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U.S. Banks Guarantee More European Debt

Some say hedging, diversification, and collateral limit their exposure

As the European financial crisis worsened during the first half of 2011, U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish, and Italian debt. Guarantees provided by U.S. lenders on government, bank, and corporate debt in those countries rose by $80.7 billion, to $518 billion, according to the Bank for International Settlements.

BIS doesn’t report which firms sold how much or to whom. Almost all of those guarantees are credit-default swaps, according to two people familiar with the numbers who asked not to be identified because they weren’t authorized to speak. Five banks—JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America, and Citigroup — write 97 percent of all credit-default swaps in the U.S., according to the Office of the Comptroller of the Currency. A credit-default swap is a contract that requires one party to pay another for the face value of a bond if the issuer defaults.