Posted Friday, April 22, 2011, at 9:32 AM
writes a piece I wish I'd thought of writing
-- a speculative fantasia about what will happen if the debt ceiling isn't raised at some point. Her hypothetical hero, whom I will call "Kyle Reese," wakes up the day that the markets freak out.
Foreign investors are spooked, and they're dumping Treasury bonds—billions of dollars' worth. They had been selling them off for weeks, of course, possessing much less stomach for the idiocy of the U.S. political system than you and your fellow Americans. But now, investors in Asia and Europe are practically using tractors and pitchforks to move the bonds onto the markets. You and your fellow principals meet: Will the bond market finally force Congress to act? Will this sell-off prove temporary? Should you buy what everyone else is terrified of? Should you all be worrying about hunkering down and battening the hatches and hoarding cigarettes for the barter economy?
You leave that issue aside for the moment. You know, from your experiences in 2008, to keep a close eye on the $ 12-trillion " repo market ." You rely on it: Every night, your firm takes hundreds of millions of dollars of low-risk securities and, in essence, swaps them for cash on that market. That helps you maintain your balance sheet and provides your trading partner with a bit of income. Now, repo lenders are asking for more collateral for their cash, imposing a "haircut" on Treasury debt and agency debt, such as the bonds issued by Fannie Mae. The repo markets are again threatening to seize.
But by 9 a.m., you are onto other worries. Your firm had used Treasurys to help finance a big investment in emerging markets. Given the foreign sell-off, those Treasurys, once as close to cash as any investment came, are now worth less. The other side of the deal wants you to cough up actual cash to make up the difference. That means that your firm will have to sell off some holdings into a very bearish market in order to keep the investment. It is going to hurt your bottom line. And you imagine similar calls happening across the financial system.
has put up some more information
about this, but Lowrey gets at a weird aspet of the debt fight -- the game of chicken might not end when Treasury says the debt ceiling will be hit. If there's no reasonable partisan meeting of minds, then what's the freak-out point? What's the analogue to the moment when members of Congress panicked and switched their votes to pass TARP?