The Largest Workout in History

What happens when a nuclear-armed nation-state goes through Chapter 11?

Now that “Liberation Day” is behind us, another piece of the puzzle has snapped into place. The method underlying what many consider to be 60+ days of madness is starting to take shape. We are literally acting like the country is bankrupt.

If you are running a profitable and/or fast growing business, you often budget based on last year’s expenses. The concept is “We are growing the top line. So if you can keep expenses, flat - margins will grow and all is good. Justify any increase from last year please.” If your business is low growth or in trouble, many organizations shift to ‘zero based budgeting’. In zero-based budgeting, it is much more severe - “Your budget starts at zero, please justify every expense you want to add - including your own salary.” In these situations, you will throw a heater out of a sinking life boat because freezing slowly is better than drowning instantly.

Trump 2.0 is going zero-based on everything. Cut spending to zero, then add back to it if necessary. Fire as many staff as possible, then add some back if necessary. Impose enormous tariffs, then back them down after renegotiating a variety of things that may not even involve tariffs. Politicians have been warning about runaway spending and ballooning federal deficits for decades. The word bankruptcy has been thrown around consistently. This crew appears to believe that no matter the negative impacts of their choices - bankruptcy is actually in play and it is a worse alternative. So let’s take a quick look at the various types of bankruptcy available in the United States.

Types of Bankruptcy (source: ChatGPT)

1. Chapter 7 – Liquidation

Overview:

• The company ceases operations and liquidates all assets.

• A court-appointed trustee sells the assets and distributes proceeds to creditors.

• Primarily used when the business has no viable path forward.

Key Features:

• No reorganization — it’s a full wind-down.

• Unsecured creditors often receive only a fraction of what they're owed.

• Equity holders usually receive nothing.

• Management is replaced by a trustee.

When to Use:

• The business is insolvent and has no realistic chance of recovery or reorganization.

2. Chapter 11 – Reorganization

Overview:

• The company continues operations while restructuring its debts.

• Management typically remains in control as a “debtor in possession.”

• A reorganization plan is created and must be approved by creditors and the court.

Key Features:

• Allows restructuring of debt, termination or renegotiation of leases and contracts.

• Can involve asset sales, downsizing, or conversion of debt to equity.

• Flexible and complex; can take months or years.

Subchapter V (Small Business Option):

• For small businesses with debts under a certain threshold (approx. $7.5 million).

• Streamlined and less expensive.

• A trustee is appointed, but the business retains control.

When to Use:

• The business is viable but needs time and structure to manage debt and operational issues.

3. Chapter 15 – Cross-Border Insolvency

Overview:

• Applies when a company has assets, creditors, or operations in multiple countries.

• Designed to provide cooperation between U.S. courts and foreign bankruptcy proceedings.

Key Features:

• Not a stand-alone bankruptcy — it supplements a primary insolvency proceeding in another country.

• Used to protect U.S. assets of a foreign company undergoing bankruptcy abroad.

When to Use:

• A foreign company has U.S. operations or creditors and needs protection or coordination during international bankruptcy.

Which is it?

Most countries that have been economic basket cases generally look like Chapter 11 entities. The countries don’t dissolve entirely. They often keep current management. There continues to be a geographic footprint with a set of laws governing it and some semblance of a government. These countries don’t go through an intergalactic bankruptcy court, but for them to borrow money from the rest of the world to fund ongoing operations, the World Bank and the International Monetary Fund kind of act like a bankruptcy court.

Notice the tools available here - restructuring debt, renegotiating contracts or leases, asset sales, etc…. This administration has been talking about all of these and is doing a lot of them already. “You can’t tariff Mexico & Canada - we have NAFTA or USMCA!” Contract renegotiation is underway…. “You can’t fire these employees - they have union jobs!” Union jobs aren’t always safe in a bankruptcy. There is talk of explicitly tying long-term purchases of U.S. Treasuries to our security guarantees for places like Japan and Europe. Some would be new issuance, some would be restructuring existing debt.

But we haven’t really declared bankruptcy, and we were currently receiving enough funds to keep the doors open. What is this weird place we are in?

Workout

A workout is an informal, out-of-court agreement between a financially distressed company and its creditors to restructure debt, avoid default, and prevent bankruptcy altogether. It’s like a preemptive negotiation to resolve problems without going through the courts.

Key Characteristics of a Workout:

• Voluntary: All parties must agree.

• Private: Not filed with the bankruptcy court.

• Flexible: Terms can include repayment extensions, reduced interest, or partial debt forgiveness.

• Faster & cheaper than Chapter 11.

• Riskier for creditors — no automatic stay or court supervision.

What we are doing feels a lot like a workout. Except for bullet #1: this isn’t voluntary for the creditors. This may be the first workout of a party that has nuclear weapons. So it is starting on ‘our’ terms. Whether it ends on ‘our’ terms is the $36 trillion question.

What happens in a bankruptcy and/or workout?

Different parties get different results. Most parties to a bankruptcy don’t get out of it what they expected when they first engaged with said organization.

• Equity holders often take the biggest hit. They had the ability to profit off the upside, but no downside protection. Take a look at the equity markets. Is there a meta-equity holder haircut happening? Does the administration appear not to care that equity holders are getting punished? It doesn’t feel strange if you think about this as part of a workout.

• Creditors often take haircuts. It takes longer to be repaid. The rates of repayment are lower than expected. The total amount repaid can be lower. The U.S. is attempting a hard-renegotiation, but soft default is always on the table with money printing. We could literally print $36 trillion tomorrow and pay off the debt. (It would destroy the U.S. Dollar forever, but it’s an option.) We appear to be trying to leverage both of these options. We’ll attempt to restructuring of the debt while also pushing U.S. Treasury yields below inflation rates.

• We are selling assets - $5 million dollar green cards so far. Look for accelerated mineral leases, public land sales, divestment of publicly owned commercial real estate (office buildings that used to house those workers who were just fired), co-development opportunities, or who knows what else.

The end result has to be the confidence of future creditors in a sustainable path forward. I have no idea if this crew is doing the right thing on tariffs, but quick and painful is the way to do a reset. If 12-18 months from now markets can see a flat trajectory on debt, more certain economic rules of engagement and a healthy underlying economy - we can keep the money-printing piece of this puzzle as small as possible. If we haven’t dramatically improved our national financial position, we will have likely accelerated its demise. At that point, keep this in mind: There is no such thing as ‘Mandatory Spending’.