Political veterans said, however, that it would be tough for hedge funds to overcome their image as villains. Most politicians have a favorite punching bag. Many Republican politicians like to bash trial lawyers. Many Democrats like to take aim at big oil companies. Hedge funds can serve as a safe diamond-studded scapegoat in tough economic times.This makes me wonder about why business and policy stories get reported like campaign stories. Is it because reporters experience a campaign as the journalistic pinnacle, through which all other written words must flow? The fact that "most politicians have a favorite punching bag" will surprise exactly no one. Why a former speechwriter for Bill Clinton would be considered the relevant expert on hedge funds remains mystifying. And the reminder that "Obama had been criticized earlier for not showing enough outrage about AIG bonus payments" seems like it's a few orders of magnitude less important than the question of whether or not he, y'know, should have gotten outraged. Why is the president obliged to "show" outrage?
"It's hard to go wrong right now being tough on those guys," said Jeff Shesol, a former speechwriter for President Clinton who noted that Obama had been criticized earlier for not showing enough outrage about AIG bonus payments. He said that Obama's "frustration, while it may be calibrated, is real. And it's certainly where the public is."
And to the substance: It isn't that hard to see how getting tough on hedge funds could go wrong. A day before the administration released some details of the Chrysler plan, it released an update on applications to its public-private investor program to repurchase toxic assets. This program, whether you like it or not, relies crucially on the partipation and confidence of private investors. The administration extended the application deadline, and it reportedly had some trouble rustling up qualified applicants. (On just about every conference call with potential investors, a couple will express wariness about partnering with the government.) Even in purely horserace terms, it's not obvious going after the holdout creditors is a good idea.
But for more on the substance, I thought Steven Pearlstein had some good thoughts elsewhere in the Post.
You know, it's interesting that they would attack the hedge funds. The largest investor class for hedge funds, and Wall St. for that matter is retirement accounts (direct Pension Fund investments, as well as mutual funds held in 401(k), IRA, and other retirement vehicles).
The hedge fund Wall St. fat cats are us!!
Obama really does seem to be pushing his luck in regards to how he treats the peopl he is counting on in these public private partnerships. If B of A or Citi fails their stress test, and the Treasury wants to unload them on another bank, who will step up to do business with Obama?
In particular, I found interesting his label that creditors are "speculators", when in fact some some of these bondholders were part of the 2003 class to fund..... the UAW pension fund! Given that the reconstituted Chrysler will need cash flow, who will fund them? Absent a guarantee from Bernanke - and lets be honest, it would have to be the Fed (the big money will be highly skeptical of a Treasury guarantee and Treasury's willingness to back it's promises irrespective of politics) - what pound of flesh will creditor's demand in the future to compensate, and what do these demands do to Chryslers ability to survive?
Bigger question: The US Treasury's promise has always been the gold standard; does the position of the Executive in regards to contracts and obligations cause an unintended market dilution of the value of the US Treasury's promise?
Irony: Rattner investigated for claims his hedge fund bribed pension funds.
I was a newspaper reporter in my 20s and one of the big things I noticed was that reporters tend to be bad with numbers. Or, better put, they are not number people. This can readily lead to a worldview that is anti-business. (If one can't figure out business, and if the business people are making the dough, the combination can lead to envy.) The same holds for writers generally -- they're just not good at math. If you're not good at math you'll have it in for the whole math-centric portion of the economy (business).
"Given that the reconstituted Chrysler will need cash flow, who will fund them?"
Well just who in the hell do you THINK is going to fund them, dude?
YOU ARE.
Obama is funding them with the tax dollars you earned today ... you moron.
I'm sorry, I apologize for calling you a moron ... but really, do you think the Obama administration is putting ANY skin in the game?
No, dude. They are STEALING companies with TAX DOLLARS. At the exact point at which you think you have them over a barrel, they can just print more dollars.
It's a NO LOSE situation for Obama.
I mean, what a great competitive position to be in. He can outbid you, and if you refuse to capitulate, he'll sick the NY Times on your ass, and if that doesn't work, he'll just nationalize your ass.
Bend. Over.
I think that after the BK, it will be really hard for Chrysler to go back to the public well. At that point, the public's good will will have expired. And Fiat has played this just about right in order to minimize their exposure. They have no skin in, so thay can threaten to walk away.
From my perspective, the key is to examine the respective end positions in a succeed/fail scenario: If Chrysler succeeds, then the Obama administration, Fiat and the UAW all win; If Chrysler fails, the Obama administration and the UAW loose - but Fiat is nuetral. Fiat has maximum leverage.
Why should Fiat put cash in to finance operations when they can dump it on the UAW (the UAW having the most to loose if Fiat walks)? The UAW will have to spend their equity in order to raise cash, and they will get brutal terms. Who will want to pay dollar for dollar with the risk that the Treasury will stick it to you?
So in the end the UAW may get jammed after all, which could be argued their subordinate lien position justifies.
The problem is that in going through the process of this exercise, the Administration has caused investors to be wary and skeptical as to the motivations, actions, and guarantees of the US Treasury. Look at the problems they are having in receiving serious submittals for PPIP. They are questioning the Treasury's guarantee.
Think of it this way - when was the last time investors questioned a guarantee of the US Treasury? It has been the gold standard in the investment world for years - but at least in regards to PPIP (and the auto companies are really PPIP type projects), not so much.
Steve Pearlstein does not have good thoughts on the situation. The concept of fairness in reorganization proceedings is a technical concept defined by 11 U.S.C. ยง 1129 and by case law, see Bank of America v 203 N. Lasalle St. Prtnrshp. 526 U.S. 434 (1999). The term is often spoken of as including the absolute priority rule, which says that no class of creditors may receive anything in the proceedings until the superior classes have consented or paid been paid in full. In the Chrysler case the UAW is not entitled to 55% of the stock until the secured creditors are paid or consent. Mr. Pearlstein's pseudo populist rantings are not helpful.
I'll be darned.
I've been reading about the reluctant Chrysler investors for days and had no idea that they were hedge funds. I wish someone had made that more prominent.
I think a huge amount of responsibility for the economic debacle (after Barney Frank and Chris Dodd and George Bush of course) belongs to unregulated bubble-inflating hedge funds.
Geez. Now I'm on Obama's side on this.