Hedge Funds Force Chrysler into Bankruptcy

[Detroitej72]

http://news.yahoo.com/s/ap/20090430/...ge/us_chrysler

These funds should be outlawed. They buy the debts of the companies, take out insurance from places like AIG against their losses, then let the company fail. Then they collect the insurance money, and write off the original debt as a loss, thus never paying any tax. Meanwhile, the hedge fund owners make millions off the company they drove into the ground, with no reguard for the livelyhoods and careers they destoyed.

Hopefully they wont get a cent from this bankruptcy. They should be illegal, but thanks to Reagan, they were brought back from the dead during his presidency. We're still feeling the effects of his legacy, 11 years later.

[ccbatson]

The same hedge funds that made it possible for the company to function by maliciously extending loans to them in the first place?? The same hedge funds in which millions of regular folks have pension funds invested and rely on a fair return on their investments? The same hedge funds that aim to protect these regular folk/shareholders by expecting to get the larger proportion of return on their invested/loaned money under bankruptcy protection [[which Obama wanted to disregard in order for government/TARP lenders, and Union fat cats to go to the front of the line)? Those hedge funds?

[mjs]

First, don't free market principles define a fair return as one where the risk is proportional to the reward? Where's the risk in betting that Chrysler will lose when you're the Judge?

Second, aren't hedge funds so high risk that only accredited investors can purchase them? Assuming for the sake of argument that these pension funds are indeed highly vested in these high risk investments, wouldn't the failure of the fund attributable to the fund's guardian?

Finally, isn't allowing a divesture of risk/reward and an abundance of highly leveraged investments how we got into this problem in the first place?

[mjs]

And no, its not the same hedge funds that made the loans that allowed Chrysler to survive. These hedge funds did not make the loans, they bought them so they could win their bet that Chrysler would be forced into bancruptcy. Its the same as when Enron took power plants of line so they could win the the bet that California would need more power than Enron felt like producing. Do you understand why they didn't want Pete Rose betting against his own team?

[ccbatson]

They hold the loans, whether they issued them, or bought them is irrelevant. The only judge of what who gets in bankruptcy is the rule of law which, if you look into it, gives first tier lean holders first priority at the highest rates...this includes these hedge funds. This is why Obama wanted to avoid bankruptcy...to avoid the rule of law and bump the TARP lean holders and UAW ahead of these private entities where they do not belong.

[ccbatson]

People want to buy quality products at low prices...bankruptcy is a minor consideration especially when it is clear that the nanny state will prop them up regardless.

[mjs]

I agree that the law says that the hedge funds can put people into bankruptcy, however, the discussion is whether that law should be changed. Under that topic, who initiated them is not irrelevant nor is the principle purpose of their purchase.

Simply put, people are arguing that there should be a law that says you can't short a company and cause its collapse especially if it harms other stake holders. A main theme in bankruptcy law is that one group of creditors can't unnecessarily harm the rest. So you saved the hedge fund investors, what about the suppliers and pension recipients?

I think the better solution is to be like the rest of the industrialized world and make the debtor priority be employees, pension beneficiaries, suppliers, and then financiers since financiers are the ones who are best positioned to avoid the company based on liquidity issues and they make their livings on assessing risk.

[ccbatson]

No, that is not the discussion, changing laws to help out your buddies [[or yourself) is the definition of political corruption. The discussion is really about that very item...political corruption...on the part of the Obama administration.

[jiminnm]

A main theme in bankruptcy law is that one group of creditors can't unnecessarily harm the rest. So you saved the hedge fund investors, what about the suppliers and pension recipients?

This is simply not true.

There are different classes of creditors in bankruptcy. Secured creditors have the first claims on a debtor's assets after taxes due. In Chrysler's case, this group determined that they would likely receive more in bankruptcy than under the plan the Obama administration attempted to force upon them. Chrysler had to secure that debt because they had exhausted their ability to borrow unsecured debt, weren't selling enough cars to generate the funds necessary to run the business. Had they not issued secured debt, they would have been in bankrupcy a year ago. Generally, secured debt is at a lower interest rate than unsecured debt.

In a chapter 11 reorganization, the court approves continuing payments to employees and suppliers so the bankrupt can continue to operate. I think this has already happened in Chrysler's case.

Unsecured creditors are usually last on the list, getting whatever is leftover after groups have been paid. That is the what the word 'unsecured. means. Creditors loaned those funds on their belief that Chrysler had the ongoing resources to repay them. Chrysler probably paid those lenders a higher interest rate, but the lenders were wrong. The VEBA funds owed to the UAW are unsecured.

If bankruptcy priorities are changed as you suggest, it will be difficult for companies to borrow. The interest rates on borrowed funds will be exceedingly high, because lenders will now want to take the risks involved. That would pretty much stymie any hope of economic growth.

[ccbatson]

Bravo jiminm... Starting to see the liberals and Obama for the underhanded Statists that they are I see. Better late, then never.

[MoparDan]

And it gets even more interesting:
http://www.allpar.com/news/

Obstinate creditors seek secrecy
May 4th, 2009
by DaveAdmin
Chrysler creditors who are seeking to avoid the quick sale of the “good assets� are now trying to keep their companies’ names secret, with an attorney claiming that he has received death threats, according to the Detroit News. Perhaps more to the point, some investors have already started pulling their funds from the companies that helped send Chrysler into bankruptcy, with Oppenheimer Funds being the most visible. Michigan’s legislature has decreed that the state will divest from the three lead funds that held out for more cash, angrily claiming that retirees and auto workers were being put ahead of banks and hedge funds. Presumably, if the names of all the creditors now challenging the Treasury plan were exposed, they could also face financial repercussions.

[ccbatson]

Surprised? Obama uses some old fashioned Chicago thug politics to villainize these folks.....darn straight they want to be kept anonymous.

[MoparDan]

Surprised? Obama uses some old fashioned Chicago thug politics to villainize these folks.....darn straight they want to be kept anonymous.

I hope they can bust these Hedge Fund Outlaws to pieces. They short companies into bankruptcy, are limited to a few wealthy investors & are not regulated. In other words, they are driven by pure greed. They can burn in hell.

[ccbatson]

Check your own portfolio, and those of your friends and family first. You maybe sending yourself to the gallows.

[MoparDan]

Check your own portfolio, and those of your friends and family first. You maybe sending yourself to the gallows.

No need to worry as none of my holdings are in hedge funds. And if any of my relatives or friends have THAT kind of money to put into one, they get no sympathy from me. The market itself beat the shit out of what I already have. But with a military retirement & another from my employer, I don't drop too much into my 401s to begin with.

[Gistok]

No, that is not the discussion, changing laws to help out your buddies [[or yourself) is the definition of political corruption. The discussion is really about that very item...political corruption...on the part of the Obama administration.

Cc.... funny how you call changing laws to help out your buddies as being the definition of political corruption. You didn't mention that when Bush helped out the oilmen and the rich with tax breaks during his tenure...

Or does the definition change to something besides "political corruption" when you support the party in power and you become a "major" beneficiary of the law change??

[Detroitej72]

Surprised? Obama uses some old fashioned Chicago thug politics to villainize these folks.....darn straight they want to be kept anonymous.

They want to be kept anonymous because they know damn well they hoped for a bankruptcy so they could sell of Chrysler's assets for a larger profit. Before you spout off about the liberal media, I heard this on NPR last week.

And yes, they are open only to the elite investors, the same folks who brought you Enron and the like. Average pensions are not allowed into this good old boys club.

If you approve of Enron's shenanagins, then you'll love these clowns.

[jiminnm]

And yes, they are open only to the elite investors, the same folks who brought you Enron and the like. Average pensions are not allowed into this good old boys club.

If you approve of Enron's shenanagins, then you'll love these clowns.

In you effort to demonize hedge fund investors, you ignore well over half of them. Yes, only those individuals who meet SEC net worth requirements can invest, but there are a lot of institutional investors who invest in hedge funds - pension funds, insurance companies, charitable organizations, endowment funds, private banks and more. Many foreign individuals invest also. You need only look at how many of those institutions were hurt by Bernie Madoff to see examples.

By the way, the Enron shenanigans were pretty much caused by company insiders, not hedge funds.

[mjs]

Jiminnm makes some excellent points which requires me to make some clarifications and change my opinion.

Yes, it will be more difficult for companies to borrow and lending will likely be more expensive. However, that occurs any time an extrinsic cost becomes intrinsic. A major function of government is to decide if certain external costs beneficial to a certain group should be internalized to be fair to the rest of society. Safety costs money if you don't have to pay for the injuries. Environmental compliance costs money if you don't have to pay for the damages. Placing workers and pensioners before the secured creditors only costs money if the pensions aren't fully funded or there's a serious risk of missing payroll. Just as banks reduce their rates when small business owners personally guarantee the loans, the banks will reduce their rates if a company shows that they can ensure their pension and payroll promises.

Jiminnm also makes a good point that changing priorities may also push debtors into bankruptcy faster and he forces me to change my view that suppliers should take priority over other debtors. To clarify other points, I had meant to prioritize the secured financiers over the unsecured financiers and I didn't mean that classes can't gain to the detriment of other classes. I meant that specific class members can't gain to the detriment of that class as a whole. What separates hedge funds from other debtors is that they get money from the bankruptcy and from the devaluation of the stock price. All that is needed is to simply forbid a debtor from gaining from the short selling of that stock.

[mjs]

The Enron gang did more than just insider stock trading. They were betting that costs would rise as they manipulated the supply. The comparison is that both were betting on a fixed game. Its key here to realize that hedge fund gains are stock holders losses so there are losses to retirement accounts.

Madoff was successful because he played on investors assumption that the game was fixed and their fears that they wouldn't be able to get in on that fix if they asked too many questions.

[mjs]

The hedge fund ownership is a red herring. If a good, hard working, man commits insider trading, its still wrong and if a cruel man makes an honest trade, its still an honest trade. Focus on the rightfulness of the act, not the actor.

[Detroitej72]

What some here fail to understand, or just simply ignore, is that the hedge funds still make their money. As I stated earlier, they immediately take out insurance against their losses, collect the payout, and can claim a tax write off on the original loss in the process.

[Sstashmoo]

Yeah, but it's a wash. They have to claim the insurance payoff as income.

[MoparDan]

http://www.allpar.com/news/index.php...p-lender-list/

Non-TARP lender list

The “Non-TARP lenders� who are still opposing a quick sale of Chrysler, instead favoring liquidation, are listed below [[with thanks to sebring96hbg).

It is interesting to note that all but one are headquartered in New York, with two in Purchase. There may be some overlap in ownership. The “Arrow Distressed Securities Fund� almost certainly bought the securities after they fell in value; it is possible the other funds also bought the loans when the possibility of bankruptcy was known.

Schultze Master Fund Ltd and Apex Master Fund 3000, Purchase, NY
Arrow Distressed Securities Fund, Purchase, NY
Stairway Capital Management II, L.P., Uniondale, NY
Group G Partners LP, New York, NY
GGCP Sequoia L.P., New York, NY
Oppenheimer Senior Floating Rate Fund and Master Loan Fund, New York, NY
Foxhill Opportunity Master Fund, LP., Princeton, NJ

Approximate Aggregate Holdings: $295,000,000.00

[Detroitej72]

Yeah, but it's a wash. They have to claim the insurance payoff as income.

Not from what I've heard on the radio. According to NPR, they claim the loss and don't have to report the insurance payout as profit, since it technically wasn't profit.