A news service for the people of Michigan from the Mackinac Center for Public Policy

Wall Street
Photo credit: Ramy Majouji - "RMajouji" at en.wikipedia

When Chrysler filed for bankruptcy on April 30, 2009, President Barack Obama publicly laid much of the blame at the feet of a group of hedge funds — investment firms that held Chrysler debt but did not initially cooperate with a deal being pushed by the White House as a means of preventing the bankruptcy. Those hedge funds had a far different story to tell, one of protecting investors large and small who had a legitimate right to a much better deal than what the White House was eventually able to impose. But a bipartisan coalition of Michigan politicians was in no mood that day to hear that side of the story.

That afternoon, Michigan Gov. Jennifer Granholm stated that she agreed with the president's condemnation of the hedge funds, and Michigan's federal officeholders from both parties issued similar statements blasting the funds.

Likewise, the Michigan House voted in favor of a resolution that accused the funds of "shortsightedness" that risked "inflicting a devastating blow" on the auto industry. The measure encouraged several states containing Chrysler production facilities to dump their investments with the firms. The resolution, House Resolution 90, received unanimous support from the Democratic caucus in the Michigan House.

Ten Republicans also joined the Democrats voting for the measure, while a strong majority of the GOP caucus was opposed.

The president's proposal for Chrysler (a version of which was ultimately enacted) schemed to give senior creditors, such as large banks and the hedge funds holding the automaker's bonded debt, only 30 cents on the dollar in repayment for their loans, but then pay 50 cents on the dollar to more junior stakeholders, such as the United Auto Workers. Believing this to be an end-run around bankruptcy law that unfairly treated their clients, many investment firms refused the deal.

The president responded that afternoon, saying, "... a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout."

He also referred to them as "a small group of speculators" that wanted to "endanger Chrysler's future by refusing to sacrifice like everyone else."

U.S. Congressman John Dingell, D-Dearborn, referred to the hedge funds as "vultures."

From the other side of the aisle, Congressman Thad McCotter, R-Livonia, issued a statement containing the following:

"Chrysler, the UAW and our entire community have toiled, sacrificed and suffered to comply with President Obama's Auto Task Force's demands and deadlines to avoid bankruptcy. These noble, Herculean efforts by workers, retirees and management have now been frustrated by hedge funds."

And the next day in her weekly radio address, Gov. Granholm echoed the president and chastised "a few greedy hedge funds that didn't care how much pain the company's failure would have inflicted on families and communities everywhere."

But the hedge funds had a different story to tell. The following week, an analysis of the situation by CBS News' online correspondent Declan McCullagh summarized their case. He noted that under contract law, senior creditors in a bankruptcy — such as the hedge funds — should be paid back first, not the UAW:

"A normal bankruptcy filing would be straightforward. Senior creditors get paid 100 cents on the dollar. Everyone else gets in line."

The funds were thus facing a decision, according to McCullagh: Either swallow the White House's imposed deal that sent their customers from the front to the back of the line; or go to bankruptcy court and force Chrysler to honor its contractual obligations to investors.

And McCullagh gave a profile of the investors that the supposed "vultures" and "greedy" hedge fund managers were working for: "These creditors, by the way, represent something of a cross-section of America: the University of Kentucky, Kraft Foods' retirement fund, the Bill and Melinda Gates Foundation, pension funds, teachers' credit unions, and so on."

He also implied what he thought was the motive for the president's decision to elevate the junior creditors ahead of the senior ones: "It must be a coincidence that the United Auto Workers has handed $25.4 million to federal politicians over the last two decades, with 99 percent of that cash going to Democrats."

Likewise, a few days after the bankruptcy, Clifford S. Asness of AQR Capital Management posted an open letter that spread like wildfire across the internet. While not one of the managers holding Chrysler debt, he angrily pointed out that those who were resisting the White House's imposed settlement were taking a very principled stand on behalf of the people they were supposed to be working for.

Some of his points:

"...[T]he 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."

"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."

"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."

Additionally, Declan McCullagh observed that those blaming the hedge funds and other investors for Chrysler's problems were staring at the wrong side of the bargaining table: "Creditors didn't force Chrysler's management to head to the capital markets and beg for funds: It was poor management, uncompetitive wages, and a union that opposed pay cuts."

By contrast, the members of the Michigan House of Representatives who voted for House Resolution 90 stated their belief in the following:

"The hedge fund managers may be too narrowly focused on immediate returns rather than considering the long-term ramifications on our nation and its manufacturing base. Such short sightedness has already lost our nation a great deal."

"Should these hedge fund managers stand in the way of saving Chrysler, these hedge funds will have taken part in inflicting a devastating blow to our domestic automobile industry that will reverberate throughout our state and nation."

Ten Republicans in the Michigan House and 66 Democrats supported these statements, while 33 lawmakers — all Republicans — were opposed. The vote was as follows:

Lawmakers who voted IN FAVOR of the resolution calling hedge fund managers "short sighted" and accusing them of taking part in "inflicting a devastating blow" to the auto industry

HOUSE REPUBLICANS (10)

Bolger (R), DeShazor (R), Haines (R), Hansen (R), Marleau (R), Meltzer (R), Moore (R), Rocca (R), Schuitmaker (R), Tyler (R)

HOUSE DEMOCRATS (66)

Angerer (D), Barnett (D), Bauer (D), Bennett (D), Bledsoe (D), Brown, L. (D), Brown, T. (D), Byrnes (D), Byrum (D), Clemente (D), Constan (D), Corriveau (D), Coulouris (D), Cushingberry (D), Dean (D), Dillon (D), Donigan (D), Durhal (D), Ebli (D), Espinoza (D), Geiss (D), Gonzales (D), Gregory (D), Griffin (D), Haase (D), Hammel (D), Haugh (D), Huckleberry (D), Jackson (D), Johnson (D), Kandrevas (D), Kennedy (D), Lahti (D), LeBlanc (D), Leland (D), Lemmons (D), Lindberg (D), Lipton (D), Liss (D), Mayes (D), McDowell (D), Meadows (D), Melton (D), Miller (D), Nathan (D), Nerat (D), Neumann (D), Polidori (D), Roberts (D), Schmidt, R. (D), Scott, B. (D), Scripps (D), Segal (D), Sheltrown (D), Simpson (D), Slavens (D), Slezak (D), Smith (D), Spade (D), Stanley (D), Switalski (D), Tlaib (D), Valentine (D), Warren (D), Womack (D), Young (D)

Lawmakers who voted AGAINST the resolution

HOUSE REPUBLICANS (33)

Agema (R), Amash (R), Ball (R), Booher (R), Calley (R), Caul (R), Crawford (R), Daley (R), Denby (R), Elsenheimer (R), Genetski (R), Green (R), Haveman (R), Hildenbrand (R), Horn (R), Jones, R. (R), Knollenberg (R), Kowall (R), Kurtz (R), Lori (R), Lund (R), McMillin (R), Meekhof (R), Moss (R), Opsommer (R), Pavlov (R), Pearce (R), Proos (R), Rogers (R), Schmidt, W. (R), Scott, P. (R), Stamas (R), Walsh (R)

HOUSE DEMOCRATS (0)

NONE

Legislators who DID NOT VOTE:

Jones, Robert (D)

2009 House Roll Call 208 on HR 90

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