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Don’t Demonize Chrysler’s Debt Holders

May 11, 2009

Don’t Demonize Chrysler’s Debt Holders For Standing Up For Their Shareholders

President Obama last Thursday gave us reason to wonder what he believes is more important: respect for rule of law or his desire for more government control over the economy.

“A small group of speculators” is how Obama disparaged holders of Chrysler debt who resisted government pressure to accept a small fraction of what they are owed as Chrysler filed for bankruptcy Thursday.

The money managers at these firms — including Oppenheimer Fund, Perella Weinberg Partners and Stairway Capital Management — rightly stood up for their shareholders and investors, who include government pension funds, school endowments, and corporate and individual retirement investors.

Government Heat

A government task force has been pushing a restructuring of America’s auto industry, and was pressuring holders of Chrysler debt to forgive most of it to keep the company out of bankruptcy.

Chrysler’s largest lenders, who hold about 70% of Chrysler’s nearly $7 billion in debt, agreed to accept $2.2 billion of the money they are owed. The smaller lenders hold about $1 billion of Chrysler debt. Their refusal to give up a similar percentage of what they are owed forced the company’s bankruptcy restructuring.

“In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer bailout,” Obama misleadingly complained. “They were hoping that everybody else would make sacrifices and they would have to make none.”

And what of those other lenders?

They include Goldman Sachs, Morgan Stanley, JPMorgan Chase and Citibank, some of the nation’s largest financial firms and recipients of tens of billions of dollars of taxpayer bailouts. The smaller lenders whom Obama falsely attacked as wanting a taxpayer bailout have taken no taxpayer bailout money.

It’s not much of a sacrifice for companies that have received tens of billions of taxpayer dollars apiece to give up less than $5 billion among them, especially when doing so will make the government that has smiled on them smile even more.

The president in his demagoguery also neglected to note that the United Auto Workers, who gave him overwhelming support in the last election, were asked to “sacrifice” far less than the lenders, even though the UAW’s lavish pay, health and retirement benefits are major reasons the Big Three automakers are in such trouble. The Obama-supporting UAW will actually end up as Chrysler’s majority owner.

The people the president derisively called speculators are simply asking the government to follow long-established law to protect their clients and shareholders.

“To facilitate Chrysler’s rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more, and being allowed to take out billions of dollars,” said a joint statement of the holdout lenders Obama demonized.

“In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100% recoveries, while even GM’s unsecured bondholders are receiving a far better recovery than we are as Chrysler’s first lien secured lenders.”

Bank On It

The holdouts note they were not allowed to negotiate directly, but instead had to go through “an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.”

They summarized the Obama administration’s move well: “The government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades.”

• Stanek is a research fellow at the Heartland Institute in Chicago.

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