After months of speaking softly to Wall Street, President Obama finally got tough with hedge funds in the Chrysler restructuring deal.
On the 101st day of his Presidency, Barack Obama finally slapped the hedge funds across the face like they deserved.
In his statement about the Chrysler bankruptcy and subsequent restructuring into a "Chrysler-Fiat Alliance," President Obama made it perfectly clear that not all the stakeholders at the table stepped up in good faith for the good of the company or the good of the nation. Some stakeholders were simply in it for themselves.
Framing his statement about Chrysler in terms of "shared sacrifice," President Obama elaborated on "substantial financial contribution" of the Canadian government, the massive debtor-in-possession financing offered by the U.S. taxpayer, and the significant sacrifices made by the UAW to guarantee that Chrysler could emerge from bankruptcy a stronger more viable company in alliance with Italian automaker Fiat.
But there were some parties, according to the President, who deserved mention only for their unwillingness to join the effort (emphasis added):
While many stakeholders made sacrifices and worked constructively in this process, some did not. In particular, a group of investment firms and hedge funds failed to accept reasonable offers to settle on their debt. In order to effectuate this alliance without rewarding those who refused to sacrifice, the U.S. government will stand behind Chrysler’s efforts to use our bankruptcy code to clear away remaining obligations and emerge stronger and more competitive. (link) (video)
Yes, America. What we read in that statement is the first, high profile, no nonsense, slap across the face, ouch that hurts, there's plenty more where that came from, the law and the nation is on our side, Commander in Chief hedge fund smack down.
May it be the first of many, many more to come.
When faced with the refusal of the hedge fund bond holders to accept 'reasonable offers'--most likely of a percentage-on-the-dollar equity swap in exchange for their debt portfolios--the Obama administration turned to the bankruptcy code to 'clear away remaining obligations,' thereby allowing the Chrysler deal to go through. By Jove! I think he's got it.
The beauty of the American bankruptcy courts is that these massive financial decisions will not take place in backrooms, but under the watchful eye of the courts.
Already, though, there is griping.
Free Press reporter Tom Walsh sums up what the reactionary view of President Obama's facilitating the Chrysler deal will be:
By forcing Chrysler LLC to file for bankruptcy, President Barack Obama fired an unmistakable warning shot today toward General Motors Corp., its bondholders, its dealers, its suppliers, its unions and anyone else who didn’t think Obama had the resolve to impose his will on the domestic automobile industry.
The message was this:
This president is not bluffing about bankruptcy. If he’s willing to use the big stick on Chrysler, there’s no reason to think he’ll balk at forcing GM there too.
He’s serious about sacrifice. Whether you’re a labor unionist who thinks Obama owes you for supporting his election campaign, or a Wall Street sharpie who thinks you can cut a better deal by holding out and maneuvering in court, you’ve got to swallow hard and cough up more than you’d like. (link)
Actually, the President's message was this: when labor, management, and taxpayers of multiple nations have stepped up to bat, the American public will not be held hostage by hedge fund managers stalling for profits.
That is the message. And it is a message Americans have been waiting patiently to hear.
Anyone who reads the public details of the Chrysler restructuring sees a plan that will ultimately benefit those who sacrificed for and believed in the company. While bankruptcy is sobering, and symbolically frightening for such a large corporation, news that the President faced down the hedge funds in favor of working families and communities should help beleaguered states like Michigan feel better about the bumpy road they are facing.
While they reap profits obscene enough to make Nineteenth Century robber barons pound their fists, a remarkable number of Americans still do not know how much financial power has been concentrated into a few hands as a result of the hedge funds.
Of course, the bigger issue is not the potential of large investment firms and hedge fund bond holders to hold up the GM restructuring, but their problematic role in the banking crisis. The Obama administration has structured a bank recovery plan that depends very heavily on hedge funds doing the right thing--on their stepping up to make shared sacrifice. Even though these hedge funds would reap huge, government subsidized profits for doing so in the long run, the bank recovery plan has not yet taken off. Shared sacrifice there has not been.
Will Obama face down these same parties to move other industries forward and, most importantly, to get the bank recovery rolling?
So stand strong, Mr. President! Rest assured that millions of Americans are hoping for a lot more hedge fund smack downs.