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

216 United States Sovereign Debt: A Thought Experiment On Default And Restructuring3. Post-Default Enforcement of Treasuries.Consider next the legal rights of holders of Treasuries upon a U.S.default. Recall that references to “holders” are to the underlying beneficialowners of Treasuries in the commercial book-entry system.But some holders are more equal than others.a.The Race to Judgment.The offering circular for Treasuries provides with respect to the commercialbook-entry system:[W]e do not have any obligations to any person or entity thatdoes not have an account with a Federal Reserve Bank. We alsowill not recognize the claims of any person or entity:(i) That does not have an account at a Federal Reserve Bank, or(ii) with respect to any accounts not maintained at a FederalReserve Bank. 133It follows that the only persons entitled to enforce Treasuries heldin the commercial book-entry system are the depository institutionswith securities accounts at a Federal Reserve Bank to which Treasurieshave been credited. We can refer to these holders as “recognizedholders.” Absent default, this circumstance is innocuous enough.The U.S. satisfies its obligations by crediting accounts at a FederalReserve Bank. A Federal Reserve Bank then credits the accounts ofits account holders. If those account holders are acting as intermediaries,they credit their own account holders in turn with the paymentand so on down the chain of intermediated holdings. The issue ofenforcement against the issuer never arises.Now consider the default scenario. Under the assumption that Congresswould not withdraw its consent to suits against the U.S., upona default, a recognized holder of Treasuries could sue the U.S. in the133 31 C.F.R. § 356.30(c)(1). “We” is defined as “the Secretary of the Treasury andhis or her delegates, including the Department of the Treasury, Bureau of the PublicDebt, and their representatives. The term also includes Federal Reserve Banks actingas fiscal agents of the United States.” 31 C.F.R. § 356.2.