(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 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
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
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.