Inside the Fed's 'D-Day' War Games

At the Federal Reserve, they called it “D-Day”: the day the U.S. hits its debt ceiling.

According to documents obtained by Republican staffers of the House Financial Services Committee, the central bank and Treasury Department held detailed calls and exchanged emails to discuss what they would do if the government ran out of borrowing authority to pay its bills—a scenario referred to in one instance as “doomsday.”

The issue of prioritizing government payments was a partisan bone of contention during debt-ceiling debates of 2013. The Obama administration publicly contended that choosing who gets paid first is tantamount to default. Republicans sought assurances that such a strategy could be done, and subpoenas were issued to learn the specifics.

The more than 200 pages of internal Fed documents, released Monday by the committee on its website, give a detailed window into the contingency planning by the central bank and Treasury in case Congress failed to raise the debt limit. In one fictitious scenario discussed in a slide presentation dated April 2013, the president would sign a bill into law giving priority to the payment of Social Security, veterans' benefits, and the principal and interest on government debt.

Later, he would meet with the Treasury secretary and Fed chairman to confirm the central bank would carry out the plan. All other government obligations would take a back seat, according to the documents.

They show Fed officials considering how to proceed if there's not enough cash to pay the principal and interest on government debt. According to an October 2013 memo for New York Fed President William C. Dudley marked “restricted,” depending on how the Treasury acts and negotiations proceed, the debt would either default or maturities would have to be extended by one day, the memo said.

In October, Congress passed a two-year budget plan that extended the government's borrowing authority until March 2017. Before the deal was reached, the Treasury put in place extraordinary measures to conserve cash and postponed an auction of two-year notes.

Republicans on the panel said the documents show that the Obama administration misled the public about contingency plans during recent debt-ceiling showdowns and obstructed a subsequent congressional probe into the matter. Committee Chairman Jeb Hensarling, a Texas Republican, said the administration “took the nation's creditworthiness and economy hostage in a cynical attempt to create a crisis.”

Treasury Considers Whether It Can Prioritize Some Bondholders over Others

In a statement released Monday, a Treasury spokesman said the department has been forced to consider a range of options should Congress ever fail to raise the limit. While delaying payments is considered the least harmful option, it would still be default, the spokesman said.

A New York Fed spokeswoman referred to a May 2015 statement citing a March 2015 letter in which the reserve bank's general counsel highlighted the information it provided to the committee and noted it could only release certain documents with Treasury approval.

“It is certainly in the Treasury and the Fed's best interest to inform the public of their ability to prioritize debt payments,” said Lawrence Goodman, president for the Center for Financial Stability in New York. “Communication and transparency would be in the best interest of markets, especially after a financial crisis.”

While the Treasury issues debt and sets fiscal policy, the Fed's role is to process payments from federal agencies and facilitate sales of Treasury securities on behalf of the government.

Fed officials appeared to be aware of the political risk of prioritizing bondholder payments. One email said there could be a “shift in the political strategy” if sentiment grew that the U.S. shouldn't “pay China ahead of veterans or Social Security recipients.”

Lawmakers resolved the 2013 debt standoff on Oct. 16 of that year, the day before the government was to exhaust its borrowing authority.

Handwritten notes by a New York Fed employee suggested that, if only principal and interest on debt were paid, funds could have lasted until at least December, according to the documents.

–With assistance from Matthew Boesler and Craig Torres.

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