Last week, when President Obama announced Chrysler’s
impending bankruptcy, he lambasted “a group of investment firms and hedge funds
that held out” by refusing to go along with the government’s proposal. The President could not have been clearer
about his ire toward the group, stating that he “did not stand with them”.
Who are these holdouts? Well, by the time a bankruptcy judge ordered
the disclosure of their identities this week, the list had shrunk to just five
investment firms.
The revealing of the group’s identities still leaves many of
us troubled by the fact that last week, we witnessed the executive branch use
their bully pulpit to castigate a group of investors that refused to submit to
the administration’s plans for them.
These investors represented none other than pension funds of
all kinds of workers, teachers unions' funds, mutual funds and endowments among
others. In other words, the investors
represented millions of Americans who have worked hard, played by the rules and
invested their money for retirement.
To put it simply, the investors ‘held out’ because the
proposed deal was not good enough for them.
They held secured bonds in Chrysler which is a fancy way of saying they
lent money to Chrysler under the agreement that if Chrysler entered bankruptcy,
those lenders would be the first in line to be repaid from any funds
available.
During the negotiations, the government offered them 29
cents for each dollar they were owed. In
total, the government asked the 46 lenders, who were owed $6.9 billion in
secured debt, to accept $2 billion and wipe out the remaining $4.9 billion owed
to them.
In the same deal, the government offered the United Auto
Workers (UAW), an unsecured lender, 50 cents on the dollar and a 55% stake in
Chrysler.
Unhappy with the proposal, some investors rejected the
government’s offer. Understandably, they
rejected a proposal that would have sent them to the back of the line behind
the UAW, despite their contractual agreement to the contrary. Also, as the keepers of other people’s money,
investors have an obligation to act in the best interest of the parties they
represent – in other words, to get the best deal for their clients. In legal terms, the investors have a
fiduciary duty to act with the highest standard of care to minimize losses to
their clients.
So there you have it.
During this time of financial uncertainty when we have all watched our investments
dwindling, this group of investors, knowing that they could certainly do no
worse in bankruptcy, stood up for their clients and said no to the
government. And for that, the President
himself vilified them. Not surprisingly,
he was able to do so without much of a backlash given the anti-Wall Street mood
that has become so popular recently. And despite the rhetoric and emphasis on these supposedly greedy
investors, in reality, the people who stood to lose the most are people like
you and me.
*This post originally appeared on http://despinakarras.blogspot.com/.