Goldman Sachs Credit-Default Swaps Jump as Levin Claims Bank Duped Clients

The cost to protect debt issued by Goldman Sachs Group Inc. (GS) jumped to the highest level in almost a month after the chairman of the Senate panel that investigated the financial crisis said the bank misled clients and Congress about investments in securities tied to mortgages.

Credit-default swaps on the U.S. bank that makes the most revenue from trading climbed 4.2 basis points to 115.5 basis points, according to data provider CMA. That’s the highest level since 118.1 basis points on March 17.

Senator Carl Levin said he wants the Justice Department and the Securities and Exchange Commission to examine whether Goldman Sachs violated the law by misleading clients who bought collateralized debt obligations without knowing the firm was betting they would fall in value.

“In my judgment, Goldman clearly misled their clients and they misled the Congress,” Levin said at a media briefing yesterday where he and Senator Tom Coburn, an Oklahoma Republican, discussed a 640-page report from the Permanent Subcommittee on Investigations.

In a statement, the New York-based bank denied that it had misled anyone about its activities. “The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report,” Goldman Sachs spokesman Lucas van Praag said.

Credit-default swaps on other major U.S. banks also rose, with contracts on Morgan Stanley adding 3.6 basis points to 140.6 and those on JPMorgan Chase & Co. climbing 2.8 basis points to 74.5, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Corporate Bonds

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Contracts on Citigroup Inc. increased 1.5 basis points to 120.9, and those on Wells Fargo & Co. added 1.2 basis points to 79.4. Default swaps on Bank of America Corp. climbed 2.7 basis points to 132.5, the data show.

The cost of protecting corporate bonds from default in the U.S. fell for the first time in four days as the House approved a spending bill to avert a government shutdown.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 0.4 basis point to a mid-price of 94.6 basis points as of 4:56 p.m. in New York, according to index administrator Markit Group Ltd.

The credit swaps index typically falls as investor confidence improves and rises as it deteriorates. It’s risen from 93.6 at the end of last week. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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