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As companies plan for U.S. default, business may take a hit

By Lauren Tara LaCapra, Jessica Toonkel and Ashley Lau

NEW YORK (Reuters) - Delayed investments and purchases by companies and investors struggling to limit their exposure to financial harm from a possible U.S. debt default is contributing to a slowdown in business activity, executives said.

Investment firms and big Wall Street banks, including PIMCO, Fidelity Investments, Blackrock Inc , Citigroup Inc and JPMorgan Chase & Co , said they had sold Treasury bonds that expire in the coming weeks, either to protect clients' investment portfolios or their own balance sheets against losses in the event of a U.S. default.

Investors have also shifted more assets into cash. Bank of New York Mellon Corp CEO Gerald Hassell said the bank has seen clients add $10 billion in cash to its balance sheet since the start of October alone.

Meanwhile, corporations are delaying plans to hire, invest or acquire companies, and mulling a new wave of cost-cutting if the economy is hurt badly by Congress' fiscal impasse, bankers and executives said.

Although the U.S. Congress looked set to reach a deal Wednesday afternoon, consumer confidence has already hit a nine-month low, and some economists expect the government shutdown to hurt the nation's economic growth this year.

Goldman Sachs says the impasse could knock half a percentage point off its forecast of 2.5 percent real GDP growth in the fourth quarter.

"Most CEOS I speak to in the United States say they're seeing a slowdown in business because of this," BlackRock Chief Executive Officer Laurence Fink said in an interview Wednesday.

"I was on a conference call with many of them, and I heard across the board, a slowdown from the American consumer because of this narrative, so it's having an impact on our economy already - and it's going to have an impact on job creation at a time when we need more job creation."

Bankers said companies either postponed or speeded up plans to go public or price deals to avoid getting caught in the middle of the debt-ceiling impasse. One investment banker said on Wednesday he has been giving clients one simple piece of advice: "Stay liquid!"

At one large Wall Street brokerage firm, executives were holding round-the-clock phone calls internally and with industry groups, such as the Securities Industry and Financial Markets Association, to figure out the various possible outcomes if the U.S. government does default. Thousands of SIFMA members dialed into its industry call this week, another source familiar with the matter said.

"People are on high alert," said an executive at the brokerage firm, who spoke on the condition of anonymity.

One big concern is what happens to Treasury bills that are scheduled to mature on October 17 if the government defaults, the executive said.

"Obviously if the firms do not get paid redemption on those bills, they are not going to credit clients' accounts," the executive said.

Wall Street is also grappling with how government securities will be valued if the U.S. defaults and bonds that mature are not redeemed, the executive said.

Even though these and other questions have no clear answer, the firm is creating communications for clients based on the various scenarios so that it can respond as soon as there is some indication of what is going to happen, the executive said.

"The expectation is Congress will pull back from the brink at the 11th hour and 59th minute ... but we have to be prepared."

Similarly, financial advisers are taking a more conservative approach with clients' portfolios until the fate of the U.S. debt ceiling is clear.

Scott Barkow, a financial adviser with Raymond James & Associates, the brokerage subsidiary of Raymond James Financial, has spent the past couple of weeks adding stop-loss orders, which are automated orders designed to limit investors' losses by selling securities when they hit a certain price.

Barkow also is holding off on buying bonds until it is clear what happens, he said.

"There are some periodic bond purchases that are we are holding off doing and if new money comes in we are waiting to invest in bonds for now," said Barkow, who has $229 million in assets under management.

(Additional reporting by Ross Kerber and Timothy McLaughlin; Editing by Paritosh Bansal and Bernadette Baum)

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