Politicians have used the Chrysler bankruptcy for demagoguery and seek to bypass the usual legal processes. Michigan Congressman John Dingell stated, "the rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury – firms I label as the “vultures” – will now be dealt with accordingly in court." The governor of Michigan said, "It also came in spite of a few greedy hedge funds that didn't care how much pain the company's failure would have inflicted on families and communities everywhere. Their refusal to share in the sacrifice forced bankruptcy proceedings to begin." Finally, Obama said that they were "a small group of speculators" who "endanger Chrysler's future by refusing to sacrifice like everyone else."
Ultimately, a bankruptcy that violates absolute priority based on political pressure sets a bad precedent on a couple of levels. First, it is damaging to the rule of law. The bankruptcy codes and precedents are well-established. While there are technical issues in valuation, the spirit of absolute priority is the central issue. The dissident claim holders in the form of the non-TARP lenders had every right to demand their fair share. Politicians have no right to demand that secured lenders sacrifice so that the UAW or anyone else could get a better deal. It does not matter at all that these creditors were "rogue" hedge funds or that many did not pay face value for their claims -- the rules of the game are already set for this bankruptcy. To blame "speculators" and hedge funds is nothing less than classic demagoguery. Second, the consequences in the capital markets may be far-reaching. How will debt be priced if security is meaningless in practice and determined by your favor with politicians? It is similar to the cram-downs on mortgages. It sounds like a way fix the housing markets in areas where many are under water on their mortgages, but it would be difficult to expect that mortgage rates in the long-term.
Some defend the "speculators" because of they are pension funds representing ordinary workers.
Far from being speculators, these funds represent retired public employees, including cops and teachers. The funds paid a premium to buy "secured" status, only to discover that they were politically outranked by the United Auto Workers in the White House hierarchy.
WSJ 5/21/09
This is a true statement since the financial markets affect wealth far more than direct holdings indicate. However, this cannot be the major point of the defense. It does not matter whether the claim holder is a "rogue hedge fund" or a fund for widows and orphans--the bankruptcy courts are not a place or charity. To do anything other than follow absolute priority is to ignore rule of law.
