Wall Street firms dust off plans as debt limit talks end


By Pete Schroeder and Michelle Price

WASHINGTON (Reuters) – Wall Street companies are sounding the alarm and dusting off contingency plans as fears grow that Congress will reach a deal to raise the country’s debt limit in time, executives said.

With federal government funding set to expire on Thursday and borrowing authority to expire on October 18, Democrats who tightly control both houses of Congress are scrambling to prevent an unprecedented credit default in the United States. Their latest efforts on Tuesday were blocked by Republicans.

Failure to raise the legal ceiling on the amount the government can borrow to finance its budget deficits and pay off its debts, currently set at $ 28.4 trillion, could send shock waves through global markets.

“If there were to be some sort of non-payment of treasury securities, we honestly don’t know what would happen,” said Rob Toomey, managing director and associate general counsel for capital markets at the Securities Industry and Financial Markets Association (SIFMA).

“Certainly you can expect significant volatility if that happens, and the market needs to prepare for it.”

JPMorgan Chase & Co CEO Jamie Dimon told Reuters on Tuesday that the bank had started to prepare for the possibility of a US default, a “potentially catastrophic” event, although he added that ‘he expected lawmakers to come to a last-minute deal. Some analysts say, however, that the uncertainty appears slightly in the spread between one-month T-bills and three-month T-bills, which are perceived to carry less risk of default. One-month bills currently return 0.07% compared to 0.04% for three-month bills. At the start of the year, both lost around 0.08%.

Previous debt limit crises have shaken global markets, although they have been resolved. A now notorious stalemate in 2011 over the cap led S&P Global Ratings to downgrade US sovereign debt for the first time, wiping out $ 2.4 trillion from US stocks. Talks turned to the wire again in 2017, but with less disruption.

Given how exposed banks, brokers and investors on Wall Street would be to default, they need to prepare for that eventuality even if they expect the crisis to be resolved.

“We’ve been through this a number of times,” Toomey said, adding that the group had resumed their previous plans for a scenario in which the Treasury would not be able to repay the maturing debt.

“We’ve dusted off this kind of work with our members to make sure everyone is on the same page.”

SIFMA is working on two scenarios. Most likely the Treasury would buy time to repay bondholders by announcing ahead of a payment that it would postpone these maturing bonds for another day. This would allow the market to continue to function even if there was greater volatility.

The other, much less likely scenario would see the Treasury let the bonds mature, which would be more disruptive as the overdue obligations would still have to be settled but no longer exist in the U.S. Federal Reserve’s systems, SIFMA said.

In general, these plans aim to ensure that companies have sufficient technological capacity, staff and cash flow to handle high transaction volumes and ensure the continued functioning of markets.

The Treasury Market Practices Group, a group of bond brokers convened by the New York Fed, also has a trading plan for defaulting Treasuries, which it reviewed earlier this year.

Internally, individual banks also make plans.

Dimon said JPMorgan had started planning scenarios on the impact of a default on the repo and money markets, its capital ratios and the reaction of rating agencies. The bank has also started to comb through its customers’ contracts to understand how they will react.

“You have to check the contracts to try to predict it,” he said. “It’s a lot of work.”

(Reporting by Michelle Price and Pete Schroeder; additional reporting by David Henry and Elizabeth Dilts in New York; Editing by Nick Zieminski)

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