(Much) More on the Chrysler Bailout, Clifford Asness, and the UAW
| Fri May. 8, 2009 10:42 AM PDT
Yesterday, I wrote about Clifford Asness, a hedge fund manager who is upset with President Barack Obama's plan for the Chrysler reorganization. Asness is upset because he says that senior creditors (including many hedge funds, although not his own) are being screwed in the deal. Anyway, the post provoked a long, thoughtful response from commenter ObamaDonor, which I'd like to highlight here (I can't link to it directly because ObamaDonor isn't a registered user of the site):
"Like Rick Santelli, Asness doesn't seem to understand that super-rich finance guys are not exactly the most popular demographic right now."
Actually, if you read the letter, you'll see this is exactly Asness' point. The President singled out hedge funds because they are unpopular, not because they have any special obligation to fund UAW pension shortfalls. Most of the Chrysler secured lenders were not hedge funds, and most hedge funds were not Chrysler secured lenders. But attacking bondholders is not smart when millions of not-so-rich people have lost money they thought was safe in bonds. So attack the nearest unpopular surrogate.
[...]
The secured bondholders thought they would do better in bankruptcy, as is their legal right. That's not asking for a bailout, it's asking for enforcement of a contract. The President wanted them to give up that extra value and give it to the UAW. He can want that, maybe it's even good public policy, but it's wrong to shake down a specific small group to pay for it....
[...]
Obama is a good President, but this was stupid and wrong. He should be called on it by his supporters, even more than by his detractors. Yes, it's politics and usual, but I didn't vote for politics as usual. Yes, this is a tough time with a lot of hard decisions, I don't expect them all to be correct. But if he doesn't fix the mistakes, soon none of them will be correct.
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There are a lot of issues to address here. I concede that Asness probably realizes how unpopular rich finance guys are right now. My point was that he doesn't understand the implications of that realization. In effect, his letter helps the White House to frame the battle as being between the administration and "speculators." The key point about Asness's letter is that it's politically obtuse, whether or not Asness is right on the morality of the situation (which is something I'll get to later).
I don't think ObamaDonor is accurately characterizing the "singling out" of hedge funds. After deciding to hold out, the secured creditors who disagreed with the Obama plan formed a committee to publicize their disagreement. They put out a statement [PDF] criticizing the decision. In other words, they willingly put themselves out there. They should have realized that by holding out when all other creditors had agreed to the deal, they were putting a bullseye on their backs. Holding out might have worked if they were a politically sympathetic group like middle-class autoworkers. But they're not. Them's the facts.
ObamaDonor is certainly right that the holdouts were acting within their legal and moral rights. The real question is whether they were being smart. I wrote: "The hedge funds should have known when they bought Chrysler's debt that any deal to save the company was likely to involve government money and all the strings that come with it." I'll add to that: anyone who was holding Chrysler debt should have known that. There's a reason it was trading at 30 cents on the dollar. The TARP money gave the government significant leverage over the banks -- any sane person should have realized that bailout money would give Obama similar leverage over Chrysler.
When the government gives a company billions of dollars, normal rules don't apply. Owning Chrysler bonds in early 2009 is no different than owning the bonds of a company in any other country experiencing massive government intervention in its economy. Political considerations come into play. Now even the holdouts are slowly realizing this. The Times reported on Friday morning that the group of dissidents is disbanding because Oppenheimer Funds and Stairway Capital are withdrawing, bringing the group's ownership of Chrysler debt below the 5 percent cutoff it needs for standing in bankruptcy court. Stairway's statement sums up the situation pretty clearly:
As American taxpayers, we appreciate the unprecedented efforts taken by the current Administration to stabilize the economy and the auto sector; but as fiduciaries to our investors we take exception to being compelled, as Chrysler senior secured lenders, to unfairly shoulder the burden relative to various junior creditors.
The question of "unfairly shouldering the burden" brings us back to ObamaDonor's point about the morality of the administration's actions. ObamaDonor seems to be holding up "enforcement of a contract" and strict adherence to the bankruptcy code as the highest moral good in this situation. I disagree. This will come as a shock, but the Obama administration is not bailing out Chrysler to preserve the value of the investments made by its secured lenders. The government is trying to "stabilize the economy and the auto sector," as Stairway's own statement acknowledges. Saving the company and its employees' jobs is the primary concern. Chrysler's secured debt holders should have realized that the possibility of government intervention—discussed months in advance—posed a threat to their investment.
Comments
We seem to have narrowed the gap of disagreement considerably
Submitted by ObamaDonor (not verified) on Sun May. 10, 2009 2:07 PM PDT.
I will concede at the beginning that Asness' letter was not calculated to gain public sympathy for creditors' rights or fund managers' obligations. In fact, the usual suspects to take Wall Street's side versus populism (SIFMA, MFA and so on; groups that maintain paid lobbyists and PR specialists) have been silent, obviously for tactical reasons.
It's certainly not true that contract enforcement is the highest good. There are some libertarians who seem to like no government for any purpose, except a massive court system backed by overwhelming police force to enforce contracts to the letter. That's one political position I not only disagree with, I have never had the slightest idea why anyone would even be tempted in that direction.
And even among contract enforcements, bankruptcy court ranks very low on the justice scale. It's full of back-room maneuvering and murky deals with locust clouds of overpaid lawyers and consultants eating most of the crop. But, like Disneyland, it is among the last places in the world I want to go, but people do have the right to the trip.
The deal in bankruptcy court seems virtually identical to the President's plan. The dissenting secured lenders gave up. It wasn't a fair outcome in the normal sense of the word, two thirds of the class agreed to the plan, which allowed the judge to impose it on the remainder. Of course, the two thirds was made up of TARP recipients, bought and paid for by the government. But you won't hear any squawk from me, that's how the game is played in bankruptcy court, when you buy bonds you know someone might use tricks like this to get the debtor's money ahead of you. It might be a nicer world if bankruptcy courts were fairer, but it's not the world we live in, and it's certainly not Obama's fault.
However, I still think the President's comments were stupid and wrong. The average beneficial owner of the secured debt may or may not be needier and more deserving than the average beneficiary of the UAW pension fund. Millions of people own the secured debt through their pension plans, mutual funds or other investments. Some are rich, some are poor (well, few people with investments and pensions are really poor, but some are not-rich). Similarly, the UAW money will go to some needy sick retired autoworkers, some will go to campaign contributions, some will go to overpaid officials, some will be wasted in other ways. I don't think anyone has the slightest clue in which place the money will do more good.
I suspect that the President did not investigate the issue, that his reasons for wanting the UAW to have it were political rather than economic. Fine, he has to govern, meaning he has to think about politics. So I'm not going to call him on the false suggestion that the secured debt holders were a small group of greedy rich people. Where he went too far in my book was to use the moral suasion of the Presidency, and the implied threat that goes along with it, to suborn the agents of millions of people to extract their money.
I don't think this is the worst thing that any President has ever done, it may be better than the best thing some Presidents have done. But it's not up to the standard I expect from this President.
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