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Bond market collapses after government buys credit default swaps on itself
8/6/2011 7:35 AM Coyle
Interest rates on U.S. Treasury bonds skyrocketed this morning after an obscure provision of the new debt ceiling agreement came to light, which authorizes Congress to set aside funds to purchase credit default swaps on itself.
Investors fled the U.S. bond market en masse, fearing that the U.S. government may purposely default on its debt obligations the next time they reach the debt ceiling in order to profit handsomely from its new investment.
President Obama, in a hastily-assembled press conference, attempted to defend the provision, arguing that "diversification is the foundation of any well-constructed portfolio." After consulting with senior economic advisers, he was told that "America was far too heavily concentrated in America, and we need to hedge our bets a bit."
Meanwhile, Speaker of the House John Boehner was outraged when he was told about the provision, saying on the House floor that he "had no clue how the hell they sneaked that one in there." When asked later by a reporter if he had even read the bill before voting on it, Boehner responded, "Why the hell would I do that? The thing was like 70 pages long."
Wall Street was clearly unnerved by this turn of events, driving down the Dow Jones Industrial Average more than 500 points in early trading. Abby Joseph Cohen, senior investment strategist at Goldman Sachs, took the U.S. government to task for its actions. "Goldman Sachs has always supported financial transparency and stability, which is why we would never get involved in such shady dealings. Perhaps it's about time that President Obama learned a lesson from Wall Street and acted a little more responsibly."
The bond rating agency Standard & Poor's immediately downgraded U.S. government debt from its former AAA status, claiming that U.S. Treasury bonds no longer provided the safety and stability required to receive its highest rating. Instead, they recommended that risk-averse investors find more financially stable countries like Greece and Spain in which to invest.
"Unfortunately, these recent events clearly indicate that the United States is no longer deserving of our highly-coveted AAA credit rating," said S&P President Deven Sharma. "Of course, we're the same people who gave AAA ratings to all those CDOs back in 2007, so I don't know why you'd ever listen to us."
In an emergency meeting of the Federal Open Market Committee, the Federal Reserve agreed to a massive new round of quantitative easing. The new program, dubbed "QE 33 1/3: The Final Insult," is authorized to buy as many Treasury bonds as necessary in order to ensure liquidity in the bond market and maintain low interest rates.
When asked if he believed this latest idea would finally help the economy turn the corner, Federal Reserve Chairman Ben Bernanke responded, "I don't know. I ran out of good ideas three years ago." - Return to Previous Page
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