Claiming Unfairness, Hedge Funds Miss the Point

By Steven Pearlstein
Friday, May 1, 2009

There may be nothing more pathetic than a hedge-fund manager worked up in a moral lather, complaining that he hasn't been treated fairly.

Since when did any of these guys ever worry about fairness?

Certainly fairness was not an overriding concern of hedge-fund managers when they threatened to move even more of their operations to the Cayman Islands if forced to pay a regular tax rate on their exorbitant management fees.

Nor do I recall receiving even a single e-mail from a hedge-fund manager complaining about how unfair it was that the government stepped in to bail out creditors and counterparties of Citigroup, Bear Stearns and AIG.

But now that these hedgies are looking at the butt end of a government-imposed cramdown that would give them only 30 cents of each dollar owed by Chrysler, suddenly they're all about fairness and the rule of law.

What you need to know about these vultures is that their idea of fairness is throwing 100,000 people out of work and denying retirees their pensions and their health benefits just so they can liquidate the company and maybe squeeze an extra 15 cents on the dollar from their Chrysler debt.

Of course, to get that extra 15 cents, the hedge funds would probably have to fork over a penny or two to pay the army of $700-an-hour lawyers needed to spend two years working it through the bankruptcy process. Add to that another couple of cents for the battalion of $10-million-a-year investment bankers needed to sell the assets to the highest bidder. Meanwhile, every day that goes by, the value of those assets would decline a little more.

And what exactly are these precious Chrysler assets that the hedge funds think would fetch them so much in liquidation? Aside from a few valuable brands, they're auto plants and machinery and large tracts of contaminated industrial land in some of the most economically depressed cities in the United States. No doubt folks would be lining up around the block for a chance to snatch up those babies.

A few years ago, when Americans were buying cars at the rate of 17 million a year, creditors might have gotten enough for them to pay off the $6.9 billion in secured debt held by the banks and hedge funds. But today, with vehicle sales running at a 9 million annual rate and with virtually no financing available, it's not clear that those assets would fetch the $2.25 billion in cash they were offered by the government.

The creditors are right when they say that Obama offered a sweetheart deal to Chrysler's employees and retirees, who as unsecured creditors would have stood in line behind banks and hedge funds in a liquidation and would probably have received nothing. It's also true, as the unhappy creditors point out, that it was the above-market wages and benefits negotiated by the United Auto Workers that helped to bring Chrysler to the brink of bankruptcy in the first place.

But those arguments are really beside the point. If the U.S. government wants to lend billions of dollars to help save the jobs, pensions and health benefits of hundreds of thousands of workers, that is certainly its prerogative. And it doesn't have to extend the benefits of that bailout in equal measure to the banks and hedge funds that stupidly lent $6.9 billion to finance a highly leveraged buyout of a long-troubled automaker.

The only "fairness" test that the bankruptcy judge must apply is to determine whether those secured creditors will get as much from the government's proposed reorganization plan as they would from selling off the company in pieces. It shouldn't take a judge more than a few weeks to conclude that 30 cents on the dollar is the best they're going to do.

If there is anyone who can claim to have been treated unfairly in this process, it is us taxpayers.

The auto workers were offered a 55 percent stake in the new Chrysler in recognition of their willingness to accept Toyota-level wages and benefits and in lieu of the $4.6 billion in cash that had been promised to the retiree health fund. An additional 35 percent was offered to Fiat for management oversight and technology that it has already developed.

By contrast, for their loans of $15 billion -- plus additional billions for plant modernization and dealer financing -- all the U.S. and Canadian governments will get is a 10 percent stake and a promise that the loans will eventually be paid back with interest. You don't have to be an investment banker to see that that is hardly sufficient compensation for a loan so risky that there isn't a private lender in the world willing to make it.

It's wonderful that we now have a president who stands with auto workers, car dealers and hard-hit communities. But as he moves on to the larger and more expensive task of rescuing General Motors, it would also be wonderful if he could be equally committed to standing with the taxpayers.

Steven Pearlstein is moderator of the Web site On Leadership at He can be reached at

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