* Wall Street moves into liquid assets as default looms
* Record liquidity levels give banks advantage--experts
* Such low-yielding investments have weighed on earnings
By Lauren Tara LaCapra
NEW YORK, July 26 Investors have long
complained about cash sitting idle on bank balance sheets, but
recently these cash cushions have become a lot more valuable.
As the U.S. lumbers toward Aug. 2 without an agreement to
raise the debt ceiling -- and the threat of a U.S. downgrade or
default looms -- banks with strong cash reserves are looking
Market experts say a downgrade or default would trigger
higher margin calls across Wall Street on trillions of dollars'
worth of transactions. On Monday, CME Group Inc (CME.O) became
the first major clearinghouse to raise collateral requirements
for trades backed by Treasury bills.
"In an environment like this ... you want to keep liquidity
as high as possible," said Terry Belton, global head of fixed
income strategy at JPMorgan Chase. "I think most firms have
been trying to achieve that."
Belton and others involved with preparations by large banks
said the industry has been moving into shorter-term investments
that can be turned into cash immediately, even if interest
margins suffer from weak yields.
Banks have also been reducing exposure to debt backed by
U.S. agencies, such as Fannie Mae FNMA.OB and Freddie Mac
FMCC.OB. Such bonds are also at risk of a downgrade if the
U.S. government's rating is lowered and are viewed as less safe
than Treasury bills.
Earlier this month, the biggest U.S. banks revealed
hundreds of billions of dollars' worth of liquidity sitting on
their balance sheets when discussing second-quarter earnings
results. During conference calls, executives were grilled by
analysts about their apparent cash-hoarding.
Goldman Sachs Group Inc (GS.N) said it had $166 billion in
"excess" liquidity at quarter-end, representing 18 percent of
its balance sheet. Chief Financial Officer David Viniar said
Goldman "underperformed" during the period in part because it
reduced risk and boosted the capital and liquidity it is
holding to protect against market uncertainty.
Bank of America-Merrill Lynch analyst Guy Moszkowski was
not impressed. Was the "liquidity drag" responsible for
Goldman's miserly 6.1 percent return-on-equity number, he
At Wells Fargo & Co (WFC.N), Chief Executive John Stumpf
complained about rising cash reserves. He noted that Wells is
"sitting on almost $90 billion of liquidity" that is not even
earning the cost of Wells Fargo's deposits.
Still, Stumpf urged investors to give the bank credit for
"This wonderful deposit franchise we have is ... really
undervalued in today's economic times," he said.
JPMorgan Chase & Co (JPM.N) said its "global liquidity
reserve" was $404 billion, up 28 percent from three months
Questioned by Sanford Bernstein analyst John McDonald about
all that liquidity sloshing around its balance sheet, Chief
Financial Officer Doug Braunstein said the bank was not
deliberately seeking low-yielding cash, but "just dealing with
the deposits as they come in."
In hindsight, though, JPMorgan investors can take solace in
the bank's well-oiled deposit-gathering machine.
"There's the potential for a near-term liquidity event,"
said Steven H. Turner, partner & leader of the risk practice at
consulting firm Novantas, a consultancy that advises some of
the 20 largest global retail banks. "The best way to deal with
that is to stockpile liquidity."
(Reporting by Lauren Tara LaCapra; editing by Andre Grenon)