Debt protection costs on U.S. brokers mixed

NEW YORK, March 19 (Reuters) - Credit spreads of contracts that insure the debt of U.S. brokers were mixed on Wednesday after Morgan Stanley reported quarterly earnings that topped estimates and several banks tested a new program allowing them to borrow directly from the Federal Reserve.

Morgan Stanley's (MS.N: Quote, Profile, Research) credit default swaps improved after the No. 2 U.S. investment bank on Wednesday reported quarterly earnings that beat Wall Street's reduced expectations by a wide margin. The earnings were sharply lower than a year ago after the bank absorbed $2.3 billion of write-downs.

The cost to insure its debt fell 5 basis points to 200 basis points, or $200,000 per year for five years to insure $10 million in debt, according to broker Phoenix Partners Group.

Credit default swaps on Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) and Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) also improved on Wednesday, while Merrill Lynch's (MER.N: Quote, Profile, Research) spreads widened and Bear Stearns Cos' BSC.N debt protection costs were unchanged, Phoenix said.

In a bid to stabilize jittery markets, the Fed said on Sunday that it would allow investment banks to borrow from its discount window using a wide range of investment-grade securities as collateral.

Goldman Sachs, Lehman Brothers and Morgan Stanley are testing the program, according to people at the banks.

Credit default swaps on Goldman tightened 5 basis points and swaps on Lehman tightened 25 basis points, to 150 basis points and 265 basis points, respectively, Phoenix said. Merrill Lynch's swap spreads, meanwhile, widened 5 basis points to 220 basis points.

Bear Stearns' credit default swaps were unchanged on Wednesday at 385 basis points, Phoenix said. (Reporting by Karen Brettell; editing by Leslie Adler)