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Citi CDS costs hit fresh high ahead of FASB vote
Wed Apr 1, 2009 10:39pm BST

NEW YORK, April 1 (Reuters) - Debt protection costs on Citigroup Inc (C.N: Quote, Profile, Research) hit record highs on Wednesday, ahead of a vote on a proposal to give banks more leeway on how they should apply mark-to-market accounting standards.

The accounting, in which assets are marked to their current market value, has been criticized for exacerbating market woes as extreme illiquidity in markets depressed debt prices.

The Financial Accounting Standards Board (FASB) plans to vote on Thursday on the guidance.

Credit default swaps insuring Citigroup's debt jumped over 700 basis points in intraday trading on Wednesday, or $700,000 per year for five years to insure $10 million in debt, said an analyst.

The swaps had closed on Tuesday at 635 basis points, according to data provider Markit.

Bank of America's (BAC.N: Quote, Profile, Research) debt protection costs also rose to around 400 basis points, up from 395 basis points on Tuesday, according to Markit.

Some analysts view modifications to mark-to-market accounting as risky as it will allow banks to create their own values for securities, which could increase distrust over assets held on their balance sheets.

"We still know the 'stuff' is on the balance sheets and if the financials are actually allowed to adjust capital based on unreal marks then who will ever buy financials again," Tim Backshall, chief strategist at research firm Credit Derivatives Research said in a report.

Changes to mark-to-market accounting will either "make PPIP irrelevant, make the stress test irrelevant, increase uncertainty in financial balance sheets, provide no benefit for mark-to-model positions, extend the recessionary period and drive a bigger wedge between market transaction levels and bank marks," he said.

The U.S. government's Public-Private Investment Program (PPIP) is designed to help banks unload toxic assets from their balance sheets by helping private investors looking to buy loans and securities from banks.