Playing Chicken

It’s hard to rent a copy of “Rebel Without a Cause” these days. Some folks see it as an analogy to the debt-ceiling debate. In the movie, James Dean and a teenage rival race two cars to the edge of a cliff in a game of chicken. Both intend to jump out at the last moment. But the other guy’s jacket gets caught and he goes over the cliff with his car.

So people are looking at the political brinksmanship going on in Washington over the debt ceiling and are wondering if we’re headed over a cliff. They’re right on one thing: a default by the United States government would be a disaster. US Treasuries would be downgraded, and because of a doctrine know as the “sovereign ceiling,” every security issued by a US-based company or trust would also be downgraded.

It’s not clear how counterparties that require Aaa collateral would fulfill their obligations. Presumably there would be huge demand for bonds issued by the UK, Germany, France, and any other Aaa issuer. But there’s a problem: there’s not enough collateral available to satisfy every swap agreement or debt defeasance that needs a risk-free back-stop. These operational details matter; market conditions would be so chaotic that Lehman’s bankruptcy would seem like a walk in the park.

Conventional wisdom is that the two parties will come together after some theatrics that will make any deal more palatable to their respective political bases. It is, after all, in the interest of incumbents to govern. If President Obama and Speaker Boehner prove they can’t, they may both be out of a job come 2012.

And given the stakes, that’s probably fair.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T11:05:46+00:00 July 14th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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