Henes: The Debt Ceiling Debate — A Good Old Fashioned Restructuring Negotiation
We are witnessing a classic restructuring negotiation.
The Administration and Congress are negotiating a plan to restructure the federal government. The dynamics of the debt ceiling restructuring negotiations resemble corporate restructuring negotiations.
In a complex corporate restructuring, one of the challenges is organizing the stakeholders and finding a plan that they can all agree upon or, if certain stakeholders will not agree, a plan that the requisite majorities can out-vote the detractors. In a public company restructuring, the typical stakeholders are the company (the debtor), secured lenders (banks and hedge funds), high yield bondholders (hedge funds and insurance companies) and shareholders (hedge funds, individuals, mutual funds). Based on their position in the capital structure, these stakeholders have different preferences, rights and desires. Indeed, within each creditor "class," stakeholders may have differences of opinions. It is the job of the debtor - the company - to analyze the situation, make alliances, foster good faith negotiations, find common ground and drive a deal that can be achieved.
In the current restructuring debate, there is a disparate group of stakeholders with different desires and goals. The stakeholders are the administration, the Senate Democrats, the Senate Republicans Democrats, the House Democrats, the House Republican leadership and the Tea Party Republicans (not to mention the American people whose voice will not be heard until November of 2012). The negotiations are complex, public and important. And, we are coming to down to the wire. With two weeks to go, the Administration and Congress may be inching closer to a deal. Over the past few days, we have seen three debt reduction proposals, which if approved in some form would result in the raising of the debt ceiling.
The first, which was approved by the House yesterday on a 234-190 vote, is the so-called "cut, cap and balance" proposal. It will not get through the Senate and, even if it did, President Obama would veto it. Interestingly, nine Republican members of the House voted against the "cut, cap and balance" proposal. According to Representative and Presidential Candidate Michele Bachman, it "does not go far enough in fundamentally restructuring the way Washington spends taxpayer dollars," although she did indicate it was a step in the right direction. Representative and Presidential Candidate Ron Paul said that "what we really need is a constitutional amendment to limit taxes and spending, not simply to balance the budget."
The second is the "Gang of Six" plan. The "Gang of Six" consists of three Democratic Senators and three Republican Senators and its plan contemplates a reduction of the federal government’s deficit by $3.7 trillion over 10 years, a reduction of publicly-held debt to 70% of GDP by 2021, and the reform of the tax code, which would lower marginal rates, while limiting exemptions. President Obama praised the "Gang of Six" plan and commented on its "balanced approach." House Majority Leader Eric Cantor issued a statement about the "Gang of Six" plan, stating that he is reviewing the plan and it appears there are "some constructive ideas to deal with" the nation's debt. But, he also expressed concerns, specifically with the revenue targets in the plan and how "the goals of tax and entitlement reforms would be enforced." Speaker of the House John Boehner explained that the "Gang of Six" plan "shares many similarities with the framework the Speaker discussed with the President, but also appears to fall short in some important areas." And, Congressman Paul Ryan released an preliminary analysis stating that the "plan is not a budget. It is a set of talking points and graphs that outlines and ambitious proposal that has serious flaws but also the potential for worthwhile budget and tax reforms."
One of the major hurdles to the “Gang of Six” planis that it is not ready for prime time and will not be ready for August 2nd.
The third is the McConnell plan, which would allow President Obama to raise the debt ceiling three times in the next 18 months without going to Congress. This plan is a backup plan to assure that the United States is not in the position of picking and choosing who gets paid. The House Democrats are pushing back on this plan and, more than likely, the House Republicans will too.
Three huge hurdles remain. First, there is not enough time. For any of these plans to be achieved, the process will be complex and the plans will be heavily negotiated over the next two weeks. This always contains risks because negotiators can hold firm on ideological views and refuse to budge. Second, the House Republicans who voted for the "cut, cap and balance" plan need to be convinced to vote for a plan that may cut (but less than their plan), may cap (but without the enforcement mechanisms they want) and will not be tied to a balance budget amendment. Third, the nine members of the House who voted against the "cut, cap and balance" bill will attempt to win over the House Republicans to vote against any compromise plan.
With three plans on the table, each with its own challenges, and time running out, President Obama today announced that he would agree to a short-term extension of the debt ceiling if there is an agreement on a long-term, bi-partisan agreement on a deficit reduction plan that simply needs time to be passed by Congress. And, while it seems that the Senate Republicans are willing to strike a deal, the question will be whether the House Republicans will give their support to any plan other than the “cut, cap and balance” plan. The White House is meeting with the House and Senate Democrats today as the restructuring negotiations keep moving. Over the next two weeks we will see the dynamics change and hear of many alternatives and options. We will also continue hearing about the risks to the nation if the debt ceiling is not raised. But, at the end of the day, there is one real question, will a deal be achieved or will the Administration need to start picking and choosing who it pays?
Jon Henes is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in the United States and abroad across a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics, federal, state and local fiscal issues.