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

242 A Comment on Professor Mooney’s Thought Experiment: Can U.S. Debt Be Restructured?ruptcy law to mediate how the costs are allocated. The allocation ispurely a political question.Corporate debtors often lack the discipline to make the choices theyhave to make to successfully restructure. We all remember how, priorto the bankruptcies of General Motors and Chrysler, the federalAutomotive Task Force required those companies to rewrite theirrestructuring plans because their initial efforts failed to grapple effectivelywith the issues they were facing. The experience of the autocompanies reminds me of the story of the senior officer of anotherlarge public company that went bankrupt many years ago who wasasked why the company did not see the firm’s financial problemscoming. He responded by saying “the mind when faced with brutalreality retreats into fantasy.” This very human reaction is common:management of the typical debtor is not equipped to deal with adversity.Their minds “retreat into fantasy” rather than face and addressthe hard choices. One of the functions of our corporate reorganizationlaws is to require a debtor to make hard choices by superimposingcreditors committees, the court or, if necessary, a trustee on thecompany’s decision making process, threatening liquidation of thebusiness, and limiting the privilege of confirming a plan of reorganizationto entities that meet a test of sustainability -- Chapter 11’sso-called “feasibility” requirement. 5Because sovereigns typically are outside the bankruptcy system, thediscipline to make hard choices has to be imposed in other ways.Commonly, another sovereign or group of sovereigns (or a proxy,like the IMF) will offer financial support on the condition that thedistressed sovereign meet certain goals in terms of debt reductionand fiscal austerity. Such conditional assistance provides the debtorcountry’s government officials with the “political cover” they need totake necessary, but unpopular, actions. There is, however, no “othersovereign” who can offer conditional assistance to a reserve currencycountry with the largest economy in the world, so it is difficult to seewhere our own government officials can find political cover from the5 To meet the “feasibility” requirement, the debtor must show there will not bea need for liquidation or further financial reorganization of the debtor. See 11U.S.C. 1129(a)(11).