This story from Bloomberg is highly misleading. Basically it says that major brokerages are trading as though they are junk, according to credit default swaps and Moody's Market Implied Ratings system. The story specifically mentions Bear Stearns, Goldman Sachs, Lehman Brothers, and Merrill Lynch.
I know a little about Moody's Market Implied system, but anyone who knows more is welcome to explain it in the comments section. This system is entirely separate from their actual ratings process. It takes real-life trading spreads and attempts to estimate what kind of rating is "implied" from that spread.
While I understand the spirit of Moody's Implied Rating system, I don't know the actual calculation methodology. Regardless, the concept is simple enough. Take how a bond is currently trading, ignoring the rating. Then look at what other bonds are trading with that kind of spread and see what the ratings are. Alternatively, you could draw a "credit curve" by marking the
spread of a typical Aaa-rated bond, the Aa-rated, etc. You take the trading level of a given bond and see where on the "curve" the bond would fall.
OK, back to the brokers story. The claim that the four brokers mentioned are equal to junk is hard for me to understand. Here are CDS as of 7/31 on the broker group according to Bloomberg.
Bear Stearns: 97
Goldman Sachs: 79
Lehman Brothers: 91
Merrill Lynch: 82
Here are CDS quotes for the top 10 names in the Merrill Lynch High Yield Master index.
Charter Communications: 958
El Paso: 278
MGM Mirage: 448
Williams Cos.: 184
R.H. Donnelley: 465
Chesapeake Energy: 248
Clear Channel Communications: 603
Note that the widest brokerage name (Bear) is 20 bps tighter than the tightest high-yield name (Freeport). The story also mentions Xerox, which is quoted at 95. OK, so you found one high-yield name that's trading around where Bear Stearns is. I don't know what that proves, really. Xerox is a relatively small issuer, outside of the top 50 in the index.
We could alternatively look to look at the spread of an index of BB-rated bonds. Currently the asset-swap spread (which is the best comparison to CDS) on the Merrill Lynch BB index is 232.
We could look at the CDX-High Yield index, which is a good comparison because it's a CDS contract but on a basket of high-yield names. That spread on 7/31 was 498.
So I just don't know where Moody's and Bloomberg are getting the notion that a CDS contract trading around 100 is equivalent to junk. Not only is that not true, that's impossible.