Chrysler has filed for Chapter 11 bankruptcy. The government had tried to sit down with the bondholders to work out a deal. Basically Chrysler owes creditors a lot of money which it can not pay back. If they went into bankruptcy, the thinking went, the creditors would lose much more than if they forgave some of the debt. J.P.Morgan Chase and other banks have complied with the governments negotiations. However some hedge-funds refused to take the markdowns and that led to the Chapter 11 filing.
So why did the hedge-funds resist? When they lent money to Chrysler, they basically went out and bought a lot of insurance, the now infamous CDS. So if Chrysler goes bankrupt the hedge-funds will get paid from the CDSs which they most probably bought from ... take a guess ... AIG. So Obama indeed has cause to be pissed. This is an unfortunate misalignment of interests and the taxpayers are in the hook for it.
I think that the primary person responsible for this situation is Paulson for not forcing a haircut on AIG. Basically, in distressed times lender and borrower (for example troubled homeowner and mortgage lender) work out a deal, debt forgiveness and such. The Obama administration had similar plans for Chrysler. But in the last administration, Paulson made sure that all of AIGs clients got paid in full. The biggest beneficiary? ... Goldman Sachs, Paulson's old bank. So once AIG started paying out in full, they'll now have to payup these hedge-funds as well and the whole process has become a moral hazard.
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3 comments:
"When they lent money to Chrysler, they basically went out and bought a lot of insurance, the now infamous CDS. So if Chrysler goes bankrupt the hedge-funds will get paid from the CDSs which they most probably bought from ... take a guess ... AIG."
Well, here's a different perspective, from a hedge fund manager. How do you parse that?
I wasn't arguing that the hedge funds were doing anything illegal. To the contrary their position is very reasonable and legal. The responsibility lies with Paulson for not forcing the counter-parties of AIG to take a haircut and now Obama is stuck with that. That's the irony which is rightfully pissing him off.
But that said, this article is entirely convincing.
(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)....
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.hmm, well let's see.
and unfairly paid bondholders less than they would get in bankruptcy court.this article discusses this issue. It is very unlikely that the hedge funds will get a better offer.
Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities.
This however I totally agree with.
I am ready for my “personalized” tax rate now.I thought he was already getting that through all the tax loopholes.
time for a new thread (update) Dyutiman, this one has been up since April.
:)
RB
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