A Bully In the White House

Barack Obama’s lawless conduct in connection with the Chrysler bankruptcy is sending shock waves through the business community. It is important to understand what is happening here. Many think that Obama is merely engaging in crony capitalism, favoring his political supporters (most notably the Auto Workers Union) at the expense of others. That’s true, of course, but it is much worse than that: Obama has tried to bully those who have not bought his favor–Chrysler’s non-TARP secured creditors–into giving up their legal rights by threatening to use the powers of the White House to damage their businesses. This sort of lawlessness is common in some of the more corrupt Third World countries, but it is brand new to the United States.

Business Insider headlines: “Hedge Funds Outraged At Obama Bullying But Also Cowering In Fear.” It reproduces a letter written by Cliff Asness, managing partner of AQR Capital Management. Here are some excerpts:

The 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 …. Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear. …

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. …

The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. … Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power. …

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.

Bullying, lying and lawless: President Obama has achieved a sort of trifecta of dishonor in connection with the Chrysler cram-down.