US Banks are Minting Money by Selling Insurance Against European Debt

US banks are selling a lot of credit defaults swaps to clients these days, as institutional investors look to hedge their risk to sovereign debt problems roiling Europe.  Credit default swaps are a kind of insurance policy in which the seller of the swap is obligated to pay the buyer in the case of default on debt.  Credit default swaps are sold on all kinds of debt, from sovereign debt to corporate bonds.  They are generally structured so that, in the event of a default on the underlying debt, the seller of the swap pays to the buyer of the swap the face value of the loan, and the seller receives the defaulted loan along with rights to recover the loan at a future point in time.

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Accordingly, the price of a given credit default swap is considered a good proxy for the likelihood of default on the outstanding loans.  The higher the probability of default, the more expensive insurance against default is.  The lower the probability the less expensive the insurance is.

The Bank for International Settlements, which operates as a intergovernmental organization of nations’ central banks, has said that guarantees provided by US banks on government, bank and corporate debt for Greek, Portuguese, Irish, and Spanish issuers has increased to $518 billion.

The primary issuers of these swaps have been JP Morgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS).   More detail on the story can be found here.  The Bank for International Settlements’ report can be found here.

Following is some information on these banks’ stock price performance.

  • JP Morgan Chase (NYSE:JPM): The shares recently traded at $33.03, down $3.66, or 9.98%, on the day.  The shares have traded in a 52-week range of $27.85 to $48.36 and its market capitalization is $125.48 billion.   About the company: JPMorgan Chase & Co. provides global financial services and retail banking.  The Company provides services such as investment banking, treasury and securities services, asset management, private banking, card member services, commercial banking, and home finance.  JP Morgan Chase serves business enterprises, institutions, and individuals.
  • Morgan Stanley (NYSE:MS): The shares recently traded at $16.42, down $1.88, or 14.91%, on the day.  The shares have traded in a 52-week range of $11.58 to $31.04 and its market capitalization is $31.65 billion.  About the company: Morgan Stanley, a bank holding company, provides diversified financial services on a worldwide basis.  The Company operates a global securities business which serves individual and institutional investors and investment banking clients.  Morgan Stanley also operates a global asset management business.
  • Goldman Sachs (NYSE:GS):  The shares recently traded at $105.51, down $10.36, or 8.94%, on the day.  The shares have traded in a 52-week range of $84.27 to $175.34 and its market capitalization is $53.38 billion.  About the company: The Goldman Sachs Group, Inc., a bank holding company, is a global investment banking and securities firm specializing in investment banking, trading and principal investments, asset management and securities services.  The Company provides services to corporations, financial institutions, governments, and high-net worth individuals.

(Note: Selected financial data are sourced from Google Finance.  All data are assumed to be accurate.)

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