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Wall Street Warns Congress: The Economy Post-Default Is A Man Post-'Suicide'

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UPDATE -- 5:50 p.m.: By the end of Wednesday, the market seemed fully aware of the debt ceiling debate. U.S. stock-index futures fell after Moody's Investors Services announced that it may cut America's AAA credit rating. An Associated Press report earlier on Wednesday that Speaker John Boehner (R-Ohio) had called the likelihood of raising the debt ceiling a "crapshoot" if a compromise between Democrats and Republicans wasn't reached caused a dive in the Dow Jones Industrial Average. The AP later updated the story to clarify that the speaker had said what would happen if a compromise isn't reached is a "crapshoot."

WASHINGTON -- Financial markets have yet to take a dive over Congress's inability to raise the nation's debt ceiling, likely because of repeated assurances from Washington that a resolution will be reached.

But time for negotiations is not infinite. In several recent reports, analysts at some the nation's largest banks are resorting to truly hyperbolic terms in an effort to warn lawmakers and investors alike about the fallout of the debt limit being breached.

"Asking what the U.S. economy might look like after a possible U.S. Treasury default is akin to asking 'what will you do after you commit suicide,' " wrote Steven Wieting, Managing Director in the Economic and Market Analysis team of Citigroup, in a July 11, 2011 report.

"It's still nearly unthinkable," he added, running through a scenario in which government spending was slashed by $100 billion per month, checks from the Treasury were drastically cut, Social Security payments were chopped down $25 billion per month and payments for military personnel salaries essentially froze. "We doubt that even the most extremist of policymakers believes that private economic activity will immediately fill the void left by so large a drop in these deficit-financed 'income' streams. Their many constituents would let them know the personal impact whatever the perceived benefits."

READ THE WHOLE CITI DOCUMENT:

The language may read as an alarmist bit of forecasting on the eve of the debt being hit. (The date of that happening is still projected by the Treasury as August 2.) But Wieting insisted in a phone interview that he's not alone in his disbelief among Financial analysts. "No one thinks any of this is funny," he said. "The economy might slip into recession again. You are talking about a catastrophic financial event."

Indeed, as the hour gets closer to default, the nation's biggest banks are dusting off their bullhorns, predicting dooms-day scenarios in the wake of inaction. Take, for example, a July 1, 2011, report put together by Bank of America Merrill Lynch warned that there was a "significant systemic risk arising from a Treasury default" that could result in "international and domestic uproar."

"A Treasury default would likely have a destabilizing effect on money markets and payments systems, given the critical function that Treasury bills and Treasury repo fulfill as cash-like instruments in the US financial system," the report said. "We believe that one of the most valuable assets of the US is the safe haven nature of the dollar and US Treasuries. This is evident from the fact that flight to quality rallies are led by the dollar and Treasuries, and that nearly half of the outstanding marketable Treasuries are held by foreigners. We believe that any fear of missed payments is likely to threaten this status permanently."

READ THE WHOLE BANK OF AMERICA MERRILL LYNCH DOCUMENT:

The extent to which the opinions in reports like these have made their way into the 11th hour, high-stakes negotiations over the debt ceiling is difficult to pin down. Lawmakers are hesitant to admit that they've received directives from Wall Street. But in conversations with top officials both on the Hill and in the White House, it is clear that an open avenue of communication is present between the parties.

"We have obviously a pretty good feel for what people in the outside business investor community believe," said one top Democrat involved in the talks. "We are obviously aware of the outside environment."

Indeed, just one day after Citigroup issued its report, the U.S. Chamber of Commerce -- which has substantial Wall Street interests and is deeply plugged in to Republican leadership -- sent a letter to the president and members of Congress, signed by 500 CEOs, demanding that the debt ceiling be raised.

"A great nation - like a great company - has to be relied upon to pay its debts when they become due," the letter read. "This is a Main Street not Wall Street issue."

READ THE WHOLE U.S. CHAMBER OF COMMERCE LETTER:

The Chamber's letter did not urge lawmakers to simply punt on the deficit reduction negotiations. Nor did Bank of America, which argued that there were both short term and long-term economic benefits made from spending cuts and entitlement reforms.

But the primary argument emerging from both these reports and back channel communications is that the time for political entrenchment and shenanigans has passed. As a sign of that growing concern, the banks have even resorted to a bit of political reporting of their own. A July 1, 2011, Citigroup report cautioned readers that Congress has a propensity to solve seemingly intractable political debates in their last moments. In that regard, the high-stakes talks were merely theater. Still, they noted, Republican leadership will have difficulty corralling their caucus behind any package.

"Our sources in DC suggest that there are negotiations behind the scenes (despite some very public political theater) yet tax increases are a huge stumbling block for the Republicans to muster the votes and Democrats insist they be part of the package. One well-placed source indicated that a very substantial number of Republican freshmen would balk at any debt ceiling lift and a tax increase would mean that only about 50 Republicans in the House would support that type of legislation. Hence, one should expect uncertainty on this issue through July."

There has certainly been no shortage of uncertainty about the final outcome of the current negotiations. But the bearing of Wall Street has seemingly had its designed affect. On Tuesday, Senate Minority Leader Mitch McConnell (R-Ky.) offered the president the political equivalent of an out-clause for the debt ceiling debate. He rationalized the move as an attempt to ensure that the resulting economic catastrophe of a default -- or even the outcome of a deal to avert it -- did not end up on the Republicans' lap.

"I refuse to help Barack Obama get reelected by marching Republicans into a position where we have co-ownership of a bad economy," he said.

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