The Debt Ceiling and Other Dangers

Americans' serious fears about the U.S. government's debt ceiling stalemate are proliferating and growing in volume as the deadline to pass an increase or face default looms. If you think corporate managers have tuned this fracas out, think again. The threat has grown so big that companies are increasingly mentioning it in their risk disclosures in SEC filings.

The dangers of hitting the ceiling
The folks at Footnoted.com regularly mine the dry legalese of SEC filings for interesting information. Since May 19, the site reports, about 145 company filings have added new prose related to "debt ceiling" or "statutory debt limit."

Earlier, Footnoted found the phenomenon limited to financial and insurance companies with direct exposure to government debt, like KKR (NYSE: KKR  ) and MetLife (NYSE: MET  ) . Now, you'll find those terms mentioned in unexpected places, from apparel company Liz Claiborne (NYSE: LIZ  ) to Noble Energy's (NYSE: NBL  ) most recent quarterly filings.

Footnoted published a slew of companies' risk warnings reflecting the possibly unpleasant effects of the current U.S. economic situation. For example, take Integrated Freight's description of how the ripple effects could trickle down to impact its business:

We believe that without a debt ceiling increase, the U.S. government could default on its obligations, triggering increased interest rates and a decline in gross domestic product, which would involve a reduction in freight shipments.... [W]e believe we [would then] experience higher interest rates and lease payment levels, increased difficulty in obtaining financing for both equipment and acquisitions and a decline in demand for freight transportation.

If you're invested in a company that depends on the U.S. government as a major customer, you might want to fire up the SEC database and look at its recent filings. Take Northrop Grumman's (NYSE: NOC  ) warning:

If the debt ceiling is not raised, it is unclear how the U.S. Government would prioritize its payments and where our payments would fall in that priority list. ... Government contracts provide generally that when funding has been approved..., the contractor will continue to perform on the contract even if the U.S. Government is unable to make timely payments. Failure to continue contract performance places the contractor at risk of termination for default. ... Should conditions occur such that the U.S. Government or others are unable to pay us timely for work performed, we would need to finance that work from our available cash resources, credit facilities and access to the capital markets, if available.

Holy cow. A situation that, in Northrop's words, is "unprecedented in the history of U.S. Government fiscal policy administration"? We do live in interesting times.

Forewarned is forearmed
Maybe it takes an SEC filings geek (and I am one) to get kind of jazzed about this topic, but such fresh and frightening prose cropping up in filings provides a sober reminder for serious investors. First, SEC filings are and always have been an essential source of information. Sometimes it's information you won't find elsewhere -- and sometimes, it's even information companies don't particularly want you to think much about.

The risk factors sections of companies' annual Form 10-K or quarterly Form 10-Q filings lay out all kinds of awful things that could happen in a worst case scenario. That may sound morbid, but in truth, no company's without risk. Companies are required to disclose elements that could hurt their businesses (and your investment).

The best investment decisions honestly assess risks. Similarly, the best corporate governance topics aim to reduce risks to shareholders.

As these debt ceiling warnings reveal, we live in scary times. However that debate ends, the bottom line is that our government's fiscal situation is a shambles. Even if Congress can reach a compromise, our economic stress will not end. I don't think there's any way to sugarcoat the macroeconomic mess we're in.

As responsible investors, we need to know and face what we're up against. It's time to double-check your portfolio and sift through SEC filings to better understand companies' risks. The strongest portfolios will contain the strongest companies, with responsible balance sheets (with very little or no debt), strong moats showing revenue-generating businesses, and prudent management teams. Now is not a time for frivolous investing; it's time to get serious.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. The Motley Fool owns shares of Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2011, at 6:16 PM, winebroker2000 wrote:

    What we're facing next week is analogous to not saying "We're overspending -- let's cut up our credit cards.", but rather "We're overspending, so we're going to stop paying on our credit cards."

  • Report this Comment On July 29, 2011, at 6:38 PM, BluegrassInNYC wrote:

    What we're facing is likewise analogous to saying "We're not earning enough to support our expenditures, so we're simply not going to pay our bills so everyone else forces us to stop spending."

  • Report this Comment On July 29, 2011, at 6:41 PM, hbofbyu wrote:

    Not true. The interest obligations will be paid regardless if congress comes to an agreement. So we will still "be paying on our credit cards". What we won't be able to do is pay some of the people who work for the federal government (we won't be able to increase our credit card balance).

    What if the Treasury cut congressman's salaries first but still paid the park rangers and the social secirity. Now that would be sweet justice!

  • Report this Comment On July 29, 2011, at 6:42 PM, Darwood11 wrote:

    The scary part is we have politicians who have proved over a decade, that they are willing and able to gamble with the well being of both current and future generations of Americans.

  • Report this Comment On July 29, 2011, at 8:23 PM, Chgallos wrote:

    Like business, governing successfully takes hard work and dedication. If you don't believe that the government can do anything well, how motivated would you be to TRY to do it well?

    It doesn’t take a genius to figure out that "the government doesn't work" is a self-fulfilling philosophy.

  • Report this Comment On August 01, 2011, at 3:03 PM, goalie37 wrote:

    They just don't get it.

  • Report this Comment On August 02, 2011, at 6:23 PM, DJDynamicNC wrote:

    If people who hate government are put in charge of government, it shouldn't surprise anybody when they try to destroy government.

    It's just more respectable treason.

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