Wall Street Makes Fallback Plans for Debt Crisis

As extremists in the know nothing elements of the Republican Party push the nation closer to potential financial disaster, Wall Street is devising ways to deal with the fall out of U.S. Treasury bonds defaulting. Personally, I have zero holdings in such bonds, but nonetheless fear for what could happen. For those heavily invested in U.S. treasuries or in funds holding treasury bonds, the prospect of default ought to be most disconcerting. Indeed, they need to be calling and writing GOP members of Congress and promising revenge if the GOP members of the House f*ck over the country simply to appease the Tea Party loons. Better yet, they ought to be ready to fund campaigns of candidates who will challenge people like douche bag Eric Cantor. The New York Times looks at what Wall Street is doing to lessen potential adverse effects. Here are highlights:
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[O]n 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.
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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.
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The rating agencies . . . 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.
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If lawmakers do not act before then [August 2], 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.
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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.
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Deterioration of investor confidence in the United States could also hurt the value of the dollar, according to William H. Gross, co-chief investment officer of Pimco, a bond fund based in California. Mr. Gross said he believed that the dollar would become weaker because of the country’s inability to deal with its rising deficit. Instead, he favors currencies in China, Canada, Brazil and Mexico. Compared with the balance sheet of the United States, he said, “their dirty shirts are much cleaner.”
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One of the worst possibilities that people in the financial industry, like Mr. Lengsfield, have been discussing is that scores of insurance companies, pension funds and mutual funds might be forced to dump their Treasury holdings. Some investors have rules that they cannot hold assets that are rated below AAA. It was this sort of rule that drove the forced selling of mortgage bonds during the financial crisis.
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[I]t is unclear whether other investors might stampede for the exits. “The question I think investors are going to face is, Where do they go?” asked Ms. Cunningham. “Do they go to foreign banks? U.S. commercial paper issuers? U.S. agencies? Is there a safer haven than Treasury securities?”
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If a default occurs, I hope that voters will remember that the GOP caused the disaster and will vote the party out of office in 2012 and elections this fall in states like Virginia.