The dissident bondholders have been routed. Was justice served, or is Big Government running amok?
If the showdown between the White House and Chrysler’s dissident hedge fund bondholders was the first round of a prizefight, then Obama just scored a knockout with his first punch. Last Thursday, the president declared that “I don’t stand” with the “speculators … who held out while others were making sacrifices.” One week later, the speculators are running for the hills. The New York Times’ Michael J. de la Merced reports that the group will disband, following the withdrawal of two more high-profile members.
The decision to dissolve the unofficial group was made in connection with the decision by OppenheimerFunds and Stairway Capital Management to withdraw, said Glenn M. Kurtz, a White & Case partner representing the bloc. With those two firms pulling out, the so-called Committee of Non-TARP Lenders would hold below 5 percent of Chrysler’s $6.9 billion in secured debt. That would almost certainly eliminate the group’s standing in federal bankruptcy court.
The dissidents claimed that their legal rights to appropriate compensation for owning Chrysler debt were trampled upon by the White House, and libertarian and right-wing-minded critics have embraced their cause. Putting the interests of UAW members above the contractual rights of hedge fund investors is being decried as banana republic-style corruption. Megan McArdle has been making the most impassioned case for this point of view at her Atlantic blog:
…It’s now clear that the worry many of us had at the time of the bank bailouts has come true: the government is using its intervention in the banking system to pressure banks to give special deals to the government’s special friends…
Countries that use their banking systems this way don’t get good results. If you’re a fairly uncorrupt developed country, you get slower growth and bloated “critical” sectors that are usually more critical in providing campaign support, lavishly remunerated make-work jobs, and photo ops, than any products the public actually wants…
When the government gives money to favored constituencies — well, I don’t like it, but as PJ O’Rourke says, that’s basically what our government does. “It ought to be right there in the constitution: ‘We the People, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and give money to jerks…’” But when it starts stepping in and trying to bypass the bankruptcy rules in order to make someone else give money to jerks, that’s different in magnitude, and in kind.
And yes, this is what government does. The Bush administration stocked its Labor Department with union-busters and cut taxes disproportionately for the wealthiest Americans. The Obama administration, in contrast, is looking out for union interests, which happens to be exactly what the candidate promised on the campaign trail. But there is also some question as to whether the lender’s rights really were trampled on. The bankruptcy judge appears to have no problem with the legality of the deal, for one thing.
McArdle ends her post wondering why the Obama administration would go all-in on a hand where the stakes just aren’t that big — Chrysler has only 60,000 employees, and the amount of cash necessary to satisfy the dissident demands was not that big in the overall scheme of things. She concludes that the precedent was set because (italics hers), “they’re planning to do it again.“
I think that’s probably exactly right. The Chrysler negotiations have always been a prelude to the much more complicated and large-scale problem of resolving the future of General Motors. By playing tough with the hedge funds on Chrysler, the Obama administration is making it clear that it expects G.M.’s bondholders to play nice.
Conservative and libertarian critics are horrified. Perhaps if we had better evidence of how the markets work without government interference, I’d be more likely to take them seriously. But, of course, the opposite is true. There’s also the fact that, while G.M. has certainly made a lot of mistakes over the years, the automaker wouldn’t have reached its current parlous straits if the economy hadn’t completely collapsed last fall. That collapse, in turn, was triggered by a financial crisis precipitated by incredibly irresponsible Wall Street behavior. The hedge fundies who feel they are getting screwed by the Chrysler deal keep talking about how they are only doing their “fiduciary duty” to their investors. But Wall Street, in toto, failed us all in doing its fiduciary duty to the country — and the world. In taking a tough line with the Chrysler bondholders, the White House is signaling that there will be some consequences for making a mess that brought down the global economy. It’s high time. Maybe they’ll think twice the next time.
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