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Wall Streeters break with Biden on debt limit

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The White House has more bad news looming on the debt limit front. Some Wall Street analysts and executives aren’t getting the memo about financial Armageddon.

Your MM host has a story this morning about those in the finance industry who are confident the U.S. will avoid defaulting on its bonds — even if the government can’t pay all its bills after hitting the debt limit “X date” later this year.

They’re banking on the Treasury Department’s ability to prioritize payments so that bondholders keep getting paid with the limited cash available.

Such a move would hypothetically avoid a global market crash, given that Treasurys are the bedrock of the international financial system.

“Most investors who follow this closely are very aware the United States will not default on its bonds,” Ajay Rajadhyaksha, global chair of research at Barclays, told MM.

Treasury and the White House are resisting any talk of such a plan, which is also being promoted by conservative Republicans who want to cut the budget. President Joe Biden’s allies are coming out hard against it.

“The notion is intellectually bankrupt,” former Treasury Secretary Jack Lew told MM.

A Treasury and Federal Reserve paper trail going back a decade — unearthed in part by House Republicans like former Financial Services Chair Jeb Hensarling and his current successor, Patrick McHenry — is giving some bankers and money managers confidence that the government can pull it off if need be.

Hensarling and McHenry said in a 2014 letter that documents prepared by the New York Fed “exhaustively detail how the department and the bank would implement any plan to prioritize payments on Treasury bonds.”

Lew confirmed to MM that officials ran an exercise to see whether prioritization was physically possible and came to the conclusion that “you might be able to.” He still thinks it’s a bad idea, in part because it’s never been tested, and also because it’s “accepting default.”

PIMCO is among the Wall Street giants taking officials like Lew at their word, telling MM that prioritization “should not be viewed as a feasible alternative to Congress raising the debt ceiling.”

Even believers in the government’s capacity to pay some bills and not others see it as a double-edged sword. Though the Treasury market might be protected, the scenario runs the risk of damaging the U.S. economy, depending on how long other individuals and businesses aren’t paid what they’re owed.

“My fear is that X date is hit. The day after, not a whole lot happens and a bunch of people who are holding out say, ‘See, everything’s totally fine,’” Rajadhyaksha said.

“This is a slow burn. The longer it takes the worse it gets.”

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The IMF will update its World Economic Outlook today … Biden will give an infrastructure speech today at 2:45 p.m. … The Fed’s Federal Open Market Committee will begin its two-day meeting Tuesday at 9 a.m. … Biden and House Speaker Kevin McCarthy will meet Wednesday … House Financial Services will hold an organizational meeting Wednesday at 1 p.m. … Fed Chair Jerome Powell will give a post-FOMC press conference Wednesday at 2:30 p.m. … The Bank of England and the ECB will announce interest-rate decisions on Thursday … The Labor Department will release January unemployment figures on Friday …

This week’s big debt limit news: Biden, McCarthy to meet Biden and McCarthy are scheduled to meet Wednesday, McCarthy said Sunday on CBS.

The California Republican said he expects to eventually come to an agreement with Biden on the debt ceiling, despite the White House rejecting any negotiation.

McCarthy wants to use debt limit talks to enact spending cuts but said Sunday he wants to take Social Security and Medicare off the table. Cuts to defense spending are still in play.

Sen. Elizabeth Warren had this to say about the debt ceiling, when MM asked about payment prioritization — “While Treasury should of course keep all options on the table to prevent this manufactured crisis, Republicans raised the debt ceiling three times without conditions under President Trump and they must do so again here. Once the hostage-taking ends, Congress can address the budget deficit, starting with rolling back tax giveaways for the wealthy and giant corporations and actually funding enforcement against rich tax cheats.”

FOMC preview — The Fed on Wednesday will likely raise interest rates by a quarter percentage point, which would mark the second FOMC meeting in a row where the central bank slowed its attack on inflation, WSJ’s Nick Timiraos reports. Looking forward, Fed officials are split on how to forecast inflation because of the tight labor market.

McHenry reboots Financial Services with retreat, first meeting — POLITICO’s Eleanor Mueller has a rundown of what will be a busy couple of weeks at House Financial Services under new Chair Patrick McHenry.

McHenry will convene GOP committee members for a retreat today in Rayburn. It follows another private meeting last week where he gathered members and laid out his vision.

“We’re not going anywhere cool. We’re just going to work,”incoming Capital Markets Chair Ann Wagner said. “It’s going to be about work, work, work, lunch — and work.”

McHenry and his subcommittee chairs are slated to give presentations, according to an aide. Wagner said it’s “going to be heavy on capital formation, digital assets stuff, data privacy stuff.”

“We’ve got a lot of new members on the committee,” said Rep. Blaine Luetkemeyer, who will chair the national security subcommittee.

The committee’s hearing schedule is taking shape.

Financial Services will meet Wednesday at 1 p.m. to vote on the committee’s structure and rules. You can dig into the details here.

The next hearing will probably be on China, according to Luetkemeyer, though he said it wasn’t set in stone.

The potential schedule, according to sources tracking the committee, also includes hearings on accredited investors and empowering entrepreneurs on Feb. 8 followed by a data privacy hearing on Feb. 9. The committee has not announced any hearings after Wednesday and did not respond to a request for comment.

McHenry is “very clear-eyed on what this opening act is going to be,” said Rep. Andy Barr, who will chair the Financial Institutions and Monetary Policy subcommittee. “We’re going to be very busy.”

A preview of Financial Services oversight — Eleanor has a Q&A with Rep. Bill Huizenga, who will chair the Financial Services Oversight and Investigations subcommittee. Huizenga said he wants to emulate former Democratic Rep. John Dingell. Huizenga’s fellow Michigander became famous for firing off “Dingellgrams” requesting information from agencies when he led House Energy and Commerce.

Huizenga’s early targets include NYSE’s recent trading glitch, the SEC, crypto and ESG investing. He said McHenry has been clear that the “full committee’s gamut of issues is squarely within the subcommittee’s oversight function.”

“I intend to utilize that,” he said.

And now, a crypto clampdown from the Fed The Fed rejected the application of crypto-focused firm Custodia for a deposit account at the central bank, in a sign that it’s hoping to insulate the payment system from digital assets, our Victoria Guida reports.

The Fed also issued a statement saying it would presumptively assume that banks are prohibited by their regulators from directly holding crypto on their balance sheets.

The law firm Cravath argues in a new note that the Fed’s position appears to have the effect of prohibiting Fed-regulated banks from holding most crypto assets as principal, with the exception being certain payment stablecoins.

The White House on Friday separately put out a statement outlining efforts to mitigate risks emanating from the crypto world, including a call to Congress and the regulators to do more.

Big banks push back on higher capital The Financial Services Forum, which represents the CEOs of the eight largest U.S. banks, has a new blog post arguing against raising bank capital requirements in light of studies that suggest it would raise borrowing costs. The group says “the economy would be best served if regulatory oversight were applied first to those sectors of the financial system subject to the least regulation and the most rapid growth.”

Russia weighs releasing secret economic data FT: “Russian policymakers are debating whether to declassify more data as the Kremlin’s drive for secrecy leaves even seasoned observers struggling to make sense of the country’s economy.”

Japan lags on central bank diversity Bloomberg: “Japanese Prime Minister Fumio Kishida risks reinforcing the view that the country is not serious about addressing gender inequality if women are shut out of the new leadership set to take the helm of the Bank of Japan this spring.”

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