Having read the letter below and having festered about this issue for weeks, I can't avoid passing this along. This issue of abusing the "hedge funds" or, perhaps better said, the whole class of owners of capital as though they are criminals doing illegal and immoral things has me apoplectic. The lenders who lent to Chrysler were either "secured" or unsecured based on our legal system. We rely on that system and expect it to function. When Chrysler and its shareholders borrowed they knew the rules and that the downside was possibly liquidation for not paying your bills -- just the way it was meant to be if you lied on your mortgage application or failed to pay your personal bills. The insertion of the White House in this whole process using the "press" to label new enemies is incredibly damaging to both commerce and the perception by the uninitiated that because the Government speaks, these things are right-headed. We are potentially destroying our capitalist system by inculcating in a whole generation of young adults that this is the way things should be. This letter bears close attention and I am pleased to see that someone has both the fortitude and the willingness to cogently lay out the issues. Remember this mess when your neighbor asks you to lend him some money. Under the "old" system you were a good person who could rely on a system of laws and a set of moral/social expectations that both heralded you for being sensitive and charitable but also gave you the reasonable expectation of a legal system requiring repayment according to the terms you negotiated with your neighbor. Now as the holder of capital with a claim, you are the bad guy. What lessons are our kids taking away from this? What will be the economic and political implications of this 10 years from now?
Unafraid In Greenwich Connecticut Clifford S. Asness Managing and Founding Principal AQR Capital Management, LLCThe President has just harshly castigated hedge fund managers for being unwilling to take his administration's bid for their Chrysler bonds. He called them "speculators" who were "refusing to sacrifice like everyone else" and who wanted "to hold out for the prospect of an unjustified taxpayer-funded bailout."
The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a "group letter", was the superb note from "The Committee of Chrysler Non-TARP Lenders" some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President's wishes out of justifiable fear.
I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It's really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I'm entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally "sacrifice" their money without their permission.
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It's not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.
The above is how it works in America, or how it's supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler's creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.
Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients' money to share in the "sacrifice", they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients' money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That's how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could "share in the sacrifice", you would not be happy.
Let's quickly review a few side issues.
The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.
Let's also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.
Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because
they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President's comments here are backwards and libelous. Yet, somehow I don't think the hedge funds will be following ACORN's lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.
I am ready for my "personalized" tax rate now.
I wonder why posts are not being added to this thread??
Obama offering secured debt holders 33 cents on the dollar, and then offering the UAW 50 cents on the dollar for their unsecured debt is fra.udu.lent as far as I'm concerned.
But that is not an argument. It is an incantation.
The system has failed spectacularly more than once in its two hundred plus years and it required government intervention.
What about the outrage over health-insurance companies denial of contractually obligated services? Again-people's lives. Or the ability to live without pain,or treat disease that is treatable, which is a reasonable outcome for any citizen of the most technologically advanced society in world history.
I could add more, but the two issues I mentioned should keep the money vs.people crowd busy for a while. Yet, somehow I doubt those issues will ever concern them.
Mr. Jenkins, if it weren't for the fact that Bernie Madoff admitted that his Hedge Fund was a Ponzi Scheme he would still be running it today. You tell us the lessons we should be learning about the Hedge Fund industry from that, and then consider why the Hedge Fund Industry is being held is such low esteem. I know it must feel bad for Hedge Fund Managers to be on the short end of a bad contract, but taken in the context of the day there is some symmetry to it.
How about some acknowledgement of the way that capitalism (increasingly in the last 200 years) interprets the law, counting on the fact that it will not be regulated or enforced? (Know any poor tax lawyers?) The implication that your (or any private individual's) interpretation of the law is final is the reason we are going through hell. So don't tell me that things do not need to change.
Or to put it in another way, scavengers who feast off the rot will object when it is taken away from them. However, things will smell better afterwards.
Those few widows and orphans who could afford to put their money into hedge funds counted on the hedge fund managers to make good decisions. Good decisions account for reality, in all its forms. Bankruptcy for Chrysler was just one possibility. Chrysler is owned 100% by Cerberus Capital Management. Why other hedge fund managers would invest in CCM thinking they could get all their money out of a bad CCM investment is a question these widows and orphans should be asking of their hedge fund managers. Besides anyone who puts their money into a hedge fund knows they are rolling dice hoping for a big payout.
This letter and your complaint, George, reminds me of the RIAA trying to put themselves in the position of the content generating artists instead of admitting that they are in it for themselves when they complain about copyright violations.
And I have one more complaint. Which side were the hedge fundsters on when the bankruptcy reform question of whether or not to allow cram downs for mortgage holders was on the table in congress? I would bet they were against it. If they were I can at least say for them that they are being consistent, even if disingenuous.
The hedge funds are supposed to be taking huge risks. The imposition of jawboned resolution of bondholder claims by a President should be one they take into account when they make their investment decisions. Crying about it is, well, childish.
It will help to update public knowledge about the meaning of limited liability.
Whatever the details, here are two points:
- Chrysler hasn't been in trouble only since yesterday. If you're a hedge fund, you need to make sure you know a lot more than what's written on some balance sheet.
- renegotiation of debt is part of the process. It's close to impossible to pin down the true scenarios that matter. But what's clear is that in the event of insolvency or near-insolvency, there are many scenarios in which it is perfectly reasonable for debt-holders to accept a reduction of principal, for their own benefit.
This means that it's impossible to determine what this is really about without a lot more detail.
The problem is, of course, that nobody knows these details. Which is one of the core reasons why it's not such a bad idea for Chrysler to go bankrupt, after all.