Why Obama Is
Pissed at the
Hedge Funds
By Ezra Klein
American Prospect
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.
**********************
Dean Baker:
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.
--Dean Baker
Saturday, May 2, 2009
Obama Battles Hedge Funds in Auto Crisis
Friday, December 26, 2008
Memo to Obama: No Bailouts Without Change
Photo: Time for Adults?
Wall St, Autos:
Cyclical Crisis
or Structural?
By Robert Reich
First prediction for 2009: A widening gap between the public's view of the bailouts of Wall Street and Detroit, and the views of the direct beneficiaries. The public believes the bailouts will permanently change these industries, but industry insiders don't really want to change.
Exhibit one is Goldman Sach's CEO Lloyd Blankfein, who says the firm's business strategy doesn't need to change.
What? Goldman got $10 billion of taxpayer money precisely because it and other big banks were so over-leveraged they threatened the whole financial system. I can understand why Blankfein doesn’t want to change. He took home $54 million last year. (He has foregone a bonus this year and is taking home a piddling $600,000.) But the public expects real reform for its $10 billion at Goldman and tens of billions more in other major banks.
Blankfein isn't alone. I've heard the same thing from CEOs and directors all over the Street. They see the problem as cyclical, not structural. "The economy stinks," they tell me, "but it'll turn around in 18 months, and then we're back to the same business."
Or take the Big Three. They've agreed to become far more fuel efficient, as a condition for their bailout. But they promised this before -- during the oil crisis of the 1970s, when Congress threatened higher fuel-economy standards. But after the crisis passed, they never delivered. Why? Because their biggest profits were in gas guzzlers that consumers wanted to buy as soon as the first oil crisis was over.
Will history repeat itself? Now that gas prices are half what they were six months ago, consumers who can afford it are suddenly less interested in fuel efficiency. They're buying fewer hybrids and showing renewed interest in SUVs. So why should we think Detroit will revolutionize itself?
I'm not so cynical as to accuse anyone of bad faith. It's just that both Wall Street and Detroit earned big bucks from their old strategies, before the bottom fell out of the economy. So it’s natural they’d view the bailouts as ways to hold on until the economy rebounds. And it's clear they see their problem as cyclical, not structural.
Right now, Wall Street and Detroit are willing to say whatever they need to say to keep the taxpayer money coming. But when the economy begins turning up, my betting is that their Washington lobbyists will push back hard against any major restructurings the government wants to impose on them. New regulations of Wall Street will be watered down and circumvented; new requirements on the Big Three for green technologies will be resisted.
Yet the bailouts have been sold to the public as means toward fundamental change in finance and autos. If the bailouts are to do what they're supposed to – stop Wall Street from wild risk-taking with piles of borrowed money, and push the auto industry into making fundamentally new products that conserve energy -- Washington will not only have to set strict standards now and in the months ahead when the bailout money flows, but also hang tough when the economy begins to revive.
The emerging debate over Wall Street's and the Big Three's ongoing obligations to reform themselves is but one part of a much larger national debate we'll be entering upon in 2009 and beyond -- whether the economic crisis we're experiencing is basically cyclical (in which case, nothing really needs to change over the long term, after the economy gets back on track) or structural (in which case, many aspects of our economy and society will needs to change permanently).
Wednesday, November 19, 2008
Message to Obama: Buyout, Not Bailout
Photos: It can be done: Neil Young's 100mpg 'LincVolt' and Honda's Hydrogen Car
Rx for 'Ailing'
Auto Industry:
Take it Over
By Carl Bloice
Left Margin via Portside.org
It is hemorrhaging fast and no end to the bloodletting seems to be insight. No question something has to be done about the auto industry. But what? As usual, the preferred answer depends your vantage point. As usual, when courses of action are proposed on matters like this the people be adversely affected are passed off as mere numbers. Bankruptcy on the part of any of the Big Three automakers would cost the U.S. economy $175 billion the first year after it went into effect and tens of thousands of workers would be laid off. The cost of a General Motors takeover of Chrysler could be as much as $10 billion and mean dismissing over 30,000 workers. Behind these sterile statistics are real live individuals and families.
It may be that Chrysler and GM are 'too big to fall.' (Although letting them go down is what some pundits are -- with clinical calmness -- advising) But what about the workers?
Over the past four decades or so, the deindustrialization of vast areas of the country has left once relatively prosperous communities in dire straits and vast numbers of young people on the street with little hope for a future of gainful employment. It has hit very hard at cities that are home to stable working class African American populations, often referred to as a 'black middle class.'
The potential devastation of bankruptcies in any part of the auto industry is being understated. There are a couple of million retired autoworkers whose pensions and health care coverage are at stake. Many of them have yet to reach the age for receiving Social Security and yet would be severely disadvantaged in today's labor market. Then there are the millions employed in auxiliary services dependent on auto making.
It's hard to think about the additional pain that will befall cities like Detroit in the face of the current crisis in the auto industry and the prescriptions being offered up to address it. The area, once the world center of auto manufacturing, is now being told that whatever happens over the coming months it's going to have to absorb a another heavy blow.
So, what is to the done about the ailing auto industry? Here's one answer: nationalize it.
Don't get your alimentary system in an uproar; it's been done before. We could simply takeover the industry with understanding that thousands of engineers and technicians would be mobilized to design and make functional and efficient 'green' cars. And, tens of thousands of autoworkers could be put to work building them. Of course, this would not employ all of those about to be laid off. They could be retrained to work in other new green industries building wind turbines, solar panels, mass transit lines and recycling factories. It would provide jobs for hundreds of thousands and provide new hope for young people entering the workforce in Michigan, Kentucky and elsewhere.
This will require a lot of central planning and that's the last thing the people now running the economy want to hear. Horrors. But let's face it; radical innovation and planning is the only thing that could get us out of the current mess and lay the base for a healthy economic future. An endless series of bailouts and stimulus packages is unlikely to do the trick. There is a lot of talk from the experts these days about what a 'recovery' would look like. Estimates of when one is likely to take place range from the end of 2010 to never.
Economists are now talking about a 'jobless recovery.' That is, Wall Street will get back up to speed and corporate profits begin to rise again while high joblessness continues and the legions of the poor grow even larger.
A government organized effort to consolidate, refurbish, and refinance the auto industry will surely be denounced as 'socialist' but, actually it wouldn't be anything a traditional socialist would recognize as such. It could be a public-private collaborative project. Yet, its central prerequisite would be a political decision -- reached democratically -- to pursue a policy of guaranteed employment to those who want to work and an economic strategy premised on full employment, innovation rooted largely in green technology and a commitment to preserve our communities' health and that of planet.
The employment statistics for September are in -- the official ones that are always understated . The country's unemployment rate is 6.5 percent. That's up from 4.8 percent a year ago. It is expected to climb above 8 percent. For teenagers it's 20.6 percent; that's up from 4.3 percent in September 2007. Latino unemployment stands at 8.8 percent; it was 5.6 percent this time last year. African American joblessness has risen steadily this year to 11.1 percent from 8.5 percent a year ago. Claims for unemployment insurance broke a new record last week. Most economists say it's only going to get worse as we move toward the holidays.
The incoming Obama Administration is being offered all kinds of advice these days on what to prioritize. Way up there on the list has got to be a program to save jobs and create new ones. Save GM? Yes, but not because of the corporate heads and financiers whose greed and errant business judgment got us into this fix but for the workers and their communities.