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Thursday, April 30, 2009

President Obama Vs. the Speculators

The big business news this morning is the announcement that Chrysler will soon file for bankruptcy.

Chrysler filed for bankruptcy protection Thursday afternoon in New York, a move President Obama said would give the company a "new lease on life."

The president also announced that Chrysler has met his demand to strike a partnership with Italian automaker Fiat and said he thinks the alliance has a "strong chance of success."

Chrysler faced a Thursday deadline to produce a restructuring plan, but some of the automaker's creditors reportedly declined an offer Wednesday from the Treasury Department that would give the lenders $2.25 billion in exchange for forgiving Chrysler's $6.9 billion debt.

This was initially a blow to the White House because they had been working tirelessly to put together a proposal to keep the company going with the UAW as the main shareholder. Yet, according to Politico, the White House sees opportunity in this setback.

With a flash of anger Thursday morning, President Barack Obama offered a blistering critique of “a small group of speculators” who refused to go along with the government’s plan to keep Chrysler out of bankruptcy.

And while he is setting up a dramatic showdown with Wall Street, it might be exactly the fight that the White House wants right now.

The White House had offered Chrysler’s lenders a deal to take roughly 33 cents on a dollar to write off the company’s debt. Most took the deal, but a few holdouts said it wasn’t good enough — and their refusal to go along pushed the company into bankruptcy.

Now Obama is calling them out.

Let's leave the politics aside for a minute. I think the politics are a lot more complicated than taking a populist stand against a group, hedge funds, that are easy to demonize. Look at what the White House has done vis a vis the automakers. They gave each loans to avoid bankruptcy. They demanded that one CEO be let go. They demanded business plans in lieu of a new loan. They got in the middle of stakeholder negotiations. Now, when those negotiations didn't go in a way they liked, they have decided to use the bully pulpit of the Presidency to demonize one of the negotiating parties. For sheer chutzpah, Obama then continues to claim that he doesn't want to run the automakers. Well, he could have fooled me given everything he has done recently?

What's important about all of this is that President Obama is tying more and more industries to the government and he's not afraid to demonize those entities, in the business process, that he feels are getting in his way. The chilling effect of such a combination can't be understated. Let's take junk bonds. Those are bonds of corporations deemed a high credit risk. How would a hedge fund now feel about investing in a junk bond? If that company goes under, they will be targeted for demonization if they have the "audacity" to hold out for the best deal for themselves, a la the bond holders of Chrysler.

What about any of the hedge funds that are supposed to get involved in the Private Public Partnership to buy toxic assets? You are watching your fellow colleagues get pulverized in the press for holding out for the best deal for themselves, and now you are supposed to invest millions and billions alongside the government. Does President Obama really expect any of these "evil" hedge funds and private equity firms that he is now demonizing to invest any money alongside the government when he sees political advantage in demonizing them when they attempt to make money?

What about energy? President Obama is trying to fast track a plan so that the government effectively has a hand in just about all energy decisions. What if you are working with an energy source that the government deems unworthy? How do you now feel about the demonization of hedge funds? What if you, too, cross the government? Will you face the same wrath, and how much will that cost your business?

It may or may not be politically effective to go after the hedge funds because they dared to hold out for a better deal for themselves in relation to Chrysler, however, economically, it is downright shameful.


Anonymous said...

That being said I still think they'd go along with that public-private investment partnership because its such a sweetheart deal. The funds get almost all the profit while the FDIC takes on almost all the risk.

mike volpe said...

They are not monolithic. Some of them might in fact see it the way you see it. Others might say that the deal is too good to be true and that the government will sell them out as soon as it is politically expedient to do so.

Anonymous said...

Mike, do you think the holdouts have enough clout to force Chrysler into Chapter 7 Liquidation? And what do you think Obama can and will do to prevent that from happening?

mike volpe said...

They have enough clout to force them into banruptcy. I don't know if it enough clout to force a Chapter 7 liquidation.

Obama will use the bully pulpit to demonize them in the hopes that enough negative scrutiny will make them see that holding out isn't worth it.