Markets Are Anxious Over Fears of Default

Fed Chairman Ben Bernanke, however, has tried to stress that the Fed isn't planning any grand rescue for financial markets. He has said several times that the U.S. central bank isn't in a position to cushion the financial system or economy.At a news conference Sept. 18, he reinforced the message, warning that Congress and the Obama administration should try to avoid "any kind of event like 2011,vacuum bottle" when lawmakers previously faced a U.S. default. "Our ability to offset these shocks is very limited, particularly a debt-limit shock,carbon fabric" Mr. Bernanke said.One topic of discussion among debt-market participants and regulators is how the Fed's payments systems would handle a U.S. debt instrument that is failing to pay interest. The system, known as Fedwire, generally stops tracking such securities, because U.S. Treasury debt that stops paying any interest typically has matured, said people familiar with the matter.Vintage bath fixturesNow, as in 2011, some banks have planned to rename the nonpaying Treasury debt to trick the computers so it could still be bought and sold. The U.S. didn't default in 2011, and it isn't known how well-tested any contingency plans are.Since the U.S. makes interest payments using a system that is separate from the one that makes many other government payments, such as Social Security, it is technically possible for the administration to prioritize interest payments.But on Thursday, Treasury Secretary Jacob Lew told the Senate Banking Committee that prioritization is "default by another name," and choosing to issue some payments but not others "would not work smoothly. It would be chaos."Many business leaders stressed that they weren't expecting the worst to come to pass."A debt default cannot happen," J.P. Morgan Chase & Co. Chairman and Chief Executive James Dimon said on a call with reporters Friday morning. 

Managers at T. Rowe Price Group Inc. TROW +1.01% were planning to "build cash and stay in a liquid position," said Joe Lynagh ,tire changer who oversees money-market funds at the Baltimore company, which has $614 billion under management.Large money-fund sponsors, including Fidelity Investments Inc., BlackRock Inc.,Clawfoot tubs BLK +1.17% Charles Schwab Corp. SCHW +1.82% and Bank of America Corp. BAC -0.28% , say they have sold short-term U.S. debt or avoided buying bills due at the end of the month or in early November. Banks sold more than 64% of their Treasury holdings during the two week-period that ended Oct. 2, according to data from the Federal Reserve Bank of New York.Michael Macchiaroli , an associate director at the Securities and Exchange Commission, has been asking large securities dealers for details on what they are doing to prepare for a potential U.S. default. He has been inquiring about the amounts of certain Treasury bills dealers own and how they are financing themselves, said a person familiar with the review.An SEC spokesman said the agency is "reaching out to firms, as we always do in such situations, to make sure they are appropriately considering and managing the risks of their positions." The spokesman said staff also are monitoring the status of money-market funds and responding to inquiries from the industry.