This is getting scary, I see more armed guards, it appears they are getting ready for the US DEFAULT and downgrade.
Treasury traders are trying to set themselves up to guard against heavy losses in the event of a spike in yields that could - in some views - follow a US downgrade. They're also positioning themselves to make a little money if the US does default and other investors call in insurance protection against their US bonds.
In the repo market, a place where investment banks and companies can get overnight cash loans in exchange for Treasury bills used as collateral, traders were awaiting word from securities exchanges, including CME Group, the largest US futures exchange operator, and ICE US Trust, on possible cuts to the value of Treasury securities used as repo collateral.
None of the exchanges that handle repo trades have detailed their plans yet, but Jim Binder, a spokesman for OCC, the sole clearing house for US stock options. said his organisation was waiting to see how the market reacted to a downgrade.
Bernanke and New York Fed President William Dudley met on Friday with Treasury Secretary Timothy Geithner to discuss the implications if the debt ceiling is not raised.
On Wednesday, top Fed policymaker Charles Plosser said that the central bank is actively preparing for the possibility of a default.
The president of the Philadelphia Federal Reserve Bank said the US central bank has for the past few months been working closely with Treasury, ironing out what to do if the world's biggest economy runs out of cash.
"We are in contingency planning mode," Plosser told Reuters in an interview on Wednesday. "We are all engaged. ... It's a very active process."
Plosser said there were very difficult questions to grapple with. For example, the Fed lends to banks at the discount window against good collateral. But what happens if US Treasuries no longer fit that bill?
"Do we treat them as if they didn't default, in which case we would be saying we are pretending it never happened? Or do we treat them as if they defaulted and don't lend against them?" Plosser said. "Those are more policy questions."
The Securities Industry and Financial Markets Association, the Treasury market's main trade group, is helping securities' firms' back offices tweak their systems to prepare for possible missed interest payments on Treasuries or a debt downgrade.
Some market participants can hardly contemplate what a default would be like. One trader at a primary dealer said: "Outright default would be Armageddon. It would fundamentally alter the landscape globally."
The market's favoured index of fear, the CBOE Volatility Index, has been at a subdued level, though after Friday's breakdown that might not continue.
It's just above 17, which is in line with its recent range. If it rises above 20 and approaches 30, it would suggest investors were getting sufficiently nervous about market gyrations to take out more protection against losses.
"Right now there's just a minimal chance of there being no deal, but never say never," said Dan McMahon, director of equity trading at Raymond James in New York, who was speaking before the Boehner announcement.
"If there was a default, we'd fall 5 to 10 per cent right off the bat," he said of major stock indices. "It would be like October 1987, but it really doesn't even warrant talking about right now." - Reuters
I understand you hate the whole banking industry since its collapse, but please do not hate people. The whole industry is recovering in respect of asset quality. Banks are getting less and less bad loans. Don't be angry with that. Thank you.
I think that's why they don't let him into all those gas stations that are for sale! And the cities with 75% foreclosure rates! Have to believe there were plenty of guards when he attempted to attend the new branch opening earlier this summer!!