November 19, 2013
NEW YORK (Reuters) - As the United States threatened to default on its debt last month, major U.S. 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 didn't come cheap. JPMorgan alone has spent more than $100 million on contingency planning for U.S. budget crises in recent years including this one, sources close to the bank say. It has reviewed and analyzed thousands of trading contracts, updated computer systems to handle fiscal emergencies, hired consultants, and built new models to figure out what might happen to securities prices.
It may not go to waste. The temporary budget agreement that President Barack Obama signed shortly after midnight on October 17 to end the shutdown and lift the default threat, authorizes government spending through January 15 and eases enforcement of the debt limit until February 7, creating the potential for another budget crisis early next year, even as some Republicans vow they will avoid it.
With each crisis, the once-unthinkable scenario of a U.S. default becomes a little more real, bank executives said.
"You could tell in the market that people were getting prepared much more this time for a potential default than last time," said a person involved with contingency planning at a major U.S. bank. "The threat moved the market, and people were preparing, whereas the first time there was little movement because most people didn't think it would happen."