosed a trading loss that reached $6.2 billion.

With regulatory fines and penalties that are poised to approach $15 billion, the playing field is leveling between the only Wall Street bank to stay profitable through the financial crisis and rivals that the credit seizure pushed to the edge of failure. Swaps tied to Citigroup, which last month removed the final vestiges of its government bailout, narrowed to within 6 basis points of JPMorgan’s for the first time since 2007.


“It’s JPMorgan’s turn to have its own types of concerns, albeit ones that are much less severe from a credit perspective than the others” and in an improved economy, said Pri De Silva, a bank analyst at debt-research firm CreditSights Inc. in New York. For lenders such as Citigroup, Bank of America and Morgan Stanley, “the balance sheets are in much better shape now compared with credit-crisis days,” he said.

The New York-based lender has tentatively agreed to pay a record $13 billion to end civil claims over its sales of mortgage bonds. The anticipated deal, which won’t absolve the bank of potential criminal liability, comes amid mounting lawsuits and regulatory probes and prompted JPMorgan to take a $7.2 billion charge in the third quarter. That led to the bank’s first loss under Chief Executive Officer Jamie Dimon.

Credit swaps protecting buyers against a default by JPMorgan for five years have dropped 15 basis points this year to 76 basis points, Bloomberg prices show. That compares with a 44.1 basis-point decline for Citigroup, Morgan Stanley, Goldman Sachs Group Inc., Bank of America Corp. and Wells Fargo & Co., which average 92.5.


Joe Evangelisti, a spokesman for JPMorgan in New York, didn’t respond to an e-mail message.

Contracts tied to Citigroup, which since the end of 2007 has almost doubled a measure of its financial strength known as the tier-1 capital ratio, have declined 48.5 to 83.7 since December. Swaps on Morgan Stanley, which last week reported earnings that beat analyst estimates, plunged 73.2 to 114.2.

“JPMorgan has always been viewed as having the fortress- type balance sheet, while the other banks have been viewed as having weaker balance sheets,” said Charles Peabody, a senior analyst at New York-based Portales Partners LLC. “Recently, that perception has narrowed dramatically.”

Elsewhere in credit markets, Shellpoint Partners LLC, canceled a planned sale of U.S. home-loan securities without government backing, saying it would instead sell the loans without packaging them into bonds. Deutsche Bank AG is preparing to market at least $300 million of bonds linked to rental-home payments. Fomento de Construcciones & Contratas SA is in talks with creditor banks to convert part of the Spanish infrastructure company’s loans into payment-in-kind debt.


A measure of the health of U.S. financial conditions that declines as the environment weakens fell from a record high. The Bloomberg U.S. Financial Conditions Index, which combines everything from money-market rates to yields on government and corporate bonds to volatility in equities, decreased 0.07 to 1.51.

The cost of protecting corporate bonds from default in the U.S. fell to the lowest level in almost six years. The Markit CDX North American Investment Grade Index, a credit-swaps benchmark used to hedge against losses or to speculate on creditworthiness, decreased 2.5 basis points to 69.9 basis points, Bloomberg prices show.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2 to 86 at 11:34 a.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan dropped 2.7 to 133.


The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bonds of Verizon Communications Inc. were the most actively traded dollar-denominated corporate securities by dealers yesterday, accounting for 3.1% of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The New York-based telephone carrier raised $49 billion on Sept. 11 in the largest corporate bond issue ever.

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