Feb. 6 (Bloomberg) -- U.S. credit markets are trading as if the economy is in a recession because investors' ``fear has overwhelmed greed,'' Goldman Sachs Group Inc. Chief Financial Officer David Viniar said today.

``Credit markets are trading like we're in the middle of the worst recession we've seen in a very, very long time,'' Viniar said at an investor conference in Naples, Florida, sponsored by Credit Suisse Group. Executives from Morgan Stanley and Merrill Lynch & Co. also said demand for debt remains weak.

Goldman, the most profitable securities firm in Wall Street history, is down 13 percent in New York Stock Exchange trading this year on concern a weakening economy will damp revenue from investment banking, trading and fund management. The level of interest from investment-banking clients is ``very high,'' though the economy will determine whether deals get done, Viniar said.

Conditions in the leveraged-lending market are similar to August and September, when liquidity all but disappeared, Viniar said.

Bonds of Freescale Semiconductor Inc., the maker of chips for mobile phones bought by leveraged-buyout firms including Blackstone Group LP, are trading at 72 cents on the dollar to yield 16.2 percent.

The extra yield investors demand to own high-yield, high- risk bonds rather than Treasuries of similar maturity widened to 748 basis points on Jan. 23, more than triple the record low reached seven months earlier and the highest in almost four years, according to Merrill Lynch & Co. data.

`Pretty Bullish'

Still, Goldman is ``pretty bullish'' on the private-equity business and the longer-term outlook, and is ``very happy'' with most of its own investments, he said.

Conditions in the leveraged lending market are the ``top concern,'' Morgan Stanley Chief Financial Officer Colm Kelleher said at the same investor conference today. Morgan Stanley, the second-biggest U.S. securities firm by market value after Goldman, reduced its non-investment grade corporate lending commitments to $20 billion in the fourth quarter from $35.7 billion in the third quarter, Kelleher said.

If loan default rates remain below 10 percent, ``the market's reached levels where it's attractive,'' Michael ``Mitch'' Petrick, who runs Morgan Stanley's global sales and trading division, said at the conference. Still, declining demand for collateralized loan obligations, which repackage leveraged loans into securities, has pared the ``natural buying base for a lot of the loans.''

`A Lot of Liquidity'

Gregory Fleming, Merrill Lynch & Co.'s chief operating officer, said at the conference that while ``there's a lot of liquidity,'' the climate for deals had deteriorated, and many investors are waiting to make sure the worst is over.

``There clearly is a lot of nervousness and indeed even fear out there,'' Fleming said.

Viniar, 52, said he expects to see a plan devised that will help the monoline bond insurers, which are facing potential rating downgrades. Insurers including MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. are at risk of losing their AAA ratings because mortgage-backed securities they've insured have declined in value.

New York State Insurance Superintendent Eric Dinallo told a meeting of Wall Street banks and brokerages that they ``created this mess,'' making necessary a plan to rescue bond insurers, the Wall Street Journal reported today, citing people familiar with the matter.

``It is likely that you will see some solutions to what's going on with the monolines,'' Viniar said. ``You have a number of companies who are involved in a lot of different things, so I think it's going to be more complicated'' than the industry bailout of hedge fund Long-Term Capital Management LP in 1998, he said.

Goldman fell $2.69, or 1.4 percent, to $187.17 at 4:05 p.m. in New York trading. It's down 13 percent in 2008 after gaining 7.9 percent last year.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: February 6, 2008 16:08 EST