April 10 (Bloomberg) -- The cost to protect the debt of banks and securities firms from default rose for a third day amid renewed concern that losses will increase after declining asset values forced Lehman Brothers Holdings Inc. to bail out five funds.

Credit-default swaps tied to Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers reached the highest levels since the start of the month, signaling a decline in investor confidence. Benchmark credit indexes in the U.S. and Europe rose earlier today, before falling back to little changed as stocks in the U.S. rallied.

Lehman took $1.8 billion in assets from five of its short- term debt funds onto its balance sheet last quarter after ``market disruptions.'' Goldman, the most profitable securities firm, late yesterday reported a 39 percent increase in hard-to- value assets, and some analysts have scrapped their earnings estimates for Merrill Lynch and are now predicting a first- quarter loss.

``When the banks report in the next couple of weeks, there's going to be a reminder to a lot of investors that there's more damage to balance sheets beyond structured finance, beyond leveraged finance,'' said Ricardo Kleinbaum, a credit analyst at BNP Paribas in New York. ``It's extending to a broader range of credit classes.''

Credit-default swaps on Goldman climbed 8 basis points to 133 basis points, Phoenix prices show. They earlier reached 140 basis points, the highest since March 31. Lehman contracts climbed 17 basis points to 212 and traded as high as 217, Phoenix prices show. New York-based Merrill, which is scheduled to report earnings April 17, rose 15 basis points to 200.

$245 Billion

Credit-default swaps, financial instruments based on bonds or loans, were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default. A decrease in the price indicates improving perceptions of credit quality, an increase shows deterioration.

The world's largest banks and securities firms have reported $245 billion of asset writedowns and credit losses amid record home foreclosures and a loss of investor confidence in so-called structured securities linked to home loans. The housing turmoil triggered a collapse of the subprime mortgage market and spread to debt once considered among the safest, including commercial paper backed by assets such as mortgage securities.

Goldman Chief Executive Officer Lloyd Blankfein told investors today that the credit crisis is nearing an end.

``We're closer to the end than the beginning,'' Blankfein, 53, said today at the company's annual shareholder meeting in New York. ``We're maybe at the end of the third quarter, or the beginning of the fourth.''

Money-Market Funds

New York-based Lehman, the fourth-biggest securities firm, recorded a $300 million loss from the bailout of five short-term debt funds, according to a person familiar with the writedown. Lehman's actions followed a $780 million charge by Credit Suisse Group in February after the Zurich-based firm bought assets from its money-market funds that had fallen in value because of a freeze in some commercial paper markets.

Bank of America Corp. and Legg Mason Inc. also have propped up money-market funds and General Electric Co.'s GE Asset Management liquidated a short-term bond fund in November after it lost about $225 million.

Most of the funds held commercial paper and medium-term notes issued by structured investment vehicles, which were shut out of debt markets last year amid concern that some of them bought securities linked to subprime mortgages.

Goldman, also based in New York, disclosed in a regulatory filing yesterday that its so-called Level 3 assets, those hardest to value, jumped to $96.4 billion at the end of February, with the ratio to total assets rising to 8.1 percent from 6.2 percent.

Asian Markets

``Investors don't like the uncertainty that it brings to balance sheets,'' said Mark Bayley, director of credit and structuring at ABN Amro Holding NV in Sydney. ``It indicates a deterioration of liquidity and transparency in the markets.''

Credit-default swaps on the Markit CDX North America Investment Grade Index, linked to the debt of 125 companies in the U.S. and Canada, fell 2 basis point to 122 basis points as of 2:59 p.m. in New York, according to Phoenix Partners. The index earlier reached 130 basis points, the widest since April 1. The Markit iTraxx Europe index fell 0.5 basis point to 104.5 basis points in London, according to JPMorgan Chase & Co.

In Asia, the Markit iTraxx Japan index rose 16 basis points to 120 basis points, according to Morgan Stanley. The benchmark gauge of credit risk has erased almost half its decline this month.

Bear Stearns

The iTraxx and CDX indexes reached record highs last month after a cash squeeze at Bear Stearns Cos., the fifth-biggest U.S. securities firm, prompted the Federal Reserve to back an emergency sale of the firm to JPMorgan Chase & Co.

The Fed's intervention in the Bear Stearns crisis on March 14, and its creation of a new lending facility designed to prevent other banks from collapsing, eased investor concern and sent credit-default swaps plunging from their record highs. The North American investment-grade index reached a record 198.5 basis points on March 14, according to CMA Datavision in London.

``I think we're going to settle into a range here for a little bit; the market needs to figure out what it wants to do next,'' said Ashish Shah, head of credit strategy at Lehman Brothers in New York. ``The good news is that you are going through the de-levering process as banks and brokers try to shed assets they don't want and continue to raise capital.''

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net;

Last Updated: April 10, 2008 15:49 EDT