As judged by the credit derivatives market, big U.S. banks look safer than they did last fall, when foreclosure scandals erupted en masse.
The more interesting read of the credit-default swap spreads for banks is in how the market has been drawing distinctions between the largest institutions.
Citigroup was long viewed as the biggest default risk in the group, until the industry's robo-signer problem came to light in October. That's when the lines showing five-year swap spreads for Citi and Bank of America first crossed, indicating that the greater default risk had shifted to mortgage heavyweight BofA.
What grew to be a spread gap of more than 40 basis points narrowed as BofA began settling worrisome claims tied to mortgage securities. By late February, only 7 basis points of spread stood between the two names. But the gap widened again this spring, as BofA struggled on with the unfortunate legacy of its large mortgage business.
If JPMorgan Chase is the Coca-Cola of banks—the safe choice, the gold standard among its peers—then Wells Fargo has been mounting the derivatives market version of the Pepsi Challenge.
After giving back ground it had gained on JPMorgan in mid-2010, Wells got investors to reconsider their preferences, putting spreads for the two banks to within 3 basis points of one another in April. But whenever the market gets antsy again on housing, as it did in June, mortgage-heavy Wells loses the benefit of the doubt.
