Why Obama Is
Pissed at the
By Ezra Klein
One of the interesting threads in the Chrysler bankruptcy was Obama's evident fury at the hedge funds and investment banks that refused the deals the government offered. The reason for their reluctance was simple enough: Bondholders don't want to lose money. But the strategy behind their intransigence proved poor: They didn't think the government would send Chrysler into bankruptcy. And that gave them leverage. Out-of-court debt restructurings generally require consensus. But they were wrong. Not only did the administration let Chrysler fall to the bankruptcy courts, but Obama called the investors out by name:
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.
You're seeing, some say, the hidden hand of Ron Bloom here. Bloom is an inside player often called Labor's investment banker. A Harvard Business School grad who spent a decade in private finance, he eventually joined the labor movement as a special assistant to the president of the United Steelworkers. Now he's one of the key players on Obama's automobile task force. And you can see his perspective informing some of Obama's decisions. ron_bloom_0217.jpg
New Yorker writer Peter Boyer recalls a talk Bloom gave three years ago to a group of insolvency lawyers and accountants. In it, he described a hypothetical restructuring, and argued that you needed to think of both the workers and the bondholders as having made the equivalent of "loans" to the company. The difference was that the bondholder had settled on clear terms. They could end the relationship at any time by selling the bond on the open market. Labor's "loan," however, could not be cashed out. If the company failed to honor future obligations to workers, the money was, for labor, simply lost. Bloom explained:
They worked a lifetime and deferred a significant amount of current compensation in exchange for the company’s promise that, upon their retirement, they would be paid a fixed stream of cash and provided with help with their medical bills. Then, without their knowledge or consent, the company chose to not set aside enough money to honor that promise. In effect, the company borrowed money from them without even discussing the terms of the loan....So what we have is a bunch of old men and widows being forced to lend the company, for whom they worked a lifetime, some portion of the value of their pension and their health care. This loan was made on terms on which they have no input and they have no ability to liquidate their position.
Labor, in other words, has no ability to liquidate. The hedge funds do. And in the case of Chrysler, the workers have seen their position brutally and quickly reduced, with very little input from them. The hedge fund, conversely, refused to liquidate their own position, and demanded ever more favorable terms from the government. And Obama, it seems, quickly grew to judge their position repellent.
The other piece of the puzzle is that Chrysler was something of a trial run. The really consequential negotiations are still to come. They'll happen when the administration sits down with GM. One of the apparent miscalculations made by Chrysler's bondholders was that the government desperately wanted to avoid letting Chrysler go into bankruptcy. But by showing its capability to be ruthless in the Chrysler negotiations, the administration might have just improved its bargaining position in the GM negotiations, as it is now harder for various stakeholders to predict exactly how risk averse the government will, or won't, be.
The Hedge Funds' Chrysler Gamble
The NYT discussed President Obama's feud with several hedge funds who refused to agree to the same write-down terms as other major bond holders. While the article points out that the hedge funds had purchased the debt for around 30 cents on the dollar, it would have also been useful to point out why the debt was selling for 30 cents on the dollar.
Other investors assessed both Chrysler's economic situation and the politics around the bailout and concluded that they were unlikely to get more than 30 cents on the dollar. The hedge funds that refused to accept the deal offered by the Obama administration were speculating that they could pressure the Obama administration into giving them a better deal. That is why they were prepared to pay more for this debt than other investors.