Basically, Republicans and Democrats cant come together, Mark T. Williams, a former bank examiner for the Federal Reserve, tells me. It seems like brinkmanship, and thats taking precedence over the profound financial implications if we should default.
The White House and Congress have yet to come to an agreement about raising the U.S. debt limit. The U.S. could be unable to pay its bills and default on its debt as soon as June 1, Treasury Secretary Janet Yellen has warned. The federal government hit its $31.4 trillion debt limit in January.
I had a conversation with Williams, currently a master lecturer in the finance department at Boston Universitys Questrom School of Business, about the financial impact if U.S. lawmakers fail to raise the debt ceiling, and why CFOs should prepare.
If politicians cant come to an agreement, then that could be the final push that moves us into recession, he says. The short-term impact would be an increase in interest rates and an increase in the cost of capital for corporations, William predicts.
Is there a probability of a default? Absolutely, he says. It may be a low probability, but if it does occur, CFOs need to be prepared with a good risk management perspective.
He continues, The stress test would be this: The debt ceiling cant be agreed to, and basically default happens. The cost of capital for U.S. Treasuries goes up, which pushes the cost of capital for all corporations up, that then impacts the economy, and we roll into recession. How does that impact my specific organization, and what can we do about it?
Executives at Bank of America, JPMorgan Chase, and Citigroup are warning the damage to U.S. businesses and the economy will start before a technical default. As financial firms rush to prepare, theyre already accumulating expenses, and assigning workers and executivesincluding heads of trading, corporate banking, and consumer bankingto study how the governments failure to pay bills would cascade through markets, Bloomberg reports.
Im sure firms are thinking about cash, Williams says. We still have uncertainty in the regional banking market, and thats concerning as well. Many corporations have really moved their deposits to larger banks like Bank of America and JPMorgan and away from the regionals. And thats why I think PacWest and Western Alliance, those banks lost a lot of deposits.
Scenario planning and having a really highly recurring revenue and cash flow model are vital, says Katie Rooney, CFO at Alight, a provider of benefits administration and cloud-based HR and financial solutions. So, I have great visibility in terms ofdo I need to make different decisions today? Rooney says.
You always have to take into account all of the macro scenarios, whether its COVID, the debt ceiling, or a banking crisis, she says. The first priority is always a healthy balance sheet because, in uncertain times, I always want to have the financial flexibility to take action for my company on what needs to happen. For example, We invested more during COVID, she explains. We built out our work-life platform through that period of time.
The clock is ticking on a debt ceiling decision with much at stake, Williams says. This is a politically-made financial storm that should be avoided at all costs, he says. To lose credibility in the global capital markets would be devastating to the U.S. and would cost trillions of dollars. And it would also have a ripple effect on the global economy, and U.S. corporations.
Sheryl Estrada
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Big deal
A new report by ClickUp, a cloud-based productivity platform provider, examines how SMB and mid-market companies are approaching growth and costs amid uncertainty in 2023. A survey of 300 business leaders in the U.S., Canada, U.K., and Australia found 85% still project growth this year, and 75% plan to increase investments in technology, according to the report. The respondents are pointing to three top priorities for business success in 2023: operational efficiency (35%), customer retention (26%), and cash flow (21%). Customer satisfaction and retention are the top business metrics for 40% of respondents.
Going deeper
How to prevent quantum-A.I. hybrids from taking over the world, is a Fortune opinion piece by Mauritz Kop, a fellow and visiting quantum and law scholar at Stanford University, and Vivek Wadhwa, an academic, entrepreneur, and author. When major technological advances arise, there are important considerations of justice, benefit, and risk, according to the authors. As quantumA.I. hybrids become more prevalent, business and government leaders must seize the moment to connect with experts in research and innovation as well as the general public, in an effort to establish ethical standards, accountability, and responsible technology frameworks for quantum-powered solutions, including quantum-classical synergies, the authors write.
Leaderboard
Erin Brewer was named CFO at Lyft (Nasdaq:LYFT), effective July 10. Brewer replaces Elaine Paul, who is leaving Lyft but will remain as an advisor until Nov. 30. Lisa Blackwood-Kapral, chief accounting officer, will serve as interim CFO until Brewers start date. Brewer previously served as managing director of enterprise finance at Charles Schwab & Co. Before Schwab, she served as head of strategy and finance at Atlassian. Brewer spent 13 years at McKesson in leadership roles, including EVP and chief accounting officer, a board member for McKesson Ventures, head of investor relations, and senior finance and financial planning and analysis roles.
Blake Grayson was named CFO at DocuSign (Nasdaq: DOCU). Blake will succeed Cynthia Gaylor. As previously announced, Gaylor will remain as DocuSign's CFO through the release of the company's Q1 earnings. Most recently, Blake served as CFO of The Trade Desk, leading the company's overall financial activities, including controllership, tax, treasury, analysis, investor relations, corporate development, facilities, and financial operations. Before that, he served in various finance leadership roles at Amazon for over a decade.
Overheard
Its hard to believe a 30-year bank executive, and CEO for 12 years, should have needed a roadmap from the regulators to define the obvious problems that needed to be fixed and werent."
Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, said to former Silicon Valley Bank CEO Greg Becker on Tuesday during the Senate hearing about bank failures, Fortune reported.
