On the 101st day of his Presidency, Barack Obama finally slapped the hedge funds across the face like they deserved.
In his statement about the Chrysler bankruptcy and subsequent restructuring into a "Chrysler-Fiat Alliance," President Obama made it perfectly clear that not all the stakeholders at the table stepped up in good faith for the good of the company or the good of the nation. Some stakeholders were simply in it for themselves.
Framing his statement about Chrysler in terms of "shared sacrifice," President Obama elaborated on "substantial financial contribution" of the Canadian government, the massive debtor-in-possession financing offered by the U.S. taxpayer, and the significant sacrifices made by the UAW to guarantee that Chrysler could emerge from bankruptcy a stronger more viable company in alliance with Italian automaker Fiat.
But there were some parties, according to the President, who deserved mention only for their unwillingness to join the effort (emphasis added):
While many stakeholders made sacrifices and worked constructively in this process, some did not. In particular, a group of investment firms and hedge funds failed to accept reasonable offers to settle on their debt. In order to effectuate this alliance without rewarding those who refused to sacrifice, the U.S. government will stand behind Chrysler's efforts to use our bankruptcy code to clear away remaining obligations and emerge stronger and more competitive. (link) (video)
Yes, America. What we read in that statement is the first, high profile, no nonsense, slap across the face, ouch that hurts, there's plenty more where that came from, the law and the nation is on our side, Commander in Chief hedge fund smack down.
May it be the first of many, many more to come.
When faced with the refusal of the hedge fund bond holders to accept 'reasonable offers'--most likely of a percentage-on-the-dollar equity swap in exchange for their debt portfolios--the Obama administration turned to the bankruptcy code to 'clear away remaining obligations,' thereby allowing the Chrysler deal to go through. By Jove! I think he's got it.
The beauty of the American bankruptcy courts is that these massive financial decisions will not take place in backrooms, but under the watchful eye of the courts.
Already, though, there is griping.
Free Press reporter Tom Walsh sums up what the reactionary view of President Obama's facilitating the Chrysler deal will be:
By forcing Chrysler LLC to file for bankruptcy, President Barack Obama fired an unmistakable warning shot today toward General Motors Corp., its bondholders, its dealers, its suppliers, its unions and anyone else who didn't think Obama had the resolve to impose his will on the domestic automobile industry.
The message was this:
This president is not bluffing about bankruptcy. If he's willing to use the big stick on Chrysler, there's no reason to think he'll balk at forcing GM there too.
He's serious about sacrifice. Whether you're a labor unionist who thinks Obama owes you for supporting his election campaign, or a Wall Street sharpie who thinks you can cut a better deal by holding out and maneuvering in court, you've got to swallow hard and cough up more than you'd like. (link)
Actually, the President's message was this: when labor, management, and taxpayers of multiple nations have stepped up to bat, the American public will not be held hostage by hedge fund managers stalling for profits.
That is the message. And it is a message Americans have been waiting patiently to hear.
Anyone who reads the public details of the Chrysler restructuring sees a plan that will ultimately benefit those who sacrificed for and believed in the company. While bankruptcy is sobering, and symbolically frightening for such a large corporation, news that the President faced down the hedge funds in favor of working families and communities should help beleaguered states like Michigan feel better about the bumpy road they are facing.
While they reap profits obscene enough to make Nineteenth Century robber barons pound their fists, a remarkable number of Americans still do not know how much financial power has been concentrated into a few hands as a result of the hedge funds.
Of course, the bigger issue is not the potential of large investment firms and hedge fund bond holders to hold up the GM restructuring, but their problematic role in the banking crisis. The Obama administration has structured a bank recovery plan that depends very heavily on hedge funds doing the right thing--on their stepping up to make shared sacrifice. Even though these hedge funds would reap huge, government subsidized profits for doing so in the long run, the bank recovery plan has not yet taken off. Shared sacrifice there has not been.
Will Obama face down these same parties to move other industries forward and, most importantly, to get the bank recovery rolling?
So stand strong, Mr. President! Rest assured that millions of Americans are hoping for a lot more hedge fund smack downs.
(cross posted from Frameshop)
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Obama backs Chrysler bankruptcy as wise move
Chrysler files for bankruptcy protection - Autos- msnbc.com
Bankruptcy for Chrysler Likely Averted as Banks Cave on Debt ...
Probably the best explanation of what the Contracts Clause means in modern day was written in an opinion by Justice John Paul Stevens in Keystone Bituminous Coal Association v. DeBenedictis (1987), Stevens stated, “It is well‐settled that the prohibition against impairing the obligation of contracts is not to be read literally”.
Hedge funds and others who refused to bend over, own SECURED DEBT. take a lesson in contract law and then speak.
If this were a nation of laws, Chrysler should be made to sell assets to pay off secured lenders first. UAW has unsecured obligations. they should be back in the line not first.
Since this is a voluntary Chapter 11, the hedge funds simply felt they could do better in bankruptcy than they were getting at the negotiating table. It's a gamble on their part, but it doesn't really matter unless they hold a strong debt position. The terms of their debt agreements, in terms of interest, length of return and other terms could be drastically altered. When the newly organize company re-emerges from Bankruptcy, all debt and equity holders will have quote "taken a bath" on their unrealized value. But, if the new company is strong and profitable, all invested parties stand to make money. In actuality, the equity holders can come out of this much better off than the secured lenders.
The outrage directed to the hedge funds is that a) they are a special group of investors allowed to do things regulated groups cannot; b) they are aggressive short-sellers and have caused much of the current problems, and c) they forced the lay offs of thousands of people much sooner than would otherwise be necessary, thereby helping to prolong and inflame the recession.
layoffs in the chrysler INEVITABLE. One of the biggest problems in airline sector is overcapacity. The companies make too much cars, employ too many people, have too many brands, have too many plants.
Contract the industry by 50%, reduce the number of viable players by 30%, industry profits will return.
AIG swaps guarantee them.
really.
The only reason the bigger banks took the bad deal is because they are TARP recipients, and had to do what CEO Obama told them.
That Obama pilloried them for this is appalling. Seriously, it's really bad. It goes against the rule of law, and it discourages investors from investing--the opposite of what we need to be doing in a recession.
I repeat--what Obama said is extremely appalling.
Discouraging investment is the road to depression. I'm starting to think that Obama really WANTS the economy to do worse. That's what his actions say. Is this some kind of warped nostalgia for the 30s, or what? it's inexplicable.
That being said, there are many ways to do the "best thing" for your investors. In this case, the hedge fund managers are gambling that they'll do better in bankruptcy than what they were going to get at the negotiating table, while others were less willing to take that risk.
Berating the hedge funds may be deserved because, they are unregulated groups of very wealthy investors whose tactics are thought by many to have been a major cause of the economic problems we're suffering today and they were willing to force the lay off of more than 20,000 people much sooner than necessary, thereby deepening and prolonging the current crisis.
When all is said and done, the hedge funds may have done a great disservice to their shareholders as it will be because of actions like this that they will be saddled with extremely strong regulations or forced out of existence all together when new regulatory laws are enacted.
Apparently you think the hedge funds should let their investors who own senior debt be ripped off so that they won't be punished by Obama for refusing to pay to his extortion racket. What happened to rule of law? You must be a lobbyist. The law is what I pay the politicians to say it is.
I read a comment the two things the President didn't understand or learn in college were economics and history.But I think even Joe Biden is smart enough to avoid this.
I still think we need Regulation, Regulation, Regulation,
of Hedge Funds and all of Wall Street !
They need Regulation Restructuring of Wall Street just like the Auto Industry !
We do need to start seeing it Mr. Obama ! ! ! Transparency also !
We have no understanding of the position of the hedge funds with regard to Chrysler, but I'd be surprised if they are lenders secured by the hard assets of the corporation. Since they would normally be bond, derivative or preferred shareholders, an equity position with more security than a simple shareholder, they stand to be smacked down in bankruptcy as well as everyone else. They're gambling they would get a better deal in bankruptcy than they were able to negotiate, and because hedge funds are most notably aggressive short sellers, figured this would give the time to hedge their bets on Chrysler and pick up some short-term bucks.
"How come the UAW...when they are the one most responsible "
Typical pure (R) bu11ch1t.
Chrysler management is almost solely responsible for the fate of the corporation. Unions have almost no voice in either the tactical or strategic operations of the company at any time.
Long range and day to day engineering and production management, material provision, future planning and marketing strategy, financial decisions (short and long), debt ratios, et al., any and all of it is strictly a management function in most corporations.
A union has little to nothing to do with any of that, they bear some responsibilty for production quantity and quality, little more, and of course they bargain for a good deal for their members within the parameters set largely by management. The average worker bee just comes in and does as guided and instructed. Mid to upper management on the other hand set virtually all policies that guide the path of the almighty corporation.
Y'all (R party goposaurs, true believers) always remind me of that currently popular cockatoo, Snowball. The RW media Wurlitzer fires up a tune and y'all start shuckin' an' jivin'. Birdbrains.
What do swaps have to do with this?
Hedge funds stand to make more money from TARP money
via AIG Credit Default Swaps,
they took out to protect their Bonds,
than the current value of the bonds themselves.
Really.
http://www.businessweek.com/lifestyle/content/apr2009/bw20090424_731357.htm?chan=top+news_top+news+index+-+temp_top+story
our money used to destroy main street
so Banksters can gamble.
The link is about GM, but you be sure Chrysler is getting the same treatment from Hedge gamblers.
The hedgies will make out like the banksters they are in bed with. The rising unemployed, un-insured, newly homeless, newly penalised, will lose more and more.