A Debt Ceiling Plaintiff With Grounds To Sue: Credit Default Swap Buyers

I’ve been sympathetic to the view that if Barack Obama were to simply sweep aside the debt ceiling, arguing that Congress has already appropriated funds and citing Section 4 of Amendment XIV on the validity of the public debt, that nobody in practice would have standing to sue and stop him. But Matt Zeitlin’s article making the case that he should do this has actually talked me down somewhat from that view. There is, after all, the matter of the credit default swap holders:

Leaving Congress aside, it appears the only possible party to a suit challenging the administration’s ability to exceed the debt ceiling would be a character that almost seems designed to elicit zero public sympathy: those who purchased credit default swaps which would pay off in the event of government default. Charles Tiefer, a law professor at the University of Baltimore, told me that Congress could pass a statute that strengthened the ability of this group of investors to sue as an injured party. But this statute, of course, could be filibustered in the Senate or vetoed by the president. Moreover, it would force Republicans to defend the right of those who had hoped to profit from a national default or dip in creditworthiness to sue the government because their payouts had been prevented.

It’s true that this wouldn’t be a very sympathetic group of plaintiffs, but that doesn’t mean they’d lose. What’s more, beyond the specifics in the case I think the general principle that the president shouldn’t sweep aside decades of practice and declare the debt ceiling non-binding would generate plenty of sympathy.

The right strategy here is payment prioritization. Keep paying creditors, keep paying transfer programs to the poor, but start paying what the government owes to contractors, health care providers, and state governments in the form of IOUs. Then these unsecured and unwilling creditors become a lobby for raising the debt ceiling so they can get paid.