US Government Debt Different - Finance Department - University of ...

182 United States Sovereign Debt: A Thought Experiment On Default And RestructuringThe discharge and satisfaction of X% of the Treasuries would be conditional.The Prosperity Shares would specify the types of beneficialholders whose Treasuries would be exempt from that discharge. Itis the exemption which would accommodate the selective defaultaspect of the restructuring. The exemption would be conditioned onthe submission of certifications (in a standard form provided by theU.S. and available online) demonstrating the exempt status of a beneficialholder at and as of the Record Date. The certifications wouldrequire specified evidence of the qualifications for exemption andwould be subject to penalty of perjury under U.S. law. The exemptionqualifications could be stated positively or negatively. For example,they could exempt specified holders (e.g., U.S. domestic holdersof all types and foreign holders that are individuals or pension-relatedfunds or entities). 18 Or they could specify the non-exemptedholders (e.g., foreign governments and political subdivisions, foreignfor-profit entities, and foreign mutual funds or similar investmentvehicles). The exemption also might extend to Treasuries to the extentheld by a foreign financial firm as required minimum capital orreserves or to meet liquidity requirements. 19The discharge and satisfaction would apply in practice as to the X%of Treasuries until holders of the securities on the books of the Fedsubmitted appropriate certifications of exemption. Upon acceptanceof appropriate certification, the Prosperity Shares would be debitedon the books of the Federal Reserve Banks (and down the line) andthe X% of the Treasuries would be reinstated (if the Treasuries remainedon the books) or additional Treasuries would be credited(and down the line through the tiers of intermediaries).The U.S. would not pay the non-exempted Treasuries at their maturitiesand would selectively default on the non-exempted debt. If,on a maturity date, an exemption certification had been received andaccepted, the Treasuries would be paid. Otherwise, the U.S. would18 If the exemption structure were to discriminate against foreign holders, the U.S.should ensure that it would not run afoul of any of its most favored nation obligationsthat might exist under GATT or any applicable bilateral investment treaties.See Steven L. Schwarcz, Ch. 15 (this volume).19 Such an exemption would impose at least some risk that financial firms couldmanipulate the system and even cover for non-financial firm clients.