Bank CEOs warn of consequences from U.S. shutdown, default

Reuters

* Blankfein objects to "cudgel" over the economy

* Similar consequences to 2011

* Business leaders encourage both sides to engage

By Jeff Mason and Mark Felsenthal

WASHINGTON, Oct 2 (Reuters) - Chief executives from majorfinancial institutions met with President Barack Obama onWednesday and warned of "adverse" consequences if governmentagencies remain closed and if lawmakers failed to raise the U.S.debt ceiling by mid-October.

Congressional Republicans and the White House are in astalemate over government funding, which has forced the firstgovernment shutdown in 17 years.

Republicans, seeking to stop Obama's signature health careact, have tied spending bills for the fiscal year that startedOct. 1 to defunding or delaying the law, a course rejected bythe president and his fellow Democrats.

The two sides are also at odds about an Oct. 17 deadline toraise the U.S. borrowing limit.

Goldman Sachs chief executive Lloyd Blankfein, whilestressing that the business leaders who met with Obamarepresented diverse political views, implicitly criticizedRepublicans for using their opposition to the healthcare law asa weapon that could lead to a U.S. default.

"You can litigate these policy issues. You can re-litigatethese policy issues in a political forum, but they shouldn't usethe threat of causing the U.S. to fail on its ... obligations torepay on its debt as a cudgel," Blankfein said.

While the government closure has already had repercussionsfrom frustrated tourists turned away from national parks tocanceled stops on Obama's Asia trip, the deadline for raisingthe nation's debt limit poses a much graver risk.

If Congress fails to raise the $16.7 trillion borrowing cap,the United States would go into default, likely triggeringfinancial market shockwaves around the world.

"There's no debate that the seriousness of the U.S. notpaying its debts ... is the most serious thing we have, and wewitnessed that in August '11 and you saw the ramifications: aslowdown in the economy," said Brian Moynihan, chief executiveof Bank of America.

The United States came close to default during a similarpolitical crisis in 2011. That standoff prompted a first-everdowngrade of the United States' credit rating.

Conservative Republicans have signaled they will take thesame tactic on the debt limit this year as they did ongovernment funding by seeking to dismantle or put off the healthcare law. The president has refused to negotiate over raisingthe debt limit.

'NO PRECEDENT'

Business leaders made clear the financial world wanted toavoid the risk of the government not paying its bills.

"There is precedent for a government shutdown. There's noprecedent for default. We're the most important economy in theworld. We're the reserve currency of the world," said Blankfein.

Business leaders wanted Washington to understand "thelong-term consequences of a shutdown ... certainly theconsequences of a debt ceiling (not being raised), and we allagree that those are extremely adverse," he said.

Michael Corbat of Citigroup, Jamie Dimon of JPMorganChase & Co, Robert Benmosche of AIG, JamesGorman of Morgan Stanley, and John Stumpf of Wells Fargo, among others were scheduled to attend the session alongwith Vice President Joe Biden.

"I think both sides have a pretty good appreciation forwhat's at stake here," said Citi's Corbat. He said theexecutives were "trying to encourage both sides to engage."

Some engagement is scheduled for later on Wednesday, whenObama meets with the top leaders of Congress at the White House.Treasury Secretary Jack Lew would brief the leaders at themeeting on the impacts of the threat of default in 2011 and theeconomic imperative for Congress to act to raise the debtceiling, White House spokesman Jay Carney said.

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