According to Bloomberg, the debt implied in the credit ratings of Merrill Lynch (MER), Goldman Sachs (GS), Lehman (LEH), and Bear Stearns (BSC) is akin to "junk" status. "Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody’s Investors Service show," writes Bloomberg.
With banks backing $300 billion in debt for buy-outs, concerns about credit quality is keeping investors away from the debt of major investment banks.
"Investors demand an extra 1.25 percentage points in yield to own the bonds of brokers instead of Treasuries, up from a low of 0.64 percentage point on Jan. 29," Bloomberg adds.
Perhaps it was just a matter of time before the buy-out boom turned down, but the stunning speed with which deals have slowed and may be falling apart shows just how far the trend had become over-extended. It would not be surprising if write-offs at major banks end up destroying the earnings brought in by the boom,
And, the status of the banks adds to the concerns about the greater economy. Lump it with high oil and mortgage defaults.
Douglas A. McIntyre