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

218 United States Sovereign Debt: A Thought Experiment On Default And RestructuringUnlike the situation of a trustee’s enforcement under the terms of abond indenture, currently there is no extant body of law or contractualarrangement that addresses enforcement by a recognized holderon behalf of its account holders (or account holders’ account holders,etc.). It would be necessary to make such arrangements post-default.If a recognized holder wished to enforce its proprietary defaultedTreasuries, would it also be willing to enforce on behalf of its accountholders? Inasmuch as the enforcement exercise would be a race tojudgment and a subsequent race to locate and execute on assets notprotected by sovereign immunity, such a recognized holder probablywould not want to share recoveries with other holders. And holdersprobably would not be willing to subordinate their rights as a conditionfor their recognized holder to pursue their claims. It would bebetter to find another recognized holder without a proprietary claimthat might be willing to enforce on behalf of other holders, subjectto appropriate remuneration, indemnification, and the like. Presumably,counsel would be available to handle an enforcement action ona contingency basis.As to Treasuries held in the commercial book-entry system, it is actuallynot surprising that the statutory and regulatory structure foractual enforcement is utterly unsuitable. No doubt it was created andhas been operated on the unquestioned assumption that no defaultwould ever occur. Action based on reasonable assumptions that turnout to be wrong is unfortunate. But action based on assumptionsthat are never questioned or examined may be considered careless.Even if it were absolutely clear that it would not be in the interest ofthe U.S. to default and attempt a restructuring of its Treasury obligations,having a clear and plausible means of enforcing the obligationsshould be a concern of holders of Treasuries. The occurrence of an“unintentional” default (e.g., arising out of a Congressional impasseon raising the debt ceiling) or a default based on an inability to paycannot be discounted entirely.Some holders in the commercial book-entry system would have anotheralternative for enforcement. They could move their Treasuriesfrom the commercial book-entry system to the Treasury Direct sys-