Skip to main content

View Diary: Economic Populist: Consol Bonds are the Debt Ceiling Walk Off Home Run (27 comments)

Comment Preferences

  •  I doubt it. (3+ / 0-)
    Recommended by:
    Wee Mama, wilderness voice, Lujane

    Perps (or perpetuals, or consuls) have a notional principal balance. That notional balance is guaranteed to remain fixed. The principal is never paid, but GAAP would require the creation of a liability equal to the notional balance. If an entity issued this debt and didn't record the liability it would be accounting fraud.

    •  Is Treasury Dept subject to this GAAP requirement? (1+ / 0-)
      Recommended by:
      Lujane

      Who would be defrauded? the Repubs in the House?

      What would their damages be? the right to interpret the debt ceiling law broadly enough to be used for hostage-taking?

      •  My guess is that it simply wouldn't (1+ / 0-)
        Recommended by:
        Lujane

        work. There would be no way to not record the liability as "long term debt", even though it is a notional balance. This is not novel - companies and governments have issued perpetuals in the past. The accounting is not all that controversial.

      •  The GAAP requirement is an accounting ... (3+ / 0-)
        Recommended by:
        TheMomCat, priceman, Lujane

        ... requirement, and it goes without saying that the GAAP accounting of the Treasury operation is not the same as the debt ceiling accounting of the Treasury operation, just as the current GAAP accounting  of the Treasury operation is distinct from the current debt ceiling accounting of the current Treasury operation.

        That is, the debt ceiling is not defined by with respect to any debt definition under GAAP, its with respect to total national debt as defined in the legislation, which is strictly guaranteed principle payments.

        Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

        by BruceMcF on Fri Sep 27, 2013 at 06:27:21 AM PDT

        [ Parent ]

        •  I found this nice summary of why this (2+ / 0-)
          Recommended by:
          wilderness voice, Lujane

          won't work.

          Here's what the law, codified as 31 USC 3101, actually says about what counts toward the limit:

              (a) In this section, the current redemption value of an obligation issued on a discount basis and redeemable before maturity at the option of its holder is deemed to be the face amount of the obligation.

              (b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $14,294,000,000,000,outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX [1] of the Rules of the House of Representatives or as provided by section 3101A or otherwise.

              (c) For purposes of this section, the face amount, for any month, of any obligation issued on a discount basis that is not redeemable before maturity at the option of the holder of the obligation is an amount equal to the sum of—

              (1) the original issue price of the obligation, plus

              (2) the portion of the discount on the obligation attributable to periods before the beginning of such month (as determined under the principles of section 1272(a) of the Internal Revenue Code of 1986 without regard to any exceptions contained in paragraph (2) of such section).

          It's Section (c) (1) that trips up the Zeros and the MOCs. The instruments would not be redeemable before maturity—they have no maturity—so their face value would be equal to the original issue price. Clever thought though.
          •  Yes, John Carney quotes the language ... (3+ / 0-)
            Recommended by:
            limpidglass, TheMomCat, priceman

            ... but doesn't read it closely.

            Indeed, he stares the loophole in the face and believing in advance that it is not there, does not see it.

            Treasury bills are sold on a discount basis ~ they are all face value on majority, no coupon, and the yield is determined by the discount to the face value on maturity at which they are sold.

            Sect. [c] is why T-bills are under the debt ceiling, and specifies how they are to be counted.

            Consols are the opposite of Treasury Bills ~ they are all coupon, no face value on maturity. These Consols would not be issued on a discount basis so "of any obligation sold on a discount basis" does not apply to them, to "the original issue price of the obligation" does not apply.

            Indeed, this point to how the loophole would be closed if a veto-proof majority of both Houses wanted to close that loophole. No face value is legally equivalent to a face value of zero, and so any no face value consol bonds would always be sold on a premium basis. So all that would be required would be:

            "for any month, of any obligation issued on a discount or premium basis that is not redeemable before maturity at the option of the holder of the obligation, is an amount equal to the sum of:"

            Its just an oversight in drafting. The legislation was drawn up with reference to the mix of Treasury securities being offered, and zero face value bonds sold at a premium basis have never been part of that mix. Regular face value long term bonds may, of course, be sold on a premium on occasion, but for the purposes of the debt ceiling computation, they are counted at face value under section (b).

            Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

            by BruceMcF on Fri Sep 27, 2013 at 07:15:13 AM PDT

            [ Parent ]

    •  Bruce is saying, though, that they aren't (0+ / 0-)

      "guaranteed" per the debt ceiling statute, which is a little different than what you're saying.

      its like how Greece bought that currency derivative from Goldman but it wasn't "debt" for purposes of the EU accounting rules.

      •  The debt ceiling language in the diary (1+ / 0-)
        Recommended by:
        wilderness voice

        references "principal". Principal can be actual or notional. This is no different than when the Treasury (or any issuer) creates bonds and then creates strips from that bond (separating the P and I components). Different investors can then buy the interest or the principal strip. If the Treasury retains the principal strip but sells the interest strip, there is still a liability created equal to either the notional balance or the sales price of the interest strip. This idea here has some semantic claims, but no accountant would agree that the issuer should not record a liability for the amount of the notional balance. So every accountant in America would say the Obama administration is trying to do something GAAP would not allow.

        •  Yes, and so? (2+ / 0-)
          Recommended by:
          TheMomCat, priceman

          The legal question is not whether there is a notional value, but whether the notional value is included under the debt ceiling definition.

          It is not. The interest would be, since the interest is guaranteed, except the legal language does not include interest in the computation of total debt under the limit.

          Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

          by BruceMcF on Fri Sep 27, 2013 at 06:19:44 AM PDT

          [ Parent ]

          •  The definition says the word "principal". (1+ / 0-)
            Recommended by:
            wilderness voice

            Principal is NOT just an amount paid upon a maturity. It can be of a second form as well - notional principal. Notional principal is not actually paid, and has no maturity date. But it is indeed a form of principal, and is the number recorded as principal issued when an issuer sells perpetuals. You should not assume that the word "principal" in the debt ceiling language means only one of the two types of principal. That is not what Generally Accepted Accounting Principles says.

          •  I doubt that. (1+ / 0-)
            Recommended by:
            wilderness voice

            I really don't think that the Treasury can issue bonds and then turn around and repudiate the principal.  That would violate the 14th amendment.  If they can't repudiate principal, then the bonds are guaranteed.

            •  What do you mean 'repudiate' the principle? (3+ / 0-)
              Recommended by:
              limpidglass, TheMomCat, priceman

              If its a consol, the principle is not guaranteed. Indeed, if its defined payment consol, the principle is market determined: it is precisely the funds raised when it is sold at auction.

              Its a term of the series on original sale that the holder receives an ongoing series of interest payments, so nothing is repudiated. There's no practical reason to expect the interest payments to be repudiated ~ the British government still makes quarterly payments on its outstanding consol bonds.

              Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

              by BruceMcF on Fri Sep 27, 2013 at 06:39:32 AM PDT

              [ Parent ]

    •  The principle is not, however, guaranteed. (2+ / 0-)
      Recommended by:
      TheMomCat, priceman

      You are talking to a different point than the legislative language, which specifies what is added up when computing the total debt.

      The existence of a notional principle balance and the existence of guaranteed interest payments are neither here nor there given that the relevant amounts are guaranteed principle payments, not notional principle balances nor any interest payments.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Fri Sep 27, 2013 at 06:23:24 AM PDT

      [ Parent ]

      •  The language says (0+ / 0-)

        "guaranteed principal", or "guaranteed principal payments"? Two different things.

        •  The language says ... (2+ / 0-)
          Recommended by:
          TheMomCat, priceman

          "face amount".

          How much do zero face value amount bonds add to the total debt outstanding, calculated on the basis of the "face amount"?

          The handling of T-bills shows how no face value consols would be handled ~ using the original issue price, which on IRS definitions would be the price at which brokers who buy the bonds at auction originally price the bonds for sale of a major portion of the bonds to the public.

          But the legislation as drafted is backward looking, and address types of securities that the Treasury has traditionally issued.

          Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

          by BruceMcF on Fri Sep 27, 2013 at 07:30:38 AM PDT

          [ Parent ]

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site