Wall Street Plans Ahead for Washington’s Screwups


It's a role reversal from a couple of years ago: Instead of lawmakers having to deal with the fallout from shortsighted, self-interested financiers, now Wall Street is making plans for how to handle the eventuality that shortsighted, self-interested lawmakers will allow the August 2 debt-ceiling deadline to pass without a resolution. Wall Streeters seem to be mostly hopeful that Washington won't let them down, but stocks' increasing volatility tell a somewhat different story. Even if a deal is reached, some worry that the damage to the U.S.'s financial reputation is already done — the value of the dollar could go down, as could the stability of Treasury bonds — and are trying to plan thusly, reports the Times:

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.

So for those particularly liquid firms, then, the crumbling of the nation's financial security would be a moneymaking opportunity.

The Fed, too, is "actively" planning for the worst-case scenario: It's planning how to let the government know which checks would go through and which wouldn't if the limit is reached, and it's considering how it would treat Treasuries if a default happens.

One ratings agency official, Mark Zandi of Moody's, used a charming illustration for a less charming situation: "The metaphor is a pile of sand. You keep putting one piece of sand on the pile, nothing happens, and then, all of the sudden it just caves.” Someone had a bad weekend at the beach.

Wall St. Makes Fallback Plans for Debt Crisis [NYT]