Bankers Warn Obama, Don't Mess With The Debt Ceiling (Again)

[Lucille]

Previous discussion on Obanksta's meeting with his owners here (http://www.ronpaulforums.com/showthread.php?429245-Obama-to-huddle-with-bankers-to-complain-about-Ted-Cruz-%28satire%29). I'm starting a new thread because that one says it's satire but the only thing that's satire about it is the Cruz part.

Bankers Warn Obama, Don't Mess With The Debt Ceiling (Again)
http://www.zerohedge.com/news/2013-10-02/bankers-warn-obama-dont-mess-debt-ceiling-again


15 Bankers just paid a visit to the White House, listened to President Obama, and explained what a total disaster it would be if the US debt-ceiling is breached and Treasuries technically default. While the politicians exclaimed how bad a government shutdown would be, the banks have turned the panic dial to 11 as Goldman's Lloyd Blankfein noted, bankers are “in a position to really know early what the consequences are,” and it would be catastrophic. The irony that the firm which the government is trying to fine $20 billion for selling fraudulent debt and giving bad advice is now providing the same government with advice on its own bad debt, is not lost on us as Dimon was among the visitors but it is Blankfein's warning, echoing Obama, that will get the headlines, "they shouldn't use the threat of causing the U.S. to fail on its obligation to repay debt as a cudgel."
[...]

Blankfein - "You can litigate these policy issues, you can relitigate these policy issues in a public forum, but they shouldn't use the threat of causing the U.S. to fail on its obligation to repay debt as a cudgel."

*BLANKFEIN: BANK CEOS EXPLAINED IN MTG HOW BAD DEFAULT WOULD BE

*BLANKFEIN SAYS HE'S `NOT ANXIOUS' TO BE WITNESS TO DEFAULT

*BLANKFEIN SAYS ECONOMIC DAMAGE OF DEFAULT WOULD BE `SEVERE'

“There’s no debate on the seriousness of the U.S. not paying its debt,” Bank of America CEO Brian Moynihan tells reporters after he, other executives met with President Obama.

Default might affect small businesses, Treasuries

Debt ceiling fight in Aug. 2011 led “to a slowdown in the economy, and we’re facing that again”

Bankers are “in a position to really know early what the consequences are,” Goldman’s Lloyd Blankfein tells reporters

Says bankers “listened” in conversation with Obama, then told him “exactly how bad it would be”

Blankfein: “There’s precedent for a government shutdown; there’s no precedent for default”

“We’re the most important economy in the world, we’re the reserve currency in the world, payments have to go out to people”

“If money doesn’t flow in, then money doesn’t flow out, so we really haven’t seen this before and I’m not anxious to be part of the process to witness this”

Tanks in the streets!

Related: Democrats Want to Use Government Shutdown For Leverage on Debt Ceiling
http://reason.com/blog/2013/10/02/democrats-want-to-use-government-shutdow


Senate Democrats apparently consider a prolonged partial government shutdown an advantage in the upcoming debate over the debate ceiling. The Hill reports:


Previously, Democrats were resistant to such an idea. That was at least in part because President Obama is refusing to negotiate on the debt limit. But a Democratic senator told The Hill this week that is no longer a concern, saying the White House can effectively deal with the GOP’s tactics.

Democrats are eager to deal with the debt limit now, when polls show most of the public blames Republicans for the shutdown. They contend it would be difficult for the GOP to make additional demands linked to the debt limit while they’re embroiled in a crisis over a six-weekend spending stopgap.
[...]
. A week ago, before the government shutdown, Treasury Secretary Jack Lew warned the US would run out of money to spend on October 17th. Despite no end in sight for the partial government shutdown, Lew again warned Congress the debt limit would be reached October 17th. Democrats’ willingness to continue the shutdown until the debt limit is hits suggests that limit’s not going to be hit much later even if the government is partially shut down throughout that period.

As with the sequester, the government shutdown illustrates that government officials are more interested in fear mongering over an inability to spend to their heart’s desire rather than budgeting within their means like the rest of us.

If neither the shutdown nor the looming debt limit can be leveraged to rein in federal spending, then the idea that Washington is supposed to budget itself becomes a complete fiction. Why budget or set debt ceilings if you can just spend without abandon anyway?


Jim Sinclair’s Commentary (http://www.jsmineset.com/)

Here is the Real Problem

http://www.jsmineset.com/wp-content/uploads/2013/10/clip_image001_thumb.jpg

[georgiaboy]

What part of "failing to raise the debt ceiling =/= US fails to pay its debt, US defaults" don't these guys get?

[georgiaboy]

If neither the shutdown nor the looming debt limit can be leveraged to rein in federal spending, then the idea that Washington is supposed to budget itself becomes a complete fiction. Why budget or set debt ceilings if you can just spend without abandon anyway?

My version of this -- if partial gov't shutdowns and not budging on the debt ceiling are the only tools available to curtail spending, Congress has no choice but to use them. Moreso, it is their obligation.

[Lucille]

http://farm4.staticflickr.com/3726/10056335864_a4d3eec4d8_b.jpg

More lulz from William Banzai here (http://www.zerohedge.com/contributed/2013-10-02/rollerdopes-savy-businessmen-and-gum-chewing-twisted-swindler).

http://www.zerohedge.com/news/2013-10-02/government-shutdown-where-do-we-go-here


In and of itself, the government shutdown appears to be a limited market event. The indirect effect, however, is on the other main risk scenario for markets – the deal on the debt ceiling (which will need to be in place before October 17). An increase in the probability of breaching the debt ceiling would likely be destabilizing for the market. For one, the effect on growth will be far larger – our economists estimate that it would imply an immediate cut in spending equal to 4.2% of GDP (4Q average of the fiscal deficit). Second, it would raise the risk of a US sovereign default because the Treasury does not believe it has the authority to prioritize interest payments above other obligations.

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/09/20131002_debt_0.jpg

[...]
Debt-limit fight is the main event

In our view, the debt ceiling itself has the potential to be much more impactful for the markets than a government shutdown. Last week, the Treasury Secretary offered updated projections of when the Treasury will exhaust its so-called “extraordinary measures,” which are a set of accounting solutions that allow the government to keep issuing Treasuries to the public even though it has reached the debt limit set by Congress. These measures involve temporarily reducing nonmarketable debt securities in order to free up space under the debt ceiling to continue issuing marketable securities to fund the deficit. Treasury will have used up these measures by October 17 at the latest, and at that point the government will have to operate strictly on a cash flow basis. We expect the Treasury to cut net bill issuance in coming weeks in order avoid breaching the debt limit, which would result in a drawdown of the government’s cash balance. The Treasury expects to only have about US$30bn in cash as of mid-October, which will only cover a week or two of deficit spending. Our projections show that it will be virtually impossible for the Treasury to get past November 1 without a debt-limit increase, otherwise the risk of default will rise to uncomfortably high levels. T-bill yields have risen this week, with the late October maturity bills currently trading about 8bp cheaper than the late-November issues, indicating growing concern about the possibility of a late payment.

http://www.zerohedge.com/news/2013-10-01/someone-getting-very-nervous


A look at the stocks surge today and one would get the impression that not only should the government shutdown be permanent (closing the Fed would have a vastly different result on the S&P), but that the debt ceiling is completely irrelevant and immaterial for risk assets. One would get a far different impression by looking at today's just concluded 4-Week Bill auction. Today's outlier rate on the just priced $35 billion in 4-week bills can be seen quite dramatically on the chart below, and is evidence that someone (or someones) is getting quite nervous ahead of the events in the next few weeks.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/09/1%20Week%20Auctions_0.jpg

What is going on here and why the spike? Recall what we said a week ago in "Here Is How To Trade The Debt Ceiling Showdown."


... there is a simple pair trade for those who would like to position for a contentious debt ceiling fight with an ETA mid-October and skip the bipolar and HFT-dominated equity markets. Recall that in the summer of 2011 when the last big debt ceiling debacle loomed and resulted in a last minute outcome that also led to the downgrade of the US by a rating agency that has since sold out, rates of bills due just before the debt ceiling D-Date soared, while those sufficiently after the ceiling interval tightened. Well, the same trade is just as applicable this time.

Sell October 31 Bills versus 12 Month Bills

Supply dynamics and potential market concerns around a debt ceiling stand-off in Washington should push the 1M1Y bill curve flatter... The October 31 bills are likely the most vulnerable, and should cheapen significantly versus 12 month bills in a protracted fight.

One-month and three month bills are already trading close to zero, having briefly traded negative last week. With bill supply to remain flat heading into the end of October, suggesting that supply should keep bills yields across the curve under pressure. With bill yields largely beholden to supply dynamics, the greatest scope for further compression is in year bills, which are currently trading around 10bp. Given historical relationship between bills yields and bills outstanding, year bills are roughly 3bp rich to supply-implied fair value, while 3-month bills are about 3.5bp rich.

This trade may be difficult to put on in size until after quarter end due to dealers balance sheet constraints. But as noted above, we believe that the market will not begin to fully price the risk to front end bills until about two weeks before the end date. We expect the opportunity to remain available at for the first week of October.

Sure enough, today is the first day of the next quarter (window dressing is over), and the bond market, if not so much the stock market, has finally awakened that the government shutdown is merely an indication of just how contenuous the debt ceiling negotiation very likely ill be, and that it is increasingly likely that the X-Date of October 18 may come and go without a deal, which just may result in a technical default on the nearest maturity Bills.

End result: today's auction was an absolute abortion and absent some deus ex machina agreement between the GOP and Democrats, one can expect the October 31 bills (and others just around them) to continue blowing wider as quietly but confidently those holding the most at risk paper exit stage left.

[Lucille]

Obama "Prepared To Negotiate" (After Government Reopens), Says This Time "Wall Street Should Be Concerned"
http://www.zerohedge.com/news/2013-10-02/obama-prepared-negotiate-after-government-reopens-says-time-wall-street-should-be-co


In an interview with CNBC's John Harwood, Obama once again shows why the polarization in Congress is at record levels. In a brief: he said he is "exasperated", and that the shutdown is "entirely unnecessary" but adds that he is (finally?) prepared to negotiate, however only after he gets his way namely after the government is reopened. And another important talking point: Obama added that while gridlock in D.C. is nothing new, "this time I think Wall Street should be concerned." It is unclear how that statement makes any sense in light of Obama's right hand senator Chuck Schumer telling the man who is really in charge, Ben Bernanke, to get to work. Unless of course, Obama is now angling for a "concerning" market crash, which sends the Dow down by 20% like in the summer of 2011, and Obama can tell the stunned public "I told you so."

Additionally, it wouldn't be an Obama theatrical presentation without the usual solid dose of scapegoating and blaming: "When you have a situation in which a faction is willing to default on U.S. obligations, then we are in trouble.... If we get into the habit where one party is allowed to extort, ... then any president who comes after me we be unable to govern effectively." The good news: we have confirmation that there will be presidents after Obama.

Some other highlights:


Obama would not comment on who he's likely to nominate to succeed Fed Chairman Ben Bernanke.

"Ben's still there's; he's doing a fine job," he said. The ultimate nominee would have to keep an eye on inflation and employment, in keeping with the Fed's dual mandate, the president said.

On Obamacare, the president's most significant legislative accomplishment, Obama said that despite certain polls showing it was unpopular with specific segments of the population—namely white people—the law would ultimately be accepted by the population at large.

Tenets of the bill are popular among "all races" the president said. "The majority of the people who will be helped by the ACA will be white," he said.

[jllundqu]

Let the crash come.

[69360]

The GOP is taking the blame already so might as well let it burn.

[Lucille]

Treasury Warns Default Impact Could Last A Generation
http://www.zerohedge.com/news/2013-10-03/treasury-warns-default-impact-could-last-generation


The President warned yesterday that "this time is different," and now the Treasury has weighed in with an even more ominous warning. In their statement, they note:

*TREASURY OFFICIAL: CONGRESS ACTION ONLY WAY TO AVOID DEFAULT
*TREASURY SEES 'TENTATIVE' SIGNS IMPASSE AFFECTING MARKETS
*TREASURY SAYS BILL YIELDS MAY REFLECT `NASCENT CONCERNS'
*TREASURY: DEFAULT IMPACT COULD BE PROFOUND, LAST A GENERATION

And so it seems not only are they looking at the same indicators as the smart money in the markets but it is clear that the rhetoric will be increased until the equity market cracks and the politicians get their catalyst to act.

Via The Treasury,

The United States has never defaulted on its obligations, and the U. S. dollar and Treasury securities are at the center of the international financial system. A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.

Full Treasury Statement can be found here.

What is amusing among all this blatant fearmongering, is that the Treasury can clearly choose to prioritize its payments and have more than enough cash from tax revenues alone to fund its debt obligations for a long period of time, even if that means not paying some of the government's other ultrabloated programs...

Inconceivable!