Pity the Poor Hedge Fund!

This follows up the last post, on “Why Is There an Economy?” A blogger named Corky Boyd is outraged that the Obama White House is strong-arming business.

Yesterday (May 1) on Detroit’s Frank Beckman’s morning talk show (WJR), bankruptcy attorney Tom Lauria made the incendiary accusation that the members of the White House had threatened to use the “the full force of the White House Press Corps to destroy” his client’s reputation if it didn’t acquiesce to highly unfavorable terms of the government’s proposed Chrysler restructuring plan. Because of the strongarm tactics, Lauria’s client dropped its opposition. …

…There is a pattern here. Financial institutions holding billions of Chrysler’s secured debt are being held hostage by the TARP loans they are not permitted to pay back. They are being forced to accept just pennies on the dollar for loans they made in good faith less than two years ago. Just like mob loan sharks, the administration wants them under its thumb so they can extort more and more concessions.

This is an abuse of power that goes beyond Nixon.

Oh Noes! Why is the White House being so mean to the nice businessman?

Here’s the reason: The client who is being strong-armed is hedge-fund manager Perella Weinberg Partners LLP. Perella and a couple of other hedge funds that owned a part of Chrysler’s debt have been obstructing Chrysler’s attempts to restructure itself and avoid bankruptcy. The hedge funders wanted Chrysler liquidated so they could take their money, and too bad if the loss of Chrysler sets off a chain reaction of failed suppliers and other businesses that send the entire American economy into a tailspin. Not to mention what would happen to the retirees, who would lose their pensions, etc.

Lisa Lerer at The Politico explains what happened.

“Bankruptcy is only required today because of the greed of a few hedge funds that held a fraction of Chrysler’s debt,” said Rep. Candice Miller, (R-Mich.) “President Obama today stated that he did not stand with these hedge funds and neither do I.”…

…“The administration put a great deal of pressure on those entities to go forward,” said Rep. Gary Peters, (D-Mich.) “They gave these hedge funds every single possible opportunity to accept the deal.”

Last night, the Treasury department sweetened their $2 billion cash offer to holders of Chrysler’s secured debt by $250 million. The secured debt holders would have gotten the cash in exchange for retiring roughly $6.9 billion in debt. The administration also extended an original 6pm deadline to continue negotiating through the night.

Sen. Debbie Stabenow, (D-Mich.) blamed the breakdown in negotiations on three large hedge funds – Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital.

“We’ve been working with them every day, last night, and up until this morning,” said Stabenow. “They pushed as hard as they could.”

The White House strong-armed Perella Weinberg Partners into signing on to the $2 billion deal in order to leave something left of Chrysler to restructure. This in turn will, it is hoped, save thousands of jobs (you’re saving not just Chrysler, remember, but also suppliers) and at least some portion of employee health and retiree benefits. And this is good not just for the employees and retirees, but for the state and local economies in which these businesses are located.

In other words, three hedge funds tried to hold a chunk of our nation’s economy hostage, and the White House didn’t let them get away with it. And this meathead blogger says the White House is abusing power. Jeez louise, people are stupid.

Update: A mouthpiece for Plutocracy called “Founding Bloggers” links here, saying,

Right on cue, here is a liberal blogger that makes the case against the evil capital investors who would dare exercise their rights under contract.

What the pea-brains aren’t noticing is that there are vast numbers of contracts that are being shredded or amended because of the plight of the automakers. These include contracts with suppliers and, probably, dealers as well as workers. Everybody else is taking a hit. The White House is trying to spread the pain around so that there’s something to salvage and the overall U.S. economy doesn’t take a bigger hit than it’s already taking.

In a perfect world the automakers would be making a profit and the capital investors would be making a nice return on their investment. But when the Titanic is going down it’s not the time to complain that you paid for a cabin with a better view and want a refund.

36 thoughts on “Pity the Poor Hedge Fund!

  1. In other words, three hedge funds tried to hold a chunk of our nation’s economy hostage, and the White House didn’t let them get away with it.

    Um…I think they did get away with it, as Chrysler filed for bankruptcy. Am I missing something?

  2. Um…I think they did get away with it, as Chrysler filed for bankruptcy. Am I missing something?

    Yes. What you’re missing is that Chrysler is asking the bankruptcy courts for protection from being entirely liquidated, which is what the hedge funders wanted. With the debt relief obtained by the White House, Chrysler ought to be able to restructure and return to business, hopefully on a more profitable basis.

  3. fluffhead, you did miss something. The hedge funds wanted Chrysler liquidated (as in sell off the assets and go out of business), as opposed to reorganizing and potentially coming out as a going concern in a bankruptcy proceeding. Big difference.

  4. That’s fine, Dave. I think most of the right-wingers who are expressing outrage about how the White House is treating the hedge funders have no idea what’s at stake.

  5. So the big bad “hedge funds” loaned money to GM, and — egads! — wanted to get more than 30 percent of it back.

    What nerve. What “greed.” LOL. Giving up, say, 70 cents on the dollar is fine, but trying to get, say, 40 cents back (i.e., trying to lose only 60 cents on the dollar)– is “greedy.”

    It’s easy to give away others’ money. How much of your own money did any of you give to Chrysler’s workers? C’mon — where’s your own skin in the game while you whine that others aren’t giving away enough of theirs.

  6. T Symanski — Did you even bother to read the post? Do you know WHY the hedge funds were asked to write off debt? Do you have any clue what the repercussions would have been if the hedge funds had their way?

    We all have skin in this game, dude. That’s what you don’t get. Open your eyes.

  7. What I want to know is, when did these hedge funds put the money in? Was it, for example, at a time when the idea that they might stand to make a bundle from a government bailout of Chrysler seemed imaginable? My sympathy for their losses shrinks drastically if the only reason they were invested in the first place was hoping to get some juicy Treasury deal.

    Seriously, the right expects me to feel sorry for anyone who invested in a US auto company in the last decade? Like that would have been a smart investment, guaranteed to make money?

    Hedge funds exist to bet big. It’s great when it works. It sucks when it doesn’t. That’s the game. Sheesh.

  8. Apparently your answer to my question (did you even bother to read it?) is “no”: You, personally, have not given a dime to Chrysler’s workers. Yet you are happy to deride others for being willing to “only” take losses of 60 cents on the dollar. As I said, it’s easy to give others’ money away.

    Your initial post is a big yawn. It makes you as one of those “useful idiots” who simply parrot the line of garbage spewed by the administration.

    If you had made any effort to learn the facts, you’d have known that the non-TARP lenders didn’t even get a seat at the negotiating table. The admin simply decreed that “this is what you will give up.”

    The deal could have had Fiat put in some cash. It could have had the UAW take a bigger haircut. But no. Obama’s pretense that the terms given to Fiat and the UAW somehow were preordained or immutable, and that the bondholders were the ones who had to give, is simply bogus.

    By the way, although you and your ilk want to tag the non-TARP lenders as some “greedy” group of rich guys, that’s not correct at all. Had you bothered to look, you’d have seen that that group includes pension funds, such as for teachers’ unions. I’d bet that if you had a pension coming, you’d be hopping mad if the administrators of your pension plan folded and gave away 70 cents on the dollar of the assets that backed your pension. But, of course, in your knee-jerk liberal world, any “rich” entity must all belong to the “rich,” and not to union pension funds, 401(k)s, and ordinary investors. Dogma is so much cleaner when it’s not sullied by the facts.

    The TARP lenders well may have jobbed their shareholders by signing onto the huge haircut the admin demanded. But when you have the likes of Barney Frank in the mood to pass retroactive laws changing any rule they don’t like, sometimes you have to fold. It will be fun to see if the non-TARP lenders manage to take some depositions and get sworn testimony about the admin’s threats to the TARP lenders.

    Finally, bankruptcy for GM seems all but inevitable. Do you want to get a start on bashing the folks who invested in GM bonds? Yes, big institutions and moms and pops alike put cash into GM debt. The GM/admin offer to the bondholders so bad that odds are they’ll reject it. The nerve of those who would refuse to give up $27 billion in return for 10% of a company’s equity, when the UAW’s VEBA would give up all of $10 billion for 39% of the stock.

  9. People pursue their self interests. Imagine that.

    Ironically, right wingers like Rush were the ones buying American while lefties (and pretty much everyone else) gulped up the Toyotas. Obama’s plan to give Chrysler to the UAW will make them lose that customer base as well.

  10. T Symanski — You’ve got your facts wrong about the non-TARP lenders, and you would have known that had you read the post. People who comment here without reading the post or knowing what issues were actually addressed in the post (which you do not address) earn an honored place in the twit filter. Good bye.

  11. Obama’s plan to give Chrysler to the UAW will make them lose that customer base as well.

    If you ever drop by here again, Roy, do try to make sense.

  12. Which part of people not buying Chryslers because they are owned by the UAW do you not understand?

  13. Which part of people not buying Chryslers because they are owned by the UAW do you not understand?

    In what universe would UAW equity in an automaker make any difference to people purchasing a car? Not this one.

    Good bye.

  14. In Roy’s world it makes sense. That is the world of right-wing loons who hate American auto workers.

    There are lots of other Americans they hate as well. In fact, they hate most Americans. They claim, however, to love America more than other Americans. Kind of weird, isn’t it?

    So the big bad “hedge funds” loaned money to GM, and — egads! — wanted to get more than 30 percent of it back.

    I’d be willing to bet the hedge funds didn’t loan money to GM. I’d bet they picked up GM paper in the debt markets at deep discounts, probably at no more than 10 or 20 cents on the dollar. The value of Chrysler and GM debt cratered a long time ago.

  15. Maha, maybe if you boldface your “here’s the reason” paragraph and put it in all caps and use lots of !!!!! they’ll get the big picture. that would be more gopish, wouldn’t it?

  16. I can’t help wondering if one or more of these hedge funds was actually betting on bankruptcy somehow (e.g. CDSs) and that their stake was perhaps a token stake, enough to block a deal.
    Is there any solid indication that this was not the case? Is this sort of thing illegal?

  17. Can you spell ‘vultures’? These hedge funds moved into a situation where they expected they could not lose. IF Chrysler survived, they would make a bundle on the interest & fees, If Chrysler failed, they were first in line to pick the bones of the bankrupt company. But they could not prevent Chapter 11 reorganization, which they probably didn’t think likely when landed on the not-yet-dead carcass.

    As I understand Chapter 11, the court takes a ‘big picture’ approach to evaluating the prospects for the company based on the plan they submit. To be a viable business entity, certain elements must be preserved: property, plant & equipment, and a trained work force. There has to be eough working capital. If the model looks workable, the bank can then allow or disallow the claims of non-essential creditors – contract or no bleeping contract. (Vultures can get their feathers singed; they were never part of the process of producing the product.)

    The quote about using the ‘Washington Press Corps’ to destroy his clients reputation stands out. There are laws which protect even vultures from slander or libel. I suspect that what would have been leaked is actual, facutal, accurate quotes from the ‘negotiations’ which would have exposed these clients for the business scum they are. And they caved under the threat of exposure.

  18. It is sad to see what has happened to our domestic automakers, I have done my part, I always buy domestic cars, in fact my wife and I just purchased a new jeep wrangler one month ago!

    Is it a big surprise that a hedge fund would look out for its profits ahead of the national interest? Isn’t that what people who buy foreign cars are doing? Whats the difference?

  19. [Deleted because Kate Grif did nothing but repeat right-wing talking points that we’ve all heard 20 thousand times already without actually addressing the issues discussed in the post. — maha]

  20. Pug is correct. The paper came from the discounted debt market. The figure I heard was in the 30 to 40 cents on the dollar range.
    Something that bothers me though. As a moderate, I am willing to go with any plan that will work. My sense of what is fair is mine, it’s pointless to try and push it on anyone, right or left. But I don’t see this as a liberal or conservative issue. The people with their hands in the pie love the political arguments that mask the looting. This is above all, about money. And of course politics play a part and may be some of the people’s motivation. But in the end, it doesn’t matter as much as the money.

  21. So Hedge Funds gambled on owning US auto debt.

    And when the Hedge Funds lost their auto gamble they demanded a government bailout.

    And when the Hedge Funders didn’t get the government money they demanded they threw a tantrum.

    And now neo-right wingers are defending gambling Hedge Funds who were looking for a government bailout.

    And as for “fairness” for Hedge Funders who slash, slice, and dice American companies and then sell them off for a quick profit while outsourceing American jobs overseas, well, gee, sounds like they got back a little of what they put out.

    The auto industry, for the record, is a key manufacturing industry in America that any true military conservative would recognize the value of keeping in America and most progressives believe was a key in forwarding the interests of America’s middle class.

    Why are right wingers so intent on selling out America and Americans?

  22. The blogger you quote, Corky Boyd, words his post to imply it is the recipients of TARP who were holding out and trashing the deal. If you read carefully, he does not say that, but mentioning TARP in that statement is gratuitous and imflammatory, since the subject of his post (the hedge funds holding out) were not TARP recipients. That program really has nothing to do with this story, other than the rather whiny claim by the hedge funds that the White House was showering some firms with TARP and screwing them.

    And the story is not quite as simple as meets the eye. I’m not too sure the hedge funds are wearing lily-white hats, and it’s complicated, but it appears their position on the debt ladder was not being honored. By definition of a hedge fund, the money in the fund belongs not to the managers of the fund, but to members, and the fund managers have an obligation to the members to protect them. (I know, and to collect humongus fees from them, but…) It sort of looks like the White House got a little tarnish on it, and in a deal like this one nobody comes out looking like Tinkerbell.

  23. [R]ight wingers like Rush were the ones buying American while lefties… gulped up the Toyotas.

    WAH ha ha! Hilarious! You mean those “American” makes manufactured in Mexico and Canada? And those “furrin” Toyotas made by U.S. workers, in U.S. plants? Musty old Rightie memes that haven’t been valid for years, and that’s the best they can do? “Chrysler is owned by the UAW!” Wow.

  24. I’m not too sure the hedge funds are wearing lily-white hats, and it’s complicated, but it appears their position on the debt ladder was not being honored.

    This story is complicated in many ways, but in some ways it’s actually quite simple. The three “holdout” non-TARP hedge funds, of which Perella Weinberg Partners was one, were holding out for Chrysler to be entirely liquidated so they could get all of their money back. Liquidated as in no more Chrysler at all. And this would create serious economic repercussions in the economy that would hurt lots and lots of people, and all kinds of contracts would be shredded, and many people would lose out.

    When you consider not just Chrysler and its employees but also Chrysler suppliers and the businesses in communities that sell goods and services to people who derive their income, directly or indirectly, from Chrysler, you’re easily looking at hundreds of thousands of people, more likely millions of people, many of whom would face a lot more than a loss of profits. They would face genuine hardship.

    The White House pushed the hedge funds into accepting a deal that, yes, paid the hedge funds pennies on the dollar. And, yes, Chrysler was forced into bankruptcy anyway. But with much of their debt relieved, Chrysler is asking the courts to be protected from liquidation so that it can restructure and try to make a comeback. The workforce will be reduced, but if Chrysler can keep going it won’t be as severe a hurt to as many people and communities as liquidation would have been.

    I think it’s interesting that not a single wingnut who is whining about how mean the White House has been to the hedge funds has so much as acknowledged the reason the White House acted as it did, or seems to have given a thought to the far-reaching problems that would have been caused if so large a company as Chrysler was completely demolished.

    It sort of looks like the White House got a little tarnish on it, and in a deal like this one nobody comes out looking like Tinkerbell.

    I don’t see the tarnish. I think the White House did what had to be done.

  25. Bill H: …but it appears their position on the debt ladder was not being honored. … It sort of looks like the White House got a little tarnish on it…

    I didn’t see that in what I was reading on the subject. Can you provide a link?

    My understanding is that this is all subject to bankruptcy code. If Chrysler were liquidated under chapter 7, unsecured debt (bonds) would be second in line for payout. Under chapter 11, it’s conceivable that they could get nothing. In the articles I’ve read (not exhaustive by any means), the banks and hedge funds are holding out for a debt-to-equity conversion where they get something, as opposed to the nothing that’s possible under chapter 11, and the argument is how much stock they get in the new organization (the three hedge funds want more than is being offered).

    I’m no lawyer. But it seems like a valid negotiation point in a chapter 11 proceeding. The fact that it’s going on in advance of actual bankruptcy is odd, but since they’re really trying to do a prepackaged bankruptcy, not really so odd.

  26. This is a tempest in a small, cracked Republican teapot. I notice that the blogger who started this “thuggery” accusation (Corky Boyd) has now stopped allowing comments. It based its accusation on the words of an interested party — Perella Whineberg’s lawyer — without ever noting the party’s interest, and without ever even bothering to examine how bankruptcy law is structured and applied.

    The issue here is Perella Whineberg’s desire to be paid 50 cents on the dollar for its bonds, rather than 29 cents on the dollar offered by the Treasury. The reason Treasury is involved is because Chrysler can’t obtain private “debtor in possession” financing for its bankruptcy. Treasury is playing that role, and he who provides DIP financing always has a big role in bankruptcy proceedings.

    Virtually every bankruptcy features some fighting among creditors over pieces of a pie that, by definition, isn’t big enough to give everyone a full slice. The biggest fights are often between different classes of creditors, and in those fights you will often see “senior” creditors howling over not being paid as much as they think they deserve relative to “junior” creditors.

    That was the case here. In addition to Perella Whineberg, two other senior creditors (Oppenheimer and Stairstep) were so-called “holdouts” from a settlement agreed to be scores of other creditors. In bankruptcies, holdouts usually don’t do very well. The judge sometimes tosses them an extra crust of bread, but not always.

    As the DIP financing provider, the Treasury wants Chrysler to remain an ongoing entity. Its interest is to produce agreement among the creditors so there won’t be a prolonged court fight that might endanger the entity’s ability to repay the DIP financing. So, it wants to corral the holdouts.

    Perella Whineberg was corralled last Friday; it issued a press release to that effect. But it also trotted out its lawyer to claim that the White House had forced it into agreement by threatening to ruin the firm’s reputation. The White House categorically denied that version, something that the blog you quoted never mentioned before abruptly closing its comment section on Sunday morning.

    We don’t know what was said by the White House to Perella Whineberg. It’s unlikely that anyone threatened Whineberg with the White House press corps, but it’s not beyond imagining that the White House pointed to President Obama’s statements and told Whineberg that they were only the beginning of what they’d face if the holdouts continued to hold out and jeopardized the ongoing operations of Chrysler. After all, the taxpayers are now on the hook for $4 billion in DIP financing, and it’s the government’s job to protect that investment against greedy graspers like Whineberg.

    In any case, the idea that “the rule of law” was ignored is outrageous. The Chrysler bankruptcy, and the recent machinations, is par for the course. Perella Whineberg was trying to get a better deal, and failed. What really sticks out here is Perella Whineberg’s utter lack of class and professionalism. They are the personification of the kind of sore losers and manipulative squirrels that the Republican Party has become.

  27. In other words, the government is holding the financial sector hostage. In much the same way they did with Fannie Mae and Freddie Mac. They required banks to make bad loans to people unable to repay them and then demonized banks as greedy. Oh, well. Who is John Galt?

  28. I have run out of sympathy for hedge funds. Obama is being much too kind to them. My suggestion is that Perella Whineberg and all the other rapacious thieves should be given nothing. Let them experience bankruptcy under the new improved 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.

  29. [Comment deleted because the pea brain who wrote it lacked the wit to actually read my post and address the real issues — maha]

  30. It’s certainly no secret that hedge funders are predators targeting the weak and infirm – sort of capitalists who engage in “creative destruction.” At this point, their shouts of “unfair” are really ludicrous.

  31. Who is John Galt?

    “John Galt” is a fictional character in a crappy novel that appeals to people who aren’t very bright, and who are driven purely by self-interest because they lack the imagination and compassion to live fully as human beings.

    Any more stupid questions?

  32. ““John Galt” is a fictional character in a crappy novel “ by sociopath Ayn Rand who created a cult around the pseudo-philosophy of “The Virtue of Selfishness,” which was literally the title of the book that included the essays by Ayn Rand that summed up her belief system.

    Ayn Rand’s “ideas” are little more than a rationalization for sociopathic behavior that has rebranded itself “Libertarianism.”

    “Libertarianism” apparently has a nicer ring to it than “Sociopathism.”

Comments are closed.