Bondholders in Bondage

By: Mr. Curmudgeon
mrcurmudgeon@inthepublicsquare.com

An American community organizer once said, “I have built my organization upon fear.” If you are a Chrysler secured bondholder, you are forgiven for attributing the aforementioned quote to President Barrack Obama. In fact, the words are those of an earlier Chicago organizer – Al Capone.

“A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded buyout,” Obama sternly declared at a White House press briefing. “They were hoping that everyone else would make sacrifices, and they would have to make none.”

Under a plan backed by the Obama administration, secured bondholders would receive 29 cents on the dollar for their original investment and a 10 percent equity stake in the terminally ill American automaker. The United Auto Workers, on the other hand, would receive 55 percent equity ownership of Chrysler and a sitting member on its board of directors. Twenty investment firms originally objected to the president’s structured bankruptcy plan, threatening to oppose it in court.

Obama’s words, of course, are lies. None of the firms opposed to Obama's plan recieved any bailout money or wanted to. They simply wanted Chrysler's assets. Secured bonds are considered safe investments because, should the company that issued them fail to meet its financial obligations, secured bondholders are entitled to seize the company’s assets and sell them to recover a portion of their investment. In fact, interest paid to secured bondholders is lower than that paid holders of unsecured bonds, which are considered far riskier. That is why U.S. bankruptcy law requires that secured bondholders be first in line to receive financial restitution if the debt-holding company goes under.

Clifford S. Asness, a managing partner of the $20 billion hedge fund AQR Capital Management, wrote a response to the Obama attack on fund managers:

…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. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not

… The President’s comments here are backwards and libelous. Yet, somehow, I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protesters soon. Hedge funds really need a community organizer.

Thomas E. Lauria, representing a group calling itself the Chrysler’s Non-TARP lenders, seemed poised to stop Obama’s reorganizing of Chrysler. That was before the administration sent representatives to strong-arm investment firms to pull out of the group. Unfortunately, the tactic worked and enough firms were frightened from exorcising their fiduciary duty to their clients and withdrew from the group. Chrysler’s Non-TARP lenders, therefore, lost their standing before the bankruptcy court.

In a written statement, attorney Lauria said:

After a great deal of soul-searching and frankly agony, Chrysler’s Non-TARP lenders concluded they just don’t have the critical mass to withstand the enormous pressure and machinery of the US government. As a result, they have collectively withdrawn their participation in the court case.

The majority of bondholders caved early to the administration. JPMorgan Chase, Citigroup, Morgan Stanly and Goldman Sachs hold 70 percent of Chrysler's secured bonds. They are all beholden to the federal government for bailout billions.

Our nation’s community organizer proved, as Capone once observed, “You can get more with a nice word and a gun than you can with a nice word.” The $5 million dollar campaign contribution to President Obama paid off nicely for Detroit’s United Auto Workers. The UAW will soon own what investors paid for in what will soon be the most breath-taking hostile takeover in modern corporate history. They now own a controlling interest in an automaker that is essentially a nonessential government agency.

As fund manager Asness wrote:

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred-plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the Oval Office to be scolded for disobedience by the President.
I am ready for my “personalized” tax rate now.

And so are we all.