Financial Services Regulatory Reform Update - May 27, 2011

Despite efforts by some on the far right to convince otherwise, it is becoming even clearer that the market is reacting to the possibility that politics will prevent Congress from rising the debt ceiling and avoiding a US default. As it was widely reported this week, the cost of insurance against a US sovereign debt default is on the rise, with the gross value of derivatives contracts that pay out in the event of a having doubled from where it was one year ago. With the House set to engage in the epitome of political theater next week when it votes on Ways and Means Chairman Dave Camp’s bill to provide a “clean extension” (i.e., increasing the debt limit by $2.4 trillion, without any accompanying spending cuts) it will be interesting to see how Wall Street reacts. Apparently, Camp and others in the Republican leadership have been calling key folks on Wall Street to explain the politics behind this maneuver. While that is all well and good, it is unclear if they have reached out globally to other key financial sectors (London, Tokyo, etc) to explain why the defeat of this bill will be necessary as a symbolic victory for conservatives, who are eager to have a vote against a debt limit increase on the books for their constituents, who may not be cognizant of the subtle domestic politics at play and may react more cautiously about their debt holdings.

Meanwhile discussions continue on parallel tracks between the two groups attempting to reach a solution for implementing long term deficit reduction. While one, the Gang of Six, seems to be descending in importance and likelihood of result, and the other, the group lead by the Vice President is ascending in terms of prestige, it is clear that the results of the special election in New York have impacted the debate.

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