Nov. 7 (Bloomberg) -- Credit-default swaps on bonds of Citigroup Inc., Wachovia Corp. and Morgan Stanley are trading at the highest in at least five years on speculation the biggest U.S. banks may be forced to write down more subprime assets.

Contracts tied to Citigroup's debt have climbed 30 basis points to 83 basis points since Oct. 31, according to broker Phoenix Partners Group in New York. The swaps are trading at the widest levels since at least September 2002, Credit Suisse Group data show. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps tied to Citigroup more than tripled in the past three weeks, indicating the risk of default is rising. Citigroup this week said losses from the assets may reach $11 billion, and analysts said writedowns may increase. Contracts on Morgan Stanley, Wachovia and Merrill Lynch & Co. are at or near six-year highs on concern that their losses will grow.

``Until there is much greater disclosure of what people have on their books, and off balance sheets as well, it just feeds into uncertainty,'' said Scott MacDonald, head of research at Aladdin Capital Management LLC in Stamford, Connecticut, which oversees $21.7 billion.

Citigroup credit-default swaps trade as if the New York- based company were rated Baa3, the lowest investment-grade rating, according to the credit strategy group at Moody's Investors Service. Moody's this week lowered Citigroup's ratings one level to Aa2, its third-highest rating, from Aa1.

Writedown Forecasts

Citigroup shares fell $1.67, or 4.8 percent, to $33.41 today in New York Stock Exchange trading and has plunged 40 percent this year. Morgan Stanley dropped $3.32, or 6.1 percent, to $51.19.

Citigroup Chief Executive Officer Charles O. Prince III stepped down Nov. 4 as the bank said it will write down the value of subprime mortgages and collateralized debt obligations by $8 billion to $11 billion. Citigroup, the biggest U.S. bank, may reduce the value of subprime securities by $2.7 billion more, analysts at bond research firm CreditSights Inc. led by David Hendler said yesterday. Additional writedowns may balloon to $21.1 billion if off-balance-sheet units are included, they said.

``The depth and scope of Citi's challenges and deficiencies extend beyond those that its bank and broker counterparts are likely to experience,'' Banc of America Securities LLC debt analysts Stan August and Bryan Cook wrote today in a note to investors. They advised clients to sell Citigroup debt.

Morgan Stanley, the second-biggest U.S. securities firm, may lose as much as $6 billion, David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller said. Wachovia and Bank of America Corp. also are overvaluing their securities linked to homeowners with poor credit, said Friedman Billings Ramsey & Co.

`Not Going Away'

Barclays Plc, the U.K.'s third-largest bank, and Royal Bank of Scotland Group Plc may have to write down a combined 2.1 billion pounds ($4.4 billion) linked to subprime-mortgage securities, analysts at Sanford C. Bernstein & Co. wrote today.

Lehman Brothers Holdings Inc., Bear Stearns Cos. and Goldman Sachs Group Inc., all based in New York, stand to lose as much as a quarter of their equity, according to the CreditSights analysts led by Hendler in New York.

Investors who expect losses to accelerate have been buying credit-default swaps, which are used to speculate on a company's ability to repay its debt or hedge against losses.

``Losses are not going away anytime soon,'' Greg Peters, head of credit strategy at Morgan Stanley in New York, said in a conference call this week with clients. ``This is a problem that is going to be here for quite some time.''

The banks and brokers packaged and repackaged subprime home loans into securities to sell to investors while holding onto some portions of the debt. As borrowers defaulted on those loans at a record pace this year, the value of some securities plummeted by more than 80 cents on the dollar and ratings companies slashed their rankings.

Wachovia

Merrill Lynch disclosed two weeks ago that it lost more than $8 billion on mortgages and related securities, creating a per- share loss that was six times the amount it had forecast, costing CEO Stan O'Neal his job.

Credit-default swaps tied to Charlotte, North Carolina-based Wachovia, the fourth-biggest U.S. bank, have climbed 23 basis points the past two days to 87 basis points, Phoenix prices show, after Friedman Billings analyst Gary Townsend cut his share-price estimate on concern the bank will write down more assets.

Townsend cut his share price estimate for Bank of America, also based in Charlotte, by 10 percent.

Contracts on Morgan Stanley, Goldman Sachs, Lehman, Bear Stearns and Merrill Lynch are all trading as if the securities firms were rated below investment grade, according to Moody's.

Speculative grade debt is rated below Baa3 at Moody's and below BBB- at Standard & Poor's.

Merrill, Goldman

Morgan Stanley credit-default swaps have more than doubled to 130 basis points since Oct. 24, Phoenix prices show, and are at the highest since November 2001. The contracts imply the bonds are rated Ba1, one level below investment grade.

The firm may be forced to reduce the value of mortgages, related securities and credit lines to structured investment vehicles, Fox-Pitt's Trone said in a report yesterday.

Contracts on New York-based Merrill Lynch climbed 34 basis points to 130 basis points, Phoenix prices show. They reached 135 basis points on Nov. 2, the highest in at least six years.

Moody's lowered its rating on Merrill Lynch one level on Oct. 24 to A1, six levels above the investment-grade threshold. The credit-default swaps show investors are trading Merrill Lynch as if its bonds were rated Ba1.

Contracts on Goldman Sachs and Bear Stearns, the firm that reported a 61 percent profit decline for the fourth quarter, are approaching the record highs reached in August, with Goldman trading today at 100 basis points and Bear Stearns at 170 basis points.

Credit-default swaps on Barclays rose 1 basis point to 54 basis points, according to CMA Datavision. The contracts traded at 6 basis points in May.

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

Last Updated: November 7, 2007 17:02 EST