CORRECTED - INSIGHT-Wall St, companies brace for U.S. default

Sat Jul 23, 2011 2:24pm EDT

Related Topics

(Correcting job title of S&P's Chambers in 23rd paragraph)

* Banks, companies ready for worst with contingency plans

* Fears remind some of chaos after Lehman collapse

* Top S&P official meets with money managers

* Investors have increased cash positions and added gold

* GE CFO says dramatically increased liquidity since 2008

By Emily Flitter and Jennifer Ablan

NEW YORK, July 22 (Reuters) - American businesses, from Wall Street banks to major industrial corporations, are preparing contingency plans for a pair of once-unthinkable events: the United States defaulting on its debt and the loss of the nation's top AAA credit rating.

While most bankers, investors and executives still cannot imagine that politicians in Washington could be reckless enough to let the government run out of money to pay its bills on August 2, they can't guarantee that the game of chicken that has been played in recent weeks won't go awfully wrong.

Lawmakers and President Barack Obama need to agree to raise the current $14.3 trillion legal borrowing limit by that date to avert a default but the decision is being held hostage to arguments between Republicans and Democrats about how to cut the U.S. budget deficit.

And on Friday evening, the prospects of an agreement suddenly dimmed when top U.S. Republican, House of Representatives Speaker John Boehner, broke off talks with Obama, saying they had become futile because the U.S. President was demanding an increase in taxes.

It all means that just as companies once formulated expensive backup Y2K plans just in case computer systems couldn't recognize the date Jan 1, 2000, investors are devising ways to cope with financial markets pandemonium if the worst happens and the government of the world's biggest economy runs out of cash.

Ringing in their ears are dire warnings from the guardians of the nation's financial well-being - Federal Reserve Chairman Ben Bernanke said only last week that a default would be "calamitous."

In some cases, bankers are delaying their summer holidays, while companies are making sure they have plenty of access to cash, and investors are being told to hedge their portfolios, with gold one favored asset for that.

"We've to some degree taken on a defensive posture. We are now at 10 percent cash with so much uncertainty. In April, we were at 2 percent," said Keith Wirtz, chief investment officer at Fifth Third Asset Management, with $18 billion in assets.

At Morgan Stanley in New York it is all hands on deck at a time when many traders might otherwise be expected to be off to the beaches and the lavish mansions of The Hamptons, a very short helicopter ride from the city.

"I can tell you that we don't have any empty seats on the floor," said Jim Caron, global head of interest rate strategy at Morgan Stanley in New York.

"That will absolutely be the case the week of August 2nd," he added. "Even with summer, no one is out of here at 4:30."

Many are dogged by flashbacks to the financial chaos in September 2008 after the Lehman Brothers collapse, and the failure of lawmakers to pass legislation to authorize a $700 billion government bailout of the banks, which sent markets into a tailspin.

General Electric Co (GE.N), which was hit badly by those events, has boosted its cash holdings and cut its long-term debt in the past three years to put it in a better position to withstand such events.

The largest U.S. conglomerate now holds $91 billion in cash on its books and has $40 billion in short-term debt, compared with the $16 billion in cash and $90 billion in short-term debt it had three years ago.

"The main thing that we've done and it's not specifically for the discussion going on in the U.S. about raising the debt ceiling or the European issue, is we just have dramatically increased our liquidity," said Chief Financial Officer Keith Sherin, in an interview.

"It's part of our stress test that we do with our team and our regulatory and board members to be able to operate the company in the event of a significant external disruption."

Industrial equipment giant Caterpillar Inc (CAT.N) is more worried about the impact on the confidence of its customers of Washington's debt and deficit arguments as it is about its own resilience, according to its Chief Financial Officer Ed Rapp.

He said the company has very diversified funding sources and strong cash flow. "I think we're in a good position in the event you get some disruption for a period of time."

For investors it is all about hedging risk to a greater extent than normal, which means assets that will retain their value if the dollar, U.S. stocks and U.S. government bonds head south.

John Taylor, chief executive officer of the $8-billion currency hedge fund FX Concepts, said he believes gold, which is close to a record having surged over $1600 an ounce on Friday, will trade higher for another two to three months.

FILED UNDER: