Wall Street thinks the Tea Party is bluffing. Analysts in New York think the chance House Republicans will blow the August 2 deadline to raise the debt ceiling is minuscule, so bond traders aren't dumping U.S. bonds. But even if they thought a default was coming, Wall Street is not exactly sure how they should prepare. The U.S. has never defaulted on it's debt; Treasury bonds are used like currency.
"Everyone in New York, notwithstanding it's 100 degrees is breathing fairly easy as long as we're inside," Westwood Capital's Daniel Alpert told The Hill's Ian Swanson. "I don't think there's anyone on Wall Street, speaking for the financial professionals, who doesn't believe that ultimately people who are being difficult on Capitol Hill are going to say uncle." USA Today's Scott Patterson found a similar attitude: He talked to Prudential Fixed Income chief investment strategist Robert Tipp, who put the odds of a blown deadline are less than 1 percent. Meanwhile, Qorvis budget analyst Stan Collender says the odds are really more like 50-50, and says it's "very dangerous" that Wall Street looks unprepared for calamity.
People in Washington increasingly think the only way to convince House Republicans that the debt limit must go up is a market crash--like in September 2008, when the Dow dropped 778 points after Congress rejected the financial industry bailout. House Minority Leader Nancy Pelosi warned, "I don't need to see markets drop 400 points, but Republicans may need to see markets drop 400 points."
And if that meltdown actually happens? The New York Times' Louise Story and Julie Creswell report that a handful of firms are working fallback plans:
In New York, the hedge fund KLS Diversified Asset Management has been accumulating cash to take advantage of profit-making opportunities if, for instance, investors are forced to sell cheaply because of a decline in the nation's credit rating. ... In the case of a United States default, KLS says it believes it can make money if investors flee the market...Several weeks ago, [Deborah Cunningham of Federated Investors] put plans in place to deal with a default. The firm will convene a teleconference with the boards of affected funds, she said, and, she is considering arguing for holding onto the federal debt. "We have to justify to the board why we would want to continue to hold them, which might be because they are a high-quality, minimum-risk security," Ms. Cunningham said.
But The Times's reporting indicates that maybe the problem isn't that Wall Street is in denial, but because it doesn't know how it would actually deal with a default apocalypse:
Timothy J. Sloan, Wells Fargo's chief financial officer, said that if Congress could not reach a deal or if there was a spike in interest rates, his bank would be there to handle the situation. But in terms of specifics, he said, there was not much banks could do. "Because nobody knows what is going to happen, nobody knows how to prepare," he said.
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Elspeth Reeve
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