Whose interests should Chrysler debt holders put first?

Hedge funds have made easy scapegoats for nearly everything that has gone wrong in the financial system over the last two years.

Today, hedge funds that own Chrysler debt got the blame for the automaker’s bankruptcy: President Obama took to the bully pulpit to say the government’s hand was forced because "a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout."

Rep. John Dingell (D-Mich.) labeled the dissidents "rogue hedge funds" and "vultures" -- perhaps not appreciating that so-called vulture investing is exactly what lures some investors to hedge funds.

While most Chrysler creditors (including major banks with government capital on their books) agreed to the firm’s proposed debt restructuring, the dissident group wanted more than the proposed 33 cents on the dollar for their loans to Chrysler. In fact, they wanted about 60 cents on the dollar.

At that point, the administration pulled the plug on the talks, and Chrysler headed into bankruptcy court.

So whose interest, exactly, should the hedge funds have been considering in the debt negotiations -- their investors’ interest, or the national interest (i.e., that of U.S. taxpayers and Chrysler employees)?

In a statement before the bankruptcy filing, about 20 of the dissidents insisted that they were "legally bound" as fiduciaries to protect the interests of their investors.

"Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well-established legal framework and cannot be rationalized as being commercially reasonable," they said.

They noted that as secured creditors, by law they ranked higher than unsecured creditors in the pecking order of claimants on Chrysler’s assets. . . .

"Nevertheless, to facilitate Chrysler’s rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars," the dissidents said.

The group of 20 didn’t list their names with their statement -- playing into their critics’ hands by further fostering the stereotype of the faceless, shadowy hedge fund.

Lamely, the group instead sought to put a face on its investors, saying it represented the money of "many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler."

But at least one of the 20 identified itself: In a separate statement, New York-based OppenheimerFunds said it rejected the government’s offer "because they unfairly asked our fund shareholders to make financial sacrifices greater than the sacrifices being made by unsecured creditors."

Which should prevail -- investors’ legal interests, or the federal government’s interests? The battle now moves to the bankruptcy court, with potential implications for a bigger financial restructuring on the horizon: the government’s effort to save General Motors.

-- Tom Petruno

Photo: President Obama speaking on the Chrysler bankruptcy today. Credit: Saul Loeb / AFP Getty Images

Comments

[Willie Ray]

Obama is really upset because he wasn't able to repay the political backing of the unions with billions of dollars in stock and controlling interest in Chrysler.
This was Obama's intention from the start.... hand over GM and Chrysler to the unions. They would then cut the salaries' of the workers who funded the Obama bid for the Whitehouse and tell the workers they are lucky to still have jobs thanks to Obama keeping Chrysler out of bankruptcy. Retired workers would be taken off the health care roles and enrolled in the new Obama health care system which would be needed more than ever. This is one big plot to repay the unions if you don't believe that I have some swamp land for sale.

[omida]

What is new about a greedy financial system. They take your money and play with it. If you are lucky (good old days) you get 5 to 10 percent while they get the millions as bonuses and commissions. If you are not luck, you lose your money and they get millions as bonuses and commissions!

[george]

blaming these funds is nonsense. first, chrysler is in the position it now is in not because of these funds but because of decades of poor management. to blame these funds for chrysler's current predicament is reckless by washington. second, of course these funds have to put their investors' interests first -- they are legally obligated to do so. will washington indemnify these funds if they get sued? if the lower ranked creditors are getting better terms than creditors with higher priority, that is a legitimate beef. finally, although they may not get much more money and are taking a big pr hit, i am glad these funds are standing up. the govt's meddling in business such as the nonsensical pay caps and the continued scapegoating of wall street is getting out of hand. a lot of ppl are to blame for this crisis from your debt-laden consumer to regulators and to wall street as well but all this administration seems to want to do is point fingers at easy targets like wall street and bush policies rather than lead the nation.

[Louis Massano]

The hedge funds' claim that they had a fiduciary obligation to their investors would seem plausible if only they were overseen and regulated by the federal government, as (for example) mutual funds are.

The role of hedge funds in fomenting this latest and worst global financial crisis - even as some of them benefitted from said crisis as they were paid off by AIG and other banks - has yet to be fully investigated.

Those who know about the fiancial climate of the late 1920s and early 30 have heard of the Insull utility holding company and Ivar Kruegar's strange attempt to corner the world production of matches.

The financial jiggerypokery of those long ago forgotten financial thimbleriggers will someday be shown to be outdone by the world's thousands of hedge funds - if only Mr. Obama and the European Union keep up the heat on them.

[Lefty]

There's a crucial piece of information missing from the discussion: how much did the hedge funds pay for the Chrysler debt? I'm doubting they bought it at par, or 100 cents on the dollar. So offering to sell it for 60 cents was not necessarily a sacrifice -- they could have bought the debt for less than 60 cents on the dollar.

[Alex, San Francisco CA]

It doesn't matter what the hedge funds paid for the Chrysler debt. That's no one's business. Do we ask people what they paid for their house when they go to sell it?
The main argument is that Chrysler needs to be restructured. Why should these bondholders forgive debt? Remember contract law...oh wait...we now have White House rules.

[Tom Petruno]

@Lefty: We don't know what prices they paid for the debt; I've seen estimates ranging from a few pennies to 60 cents on the dollar. The cost basis varies with the fund, of course. Their argument is that they didn't have to make any sacrifice (under the law), but were willing to go to 60 cents. Were they trying to ensure a profit? Of course. They didn't buy the bonds just so they'd be in a position to help Chrysler some day. I don't care at all what happens to an individual hedge fund, but if we look at this purely from a legal standpoint, either creditors' rights are worth something, or they're worth nothing. They can't be worth something just some of the time. (Then again, if Chrysler's debtholders didn't understand that the government would be crawling into bed with them, maybe they deserve the public flogging they're getting.)

Tom Petruno

[bkl]

This illustrates the problem with the government being a stock holder and/or a debt holder. Is the government trying to do what is best for the country as a whole, for taxpayers, or for its political supporters? These three roles are most likely in conflict, so the government is probably not doing what is best for the country or what is best for taxpayers. It certainly isn't taking a neutral position relative to the various stakeholders. The bailout is a mistake.

[Vic Arpeggio]

You know, I understand hedge fund managers wanting to the best for their investors. I also understand them realizing reality staring them in the face. Under bankruptcy protection, what will they get? Greedy fools.

PS - Willie Ray, wear the tinfoil hat much?

[yo]

bkl,
it appears that you're calling the hedge funds greedy for wanting a better deal than the unions, which they are legally superior to.

you're obviously part of this whole crowd that thinks the law is an impediment to fairness and it should simply be disregarded. I would bet that you were one of the people calling bush a fascist at every opportunity, too.

[Robert Johnson]

Funny, but Goldman Sachs and the other banksters got a full payout from AIG even as the gov put 160 billion into AIG. But now Obama and company want the chrysler bondholders who are not part of the gov cabal to take a big haircut. I hate how the playing field is so unlevel.

[Robert Thomas]

If anyone cares about the rule of law, theire is no question that the 20 or so majority debt holders should challenge the Obama plan. We have 10's of years of chapter 11 preceeent with a very speciific hierarchy of who gets paid first, something every 1st year corp finance student learns. Just because Obama wnat's to reward the UAW for political support does not mean he is ablt to break corporate contract law. It would also appear that some of the 20 senior debt holders who resisted, were about to be beatedn and haraased by the Obama Chicago henchmen know as the White House Press core. Chrysler and GM would be far better off today, if they had firled for Chapter 11 months ago and saved taxpayers billions which can never be paid back. Just giving ghe UAW 55% or controlling interest of Chrysler (who were responsible for most of the auto inustries problems to being with in charte) is like making Vito Corlene incharge of contract negoiations for the music business.

[jim]

Why is the UAW scum recieving more money on their dollar than secured Bondholders who are above them in the line? Why does the UAW get any money at all if they are BY LAW (something Obama clearly doesnt understand) behind them in line for the money. Obama already ripped up the constitution, so whats stopping him from ripping up every law there is until the Unions own everything. This crap about him wanting a supreme court justice that has "empathy" is complete BS too. You know they would be "empathetic" to the Union members and allow them to steal money from the average americans who own bonds in mutual funds and such