Lawmakers in Washington are racing to reach a deal to save the country from defaulting on its debt, but on Wall Street, financial players are devising doomsday plans in case the clock runs out.
These companies are taking steps to reduce the risk of holding Treasury bonds or angling for ways to make profits from any possible upheaval. And even if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country’s market credibility.
On Wall Street, Treasuries function like a currency, and investors often use these bonds, which are supposed to be virtually fail-proof, as security deposits in their trading in the markets. Now, banks are sifting through their holdings and their customers’ holdings to determine if these security deposits will retain their value. In addition, mutual funds — which own billions of dollars in Treasuries — are working on presentations to persuade their boards that they can hold the bonds even if the government debt is downgraded. And hedge funds are stockpiling cash so they can buy up United States debt if other investors flee.
The rating agencies, which control the fateful decision of whether the nation deserves to have its credit standing downgraded, are surveying other entities that would be affected by a United States default — like insurance companies and states — and issuing warnings that a United States downgrade could result in several other ratings cuts. States that might be downgraded, in turn, are trying to reassure the market that they could still pay their bills on time.
All these contingency plans hinge on the pivotal date of Aug. 2, when the Obama administration has said it will no longer be able to finance government obligations without raising the $14.3 trillion cap on government borrowing. If lawmakers do not act before then, it will be difficult for the Treasury to meet coming interest payments as well as obligations to government employees, vendors and programs like Social Security and Medicare.
Even though many on Wall Street believe that a default remains unlikely, the financial markets are starting to become agitated. Volatility in stocks has soared, and some investors say stock prices are falling because a United States default could severely raise companies’ costs of doing business.
In the Treasury market, investors are starting to sell, fearing that the government will not make good on some interest payments that will be due next month. And complex financial instruments that will pay out if the United States defaults have become twice as expensive to buy as they were at the start of the year.
Analysts say the signs of panic are small for now.
That should be fun- “safe” mutual funds crashing left and right. And jacking up the borrowing costs of every business in the nation- awesome. You thought the EPA and ADA and OSHA were “job-killing,” wingnuts? You ain’t seen nothing yet.
PeakVT
11.5 days to go.
BudP
Eric Cantor – Financial Whiz Kid.
beltane
Remember, they’re Tea Party Patriots, not American patriots. You can’t serve two masters and the master these people have chosen to serve wants to destroy this country and remake it according to the vision laid out by such luminaries as Glenn Beck and Michele Bachmann.
Until someone decides to wage war directly on the 27%ers, there is nothing that is going to change that.
Han's Big Snark Solo
Of course hedge funds are going to do their best to make money off the Republicans taking the debt ceiling hostage. Hell, I wouldn’t be surprised if certain hedge fund managers were lobbying for a default for just that purpose.
Zach
“And jacking up the borrowing costs of every business in the nation- awesome.”
This is why there probably won’t be some sudden crash a la what preceded the final TARP vote… this will be a gradual process and pressure will come from the business community very early on — once people see the slightest change in their bottom line. Such a crash *will* happen if and only if there’s a vote in Congress to raise the debt ceiling that’s expected to pass, and it fails. This is why the House told everyone ahead of time that the “clean” debt ceiling vote was a joke.
France and Germany and tons of other countries have super stable AAA ratings and a higher debt load than the United States. The only reason this is even an issue is because of debt-limit hostage taking.
Yevgraf
The Baltic Dry Index settled into an abyssal plain in the fall of last year, and hasn’t really rallied like it tried several times in 2009 and the first half of 2010.
The teatards have accomplished their goal.
Nemesis
There is money to be made during real or imagined crisis.
Well, the big guys can make money on the default trade. Us, not so much.
Im predicting a default or near default. Near might be close enough for the short-side vultures to extract their quick trade billions in profits. In fact, we may expect an S&P downgrade soon which may be the catatlyst for the drop the vultures are looking to capitalize on.
The crisis needs to progress further for the real money to be made, so expect just that. We will go to the last second, that is if we get a deal before 8/2.
This scenario allows for weak hands, usually the retail investor, to panic sell, at predictably the worst possible moment. Monied interests swoop in, pick up a bargain, and once again the public gets fleeced in broad daylight by the corporate job creators.
If the baggers in the House had a lick of sense, they would jump all over the GO6 Plan. Baggers do not realize how long and how hard their fellow goopers have been working to dismantle the New Deal. The GO6 Plan would be a stunning victory for those striving to destroy gummit. The only thing between the gop establishment and their safety net destruction goal is said to be the baggers. Im not convinced. Charade?
General Stuck
LOL, great title
AAA Bonds
This is what will fuck us first and hardest.
dr. bloor
I’m actually in the process of moving out of Treasuries. I’ve decided string and bottle caps will be much stronger sectors until the grown-ups retake the gummint.
Yevgraf
Some prominent right winger was twittering yesterday that it was the fault of ACORN, welfare cadillac queens and bucks eating t-bone steaks. I expanded his comment a little by way of paraphrase, but that was the gist of the piece.
jeffreyw
Cantor is the fucker hoping to hold the reins while the Four Horsemen dismount to do their dirty work. Silly human, even the meanest stable boy knows that a Pale Horse will turn and bite.
AAA Bonds
Another neat effect we’ll see from this: when states face rating cuts, they will begin to sell off assets to private companies to prove they’re not credit risks.
The good news is that muni bond ETFs don’t indicate any sort of panic yet:
http://www.etftrends.com/2011/07/muni-bond-etfs-shrug-off-moody's-warning-on-states/
http://blogs.barrons.com/focusonfunds/2011/07/20/muni-bond-etfs-on-the-rise-as-defaults-fall-wheres-meredith-whitney/
kdaug
@jeffreyw:
Johnny Cash.
Yevgraf
Robespierre learned that, but much too late.
kindness
So much for depending on my retirement 401K.
Hey I got a good idea! Let’s slash Social Security payments even though the Social Security trust fund has money. Yes, that will help (elect more republican idiots).
Thoughtful Black Co-Citizen
Yes, the economy is bad so let’s beat up on some brown people. Gosh. How original.
Seriously, the fRighties haven’t updated their playbook since the 1860.
Linda Featheringill
@jeffreyw: #12
pale horse, etc.
Wow, Jeffrey. Very deep.
And, unfortunately, probably very accurate. Sigh.
PreservedKillick
There is no issue here, as you say. In fact, we should be borrowing like absolute crazy since our borrowing costs are lower than cash.
But no.
chopper
@19:
indeed. the cost of borrowing is so low it’s insane. one of the reasons it’s so low is that people keep buying up our debt, thinking it’s solid.
even if all this shit works out, the goopers will have created enough doubt about the full faith and credit that rates on treasuries will still go up over time – overseas buyers are going to think this whole thing is just gonna happen again later so the risk for holding bonds goes up.
danimal
Boy, if I were to find out that someone like Cantor has shorted US treasuries in order to profit from national economic disaster, I’ll be pissed.
daveNYC
I doubt that they actually would want a default to happen. There’s a big difference between being able to have a position to take advantage of the day-one effects of a default, and being able to ride out the subsequent chaos with the profit you made from that action intact.
Funny though, I was telling my mom a couple days ago that it’s only the financial companies that are in a position where they can either profit or at least deal with a default. Everyone else has dick for options. What are they going to do, hoard gold, canned food, non-hybrid seeds, and ammo?
I work in finance, so that’s good for me, but I can’t understand why there are so many tools in this country that seem to be willing to self-immolate.
Snarki, child of Loki
Even more fun if Obama gets on the teevee and tells the world:
“Guess what Goldman Sacks? You AREN’T GOING TO GET PAID. You are going to be FUCKED. FUCKED like you have never been FUCKED before, unless you beat some sense into those GOP retards you keep on your string.”
“Otherwise, you are an enemy of the USA, and I have predator drones with your names on them.”
somegayname
I would just like to know why anyone puts any value in the ratings agencies that missed the 2008 crash.
catclub
smoegayname @ 24 Also Russia 1997, also Enron.
PurpleGirl
It has now occurred to me: What happens to FDIC insurance of deposits in banks. That’s another of the “full faith and credit” of the federal government benefits. If one of those too big to fail banks does go under, or if a smaller bank goes under, will we still have our deposits protected? Maybe I’m talking out my ass here, but I do wonder (and worry) about this.
Brachiator
Heck, this ain’t nuthin’ that a return to the Gold Standard, the elimination of the Federal Reserve, and prayers to the Baby Jeebus wouldn’t solve. Just ask the Pauls, Ran and Ron, and Michelle Bachmann.
By the way, has Sarah Palin given her opinion on the debt ceiling, also too?
Uh, no. The European version on the financial crisis is threatening to lead to the abandonment of the euro.
catclub
Purplegirl @ 26 Interesting point. Sound as the dollar!
Until the full faith and credit is nil.
Brachiator
@PurpleGirl:
Throughout the financial crisis, maintaining depositor confidence has been a priority of the Treasury Department. So far, not even Tea Party crazies have tried to suggest that this is not an essential government function.
Interestingly enough, although there are stories about Treasury having a secret default contingency plan, the official position is that there is no plan and they assume that the debt ceiling will be raised.
Pliny
If the end result of this charade is a Democratic president signing an “emergency” bill right out of the Shock Doctrine playbook that cuts taxes for the rich and preserves absurd subsidies for agriculture, energy, and pharma, while savagely cutting the safety net, will that finally convince the die-hards that Barack Obama and the Democratic party are not to be trusted on economic issues? I mean, it’s been blatantly obvious for 2.5 years but will this finally drive the point home? I mean, fuck.
Gus diZerega
Between the traitors in the Tea Party and the traitors in Wall Street this country is in deeper trouble than at any time since the Civil War. The sooner decent people recognize this the better chance we will have of surviving as a nation, but for me I am coming to the conclusion that we should separate from the most intractable right wing states and begin living as a self-governing civilized nation.
That we will be weaker militarily will be a good thing. We won’t be so dominated by the “I’m bigger than you so I can do anything I want” mentality that has progressively poisoned us since the fall of Russia.
kindness
[email protected]
What weird hopes and dreams you have. Now I’ll admit Obama is governing more conservatively than my preferences go but I’m not seeing him as some Gaultian such as you. I’m hoping to make it out of this mess by blaming the people who are actually causing the problem….you know, the REPUBLICANS!?!
I can’t believe I have to tell you people this stuff. You’re supposed to already know it.
Gus diZerega
kindness- here is a column from The Guardian that you might want to think about
http://www.guardian.co.uk/commentisfree/cifamerica/2011/jul/21/barack-obama-social-security-cuts
Brachiator
@Pliny:
Whenever I read someone mention the erosion of “the safety net,” I realize how conventional everyone’s thinking has become, from the morans in the Village to old school liberals stuck in some weird time warp.
Any safety net depends on a strong economy and a productive middle class. You cannot have a safety net in the absence of this. None. Nada. Zip.
And extremists like the Koch boys are way past caring about a safety net. They would be happy with standard issue oligarchy in which an elite moneyed class live well, supported by a thin veneer of a perpetually struggling middle class to cater to them and to shield them from an outcast, miserable poverty stricken majority, with a pundit class reminding everyone that if you aren’t rich, then it must be your fault.
I’m all for taxing the rich. I really don’t care about subsidies for agriculture, energy and pharma. These may be problems, but they are more fetish totems for lefties, not answers to getting the economy moving again.
ruemara
Pliny
I’m glad this is still all Obama’s fault, despite the gun being in the other guy’s hand. It keeps things simple. Kucinich/Warren 2012!
John Puma
You lament “safe” mutual funds crashing?
Well, worry harder because you don’t quite grasp the problem or have failed to explain it accurately.
It is NOT mutual funds, themselves, that are “safe.”
It is, or WAS, the debt obligations of the US Treasury that WERE considered the world’s safest investment, alone, or as part of the assets of many mutual funds.
That is, the very T-bills, notes and bonds that will be downgraded if the debt ceiling is not raised.
priscianusjr
@somegayname
Pliny
@Brachiator
I completely agree with your points about the middle class, but I can’t figure out if you’re agreeing with me that President Obama and the Democratic Party have given up on protecting the middle class. I certainly haven’t seen any evidence that they give a fraction of a shit. Won’t massive cuts in spending (not just on the safety net, but transportation, education, grants to states and local communities, etc…) overwhelmingly hurt the middle class?
I brought up those “fetish totems” because they are nothing more than government-sponosored upward redistribution of wealth. Even worse is the complete capitulation to Wall Street, to the point that the CFTC has, for 6 months now, completely ignored the law regarding commodities speculation written into Dodd-Frank. Who controls the CFTC other than the Obama Administration (by which of course I mean his team of Wall Street executives and lobbyists)?
kindness
Pliny, pliny, pliny. Are you a paid troll? You come across as if your purpose was to get Democrats/progressives to fight one another.
Just statin’ the obvious here…
cleek
@Pliny:
totally. like, now that Obama has signed Paul Ryan’s budget into law, the middle class is going to really feel some pain! right?!
yeah!
Brachiator
@Pliny:
It’s not just about “protecting” the middle class. It’s about encouraging an economic policy that makes a middle class possible and maintains it.
Now, neither the Obama Administration nor the Democrats in general seem to have much of a plan, but it’s not just a matter of tax cuts or tax increases.
Again, this is not quite the same thing as getting the economy going again. If we kept all spending exactly as it is now, we would still have a recession, wages would be stagnant, unemployment would be high.
Again, the discussion in the Village and among pundits and activists seems to be out of step with the harsh reality that a lot of people are living with every day.
Not really. Yeah, this stuff is bad, but a small portion of the economy. And supposed green energy or whatever the new fashion might be, is expensive at current levels of technological knowledge.
Yeah, this is bad, too, but how is doing this better going to boost the economy?
Bottom line: your concerns are valid, but a small part of the bigger picture. This is not letting the Obama Administration and the Democrats entirely off the hook.
But it sounds like you are more interested in punishing Wall St for its sins than in getting the economy going, and imagine some pure world in which Obama Administration appointees would be pure and untainted by any affiliation with business. Strangely, this ignores a harsher reality, such as the abdication of the Democrats in Congress on tax and economic policy and the self-destructive obstruction and opposition coming from the Republicans.
PIGL
As a foreigner, I can tell you that none of my pittance is invested in the USA, and none ever will be. “Flight to value” me tin ass. Flight to daylight robbery and institutional corruption so systematic it’s not even visible, more like.
I’ve been pointing out for some time that the Republican Party and its voters are a threat to the national security of your nation. Wake up, sheeple :-)
Brachiator
@PIGL:
Hey, this here is ‘Merica, the mighty US of A. The Republicans will happily drag the entire world economy down the drain just to prove a point.
Pliny
@Brachiator
Good points, especially about the pundits disconnect from reality. Can someone make a reality show where a group of wealthy journalists are cut off from all their connections and given $10/hour jobs?
You’re right that there is a lot the Administration could be doing, without Congress, to get money into the economy. The Fed, which is really supposed to care about employment, instead happily injects huge piles of money into banks (which they are expected to lend out to boost the REAL economy, but they don’t, because the free money comes with no stipulations).
I really disagree about Wall Street, however. The level of rents they are extracting from the overall economy are outrageous. Using the commodity speculation example I already brought up, when a few banks are allowed to speculate with unlimited amounts of money on oil, it functions as a “hidden tax” that we all pay directly to the speculators, every single day, over and over. It’s not just at the gas pump: the price of nearly everything else goes up as well. This money, which would otherwise be spent on actual products or services, is instead funneled directly into the wealthiest and most powerful banks. It’s not just limited to oil, either; the planet has been producing huge surpluses of wheat, yet prices remain absurdly high, because of excessive speculation.
4jkb4ia
The most frightening part of that article was that Treasuries are supposed to be so safe that there is nothing to substitute for them. The throwaway line was that the SEC requires them to hold Treasuries–not that the Treasuries be rated AAA. It was unthinkable that Treasuries be rated anything else.