Sept. 23 (Bloomberg) -- The cost to protect Morgan Stanley and Goldman Sachs Group Inc. debt from default rose on concern the U.S. plan to buy $700 billion of troubled assets will fail to ease the credit crunch.

Credit-default swaps on Morgan Stanley and Goldman climbed to levels reached Sept. 15 when Lehman Brothers Holdings Inc. filed for bankruptcy. Indexes of bank and corporate credit risk in the U.S. and Europe also jumped. Default swaps had dropped, and stocks rallied, after U.S. Treasury Secretary Henry Paulson announced the plan to free up credit markets.

``Like pretty much every plan Paulson has already rolled out, it's woefully short on details,'' said Derrick Wulf, a portfolio manager at Dwight Asset Management Co. in Burlington, Vermont, which oversees more than $70 billion in assets. ``At this point people say, `put your money where your mouth is and let's see some details.'''

Paulson and Federal Reserve Chairman Ben S. Bernanke today urged Congress to approve the rescue plan. Bernanke warned the economy will shrink if markets don't begin functioning normally. Lawmakers have balked at rubber-stamping the proposal, with Democrats demanding it include support for homeowners and limits on executive pay and Republicans resisting its reach and size.

CDX North America

The Markit CDX North America Investment Grade Index, a gauge of credit risk tied to the bonds of 125 companies in the U.S. and Canada, jumped 9.5 basis points to a mid-price of 160.4 basis points, according to CMA Datavision.

Contracts on Morgan Stanley increased 85 basis points to 513 basis points and swaps on Goldman rose 99 basis points to 383, CMA data show.

Morgan Stanley and Goldman contracts remain below levels reached last week during the peak of the crisis on Wall Street. Sellers of the Morgan Stanley contract last week demanded a record $2.1 million upfront and $500,000 a year to protect $10 million of bonds for five years, according to Phoenix. Today, it would cost $513,000 a year.

The two largest remaining independent U.S. securities firms this week won approval from the Federal Reserve to become bank holding companies, allowing them to build up deposits and move away from a business model that investors concluded relied too heavily on borrowed money, or leverage, to survive.

``It will take them some time to do it,'' said Puneet Sharma, the head of investment-grade credit strategy at Barclays Capital in London. ``Saying you're a bank is one thing. Changing your risk profile to be a bank is another.''

Credit Quality

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Contracts on Charlotte, North Carolina-based Wachovia Corp., the fourth-largest U.S. bank, rose 122 basis points to 590 basis points, CMA data show. Contracts on Merrill Lynch & Co. climbed 48 basis points to 322 basis points.

Contracts on Seattle-based Washington Mutual Inc., the biggest U.S. savings and loan, soared to 53 percentage points upfront and 5 percent a year, according to Credit Derivatives Research LLC. That compares with an upfront cost of 31.5 percent yesterday, according to CMA, and means it now costs $5.3 million in advance and $500,000 a year to protect $10 million of WaMu bonds from default for five years.

Contracts on the Markit iTraxx Financial index of 25 European banks and insurers rose 11 basis points to 110 basis points, JPMorgan Chase & Co. prices show. The Markit iTraxx Europe index of 125 companies with investment-grade ratings climbed 7 basis points to 112 basis points.

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

Last Updated: September 23, 2008 18:22 EDT