On every news story this morning about the pending Chrysler bankruptcy, the narrative included “hedge funds would not agree…” as a central theme. Economic populism still carries the day in Washington.
What you won’t hear in these mainstream news stories is that Treasury was demanding a huge haircut for debt holders (screw the “hedge funds” label, these are private investors who lent Chrysler money) in exchange for 15 cents on the dollar, a slap on the back and a hearty “atta boy”. Labor unions, on the other hand, were being subjected to slight changes in work rules and relieving Chrysler of paying $4b to the UAW for retiree benefits, all in exchange for 55% of the equity in the “good Chrysler” and a long term note. So basically the equation that Treasury was using was the debt holders give up 85% and get nothing, the UAW gives up half of that and gets half of Chrysler’s equity in return and long term note paying back (if I recall correctly) $5 billion by 2025.
This company is worth more to creditors through bankruptcy than it is under the Treasury plan (creditors are at the top of the waterfall in a bankruptcy case, retiree benefits would resolve below creditors) and anyone who thinks GM could go through a similarly easy restructuring should watch this case under a microscope.
“[The hedge funds’] failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders nor will it impede the new opporunity Chrysler now has to restructure and emerge stronger going forward.”
How dare these hedge funds believe that debt covenants have any value under the current administration? After all, Obama himself is telling you that your economic interests have to align with the national ones. As long as they diverge, you can expect to pay 99% of all income as taxes in perpetuity compliments of soon to be implemented legislation out of Barney Frank.