"Hedge funds really need a community organizer," quips Clifford Asness, managing partner at AQR Capital Managment, in a strongly-worded letter rebuking the administration's comments about secured investors opposing the reorganization plan for Chrysler. When asked about the 16 or so bondholders who were not willing to accept the government's terms President Obama said, “I don’t stand with those who held out when everyone else is making sacrifices.” Mr. Asness, rightly, tries to set the record straight.
Certainly there are plenty of targets for bondholder ire in the Chrysler case -- even for funds, like AQR, that are not invested. The sanctity of contracts, the government intrusion in the economy, the package offered to the UAW, the merits of bankruptcy court are all at issue here. However, the size of the auto companies and their historical importance to the econmy make it easy to tar as un-American those who would see Chrysler in bankruptcy.
In the economic crisis, there is a broad perception that, as the President suggests, we are all in this together and we need solutions that require cooperation from all parts of society and business. This puts Chrysler's dissident bondholders in the same uneviable position as those investors who oppose restructuring mortgages because of ripple effects into the bond market. The complexity involved in both of these situations and Main Street's lack of understanding of the rules of bankruptcy and the financial system in general contribute to the reputational risks associated with taking a principled but massively unpopular stand on hot-button issues like automakers and mortgages.
Of the Chrysler holdouts, The New York Times writes, "this bit of brinkmanship — which many characterized as a game of chicken with Washington — has become yet another public relations disaster for Wall Street...What is striking to many in financial circles is how much Chrysler’s reluctant creditors gambled for what is, in the scheme of this bankruptcy, a relatively small amount of money."
Yes hedge funds need a community organizer. Job one would be to unify the industry and develop a sense of, well, community based on shared business interests. Job two would be to become more effective at advocating common sense on critical issues facing hedge funds' ability to operate freely in the marketplace. Job three would be to know which fights, like Chrysler, cannot be won.