Hello there, Viewfinders. Here's some of what I've been reading today. As you can see the day's dominant story is the prospect of a government shutdown and what it means, especially for the financial markets. As usual the conventional wisdom is that a shutdown is no big deal, even if it lasts a while, while a government default would be a nightmare scenario and almost completely unimaginable because even the most extreme nut jobs in Congress couldn't be that stupid. On with the links.
The Securities and Exchange Commission issued a notice today saying that, for the time being, it "will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1." So 10-Qs, 8-Ks and other disclosure filings still must be filed when due. Jim Snyder of Bloomberg News also has a good Q&A explaining what will and won't happen to government services. (Click the second link for that.) You can still fly, you still must pay taxes, and your elderly relatives will get their Social Security checks. But some economic data won't be released on time. And forget about that trip to Yellowstone.
How a government shutdown would hurt banks
American Banker says the most immediate impact will be felt at banks that make government-guaranteed loans for small businesses, mortgages, farms, and so on. The Small Business Administration, the Federal Housing Administration and the Farm Service Agency would mostly stop processing loan applications. The Department of Housing and Urban Development would largely shut down. As for the major federal banking regulators, such as the Federal Reserve Board and the Federal Deposit Insurance Corp., they "are all poised to remain open in the event of a shutdown, because none are subject to the federal budget." But the Volcker rule and other new regulations could be delayed (which a lot of banks probably would see as a silver lining.)
A contrarian view on too big to fail
Francesco Guerrera, the Wall Street Journal's financial editor, has a column today where he expresses optimism about the government's ability to avoid a taxpayer bailout in the event a large U.S. bank got in trouble. I'm not convinced, but he points to some noteworthy movements in the bond market: "There are signs that investors are adapting to the new regime. Movements in bonds of large U.S. banks suggest that markets perceive the holding companies of large lenders as riskier than their operating subsidiaries."
A good primer on Europe's banking woes
If you ever wondered what the policy wonks are talking about when they speak of the "sovereign-banking nexus," Jens Weidmann, the president of the Deutsche Bundesbank, has a good explainer on the Financial Times op-ed page. (In short, weak banks threaten the solvency of their home countries' governments and make the problem worse by loading up on their sovereigns' debt, because bank regulations encourage them to do so.) "In an economy in which the sovereign defaults, banks are likely to default, too," he writes. "Thus, the domestic banks have an incentive to invest in sovereign’s bonds and earn the yield mark-up if things go well. What happens in the event of a joint sovereign-bank default is not relevant for them. This undermines market discipline for governments and reduces their incentive to carry out necessary structural reforms. On the other hand, banks, which can obtain unlimited cash against sovereign collateral from the central bank, are protected from discipline from investors who provide funding."
Dumb headline of the day
Here's the headline from a Los Angeles Times article today: "How far could stocks fall if the government shuts down?" As if a newspaper reporter (or anybody else) would know the answer.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)