April 18, 2025 • 37 mins
US Treasuries are the most important market in the world. With some $29 trillion outstanding, they create the benchmark that informs basically every other type of borrowing. Any changes to how the bond market works would be a massive deal. But lately, there's been a lot of chatter about how the Trump administration could radically restructure and refinance the US debt under the so-called "Mar-a-Lago Accord." In this episode, we speak with University of Virginia law professor Mitu Gulati about how far the administration could go to legally reform this huge and important market. We also talk about how to buy Greenland and whether Trump could make a few billion by collecting on some old loans from allies.
Read more:
One Way for Trump to Find a Few Extra Trillion Dollars
The Stories We Tell Ourselves About Bonds
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe. Why isn't thal Joe?
Speaker 2 (00:24):
You know what I like to say about bonds go on.
I think there's this perception that bonds are all about
finance and legalities. They are these contracts and borrowers have
to stick to the contract, lenders have to stick to
the contract. But actually I like to look at bonds
(00:45):
as more stories. Yeah, and I know we've been talking
on this podcast a lot about norms and the idea
that a lot of the way the US operates is
based on norms and habits that have developed over time.
Bonds are kind of the same way. It's all about
the narrative of who owes, whom, what and why, and
(01:07):
that can change really quickly.
Speaker 4 (01:09):
You know.
Speaker 3 (01:09):
It's actually interesting about you saying this. I was thinking
back to our episode that we did with a Sujit
end up about creditor and creditor violence, and perhaps one
way to think about that whole phenomenon is the exploitation
of rules above norms. Right, So you have all of
these norms about how debt is paid back, et cetera.
(01:31):
And there's like extra alpha to be squeezed by actually
redoubting to the courts and the rules that are literally
written down in a fight between creditors about who gets
the cash flows, et cetera. And it really is about
this tension of like what's written on paper, what's technical,
what does these words mean, et cetera versus Come on,
(01:51):
that's not how we deal with bonds.
Speaker 2 (01:53):
That's right. You can use the rules if you're really clever,
to try to achieve your aims right and change the
story on some of these. So we should talk about
that because there is a lot of discussion about what
the Trump administration could do when it comes to sovereign debt. Obviously,
people have been talking about the potential Mara Lago accord,
which includes a possible debt swap. Again, all of that
(02:16):
is hypothetical at the moment, but beyond that, there are
some other things going on, and it certainly seems like
nothing is off the table when it comes to the
Trump administration. So we should we should.
Speaker 3 (02:27):
Discuss Yeah, but can I just say one thing, which
is my ethical reservations here of doing any episode. It
feels like the entire world now operates in this system
in which people both outside of the White House and
inside the White House, the various people trying to like
curry Trump's favor on a given day try to wish
(02:48):
cast their ideas about policy into the ether. And they
put out a tweet and they say it's a negotiation.
They say it's not a negotiation. They say there should
be applause, et cetera. And there is this incredible mailstream
of noise where it's all about trying to manifest some
outcome that so and so person desires. And I have
some ethical questions about this sort of contribution to the
(03:08):
noise by introducing the idea of like further taking seriously
the idea of debt swaps, which to me sounds like
default into the world. But yes, this is one thing
that in this great manifestation of ideas people are talking about.
So I suppose we should talk about it.
Speaker 2 (03:24):
You always say you want to take Trump literally and seriously, so.
Speaker 3 (03:28):
I only take them literally anymore.
Speaker 2 (03:30):
Okay, here's our disclaimer. This is not an actual policy
suggestion for the Trump administration. But we are going to
talk about it.
Speaker 3 (03:36):
People are talking about it.
Speaker 2 (03:37):
Let's talk about how realistic it is. And we have
the perfect guest. We're going to be speaking with mittwu Galotti,
law professor over at the University of Virginia and one
of our favorites when it comes to all the ins
and outs, the technicalities the legalities of sovereign debt. So Midwo,
thank you so much for coming on all thoughts, I'm.
Speaker 5 (03:55):
So excited to be here. I shouldn't be excited about
all that. No crazy things that are being discussed, but
from an academic perspective, this is just heavenly, even though
I might be jobless soon.
Speaker 4 (04:10):
Right.
Speaker 2 (04:11):
So markets have been crazy, but the upside is, I
guess we get to talk about bond contracts. When did
you first become aware of the mar A Lago accord?
When did people start talking about it?
Speaker 5 (04:24):
So I actually think that I heard about it on
one of your podcasts.
Speaker 3 (04:29):
Oh God about it's wowerful.
Speaker 5 (04:33):
And then I dug into it and looked at one
of the proposals in particular interested me, which was sort
of swapping out short term US treasuries for longer term,
low interest US treasuries, which was talked a lot about
(04:55):
it as a debt swap with our allies, but really
was just an extension maturities at a low rate when
the market might not actually be giving you the low rate.
And that has become I mean, that was I think implausible.
When you guys talked about it, it was just sort of, oh,
here's some crazy ideas. People are now emailing and asking
(05:20):
sort of respected market people, how could this happen and
what would the legal barriers be and what are the ramifications.
Speaker 3 (05:30):
So what's basically going on in the last several weeks
is that this very theoretical idea, which by the way,
Trump himself actually I don't think he's ever used he's
certainly never used the term mar Alago court. But there's
the people around him, some influential thinkers talking about this
could be some endgame here where there's some sort of
rethinking about the US dollar and the dead And now
(05:51):
it's come to the point where people who are serious
in markets, they're coming to mewtwo Gladia and they say,
what's up, help me understand this?
Speaker 4 (05:59):
Yes, I think so.
Speaker 5 (06:01):
You know, we talked about Trump and taking him seriously
and taking the kinds of things that he has done
in the past seriously, and what he's willing to do,
and restructuring distress debt is something that he has done
a lot of, and he talked about it prior to
(06:23):
his first presidency when he talked about, oh, the US
debt not a big deal. We could just inflate it
away or something like that. A debt swap using the
power of US governing law is really not that insane,
both in historical contexts and in what we could do.
(06:46):
It is insane in terms of norms that have been
built carefully over the last sixty seventy years.
Speaker 4 (06:54):
But Trump is not.
Speaker 5 (06:56):
Alexander Hamilton, I think yes, to.
Speaker 2 (06:59):
Put it mildly, explain this further. You said earlier a
debt swap could be basically the equivalent of extending maturities
on existing treasuries. But like I would hope that there
is some clause in the bond documents that would rule
that out. Am I wrong?
Speaker 5 (07:19):
I guess I'm wrong, alas you are wrong. So really,
anybody and everybody who holds US treasuries should go and
look at the contract terms for their US treasuries and
ask the question, do my contract terms restrict the US
Treasury Department from saying to me tomorrow, you know we
(07:44):
need a little more money, So we're just extending the
maturity of your debt by another twenty years at the
interest rate that you lent to us. Is there anything
restricting that I don't think you'll find anything.
Speaker 3 (08:00):
This blows my mind because to me, if I'm a
holder of US treasuries and a creditor or I'm lender,
the creditor says, you know what, I'm just paying you
back a long time, to me, that sounds like default.
And you're saying that in the research that you've done,
this would not say trigger credit default shops, because to
my mind, my assumption would be, oh, this breaks the
(08:21):
entire system. This is a default, and we can't have
a default on the risk free assets. And you're saying
that actually in the wording of the document is not there.
Speaker 5 (08:30):
So we have to be clear and I have to
be geeky here in my law professor mode, there are
at least three different types of default. So there's a
default on the contract. Something you could sue somebody for
breach of contract. It would not be a breach of contract.
US government is allowed to do this. Then there's default
(08:51):
in terms of would it trigger the handful of credit
default swaps that are written on US Treasury. Well, that
sort of depends on the credit rating agencies decide, and
based on what we saw in Greece twenty twelve, they
probably would say it was a default for credit default swaps.
But that doesn't apply to everyone. So those are the
(09:16):
two big default scenarios.
Speaker 3 (09:19):
What do you mean that doesn't apply to everyone.
Speaker 4 (09:21):
Well, they don't.
Speaker 5 (09:22):
The default for a credit default swap really only applies
to the people who are holding credit defaulse protection on
US Treasury, so they would be able to get their
money back from somebody who had provided them insurance. But
the rest of US dupes like me would just have
to sit with the US extending the maturities. Now, the
(09:45):
details are important, but if you are willing to let
me bore you with them, I can sort of sketch
out the scenarios always Okay. My students asked me this
in class a couple of days ago, so I had
to sketch it out for them. So I said, step one,
the US Treasury Department and the Secretary of the Treasury
(10:07):
have authority to manage the maturities of US treasuries. What
does manage the maturities mean? It really does mean, you know,
issuing bonds of different maturities, managing your yield curve. But
could it include unilaterally extending the maturities? Seems implausible, but
(10:31):
this government has pushed its legal authority in many ways. Now,
what is most likely to happen that the US Treasury
if they ever went down this path because they needed
money and rates had gone up and they wanted to
take advantage of the fact that their old borrowing was
at low rates, what they would do. I think the
(10:54):
pattern we have seen is that they would extend the
maturities and then Congress would quickly pass a law confirming it.
That's what we've seen in all of the other Trump
executive orders, plus Congress quickly passing a law, and then
there would be lawsuits. There would be lawsuits left and
(11:16):
right saying this is a violation of the Constitution because
remember there's no contractual protection. So now you have to
say you've somehow taken my property and I have an
implicit moralistic right to having my money paid back at
the time when you said you would pay it back.
(11:38):
Now that's really tough, and we have historical precedent for this,
going back to the nineteen thirties when we were in
deep trouble because of gold. We didn't have enough gold
to pay everyone in case. They invoked their gold clauses,
(11:58):
which entitled whole of certain US treasuries to get paid
in gold. If they had gotten paid in gold or
asked to get paid in gold, US would have essentially
gone broke. So the President back by Congress abrogated the
gold clause protection in contracts, and it was thought that
(12:21):
surely the Supreme Court would say this is not allowed.
You cannot just take away people's contractual rights. And the
Supreme Court, in one of the most famous cases of
that era, said it was okay. And the markets. I
don't want to say this, but I'm gonna say it
because it's true. The markets didn't crash. Yeah, I think
(12:46):
it's around nineteen thirty five. I'm going to mess up
which year Congress did the abrogation and then when the
Supreme Court decision came out. But the predictions were this
will destroy the US ability to ever borrow in the future,
and that did not happen. There's some famous articles about this.
Speaker 2 (13:21):
What's your read then on why this didn't happen, like
why did the market seem to just go like, Okay,
this is unusual, but fine.
Speaker 5 (13:30):
So my read, with no proof, is that there are
these rare instances where the market thinks, you know, this
abrogation of contractual rights, while it looks like a violation
of the rule of law in every which way possible,
(13:52):
is necessary to make us all better, and therefore, instead
of penalizing the government does it, we're going to reward
them and we're going to lend even more. Arguably Greece
in twenty twelve, where Greece also legislatively abrogated contractual rights
(14:16):
and did something very similar, is a similar situation where
the market didn't penalize them anywhere near the amount that
many sages on Wall Street were saying would happen. Now.
I'm not saying that that's what would happen now, I mean,
this administration seems crazy.
Speaker 3 (14:38):
What about Fourteenth Amendment Section four that says the validity
of the public debt of the United States authorized by law,
including debts and curd for payments of pensions and bounties
for services and suppressing insurrection or rebellion, should not be questioned.
Speaker 5 (14:52):
Oh, I love it that you're bringing up the Fourteenth
Amendment and the debt language of the fourteenth Amendment that
my students don't even know exist.
Speaker 3 (15:00):
The only reason I know about this is because it
comes up a lot during the dead Sertes.
Speaker 2 (15:03):
Joe carries around a copy of it in his podcast
at all times.
Speaker 5 (15:07):
Okay, this language is so important for a variety of
reasons relating to multiple debt crises around the world, but
I won't go into those. Let's just look at the
language about the validity of the US debt. Arguably, that
language goes back to the eighteen hundreds at least, when
(15:29):
often small municipalities would say a certain debt was illegally
issued by this government in place that did not have
the proper authorization to issue it. So if that's the
meaning of validity, that it's about the original issuance, the
(15:51):
Trump administration could say, we're not challenging the validity. We
think your debt is very valid. We're just extending the maturity,
and we do promise to pay you. Let's say they
extend the maturity by one hundred years. We promised to
pay you in one hundred years.
Speaker 2 (16:07):
When we're all dead. Yes, Okay, I hesitate to ask
this question for some of the reasons that Joe laid
out earlier. But we've established that there's a lot of
creativity embedded in the rules of bonds, or at least
you can use those rules rather creatively to achieve whatever
aims you're trying to achieve. One of the things that
(16:30):
has come up recently is the idea of maybe collecting
on historical debt. Oh yeah, that was never paid to
the US, you know it. I called it the equivalent
of like looking in your sofa under the cushions for
spare change. How viable would something like that be?
Speaker 5 (16:49):
Okay, legally that is much more viable. So this has
come up in the context of there's a recent book,
very recent by a senior US Treasury official about the
negotiations between Andrew Mellon and Winston Churchill about the debts
that were owed to the United States by Great Britain
(17:14):
after World War One. So I think it's about four
point four billion or so that was owed, and Great
Britain resisted paying, and the US tried to get it paid,
and then finally we kind of gave up, and then
we had World War Two and all sorts of things.
Those debts have never been written off. Officially they are
(17:35):
still official debts of now the United Kingdom to the US.
They had interest rates on them. I think the interest
rate was three percent. If you compounded that amount to
today's values, that would be many trillions of dollars worth. Okay,
(17:56):
so that's old. But how would you engineer this. That's
a debt that is owed by the United Kingdom to
the US. The US owes the United Kingdom because the
United Kingdom, by the Treasury Zone estimates, holds upwards of
seven hundred billion in US treasuries, those can be and
(18:19):
the legal term is set off. Two sets of debts
can be set off against each other. It is a
technique that is used every day in the markets.
Speaker 4 (18:32):
It's just who would have thought.
Speaker 5 (18:35):
That it could be applied in this context, But it
can be, and in fact, in the Russia Ukraine contexts,
the Biden administration thought very hard about using set off
techniques to get funding to Ukraine. So this is an
idea that's out there current. But applying it to the
(18:55):
UK debt and then maybe even applying it to the
French debt from World War One would be truly radical,
but maybe it wouldn't destroy the markets in the same
way as the first swap that we discussed.
Speaker 2 (19:09):
That's a very big maybe. But okay, so theoretically the
UK debt could cancel out some US debt. I think
this is a really good example of where norms come
into play, because Okay, after World War One, the US
knew that the UK owed it a bunch of money,
but the UK was arguing, well, this is actually emergency
(19:32):
war funding and it's not fair if we have to
pay it back, and ultimately the US just decided, you
know what, it was better to keep the UK as
an ally not annoy them over this particular loan, and
so they just never did anything about it. But obviously
relations between the US and the UK are changing, not
(19:54):
as friendly as they used to be perhaps, and so
that opens up the question of whether the how youse
around these loans and bonds can start to change.
Speaker 3 (20:03):
No, well, this sort of anticipated the question that I
was going to go to, which is like, say more
about like why it was just accepted that these debts
were not collected upon.
Speaker 5 (20:14):
Well, I'm not sure there is extensive writing about the negotiations.
I think they went all the way up to the
nineteen seventies, and for those who study financial history. Post
World War two was a truly horrible time in Europe.
The US was trying to help European countries recover. The
(20:39):
UK in particular, had taken the position after World War
One that the US should try to collect this money
from Germany, because really Germany owed the money to the
UK and France in reparations, and sort of the consensus
was world War One reparations were a stupid idea and
(21:03):
resulted in World War Two. This is Canes and all
of that work, but generally, in the interest of letting
Europe recover, I think the US decided better not to
push this. But Congress never allowed those debts to be
wiped out completely, and so in some sense this has
(21:28):
always been an option. I have heard Treasury officials, people
negotiating debt restructurings talk, and every once in a while,
when they can't get the UK to do what they want,
US officials will kind of snidely mention, you know, there's
that World War One debt that you never paid, and
(21:50):
everybody laughs and in a knowing way, And then I
have this.
Speaker 2 (21:54):
Image of them having like a laminated copy of the
bond documents and just whipping it out in negotiation. But
actually that reminds me we don't know what the exact
bond documentation is.
Speaker 5 (22:05):
We don't know. We don't even know. I mean, we
know the interest rate is three percent. I've never met
anybody who's actually seen the document back in nineteen seventeen,
I don't think it would have been governed by the
law of New York or the law of England. So
who knows what statutal limitations would be. Who knows today
(22:26):
whether or not there is some kind of international statutal
limitations that would apply, and would it apply in the
context of setuff. This is just for lawyers. This is
a bonanza. We could be working on this forever. But
it seems a bit crazy. But nothing's crazy these days.
Speaker 2 (22:46):
The lawyers always win.
Speaker 3 (22:47):
So speaking of all these old debts and world wars
and stuff like this, I've gotten into my I'm in
my mid forties, so of course I read about twentieth
century history now. And one of the things that are
actually like was like this big like light bulb revelation
for me in reading history is that like modern fixed
borders of countries, it's sort of a novel phenomenon that
(23:11):
actually like the idea that like these are the lines
around the country, we just all sort of accept that
is like very fresh in modern history. And what it
was striking is like reading about the run up to
World War two, or like the Germans would sign a
border agreement with another country, but it would be only
ten years. They're like, let's be peaceful for ten years
and then we'll revisit war down the line, whether or not,
(23:32):
and then we might revisit the idea of conquest. But
at least in the meantime, some of it's coming back,
and it's coming back, particularly with respect to Trump's talk
about Greenland, and people talked about how much a lot
of people think it's a joke. But a lot of
people have gotten burned by thinking that things Trump has
been saying our a joke. And so that's why I've
become much more on the take Trump literally side. How
(23:56):
should we think about the idea of like countries just
sort of like acquire land from other countries as a
thing that could happen in the twenty first century.
Speaker 5 (24:05):
Okay, this is going to happen, This not could happen.
You're raising an incredibly important question. So there is greenland,
but Greenland's kind of fun to talk about. Yeah, although
you know, Trump seems very serious about it. He keeps
telling us, don't think this is a joke. We have
to have it, and I will have it. But it's
(24:25):
going to be directly relevant in the context of Ukraine.
So let us say that mister Putin is able to
negotiate with President Trump to take half of Ukraine. Okay,
so Ukraine becomes baby Ukraine. What happens to the enormous
(24:47):
pile of debt that Ukraine has that is unpaid and
that was restructured in the context of war, including billions
and billions of dollars that are owed to the US
and to European allies. Does all Ukraine pay all of
this or does baby Ukraine pay all of this? Does
(25:09):
it get divided? It turns out that the laws from
the era of conquest, those are the laws that apply
even today. Of what happens when the borders of a
state change, those laws are really unclear, and so we'd
have to decide in the modern era, how would those
(25:30):
old laws apply, given that we pretend that borders don't change,
and we pretend that conquest is not allowed. I mean,
Putin takes the position that what's happening in Ukraine is
an independence movement that started domestically and that he's just
(25:52):
encouraging it. Well, there is a whole set of laws
that apply to civil wars. And if they take the
position of this is civil war, then there is nineteenth
century debt law that applies to a civil war.
Speaker 2 (26:21):
This is one of my favorite ever financial history topics,
which is the repudiation of debt from the Soviet Union,
also Imperial China. And there is this argument that, Okay,
there's a revolution in a country, the new administration or
the new policymakers should the new government should not be
(26:42):
saddled with debt from the previous administration because that administration
was wrong and was not supposed to be there and
they were taking advantage of the people and spending all
their money. Blah blah blah blah. Talk about that.
Speaker 5 (26:56):
So you have brought up one of our favorite topics,
that doctrine of odious debts, and the doctrine of odious
debts is really about some despotic leader, a kleptocrat who's
borrowing a lot of money from usually foreign creditors and
then absconds with that money, and should the new government
(27:19):
that comes into place after kicking out the kleptocratic leader
be responsible to those creditors, especially if those creditors knew
they were lending to a kleptocrat. What Joe raised with
the change of state borders is a more obscure doctrine
that falls within the subset of odious debts, but is
(27:40):
a little bit different and more importantly, has much more
legal basis for it. So Joe, can we go back
to the fourteenth Amendment please? Okay, can we read that
language that you read.
Speaker 2 (27:55):
Joe's reaching into his pot.
Speaker 3 (27:59):
The validity of the public debt of the United States,
authorized by law, including debts incurred for payments of pensions
and bounties for services in suppressing insurrection or rebellion, shall
not be questioned.
Speaker 5 (28:11):
Okay, So that last part when Joe raised this at
the beginning of the podcast, I think he was focusing
and Joe, and you.
Speaker 3 (28:22):
Know what it was, to be honest, and you probably
sense this, to be honest, When I read this, I
was like, oh, I never really paid much attention to
that insurrection or rebellion point.
Speaker 5 (28:32):
That stuff is so important. Okay, I'm getting so excited
so I apologize for raising my volume. That is the
US saying to international creditors, we will not pay if
you lend for insurrection that is civil war, we will
not pay. And we think this is fine by international law.
(28:56):
Is remember in the early days, we were very concerned,
actually none of us, remember, we were very concerned about
following international law because we didn't want other countries to
send in the gunboats because we were violating law. It
was accepted arguably at that time there was okay not
to pay for debts incurred by the rebels in fighting
(29:19):
in a civil war.
Speaker 2 (29:21):
Right, and we all know at this point that one
man's coup can be another man's fight for liberation. So
it's open to interpretation. I got to ask just before
we go going back to Greenland, can Trump get Greenland?
How does that work legally?
Speaker 5 (29:38):
Oh? This is good too, But can I just go
back to what the implications of what Joe's language in
that in the fourteenth Amendment for Ukraine? If Putin takes
the position that what has happened in Ukraine is an
independence movement and there was a civil war, then Putin
(30:00):
could invoke basically our fourteenth Amendment and the laws that
followed since their's have been cases where the British took
a similar position in the context of the Boer War
and say I am not responsible for any of the
debts incurred by Ukraine because that was a civil war context,
(30:23):
and the side that wins does not have to pay
the debts of the side that loses. Bondholders I think
have been quite unaware of this possibility. Now, maybe it
will all get worked out, but I don't really see
how we can avoid working this out. But back to Greenland. Now,
(30:43):
can we get Greenland? Well, yes, we can get Greenland.
Even though borders are not supposed to change. We could
in theory, there's no international law prohibiting us purchasing Greenland.
The question is who do we purchase it from. In
(31:05):
the old days, we would have just purchased it from Denmark.
They kind of owned Greenland as property. But now we
don't think of post colonial states as property, although we
don't quite know. Maybe the property interests, to the extent
you think of sovereignty interests as property interests lie with
(31:26):
the people of Greenland. And so the fifty seven thousand,
quote unquote citizens of Greenland, maybe Trump could offer to
pay them each one point five million dollars in a
Swiss bank account and give them each a little house
on the beach in Santa Monica and give them one
(31:48):
of his Golden visas it could happen. It would be
brand new international law, but entirely plausible. The question, though,
is where's he going to get the money from. He
would really have to borrow a large amount of money,
And so we come back to the question of issuing
(32:10):
more US sovereign debt in a context in which we're
trying to reduce the sovereign det I am, maybe the.
Speaker 2 (32:17):
US could use the proceeds from recouping payment on those
old UK bonds to buy Greenland.
Speaker 5 (32:23):
We could, now, I suspect, okay, I'm building conspiracy theory
upon conspiracy theory, and maybe this is just.
Speaker 4 (32:30):
A bridge too far.
Speaker 5 (32:32):
But if you go back to techniques that Trump was
very fond of using, say in his casino days, he
really didn't like market processes where say, the US would
be bidding against Denmark and maybe Germany and maybe a
France for who would pay the Greenlanders the highest amount
(32:57):
in order to acquire Greenland. Instead, there's been a lot
of talk about security reasons. The security reasons and the
imperative that the US must have Greenland, and no talk of, say,
an auction for Greenland where the Greenlanders would get the
highest price. This talk about security reasons sounds more like
(33:20):
a regulatory taking where we get to take it at
the price we set because it is important for security reasons.
It is a technique that Trump has used in the
past in his property dealings and could try to use here.
Although I don't think there's any international law equivalent, but
(33:42):
we're making up international law in the modern era, okay.
Speaker 2 (33:46):
So I think at a minimum we can say we
are living through interesting times, and it's interesting times in
bonds as well. So thank you MITCHU for coming on
the show to explain all of that to us and
hopefully not give two many policy suggestions to the administration.
Speaker 3 (34:03):
I love talking to law professors. Thank you so much
for coming back on.
Speaker 4 (34:06):
It was so funny. Thank you both, Joe.
Speaker 2 (34:20):
I love talking to Mit too. I know sovereign bond
documentation is not necessarily everyone's idea of an exciting time,
but he makes it exciting and interesting.
Speaker 3 (34:31):
No, I wasn't kidding. I Actually it's fun to talk
to law professors, especially on this kind of stuff because
you can just see how their brain works and how
they're like, well, this part of the sentence you think
it's talk about this, but this part of the sentence
is like, oh, are we talking about conquest law that's
been in effect forever? Are we talking about the repudiation
(34:52):
of odious debt? Et cetera. And I just find it
a real pleasure to hear all of it.
Speaker 2 (34:57):
Absolutely, And I think the whole conversation highlights that point
about just how fluid some of these contracts actually can be.
And again, there's so many assumptions and norms that are
built into these things, even though often the documentation tries
to be air tight. Once those assumptions and norms start
to change, the way the bonds can be used or
(35:20):
enforced starts to change as well. And the same applies
to borders, as you pointed out, Yeah.
Speaker 4 (35:25):
And that's funny.
Speaker 3 (35:26):
Countries are so new, no, they really, Like I I
realized this a little while ago, like almost every country
is like it's basically day one around here. That you know,
so many countries are post World War two. That was
one of those things that I feel like only that
clicked in my brain way too late.
Speaker 2 (35:42):
I've been meaning to ask you, Yeah, how do you
feel about the trillion dollar coin now? Because I said
something like it's based on norms, that the treasure never
done this and we should treasure norms.
Speaker 3 (35:54):
I agree. I think an actual default where a mispayment
would be really bad. And if the choice is between
yet another norms violation, which at this point added to
the list, versus a literal non payment of a coupon,
which would be a default, I will I'll take the coin.
Speaker 2 (36:11):
Okay, glad we settled that. Yes, shall we leave it there?
Speaker 3 (36:14):
Let's leave it there.
Speaker 2 (36:15):
This has been another episode of the Authlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (36:21):
I'm joll Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carman armand dash O
Bennett at Dashbot and Kilbrooks at Kelbrooks. For more odd
Lots content, go to bloomberg dot com slash odd Lots,
where we have all of our episodes in a daily
newsletter and you can chat about all of these topics.
Twenty four to seven in our discord Discord dot gg
(36:42):
slash Outlock.
Speaker 2 (36:43):
And if you enjoy Odd Lots, if you like it
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Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Thoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe. Why isn't thal Joe?
Speaker 2 (00:24):
You know what I like to say about bonds go on.
I think there's this perception that bonds are all about
finance and legalities. They are these contracts and borrowers have
to stick to the contract, lenders have to stick to
the contract. But actually I like to look at bonds
(00:45):
as more stories. Yeah, and I know we've been talking
on this podcast a lot about norms and the idea
that a lot of the way the US operates is
based on norms and habits that have developed over time.
Bonds are kind of the same way. It's all about
the narrative of who owes, whom, what and why, and
(01:07):
that can change really quickly.
Speaker 4 (01:09):
You know.
Speaker 3 (01:09):
It's actually interesting about you saying this. I was thinking
back to our episode that we did with a Sujit
end up about creditor and creditor violence, and perhaps one
way to think about that whole phenomenon is the exploitation
of rules above norms. Right, So you have all of
these norms about how debt is paid back, et cetera.
(01:31):
And there's like extra alpha to be squeezed by actually
redoubting to the courts and the rules that are literally
written down in a fight between creditors about who gets
the cash flows, et cetera. And it really is about
this tension of like what's written on paper, what's technical,
what does these words mean, et cetera versus Come on,
(01:51):
that's not how we deal with bonds.
Speaker 2 (01:53):
That's right. You can use the rules if you're really clever,
to try to achieve your aims right and change the
story on some of these. So we should talk about
that because there is a lot of discussion about what
the Trump administration could do when it comes to sovereign debt. Obviously,
people have been talking about the potential Mara Lago accord,
which includes a possible debt swap. Again, all of that
(02:16):
is hypothetical at the moment, but beyond that, there are
some other things going on, and it certainly seems like
nothing is off the table when it comes to the
Trump administration. So we should we should.
Speaker 3 (02:27):
Discuss Yeah, but can I just say one thing, which
is my ethical reservations here of doing any episode. It
feels like the entire world now operates in this system
in which people both outside of the White House and
inside the White House, the various people trying to like
curry Trump's favor on a given day try to wish
(02:48):
cast their ideas about policy into the ether. And they
put out a tweet and they say it's a negotiation.
They say it's not a negotiation. They say there should
be applause, et cetera. And there is this incredible mailstream
of noise where it's all about trying to manifest some
outcome that so and so person desires. And I have
some ethical questions about this sort of contribution to the
(03:08):
noise by introducing the idea of like further taking seriously
the idea of debt swaps, which to me sounds like
default into the world. But yes, this is one thing
that in this great manifestation of ideas people are talking about.
So I suppose we should talk about it.
Speaker 2 (03:24):
You always say you want to take Trump literally and seriously, so.
Speaker 3 (03:28):
I only take them literally anymore.
Speaker 2 (03:30):
Okay, here's our disclaimer. This is not an actual policy
suggestion for the Trump administration. But we are going to
talk about it.
Speaker 3 (03:36):
People are talking about it.
Speaker 2 (03:37):
Let's talk about how realistic it is. And we have
the perfect guest. We're going to be speaking with mittwu Galotti,
law professor over at the University of Virginia and one
of our favorites when it comes to all the ins
and outs, the technicalities the legalities of sovereign debt. So Midwo,
thank you so much for coming on all thoughts, I'm.
Speaker 5 (03:55):
So excited to be here. I shouldn't be excited about
all that. No crazy things that are being discussed, but
from an academic perspective, this is just heavenly, even though
I might be jobless soon.
Speaker 4 (04:10):
Right.
Speaker 2 (04:11):
So markets have been crazy, but the upside is, I
guess we get to talk about bond contracts. When did
you first become aware of the mar A Lago accord?
When did people start talking about it?
Speaker 5 (04:24):
So I actually think that I heard about it on
one of your podcasts.
Speaker 3 (04:29):
Oh God about it's wowerful.
Speaker 5 (04:33):
And then I dug into it and looked at one
of the proposals in particular interested me, which was sort
of swapping out short term US treasuries for longer term,
low interest US treasuries, which was talked a lot about
(04:55):
it as a debt swap with our allies, but really
was just an extension maturities at a low rate when
the market might not actually be giving you the low rate.
And that has become I mean, that was I think implausible.
When you guys talked about it, it was just sort of, oh,
here's some crazy ideas. People are now emailing and asking
(05:20):
sort of respected market people, how could this happen and
what would the legal barriers be and what are the ramifications.
Speaker 3 (05:30):
So what's basically going on in the last several weeks
is that this very theoretical idea, which by the way,
Trump himself actually I don't think he's ever used he's
certainly never used the term mar Alago court. But there's
the people around him, some influential thinkers talking about this
could be some endgame here where there's some sort of
rethinking about the US dollar and the dead And now
(05:51):
it's come to the point where people who are serious
in markets, they're coming to mewtwo Gladia and they say,
what's up, help me understand this?
Speaker 4 (05:59):
Yes, I think so.
Speaker 5 (06:01):
You know, we talked about Trump and taking him seriously
and taking the kinds of things that he has done
in the past seriously, and what he's willing to do,
and restructuring distress debt is something that he has done
a lot of, and he talked about it prior to
(06:23):
his first presidency when he talked about, oh, the US
debt not a big deal. We could just inflate it
away or something like that. A debt swap using the
power of US governing law is really not that insane,
both in historical contexts and in what we could do.
(06:46):
It is insane in terms of norms that have been
built carefully over the last sixty seventy years.
Speaker 4 (06:54):
But Trump is not.
Speaker 5 (06:56):
Alexander Hamilton, I think yes, to.
Speaker 2 (06:59):
Put it mildly, explain this further. You said earlier a
debt swap could be basically the equivalent of extending maturities
on existing treasuries. But like I would hope that there
is some clause in the bond documents that would rule
that out. Am I wrong?
Speaker 5 (07:19):
I guess I'm wrong, alas you are wrong. So really,
anybody and everybody who holds US treasuries should go and
look at the contract terms for their US treasuries and
ask the question, do my contract terms restrict the US
Treasury Department from saying to me tomorrow, you know we
(07:44):
need a little more money, So we're just extending the
maturity of your debt by another twenty years at the
interest rate that you lent to us. Is there anything
restricting that I don't think you'll find anything.
Speaker 3 (08:00):
This blows my mind because to me, if I'm a
holder of US treasuries and a creditor or I'm lender,
the creditor says, you know what, I'm just paying you
back a long time, to me, that sounds like default.
And you're saying that in the research that you've done,
this would not say trigger credit default shops, because to
my mind, my assumption would be, oh, this breaks the
(08:21):
entire system. This is a default, and we can't have
a default on the risk free assets. And you're saying
that actually in the wording of the document is not there.
Speaker 5 (08:30):
So we have to be clear and I have to
be geeky here in my law professor mode, there are
at least three different types of default. So there's a
default on the contract. Something you could sue somebody for
breach of contract. It would not be a breach of contract.
US government is allowed to do this. Then there's default
(08:51):
in terms of would it trigger the handful of credit
default swaps that are written on US Treasury. Well, that
sort of depends on the credit rating agencies decide, and
based on what we saw in Greece twenty twelve, they
probably would say it was a default for credit default swaps.
But that doesn't apply to everyone. So those are the
(09:16):
two big default scenarios.
Speaker 3 (09:19):
What do you mean that doesn't apply to everyone.
Speaker 4 (09:21):
Well, they don't.
Speaker 5 (09:22):
The default for a credit default swap really only applies
to the people who are holding credit defaulse protection on
US Treasury, so they would be able to get their
money back from somebody who had provided them insurance. But
the rest of US dupes like me would just have
to sit with the US extending the maturities. Now, the
(09:45):
details are important, but if you are willing to let
me bore you with them, I can sort of sketch
out the scenarios always Okay. My students asked me this
in class a couple of days ago, so I had
to sketch it out for them. So I said, step one,
the US Treasury Department and the Secretary of the Treasury
(10:07):
have authority to manage the maturities of US treasuries. What
does manage the maturities mean? It really does mean, you know,
issuing bonds of different maturities, managing your yield curve. But
could it include unilaterally extending the maturities? Seems implausible, but
(10:31):
this government has pushed its legal authority in many ways. Now,
what is most likely to happen that the US Treasury
if they ever went down this path because they needed
money and rates had gone up and they wanted to
take advantage of the fact that their old borrowing was
at low rates, what they would do. I think the
(10:54):
pattern we have seen is that they would extend the
maturities and then Congress would quickly pass a law confirming it.
That's what we've seen in all of the other Trump
executive orders, plus Congress quickly passing a law, and then
there would be lawsuits. There would be lawsuits left and
(11:16):
right saying this is a violation of the Constitution because
remember there's no contractual protection. So now you have to
say you've somehow taken my property and I have an
implicit moralistic right to having my money paid back at
the time when you said you would pay it back.
(11:38):
Now that's really tough, and we have historical precedent for this,
going back to the nineteen thirties when we were in
deep trouble because of gold. We didn't have enough gold
to pay everyone in case. They invoked their gold clauses,
(11:58):
which entitled whole of certain US treasuries to get paid
in gold. If they had gotten paid in gold or
asked to get paid in gold, US would have essentially
gone broke. So the President back by Congress abrogated the
gold clause protection in contracts, and it was thought that
(12:21):
surely the Supreme Court would say this is not allowed.
You cannot just take away people's contractual rights. And the
Supreme Court, in one of the most famous cases of
that era, said it was okay. And the markets. I
don't want to say this, but I'm gonna say it
because it's true. The markets didn't crash. Yeah, I think
(12:46):
it's around nineteen thirty five. I'm going to mess up
which year Congress did the abrogation and then when the
Supreme Court decision came out. But the predictions were this
will destroy the US ability to ever borrow in the future,
and that did not happen. There's some famous articles about this.
Speaker 2 (13:21):
What's your read then on why this didn't happen, like
why did the market seem to just go like, Okay,
this is unusual, but fine.
Speaker 5 (13:30):
So my read, with no proof, is that there are
these rare instances where the market thinks, you know, this
abrogation of contractual rights, while it looks like a violation
of the rule of law in every which way possible,
(13:52):
is necessary to make us all better, and therefore, instead
of penalizing the government does it, we're going to reward
them and we're going to lend even more. Arguably Greece
in twenty twelve, where Greece also legislatively abrogated contractual rights
(14:16):
and did something very similar, is a similar situation where
the market didn't penalize them anywhere near the amount that
many sages on Wall Street were saying would happen. Now.
I'm not saying that that's what would happen now, I mean,
this administration seems crazy.
Speaker 3 (14:38):
What about Fourteenth Amendment Section four that says the validity
of the public debt of the United States authorized by law,
including debts and curd for payments of pensions and bounties
for services and suppressing insurrection or rebellion, should not be questioned.
Speaker 5 (14:52):
Oh, I love it that you're bringing up the Fourteenth
Amendment and the debt language of the fourteenth Amendment that
my students don't even know exist.
Speaker 3 (15:00):
The only reason I know about this is because it
comes up a lot during the dead Sertes.
Speaker 2 (15:03):
Joe carries around a copy of it in his podcast
at all times.
Speaker 5 (15:07):
Okay, this language is so important for a variety of
reasons relating to multiple debt crises around the world, but
I won't go into those. Let's just look at the
language about the validity of the US debt. Arguably, that
language goes back to the eighteen hundreds at least, when
(15:29):
often small municipalities would say a certain debt was illegally
issued by this government in place that did not have
the proper authorization to issue it. So if that's the
meaning of validity, that it's about the original issuance, the
(15:51):
Trump administration could say, we're not challenging the validity. We
think your debt is very valid. We're just extending the maturity,
and we do promise to pay you. Let's say they
extend the maturity by one hundred years. We promised to
pay you in one hundred years.
Speaker 2 (16:07):
When we're all dead. Yes, Okay, I hesitate to ask
this question for some of the reasons that Joe laid
out earlier. But we've established that there's a lot of
creativity embedded in the rules of bonds, or at least
you can use those rules rather creatively to achieve whatever
aims you're trying to achieve. One of the things that
(16:30):
has come up recently is the idea of maybe collecting
on historical debt. Oh yeah, that was never paid to
the US, you know it. I called it the equivalent
of like looking in your sofa under the cushions for
spare change. How viable would something like that be?
Speaker 5 (16:49):
Okay, legally that is much more viable. So this has
come up in the context of there's a recent book,
very recent by a senior US Treasury official about the
negotiations between Andrew Mellon and Winston Churchill about the debts
that were owed to the United States by Great Britain
(17:14):
after World War One. So I think it's about four
point four billion or so that was owed, and Great
Britain resisted paying, and the US tried to get it paid,
and then finally we kind of gave up, and then
we had World War Two and all sorts of things.
Those debts have never been written off. Officially they are
(17:35):
still official debts of now the United Kingdom to the US.
They had interest rates on them. I think the interest
rate was three percent. If you compounded that amount to
today's values, that would be many trillions of dollars worth. Okay,
(17:56):
so that's old. But how would you engineer this. That's
a debt that is owed by the United Kingdom to
the US. The US owes the United Kingdom because the
United Kingdom, by the Treasury Zone estimates, holds upwards of
seven hundred billion in US treasuries, those can be and
(18:19):
the legal term is set off. Two sets of debts
can be set off against each other. It is a
technique that is used every day in the markets.
Speaker 4 (18:32):
It's just who would have thought.
Speaker 5 (18:35):
That it could be applied in this context, But it
can be, and in fact, in the Russia Ukraine contexts,
the Biden administration thought very hard about using set off
techniques to get funding to Ukraine. So this is an
idea that's out there current. But applying it to the
(18:55):
UK debt and then maybe even applying it to the
French debt from World War One would be truly radical,
but maybe it wouldn't destroy the markets in the same
way as the first swap that we discussed.
Speaker 2 (19:09):
That's a very big maybe. But okay, so theoretically the
UK debt could cancel out some US debt. I think
this is a really good example of where norms come
into play, because Okay, after World War One, the US
knew that the UK owed it a bunch of money,
but the UK was arguing, well, this is actually emergency
(19:32):
war funding and it's not fair if we have to
pay it back, and ultimately the US just decided, you
know what, it was better to keep the UK as
an ally not annoy them over this particular loan, and
so they just never did anything about it. But obviously
relations between the US and the UK are changing, not
(19:54):
as friendly as they used to be perhaps, and so
that opens up the question of whether the how youse
around these loans and bonds can start to change.
Speaker 3 (20:03):
No, well, this sort of anticipated the question that I
was going to go to, which is like, say more
about like why it was just accepted that these debts
were not collected upon.
Speaker 5 (20:14):
Well, I'm not sure there is extensive writing about the negotiations.
I think they went all the way up to the
nineteen seventies, and for those who study financial history. Post
World War two was a truly horrible time in Europe.
The US was trying to help European countries recover. The
(20:39):
UK in particular, had taken the position after World War
One that the US should try to collect this money
from Germany, because really Germany owed the money to the
UK and France in reparations, and sort of the consensus
was world War One reparations were a stupid idea and
(21:03):
resulted in World War Two. This is Canes and all
of that work, but generally, in the interest of letting
Europe recover, I think the US decided better not to
push this. But Congress never allowed those debts to be
wiped out completely, and so in some sense this has
(21:28):
always been an option. I have heard Treasury officials, people
negotiating debt restructurings talk, and every once in a while,
when they can't get the UK to do what they want,
US officials will kind of snidely mention, you know, there's
that World War One debt that you never paid, and
(21:50):
everybody laughs and in a knowing way, And then I
have this.
Speaker 2 (21:54):
Image of them having like a laminated copy of the
bond documents and just whipping it out in negotiation. But
actually that reminds me we don't know what the exact
bond documentation is.
Speaker 5 (22:05):
We don't know. We don't even know. I mean, we
know the interest rate is three percent. I've never met
anybody who's actually seen the document back in nineteen seventeen,
I don't think it would have been governed by the
law of New York or the law of England. So
who knows what statutal limitations would be. Who knows today
(22:26):
whether or not there is some kind of international statutal
limitations that would apply, and would it apply in the
context of setuff. This is just for lawyers. This is
a bonanza. We could be working on this forever. But
it seems a bit crazy. But nothing's crazy these days.
Speaker 2 (22:46):
The lawyers always win.
Speaker 3 (22:47):
So speaking of all these old debts and world wars
and stuff like this, I've gotten into my I'm in
my mid forties, so of course I read about twentieth
century history now. And one of the things that are
actually like was like this big like light bulb revelation
for me in reading history is that like modern fixed
borders of countries, it's sort of a novel phenomenon that
(23:11):
actually like the idea that like these are the lines
around the country, we just all sort of accept that
is like very fresh in modern history. And what it
was striking is like reading about the run up to
World War two, or like the Germans would sign a
border agreement with another country, but it would be only
ten years. They're like, let's be peaceful for ten years
and then we'll revisit war down the line, whether or not,
(23:32):
and then we might revisit the idea of conquest. But
at least in the meantime, some of it's coming back,
and it's coming back, particularly with respect to Trump's talk
about Greenland, and people talked about how much a lot
of people think it's a joke. But a lot of
people have gotten burned by thinking that things Trump has
been saying our a joke. And so that's why I've
become much more on the take Trump literally side. How
(23:56):
should we think about the idea of like countries just
sort of like acquire land from other countries as a
thing that could happen in the twenty first century.
Speaker 5 (24:05):
Okay, this is going to happen, This not could happen.
You're raising an incredibly important question. So there is greenland,
but Greenland's kind of fun to talk about. Yeah, although
you know, Trump seems very serious about it. He keeps
telling us, don't think this is a joke. We have
to have it, and I will have it. But it's
(24:25):
going to be directly relevant in the context of Ukraine.
So let us say that mister Putin is able to
negotiate with President Trump to take half of Ukraine. Okay,
so Ukraine becomes baby Ukraine. What happens to the enormous
(24:47):
pile of debt that Ukraine has that is unpaid and
that was restructured in the context of war, including billions
and billions of dollars that are owed to the US
and to European allies. Does all Ukraine pay all of
this or does baby Ukraine pay all of this? Does
(25:09):
it get divided? It turns out that the laws from
the era of conquest, those are the laws that apply
even today. Of what happens when the borders of a
state change, those laws are really unclear, and so we'd
have to decide in the modern era, how would those
(25:30):
old laws apply, given that we pretend that borders don't change,
and we pretend that conquest is not allowed. I mean,
Putin takes the position that what's happening in Ukraine is
an independence movement that started domestically and that he's just
(25:52):
encouraging it. Well, there is a whole set of laws
that apply to civil wars. And if they take the
position of this is civil war, then there is nineteenth
century debt law that applies to a civil war.
Speaker 2 (26:21):
This is one of my favorite ever financial history topics,
which is the repudiation of debt from the Soviet Union,
also Imperial China. And there is this argument that, Okay,
there's a revolution in a country, the new administration or
the new policymakers should the new government should not be
(26:42):
saddled with debt from the previous administration because that administration
was wrong and was not supposed to be there and
they were taking advantage of the people and spending all
their money. Blah blah blah blah. Talk about that.
Speaker 5 (26:56):
So you have brought up one of our favorite topics,
that doctrine of odious debts, and the doctrine of odious
debts is really about some despotic leader, a kleptocrat who's
borrowing a lot of money from usually foreign creditors and
then absconds with that money, and should the new government
(27:19):
that comes into place after kicking out the kleptocratic leader
be responsible to those creditors, especially if those creditors knew
they were lending to a kleptocrat. What Joe raised with
the change of state borders is a more obscure doctrine
that falls within the subset of odious debts, but is
(27:40):
a little bit different and more importantly, has much more
legal basis for it. So Joe, can we go back
to the fourteenth Amendment please? Okay, can we read that
language that you read.
Speaker 2 (27:55):
Joe's reaching into his pot.
Speaker 3 (27:59):
The validity of the public debt of the United States,
authorized by law, including debts incurred for payments of pensions
and bounties for services in suppressing insurrection or rebellion, shall
not be questioned.
Speaker 5 (28:11):
Okay, So that last part when Joe raised this at
the beginning of the podcast, I think he was focusing
and Joe, and you.
Speaker 3 (28:22):
Know what it was, to be honest, and you probably
sense this, to be honest, When I read this, I
was like, oh, I never really paid much attention to
that insurrection or rebellion point.
Speaker 5 (28:32):
That stuff is so important. Okay, I'm getting so excited
so I apologize for raising my volume. That is the
US saying to international creditors, we will not pay if
you lend for insurrection that is civil war, we will
not pay. And we think this is fine by international law.
(28:56):
Is remember in the early days, we were very concerned,
actually none of us, remember, we were very concerned about
following international law because we didn't want other countries to
send in the gunboats because we were violating law. It
was accepted arguably at that time there was okay not
to pay for debts incurred by the rebels in fighting
(29:19):
in a civil war.
Speaker 2 (29:21):
Right, and we all know at this point that one
man's coup can be another man's fight for liberation. So
it's open to interpretation. I got to ask just before
we go going back to Greenland, can Trump get Greenland?
How does that work legally?
Speaker 5 (29:38):
Oh? This is good too, But can I just go
back to what the implications of what Joe's language in
that in the fourteenth Amendment for Ukraine? If Putin takes
the position that what has happened in Ukraine is an
independence movement and there was a civil war, then Putin
(30:00):
could invoke basically our fourteenth Amendment and the laws that
followed since their's have been cases where the British took
a similar position in the context of the Boer War
and say I am not responsible for any of the
debts incurred by Ukraine because that was a civil war context,
(30:23):
and the side that wins does not have to pay
the debts of the side that loses. Bondholders I think
have been quite unaware of this possibility. Now, maybe it
will all get worked out, but I don't really see
how we can avoid working this out. But back to Greenland. Now,
(30:43):
can we get Greenland? Well, yes, we can get Greenland.
Even though borders are not supposed to change. We could
in theory, there's no international law prohibiting us purchasing Greenland.
The question is who do we purchase it from. In
(31:05):
the old days, we would have just purchased it from Denmark.
They kind of owned Greenland as property. But now we
don't think of post colonial states as property, although we
don't quite know. Maybe the property interests, to the extent
you think of sovereignty interests as property interests lie with
(31:26):
the people of Greenland. And so the fifty seven thousand,
quote unquote citizens of Greenland, maybe Trump could offer to
pay them each one point five million dollars in a
Swiss bank account and give them each a little house
on the beach in Santa Monica and give them one
(31:48):
of his Golden visas it could happen. It would be
brand new international law, but entirely plausible. The question, though,
is where's he going to get the money from. He
would really have to borrow a large amount of money,
And so we come back to the question of issuing
(32:10):
more US sovereign debt in a context in which we're
trying to reduce the sovereign det I am, maybe the.
Speaker 2 (32:17):
US could use the proceeds from recouping payment on those
old UK bonds to buy Greenland.
Speaker 5 (32:23):
We could, now, I suspect, okay, I'm building conspiracy theory
upon conspiracy theory, and maybe this is just.
Speaker 4 (32:30):
A bridge too far.
Speaker 5 (32:32):
But if you go back to techniques that Trump was
very fond of using, say in his casino days, he
really didn't like market processes where say, the US would
be bidding against Denmark and maybe Germany and maybe a
France for who would pay the Greenlanders the highest amount
(32:57):
in order to acquire Greenland. Instead, there's been a lot
of talk about security reasons. The security reasons and the
imperative that the US must have Greenland, and no talk of, say,
an auction for Greenland where the Greenlanders would get the
highest price. This talk about security reasons sounds more like
(33:20):
a regulatory taking where we get to take it at
the price we set because it is important for security reasons.
It is a technique that Trump has used in the
past in his property dealings and could try to use here.
Although I don't think there's any international law equivalent, but
(33:42):
we're making up international law in the modern era, okay.
Speaker 2 (33:46):
So I think at a minimum we can say we
are living through interesting times, and it's interesting times in
bonds as well. So thank you MITCHU for coming on
the show to explain all of that to us and
hopefully not give two many policy suggestions to the administration.
Speaker 3 (34:03):
I love talking to law professors. Thank you so much
for coming back on.
Speaker 4 (34:06):
It was so funny. Thank you both, Joe.
Speaker 2 (34:20):
I love talking to Mit too. I know sovereign bond
documentation is not necessarily everyone's idea of an exciting time,
but he makes it exciting and interesting.
Speaker 3 (34:31):
No, I wasn't kidding. I Actually it's fun to talk
to law professors, especially on this kind of stuff because
you can just see how their brain works and how
they're like, well, this part of the sentence you think
it's talk about this, but this part of the sentence
is like, oh, are we talking about conquest law that's
been in effect forever? Are we talking about the repudiation
(34:52):
of odious debt? Et cetera. And I just find it
a real pleasure to hear all of it.
Speaker 2 (34:57):
Absolutely, And I think the whole conversation highlights that point
about just how fluid some of these contracts actually can be.
And again, there's so many assumptions and norms that are
built into these things, even though often the documentation tries
to be air tight. Once those assumptions and norms start
to change, the way the bonds can be used or
(35:20):
enforced starts to change as well. And the same applies
to borders, as you pointed out, Yeah.
Speaker 4 (35:25):
And that's funny.
Speaker 3 (35:26):
Countries are so new, no, they really, Like I I
realized this a little while ago, like almost every country
is like it's basically day one around here. That you know,
so many countries are post World War two. That was
one of those things that I feel like only that
clicked in my brain way too late.
Speaker 2 (35:42):
I've been meaning to ask you, Yeah, how do you
feel about the trillion dollar coin now? Because I said
something like it's based on norms, that the treasure never
done this and we should treasure norms.
Speaker 3 (35:54):
I agree. I think an actual default where a mispayment
would be really bad. And if the choice is between
yet another norms violation, which at this point added to
the list, versus a literal non payment of a coupon,
which would be a default, I will I'll take the coin.
Speaker 2 (36:11):
Okay, glad we settled that. Yes, shall we leave it there?
Speaker 3 (36:14):
Let's leave it there.
Speaker 2 (36:15):
This has been another episode of the Authlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (36:21):
I'm joll Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carman armand dash O
Bennett at Dashbot and Kilbrooks at Kelbrooks. For more odd
Lots content, go to bloomberg dot com slash odd Lots,
where we have all of our episodes in a daily
newsletter and you can chat about all of these topics.
Twenty four to seven in our discord Discord dot gg
(36:42):
slash Outlock.
Speaker 2 (36:43):
And if you enjoy Odd Lots, if you like it
when we talk about Bond documentation, then please leave us
a positive review on your favorite podcast platform. And remember,
if you are a Bloomberg subscriber, you can listen to
all of our episodes absolutely ad free. All you need
to do is find the Bloomberg channel on Apple Podcasts
and follow the instructions there. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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