Unafraid In Greenwich Connecticut

[darrels joy]

Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves).

Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.

Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets.

It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.

Let’s quickly review a few side issues.

The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to “sacrifice” some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon.

Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself.

Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

I am ready for my “personalized” tax rate now.

[SuperScout]

The Bully Boys are just beginning to make their putrid mark on America. Hold on to your asses folks, it's going to get much worse.

[darrels joy]

Chrysler Dissidents Must Reveal Identity, Judge Says (Update3)


By Tiffany Kary


May 5 (Bloomberg) -- Chrysler LLC dissident lenders must reveal their identities by 10:00 a.m. tomorrow, a bankruptcy judge ruled, rejecting claims that their safety was at risk.
U.S. Bankruptcy Judge Arthur Gonzalez in New York forced the group to file a list of its members publicly, denying their request to reveal their identities only to the bankruptcy court. Gonzalez said the lenders have no evidence that keeping their identities private would help protect them. The group seeks to block an auction of most company assets to an entity managed by Fiat SpA, an outcome Chrysler said would force it to liquidate, costing thousands of jobs.

“There’s no evidence that authorities found the threats bona-fide,” Gonzalez said, questioning whether the group was trading in and out of Chrysler’s debt. He was told the group is a mix of original debt holders and parties who bought the debt at different prices.

Hedge funds have been denied bids to keep their identities confidential in other cases, amid concerns about whether short- term trading interests or credit default swaps give them conflicts of interest in bankruptcy proceedings. Gonzalez compared his ruling to a 2007 decision from U.S. Bankruptcy Court Judge Allan Gropper, who forced a group of hedge funds that invested in Northwest Airlines Corp. to fully disclose the size of its members’ stakes in the carrier.

Threats
Thomas Lauria, a lawyer for the dissidents, told Gonzalez today that the group has been exposed to “undue reputational damage, and threats of violence.” He said criticism of the group was exceptional, because it came from U.S. President Barack Obama.

Gonzalez said criticism is inherent in any bankruptcy, and Obama shouldn’t be singled out as an exceptional party given the government’s involvement with Chrysler.

Robert W. Hamilton, a lawyer for Chrysler, said that the threats couldn’t be taken seriously, as they were postings on an Internet message board affiliated with the Washington Post.

“The only evidence they have provided is a series of four or five anonymous rants on a Washington Post Web site,” Hamilton said. “Anyone with a passing familiarity with the hyperbolic rants on such boards on the Internet would not take such comments seriously.”

For example, an anonymous commenter who signed himself “jerkhoff” wrote, “These aristocrats should be lined up against the wall and executed.”

Credit Default Swaps
Hamilton also questioned whether the group may have had an incentive to force Chrysler into bankruptcy because it owns credit default swaps, which insure them against a default on Chrysler’s debt.

“What if the facts are that in order to recover on those CDS, they forced it into bankruptcy to recover 100 percent, or even more, of their investment,” Hamilton said.

Lauria told Gonzalez that the group doesn’t currently hold any CDS. Any CDS or derivatives the group holds would be disclosed tomorrow along with the groups’ identities.

The dissident lenders own only about $300 million of a total $6.9 billion in secured debt, they said in a bankruptcy court filing today.

A lawyer representing JPMorgan Chase & Co., the largest lender on the loan, and other lenders in favor of the deal, said last week the dissidents held about 10 percent of its value, less than $700 million.

Identified Lenders

In the filing, the lenders told the judge in charge of Chrysler’s bankruptcy that the carmaker’s plan to auction its best assets later this month was unfair because it prevents creditors from using claims like a loan to make a non-cash bid.

“The proposed sale is not an arms’ length bargain but rather is tainted by government domination and control,” the group said in the filing in U.S. Bankruptcy Court in New York.

The group refused last week to share in a $2.25 billion buyout for a $6.9 billion Chrysler loan that the U.S. government wanted off the books to keep the carmaker out of bankruptcy. Obama criticized them for speculating at taxpayers’ expense and said their opposition tipped Auburn Hills, Michigan-based Chrysler into bankruptcy.

Those named publicly include OppenheimerFunds Inc., Perella Weinberg Capital Management LP’s Xerion hedge fund and Stairway Capital Advisors. Perella withdrew its sale objection last week.

The lenders claim in their court filings that the U.S. government is subverting federal bankruptcy law by forcing lenders to agree to a reorganization that repays unsecured creditors ahead of some secured creditors.

The group, calling itself Chrysler’s non-TARP lenders, in reference to aid other creditors got from the federal Troubled Assets Relief Program, said the proposed auction would prevent a so-called “credit bid” from its members.

Credit Bid

Under a credit bid, parties use debt to buy a company. The group also seeks to block the proposed sale to an alliance led by Fiat, as well as a request by the U.S. automaker for approval of a $4.5 billion Treasury loan to finance the reorganization.

In a footnote, they cited a requirement that any competing bid include 10 percent of the purchase price in cash. That “appears designed specifically,” to prevent non-TARP members from making a credit bid, using the full amount of their secured claim, they said.

The group also objected to rules that would require all competing bids be subject to the same terms as the proposed transaction with the government and Fiat, which are financing the reorganization and providing small-car technology, respectively.

Because bids need to be made in a week under the proposed timeline, there isn’t enough time for parties to make due diligence required for a competing bid, the holdouts said.

Secured Lenders

The group has pitted itself against secured lenders that agreed to the Fiat deal, including JPMorgan, Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc., saying those institutions had conflicts of interest because they had accepted TARP funds, which included some government controls.

The four largest banks hold $4.83 billion of the debt, or about 70 percent.
In a related move, a group of Chrysler LLC unsecured creditors formed an 11-member committee today at a meeting in a midtown Manhattan hotel that will include the United Automobile Workers union, trade groups, car dealers and lawsuit plaintiffs. That group hired Kramer Levin Naftalis & Frankel LLP on New York as its law firm.

U.S. Trustee Diana Adams, who represents the Justice Department in the Chrysler bankruptcy case filed last week in Manhattan federal court, appointed the committee members at a meeting today. The automaker is seeking court approval of a sale that would create an alliance with Fiat, forming the world’s sixth-largest carmaker.

Major Shareholders

“All of the major shareholders are supportive of this transaction,” Chrysler spokesman Fredric Spar said outside the meeting, without referring specifically to the new committee.

The new company created by the auction asset sale would be owned by the United Auto Workers, Fiat, the U.S. Treasury and the Canadian government, Chrysler has said. Fiat’s 20 percent stake could be increased to 35 percent if the company meets certain milestones, the company has said.

The case is In re. Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan)

To contact the reporter on this story: Tiffany Kary in U.S. Bankruptcy Court in New York at tkary@bloomberg.net;

http://www.bloomberg.com/apps/news?p...2Tg&refer=news

[darrels joy]

Chrysler won't repay bailout money

An administration official confirms that a $4 billion bridge loan and $3.2 billion in bankruptcy financing won't be paid back by Chrysler following bankruptcy.


NEW YORK (CNNMoney.com) -- Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing.

This revelation was buried within Chrysler's bankruptcy filings last week and confirmed by the Obama administration Tuesday. The filings included a list of business assumptions from one of the company's key financial advisors in the bankruptcy case.

Some of the main assumptions listed by Robert Manzo of Capstone Advisory Group were that the Treasury would forgive a $4 billion bridge loan given to Chrysler in the closing days of the Bush administration, a $300 million fee on that loan, and the $3.2 billion in financing approved last week by the Obama administration to fund Chrysler's operations during bankruptcy.

An Obama administration official confirmed Tuesday that Chrysler won't be repaying the loans, though a portion of the bridge loan may be recovered by Treasury from the assets of Chrysler Financial, the former credit arm of the automaker which is essentially going out of business as part of the reorganization.

"The reality now is that the face value [of the $4 billion bridge loan] will be written off in the bankruptcy process," said the official, who added that the 8% equity stake that Treasury will be receiving as part of the company's reorganization is meant to compensate taxpayers for the lost money.

"While we do not expect a recovery of these funds, we are comfortable that in the totality of the arrangement, the Treasury and the American taxpayer are being fairly compensated," said the official.

The company filed for bankruptcy Thursday as part of a deal with the federal government, unions, some lenders and Italian automaker Fiat to keep the company from being shut down.

The Canadian government also agreed to kick in about$900 million in bankruptcy financing. According to the filings, Chrysler's advisor assumes that this loan will be forgiven as well.

The Obama administration official said that other money being made available to Chrysler, such as the $4.7 billion that will go to the company as it exits bankruptcy, will be a loan that the government expects to be paid back. In addition, that loan will be secured by company assets, unlike the previous loans to Chrysler.

According to the filing, the company's financial advisor also foresees the need for an additional $1.5 billion loan from the Treasury Department by June 30, 2010.

Lori McTavish, a spokeswoman for Chrysler, said some of the assumptions made by the company have changed since its bankruptcy filing on April 30. But she could not say specifically if the company still hoped for the additional federal loan in 2010.

"The content of the document needs to speak for itself. We are simply not in a position to comment," she said.

Bob Corker, R-Tenn., who took the lead among Senate Republicans in challenging the auto bailout last December, said he was disappointed but not surprised that Chrysler would not be paying back the money.

"I've known for sometime that with the capital structure of the company and the situation it was in, we would not be paid back," he said. "There were several secured lenders ahead of us, and they're not getting most of their money."

Major banks and hedge funds that loaned Chrysler $6.9 billion were offered only $2.25 billion to settle those loans by Treasury. While major banks accepted the offer, hedge funds rejected it, forcing the company into bankruptcy.

Typically lenders who loan bankrupt companies funds to operate during reorganization go to the front of the line on getting the money they are owed repaid. But Corker said Chrysler's dire financial situation left it no chance to even pay back the bankruptcy financing.

He said the fact that Chrysler isn't paying what is owed should be a warning that the $15.4 billion loaned to General Motors by Treasury since December, as well as any bankruptcy financing it might need, is also at risk.

"Certainly there are red flags," he said.