By Sheila Mullan

NEW YORK (MNI) – In an unusual meeting brought about by the looming
Tuesday deadline for giving the Treasury Department room to resume
borrowing, executives from the nation’s top banks and broker-dealers
Friday told Treasury of their heightened concerns about what happens
under the worst scenarios.

William O’Donnell, Managing Director and head of U.S. Treasury
Strategy within the Royal Bank of Scotland’s global banking and markets
division said afterward the meeting “was a very cordial meeting” wherein
dealers talked about “market conditions and supply”.

He added that “there were certainly discussions” about next week’s
auction “but of course no conclusion” resulted, with the outcome of the
debt talks in Washington still murky.

“Everybody is equally concerned,” said O’Donnell, referring to
Treasury and the dealers. “This debt ceiling issue went much further
than anybody expected, so we are all concerned: they are concerned, and
we are concerned.” Primary dealers also commented on the market
conditions, repo markets and liquidity, sources said.

Morgan Stanley sent its recap of the meeting to its clients, saying
Treasury did not want to discuss specific contingencies but did want to
outline a course of action aimed at preserving access to the markets.
Treasury said Monday’s bill auctions will be held as scheduled and if
there is a resolution before the deadline, Wednesday’s 9.a.m. ET
refunding announcement and the consequent auctions will go on as
scheduled.

Without action in time, however, the refunding would be delayed and
short-dated cash management bills substituted. Or, Morgan Stanley said,
the size of the refunding auctions could be reduced to stay under the
remaining borrowing authority. Finally, Treasury could announce a
conditional refunding with when-issued trading with the auctions taking
place as soon as the debt ceiling was raised.

Dealers did not think that was a viable option. Treasury said
dealers should be prepared for the possibility that auctions could be
announced, auctioned and settled on the same day.

After the meeting the Treasury Department chose to characterize the
meeting as one in which “there was a general consensus among all
participants that Congress should act as quickly as possible to raise
the debt ceiling for as long a period as possible to lift the cloud of
uncertainty from the economy.”

As Market News International reported in mid-morning, although the
day was one in which, every quarter, half the primary dealers usually
share their thoughts one-on-one with Treasury prior to the following
week’s announcements of federal financing parameters, this meeting’s
format was changed on short notice to be a one-hour gathering of all the
dealers.

The New York Fed anoints banks and broker-dealers as primary
dealers only if they agree to participate in all Treasury auctions while
providing what the Fed considers “useful market information and
commentary.” They must undergo a rigorous six-month vetting process and
can be kicked out of the exclusive club if they run afoul of Fed
regulations or have legal problems.

So the participants from RBS, Barclay’s Mike Pond, Nomura’s David
Resler and others began arriving at Maiden Lane about half an hour prior
to the noon start of the meeting.

Cantor Fitzgerald, Citigroup Global, Credit Suisse, Daiwa, Deutsche
Bank, Goldman Sachs were represented, along with HSBC, Jefferies, J.P.
Morgan Securities, MF Global, BA/Merrill Lynch, Mizuho, Morgan Stanley,
RBC Capital, SG Americas and UBS rounded out the gathering.

“We were going through the contingencies,” RBS’ O’Donnell said,
“well, actually not the contingencies. Just having a market discussion,
how market conditions are.”

What happens if the debt ceiling is not raised by Tuesday midnight?
“It’s anybody’s guess,” O’Donnell answered.

Will there be Treasury auctions next week? O’Donnell said, “There
were certainly discussions about that but of course no conclusion. We
were sitting down at the table, as Wall Street representative from the
buyside, working with the Treasury.”

He continued, “We were just offering opinions.There were different
ideas that were shared and different thoughts.”

Did Treasury allay your concerns? “Everybody is equally concerned,”
he said. “This debt ceiling issue went much further than anybody
expected so we are all concerned. It’s not a unique position. They are
concerned and we are concerned.”

At the White House shortly after the New York meeting concluded,
spokesman Jay Carney dashed any remaining hope that the president could
invoke a little-known provision of the 14th Amendment to the
Constitution to bypass Congress and raise the debt ceiling himself.

“This administration does not believe that the 14th Amendment gives
the president the power to ignore the debt ceiling,” Carney said,
reading prepared language. “This is not about giving anyone a blank
check to spend. It’s about paying bills that have already been rung up.”

Carney concluded, “Defaulting on our debt is not an option. There
are no arguments that can avoid the basic truth that if we fail to act
it will have devastating consequences for our jobs and our economy.”

** Market News International Washington Bureau: 202-371-2121 **

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