As the United States threatened to default on its debt last month,major US banks set up war rooms,spent many millions of dollars on contingency planning and,in some cases,even prepared to underwrite federal government benefits.
In a series of interviews with top bank executives,new details emerged about the extent of the contingency planning that was undertaken before and during the 16-day government shutdown and as a potential default loomed.
The planning for worst-case scenarios didnt come cheap. JPMorgan alone has spent more than $100 million on contingency planning for US budget crises in recent years including this one,sources close to the bank say. It may not go to waste. The temporary budget agreement that US President Barack Obama signed shortly after midnight on October 17 to end shutdown and lift default threat,authorises spending through January 15 and eases enforcement of the debt limit until February 7,creating the potential for another budget crisis early next year.
With each crisis,the once-unthinkable scenario of a US default becomes a little more real,bank executives said. In October,officials at JPMorgan Chase & Co asked chief executive Jamie Dimon how to handle the government benefits that many of its customers receive monthly.
Some of the banks retail customers depend on government programmes like Social Security and food stamps to pay their bills,and Dimon decided the bank would pay the benefits out of its own pocket if it had to. Were going to fund them, he said,according to a person at the meeting. It is the right thing to do.
Staff in the legal,finance and risk departments,were reluctant,and although they had to listen to Dimon,they found potential hurdles. The bank would have had to have paid an estimated $5 billion of cash every month,and it was not clear how the money could be legally recouped.
JPMorgans legal staff determined that,by law,customers Social Security checks cannot be used as collateral for short-term loans. It was also unclear how regulators would assess the riskiness of the loans it was making. Other banks gave their customers concessions because of the crisis in Washington. Wells Fargo,for example,waived late fees for those who were tardy with their mortgage payments in October.
However meticulous the planning,a panic is almost impossible to guard against,top bankers said. And even if there is no default,the threat of one is bad news for Treasury debt. US government bills,notes,and bonds are seen as assets without credit risk that form the basis for pricing securities globally,and every time a default looms,that status is threatened,said an executive at Goldman Sachs Group.
Executives said that preparing for a default was difficult,because there were so many unknowns. No one was sure what the value of defaulted bonds would be if the government really had failed to make payments.
Those questions could have hurt trading in multiple markets,which in turn raised questions about how the US Federal Reserve might intervene. Bankers characterised their conversations with the Fed as one-sided, with many of their questions remaining unanswered.
* In interviews with top bank executives,new details emerged about the extent of the contingency planning that was undertaken before and during the 16-day US government shutdown
* The planning for worst-case scenarios didnt come cheap. JPMorgan alone has spent more than $100 million on contingency planning for US budget crises in recent years.