Debt-ceiling threat has Wall Street scrambling

Wall Street has tried to ignore the threat posed by Washington failing to raise the debt ceiling. No more.

Business executives stepped up appeals this week for political action, worried that the nation faced a crisis, and prepared contingency plans in case the stalemate persists. At Wall Street banks and investment firms, many traders are putting vacation plans on hold so they can be at their desks Aug. 2.

“Trading floors Street-wide are unusually well populated for this time of year,” said Peter Kenny, a trader at Knight Capital Group. “You will see very few people on vacation.”

The Dow Jones industrial average fell for a third day in a row Tuesday, the dollar slumped and gold hit a new high amid increasing jitters that President Obama and Congress won’t reach an accord to lift the debt ceiling in time.


Without a deal, the most feared scenario is that the U.S. will miss payments on its bonds and default — which financial experts say would be disastrous. While still considered unlikely, the prospect is popping up more in conversations.

“No one … could possibly say that there is no chance of a catastrophic outcome,” JPMorgan Chase & Co. CEO Jamie Dimon told analysts last week.

The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever.

Such a downgrade could lead to a temporary market panic. In the longer term it could push interest rates up for everyone from bankers down to ordinary people taking out car loans, and weaken the dollar’s position as the world’s reserve currency.

Meanwhile, bond rating company Moody’s Investors Service warned Tuesday that the impasse in Washington threatened money market mutual funds. The investments are required to hold high-quality securities, including Treasury issues, and could be hurt if the government misses an interest payment on its debt.

The potential consequences give business leaders a responsibility to warn Washington policymakers about the real-life implications of failing to raise the debt ceiling, said Larry Zimpleman, chief executive of Principal Financial Group.

“I’ve been a little bit surprised that, if nothing else, the business community hasn’t been a little bit more engaged to make sure the information is flowing to them,” said Zimpleman, who has urged Washington to put politics aside and compromise.

One of the leading names on Wall Street, money manager BlackRock Inc., recruited leaders of other investment firms and large pension funds to send a joint letter to President Obama and congressional leaders asking them “to act with unity of purpose and spirit of commitment — and to act now.” Signers included the powerful California Public Employees’ Retirement System and the California State Teachers’ Retirement System.


On Tuesday, the U.S. Chamber of Commerce and financial industry trade groups such as the Securities Industry and Financial Markets Assn. and the Financial Services Roundtable pushed Congress to act. Unlike in previous debates about healthcare and financial reform, most of the financial community has tried to step delicately and avoid picking particular partisan plans.

Some financial executives said the intense partisan clash was like a firefight and business leaders were afraid to stick their heads too far out of the foxhole, at least in part to avoid getting in the way of a deal.

That was clear Tuesday as the U.S. Chamber of Commerce announced its support for the debt-ceiling package backed by House Speaker John A. Boehner (R-Ohio). But chamber spokeswoman Blair Latoff noted that didn’t preclude the group from also supporting other debt-ceiling bills.

“Our priority is ensuring the debt ceiling is increased,” she said.


But the broader silence by the business community can be largely explained by the assumption among bankers that politicians would have managed to strike a deal by now.

“There was a reasonable sense of optimism that this would be resolved last Friday,” said Barbara Novick, the vice chairwoman of BlackRock. “We got to the end of the last week and it wasn’t resolved, and everybody’s concern level went up.”

BlackRock is one of several financial firms that has offered up its economists and analysts to the different political factions in the debt debate to provide modeling and predictions for how different agreements would affect markets.

The firms have avoided advocating for any of the particular solutions that have been proposed. As long as there’s no major tax increase — and the chances of one are remote — executives don’t care exactly how the debt ceiling is raised as long as it’s done to avoid a default and the risk of a downgrade of the U.S. credit rating.


“Right now, at this moment, there’s nothing more important for financial stability than coming to an agreement that will both lift the debt ceiling and put us on a sound fiscal path,” said Rob Nichols, president of the Financial Services Forum, a trade association of the chief executives of Goldman Sachs, JP Morgan Chase and other large financial firms.

Some major investors and borrowers already have taken steps to protect themselves from potential market turmoil. California had planned to borrow in August by selling short-term notes to investors, but instead on Tuesday took a $5.4-billion loan from eight major banks to bypass the U.S. debt drama.

State Treasurer Bill Lockyer said he couldn’t take the chance that Washington would “risk pushing the country into a financial and economic abyss.”

Some global investors have been buying gold as insurance. Gold hit another record high Tuesday and has risen 9% just since July 1.


But Treasury bond interest rates, which might be expected to surge if investors believed a default was inevitable, have remained near their lows of 2011. Major stock indexes are close to their 2011 highs reached in April, although the market has eroded in recent sessions. The Dow fell 91.50 points, or 0.7%, to 12,501.30 on Tuesday.

Industry experts say that even as the chance of a default or downgrade has grown, smart traders have stayed on the sidelines.

‘We’re literally sitting on our hands and just waiting,” said Ted Weisberg, who works on the New York Stock Exchange floor for Seaport Securities. “When you don’t know what to do the best thing is to do nothing.”


Times staff writer Tom Petruno contributed to this report.