- Will the Fed "lend against Treasuries with a defaulted interest payment?"
- Will the Fed "support the refinancing of Treasury securities by stepping in and buying any unsold stock at auctions?"
Three issues in particular
Bankers want the Fed to provide its thinking on contingency plans for several possible outcomes of a downgrade or default.
The potential fallout about which the banks are most concerned involves a possible "run on money market funds that hold Treasury bonds, the impact on capital and liquidity ratios if there are large inflows or outflows of deposits and the potential effect on short-term financing from any problems in the repurchase, or “repo”, market."
Bankers, who think the Fed is scared to send any sign whatsoever it is preparing for downgrade, told the FT:
"The responsible government people aren’t engaging and I bet a piece of it is they are really not sure what to do."
"We don’t have any information from them. For the government shutdown [when budget disagreements nearly closed down the federal government] at least we had a road map."
The Fed says it can't give any advice to Wall Street companies until there "is greater clarity from the Congress and as Treasury." Since the Treasury hasn't discussed openly any contingency plans for an August 2 disaster—the Fed says it is impossible to talk about the implications with Wall Street.
Meanwhile, bank CEOs have sent a letter to congress and Obama saying they can't wait for a debt deal to be figured out next week: they need it wrapped up now.
This story originally appeared on Business Insider
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