Mitu Gulati on Whether Trump Could Restructure US Debt

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, you know what I like to say about bonds?

Joe Weisenthal (0:27)

Go on.

Tracy Alloway (0:28)

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 as more stories. 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 that can change really quickly.

Joe Weisenthal (1:09)

You know what's actually interesting about you saying this, I was thinking back to our episode that we did with Sujit Indap about creditor-uncreditor 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, etc. 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, etc. Versus, come on, that's not how we deal with bonds.

Tracy Alloway (1:53)

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 bonds. 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 Mar-a-Lago Accord, which includes a possible debt swap. Again, all of that 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 discuss.

Joe Weisenthal (2:28)

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 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 a pause, etc. And there is this incredible maelstrom 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 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.

Tracy Alloway (3:24)

You always say you want to take Trump literally and seriously, so...

Joe Weisenthal (3:28)

I only take him literally anymore.

Tracy Alloway (3:30)

Okay, here's our disclaimer. This is not an actual policy suggestion for the Trump administration, but we are going to talk about it.

Joe Weisenthal (3:36)

People are talking about it, so let's talk about it.

Tracy Alloway (3:37)

How realistic it is. And we have the perfect guest. We're going to be speaking with Mitu Gulati, 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, Mitu, thank you so much for coming on Odd Lots.

Mitu Gulati (3:55)

I'm so excited to be here. I shouldn't be excited about all the crazy loony things that are being discussed, but from an academic perspective, this is just heavenly, even though I might be jobless soon.

Joe Weisenthal (4:10)

Right.

Tracy Alloway (4:11)

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?

Mitu Gulati (4:24)

So I actually think that I heard about it on one of your podcasts.

Joe Weisenthal (4:29)

Oh, God.