Premarket Stocks: Debt ceiling problems could kill Wall Street trading

New York (CNN) Mergers and acquisitions are the bread and butter of Wall Street. When companies merge or one company buys another, it creates opportunities for investors and banks To make money by providing advice or financing for the transaction.

But M&A activity has dried up in the past year as traders grapple with rising interest rates and fears of a recession – investment banks struggling with powerhouses. Goldman Sachs (GS) And Morgan Stanley (Mrs) Both reported sharp declines in revenue and profits at the end of last year.

Things started looking up again earlier this year when talks resumed, but market uncertainty around the sovereign debt limit and the possibility of a US default put the kibosh on the comeback.

Before Bell spoke with Mitch Berlin, EY Americas vice president, strategy and transactions, to discuss the debt ceiling drama’s impact on deals:

This interview has been slightly edited for clarity.

Before the bell: M&A activity was surprisingly low in 2022 and banks suffered as a result. What changes did you see at the beginning of 2023 and what brought them about?

Berlin: Contracts for the latter half of 2022 have eased as interest rates rise and valuations rise. The approach to 2023 continues to be slow as companies balance persistent inflation and higher capital spending with growth and employment, but we were seeing some compression at the end of the first quarter as March deal prices combined with January and February. Firms are finding financing difficult due to the stress in the banking sector and the uncertain economic outlook, particularly the risk of defaults, as credit conditions tighten. Given the difficulty of financing from traditional sources, we expect higher levels in private lending.

How does the possibility of default threaten to hurt M&A again? How bad will it be for the market? Even if a deal is struck at the 11th hour, will we see M&A suffer?

Uncertainty over the debt ceiling threatens to halt any activity in the M&A market. Building a thesis around deals is difficult given the lack of predictability in the economy, and the growing risk of default is already challenging the economy for any deals in the works and delaying the timeline for completing deals. If the debt ceiling is not lifted in the next few weeks, negotiations will likely be put on hold [it] It could send M&A deals back to their original epidemic lows or worse.

How does this affect the broader economy? Why should Main Street care about what’s happening on Goldman’s upper floors?

It’s hard to predict all the ways in which a U.S. debt default will challenge our economy because we’ve never experienced one, but failure to lift or stop the statutory debt limit would cause widespread and devastating financial market chaos. Main Street is showing signs of distress with record credit card debt and declining savings, and according to economists at EY, not only will the deficit from raising the debt limit hit real GDP by around 5%, the recession it brought on itself this summer, but the economy will be 5 Almost a million jobs have been lost.

Is there an M&A pipeline just waiting to open when conditions improve? When can it be?

Marketing continues to be necessary to make a difference in this challenging economy. Many companies have stronger balance sheets than they did before the pandemic and will closely monitor any decline in target prices to find strategic and transformational acquisitions, and private equity will continue to explore opportunities and build pipelines but not pull the trigger until valuations are reconciled. For increased capital expenditure. We expect a moderate and still difficult recession in the second half of the year, but if we avoid debt defaults and the Fed keeps rates at current levels for the rest of the year as we expect, we could see M&A. In Q4 and early 2024, the market will really start to recover.

American and JetBlue split up.

Nothing lasts forever, and the romance between American Airlines and JetBlue is over.

American Airlines (AAL) And JetBlue Airlines (blue) They have to break up their alliance with Northeast American Airlines by court order.

What happened: U.S. District Judge Leo Sorokin sided with the Justice Department, giving the Biden administration a victory in its lawsuit against the airline merger, my colleague Ramishah Maruf reports.

The Justice Department filed the lawsuit in 2021, alleging the two companies raised prices and reduced choice for air passengers traveling to major cities in the Northeast and to New York City and Boston.

The airlines will have 30 days to finalize their partnership – a daunting task as the busy summer travel season begins.

what else: In March, the Justice Department filed suit to block JetBlue’s $3.8 billion bid to buy Spirit Airlines.

US Attorney General Merrick Garland said the merger would hurt consumers, especially those who depend on low fares from budget airlines.

Janet Yellen will stand on the deadline for the debt ceiling on June 1

US Treasury Secretary Janet Yellen confirmed Sunday, June 1, as a “hard deadline” for the United States to raise the debt ceiling or risk default.

While other analysts and rating agencies put this so-called X-Day later in the summer, Yellen insists it will come within the next few weeks.

“In my last letter to Congress, I indicated that we don’t expect to be able to pay all of our bills by early June and probably as soon as June 1. And I will continue to update Congress, but I certainly haven’t changed my assessment. So I think that’s a tough deadline,” Yellen said in an interview on NBC’s “Meet the Press.” He said.

Her confirmation came just hours after US President Joe Biden took a gloomy view of debt ceiling talks with Japan. Following a phone call with House Speaker Kevin McCarthy, Biden said the deadline to use unilateral measures to raise the federal debt limit had passed, making a dramatic shift just days before the deadline to reach a deal.

After Biden’s warning, Yellen reiterated that “if the debt ceiling is not lifted, there will be tough choices to make.” “And you know, simply since 1789, the United States has a history of paying its bills on time, and what the world wants to see is a continued commitment to doing that. That makes U.S. Treasury securities the safest investment on the planet. And it’s not an acceptable situation for us to be unable to pay our bills.”

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