Unlike Barack Obama and others, I have sympathy for the hedge funds and other investment funds that rejected the Chrysler restructuring offer and forced it into Chapter 11 bankruptcy.
In fact, not only do I sympathise with their argument, but I think they have a better chance of getting improved terms from the bankruptcy court than the US administration would have us believe.
Here is what President Obama had to say on the topic this morning:
While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them. I stand with Chrysler’s employees and their families and communities. I stand with Chrysler’s management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don’t stand with those who held out when everybody else is making sacrifices.
And here is Felix Salmon, chiming in:
As for the smaller creditors who stood in the way of a deal which would have avoided bankruptcy, I have very little time for their plaints. They’re offering nothing which will help Chrysler in the future: they just want to get the maximum return on selling the bonds they picked up for pennies on the dollar. I hope and trust that the bankruptcy judge will give them short shrift.
Well, that all sounds reasonable. Hurray for the big banks, which are recipients of government money, being nudged into taking 33 cents on the dollar. Hurray for Chrysler and its workers. Boo to all those nasty hedge funds and “speculators”.
Well, yes except that some of these “speculators” inconveniently manage money on behalf of pension plans and endowments, rather than rapacious rich people. They have a fiduciary duty to get the best deal they can on behalf of their investors.
I also take seriously their point that, although they are higher up in the ranks of creditors than Chrysler’s unions, notably the UAW, they were offered less for their investments.
According to their statement:
Under long recognized legal and business principles, junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full. Nevertheless, to facilitate Chrysler’s rehabilitation, we offered to take a 40 per cent haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50 per cent or more and being allowed to take out billions of dollars.
President Obama is trying to use the bully pulpit of the presidency to shove these investors into taking a worse deal than they could ordinarily expect under Chapter 11. The Tarp-funded banks that voted for the deal were no doubt aware of how they might by pilloried if they did not do so.
But there is a decent chance that the bankruptcy judge will ignore all of this poltical grandstanding in favour of longstanding legal principles, and so he or she should.
Update: Andrew Leonard is also unhappy about the “vultures”. I do find it odd that one set of people who pursue their financial self-interest is regarded as OK, while another set is regarded as villainous.
