Nov. 21 (Bloomberg) -- The cost of protecting U.S. bank bonds from default rose as investors speculated that a potential restructuring of Citigroup Inc. would leave debt holders with a weakened company.

Credit-default swaps on New York-based Citigroup jumped to a record even as Chief Executive Officer Vikram Pandit told employees he doesn’t plan to break up the company. Contracts on Bank of America Corp. and JPMorgan Chase & Co. reached the highest in more than two months.

Citigroup shares plunged below $4 in New York trading today as investors speculate that bad loans and falling asset values will extend the company’s $20 billion in losses of the past year. Citigroup directors, led by Chairman Win Bischoff, were meeting today at the bank’s New York headquarters, a person with knowledge of the matter said. The panel may choose to sell pieces of the bank or the entire company, the Wall Street Journal reported, citing unidentified people familiar with the situation.

“Because Citigroup is so huge, it’s very hard to assess what risk hasn’t been disclosed,” said Tim Brunne, a Munich- based credit strategist at UniCredit SpA. “There is uncertainty regarding what’s coming next.”

The concern for debt investors is that brokerage units Citigroup Global Markets and Smith Barney “would be peeled away from the banks,” said Ricardo Kleinbaum, a credit analyst at BNP Paribas in New York. Some investors say that could leave credit- default swap contracts tied to a weakened entity, he said.

Citigroup, which has more than $2 trillion of assets, wouldn’t be allowed to fail by the U.S. government, said investors including Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion.

No Sales

Pandit, on a worldwide conference call today with employees, said he doesn’t plan to break up the company and doesn’t expect to sell the Smith Barney unit, according to two people who listened to the call and declined to be identified because it wasn’t open to the public.

Credit-default swaps protecting against a Citigroup default for five years climbed 90 basis points to 500 basis points and earlier reached a record 510, according to broker Phoenix Partners Group. The contracts have jumped 315 basis points the past eight days.

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.

The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite.

Investment Grade

The speculation surrounding Citigroup pushed credit-default swaps on other banks wider as well. Contracts on Charlotte, North Carolina-based Bank of America rose 18.5 basis points to a mid- price of 202.5 basis points, according to CMA Datavision. JPMorgan climbed 27.5 to 192.5.

Contracts on Wells Fargo & Co., the San Francisco-based bank acquiring Wachovia Corp., increased 13 basis points to 160 basis points, CMA data show. Goldman Sachs widened 12.5 basis points to 377.5 and Morgan Stanley increased 15.5 to 532.5.

Bank protection costs rose as a benchmark gauge of credit risk in the U.S. fell from a record high.

Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada dropped 20 basis points to 265.5 basis points as of 4:53 p.m. in New York, according to Barclays Capital. In London, the Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 3 basis points to 183, according to JPMorgan prices.

Treasuries

The price of the Markit LCDX index linked to U.S. leveraged loans, which falls as investor confidence deteriorates or as they hedge against losses, reached a record low. The index, tied to the loans of 100 companies, was unchanged at 76 percent of face value after earlier dropping to 75.25, according to Goldman Sachs.

Credit-default swaps used to hedge against losses on U.S. Treasuries and U.K. gilts rose to records.

Five-year contracts on U.S. government debt increased 4.5 basis points to 43, according to CMA. Credit-default swaps on 10- year Treasury contracts rose 7 to 49. Five-year contracts on British government debt surged 14 to 82 and 10-year contracts rose 5.5 to 88.5, CMA prices show.

The cost of protecting corporate bonds from default in Europe fell for the first time in a week today after benchmark credit indexes opened at record-high levels.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings fell 14 basis points to 913, according to JPMorgan.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: November 21, 2008 17:44 EST