Getting all Hugo Chavez on the hedge funds

Wall Street investors are moaning and whining about President Obama's attack on speculators. For supposed smart guys, they're not too hip to what's happening.

By Andrew Leonard
Published May 1, 2009 2:20PM (EDT)

As expected, there is much angst in Wall Street over President Obama's attack on hedge fund speculators Thursday.

I am particularly enamored of this quote from the Wall Street Journal's Serena Ng (the same reporter who brought us the contrived anguish of Chrysler investor Geoffrey Gwin yesterday) in a story headlined "U.S. Tactics Spark Worries Over Lenders' Rights." Italics mine.

Ty Anderson, global head of high-yield strategies at DB Advisors, Deutsche Bank's institutional asset manager, said that the government's involvement "could become a risk factor for investors, as there's a significant difference between what the government thinks is good for the country and how that could affect lenders' contractual rights."

Similar concerns are raised in The New York Times' "The Lenders Obama Decided to Blame."

Representatives for Perella Weinberg, which is advising the government on a wide range of banking issues, initially defended the firm's decision to rebuff the government's offer. They characterized the move as a principled stance against the administration's growing intrusion into American business. Many in the financial and in the legal worlds said the investors were within their rights to challenge the proposal.

The main grief the holdout lenders appear to have is that, according to bankruptcy law and tradition, they believe that the Chrysler debt that they purchased (often at a discount, long after it was clear that the company was in deep trouble) has rights that are superior to some of the "junior" parties involved. The government, they believe, is stumbling into a Hugo Chavez role, running roughshod over everyone in its way. First -- a take it or leave it deal for Wall Street hedge funds. Next nationalization of Citigroup! And then finally, everyone who works on Wall Street gets forced to wear a dunce cap and kick-me sign.

Haircuts and compromises in out-of-court financial restructuring deals happen all the time. How one feels about this particular case depends, in part, on how serious one thinks the economic situation is, and how important it is for government to take an active role in it. Chrysler, by itself, would not bring down the U.S. economy if it disappeared from the earth. But Chrysler, plus GM, plus all their suppliers and dealers and related parties, does play a major role in the economy of the Midwest, and standing by and simply allowing their complete evisceration would be another devastating blow to an already very weak economy. These are not ordinary times, and Wall Street hedge fund operators, in particular, should not expect ordinary practices to continue, especially when their own reckless lending played such a large role in contributing to today's mess. This is not a case of Barack Obama channeling Hugo Chavez. This is a case where the government's view of what is good for the country is at clear odds with the financial interests of a small group of speculators.

In the Times story, we also learn that the hedge funds thought that the administration's offer was "simply unfair."

Here is where the mind boggles. These are smart people, we have been led to believe. Do they not understand the mood in the country? Do they not get that to many people, the Obama administration has been too soft on Wall Street? How can they not understand that there are times to bitch and moan, and times to just take your punishment, and now is the time for the latter?

From the Times:

A move is already afoot to tighten oversight of hedge funds and end certain tax benefits for private investments funds. The Chrysler bankruptcy, and Wall Street's role in it, will make resisting those efforts more difficult.

What is striking to many in financial circles is how much Chrysler's reluctant creditors gambled for what is, in the scheme of this bankruptcy, a relatively small amount of money.

Wall Street just doesn't get it. As I've noted several times already, we are about to watch this whole drama play out on a much bigger scale, in the case of General Motors. It will be very interesting to see whether any lessons have been learned.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

MORE FROM Andrew LeonardFOLLOW koxinga21LIKE Andrew Leonard

Related Topics ------------------------------------------

Chrysler Globalization How The World Works