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In attempting to describe the behavior on Wall Street in recent years, the term “risk management” probably won’t be near the top of anyone’s list. But when it comes to the nearing possibility of the United States defaulting on its debt, Wall Street embraces risk management with a passion.
Right now, the Federal Reserve is preparing for the possibility of default if the August 2 deadline for raising the government’s $14.3 trillion borrowing limit is not met. All signs (and common sense sprinkled with a bit of optimism) point to President Barack Obama and Congress finding an agreement to increase the Treasury’s borrowing authority in time to avert a default. If not, the world’s biggest economy faces rating agency downgrades and runs out of cash — soon.
To prepare for that possibility, financial players are “taking steps to reduce the risk of holding Treasury bonds or angling for ways to make profits from any possible upheaval. And even if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country’s market credibility.”
The rating agencies, which control the fateful decision of whether the nation deserves to have its credit standing downgraded, are surveying other entities that would be affected by a United States default — like insurance companies and states — and issuing warnings that a United States downgrade could result in several other ratings cuts. States that might be downgraded, in turn, are trying to reassure the market that they could still pay their bills on time.
Some say bond traders are optimistic, however — thinking there’s no way the House Republicans will blow the August 2nd deadline. But just in case, they’ve got a plan.
Now that’s some Wall Street risk management.
Risk Management Magazine and Risk Management Monitor. Copyright 2013 Risk and Insurance Management Society, Inc. All rights reserved.