The US government’s massive capital injection into the nation’s top banks, coupled with its promise to guarantee unsecured loans by financial institutions, has punctured ballooning prices on banks’ credit default swaps market and restored some faith in the financial sector. But when the big banks report earnings this week, starting with JPMorgan Wednesday, investors should expect a sobering reminder that the economic landscape remains bleak. Analysts do not have high hopes for JPMorgan’s earnings. For an institution that has become a safe haven for investors, the government injection seems to have removed that competitive advantage, at least temporarily. Citi and Wells Fargo report earnings Thursday and in Citi’s case, the numbers are not expected to look good. And yet, the cost of default protection of financial companies, which soared in the month since Lehman Brothers filed for bankruptcy, plummeted Tuesday and risk premiums on their bonds fell sharply. Default protection on Morgan Stanley’s debt was quoted at 385bps, or $385,000 a year to insure $10m of debt for five years, after soaring to 1,420bps late last week, according to Markit. Goldman Sachs CDS dropped to 205bps from 539bps and Citigroup fell to 145bps from 347bps on Friday.

This entry was posted by Gwen Robinson on Wednesday, October 15th, 2008 at 5:44 and is filed under Capital markets. Tagged with citi, goldman sachs, jpmorgan, wells fargo. Edit this entry.