More on Chrysler Coercion
May 8th, 2009 | Author: JBH
There are many people discussing if government threatened hedge funds to take less during the Chrysler bankruptcy. Implied in these discussions/opinions is that hedge funds are dirty, greedy, evil people looking to profit from others’ misfortunes. Most definitely some are evil, much like individuals in general. But what does that have to do with the government’s actions?
That whole discussion misses the point and is completely irrelevant to the fact that the government got involved with the automakers bankruptcy filing and enacted policy, ignoring the Rule of Law. The fact is the government forced secure creditors (Chrysler made very specific promises to them giving them first rights to all assets in case of bankruptcy) to take less than due to them and gave considerably more to the UAW who were unsecured creditors (Chrysler made promises to them but the union workers were well aware that they were behind the secure creditors in case of bankruptcy). Who held the secure debt is immaterial to this case as the Rule of Law is not being followed. And it’s our own government not following it!
If you want to see the unintended consequences of these governmental dictates, please refer to page C2 of today’s Wall Street Journal or to recent comments from Bill Gross of Pimco (the largest steward of debt instruments in the US). When the government changes the rules after the fact, no private capital will want to align with them to help solve the liquidity problems. Or, if they do, they will require outsized returns to take on the outsized risks. This only increases the costs of capital movement, therefore lowers the actual movement of capital which only drives the economic decline farther down.
This is exactly what happened in the 1930′s as the government continued to enact legislation that changed the rules after the fact. This caused private capital to move/stay on the sidelines. CEO’s decided to wait to buy new equipment and/or hire. Capital providers demanded a higher return given the government’s involvement. Investment, which drives job growth, stalls. Quality of living drops.
Question: Why does it matter if a hedge fund owns any of the Chrysler debt? Does anyone feel it fair to treat them as less-than-equal investors? If so, how do you want to parse out the good hedge funds (those managing the money for charities and widows) from the bad ones? Who is to say that one man’s money is more ‘ethical’ than someone elses? And what does any of that have to do with the government disobeying the Law?
Tags: 
Interesting piece, I agree. What other options and potential outcome were available to them?
It could have gone directly to the bankruptcy courts where they have tremendous experience in figuring out how best to parse the assets to the various creditors. Many large companies go through bankruptcy and continue to function. In this case, government is using it as a means to enact policy outside the normal checks and balance system.
By going that route, what would be the likely outcome and who would the winners and losers be?
I guess I look at it differently. It doesn’t matter who wins or loses, for me, it’s about right and wrong. The most obvious losers were those that had the equity prior to the filing. But, I believe, if you look at past bk’s, everyone loses some. Winners would be those that continue to work at what would hoped to be a stronger organization and the new owners if all works.