Hating on the Hedgies

Going beyond Obama’s rhetoric on Chrysler’s lenders

Announcing the historic bankruptcy plan for one of America’s largest automakers, President Obama had harsh words for the hedge funds that hold $6.9 billion dollars of Chrysler’s debt. He wants the lenders to accept roughly $2 billion instead, but they’re holding out hope for a more favorable settlement with in court. Here’s how The New York Times recounted the incident.

Bringing to bear his White House megaphone on Thursday, Mr. Obama laid out the terms of a deal that he said would save well over 35,000 jobs. And with a hint of anger, he railed against the holdout lenders, now effectively a hostile group of business partners, whom he called “speculators.”

“They were hoping that everybody else would make sacrifices, and they would have to make none,” Mr. Obama said of the creditors, among them several hedge funds and boutique investment funds. “I don’t stand with them.”

And, Reuters, too, reported the hedgies rejection in stark, accusatory terms, quoting an anonymous official from the White House, without giving voice to Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital, the companies that hold Chrysler’s secured debt.

Obama’s sharp words have been received with a particular glee, like this impression from the Huffington Post, “On the 101st day of his Presidency, Barack Obama finally slapped the hedge funds across the face like they deserved.”

While it’s clear that popular sentiment is teeming with anti-bank, anti-lender acrimony, it’s a little less obvious exactly why we should hate these particular hedge funds so much. But, news outlets are just a little too willing to echo Obama’s categoric, politically charged criticism of the lenders. Readers, and their anger, would be better served by a complete reading of the facts. Smart and angry is much better footing than just plain angry, as the Tax Day tea parties taught us.

It would’ve been nice to get some context for Obama’s claims. For example, the lenders who are vilified for tilting the negotiations toward bankruptcy court don’t sound unreasonable when asking standard bankruptcy law to apply in this situation, as Geoffrey Gwin, head of one of the funds, told the WSJ yesterday: “I feel personally threatened because of what the government is doing at Chrysler and General Motors and how they are changing the rules of the game, instead of allowing bankruptcy laws to be carried out the way they are written.”

On the other hand, the only way the hedge funds would get a better deal than the thirty cents on the dollar that the administration offered would be through a liquidation of Chrysler’s assets, as this helpful Q & A explains:

The hedge funds, which have interests that are 100 percent secured by Chrysler’s assets, are going to presumably try to prove that they’d get more than 30 cents or so on the dollar if Chrysler were liquidated. … This is just a hypothetical. But it could well get litigated, which would basically amount to a battle of expert [witnesses], who would testify as to what value would be rendered through a liquidation of Chrysler’s assets. … Liquidations are often incredibly messy, and often yield far less than it might appear at the outset.

That information came from the WSJ, which did a decent job of contextualizing Chrysler’s bankruptcy, so that readers would at least know what, specifically, they should be angry about. The liquidation part is the evil aspect. If it comes to that, Chrysler may not exist as a company at all. But few papers made that connection.

As it stands, reporters aren’t doing a good job explaining whether the hedge funds are the bad guys as Obama says, or if they’re just lenders trying to do right by their shareholders. The truth is, as WSJ reporting shows, somewhere in the murky middle, but it isn’t found on too many other front pages.

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Katia Bachko is on staff at The New Yorker.