In Defense of Hedge Funds
by Richard
At a time when the monied class is being demonized…we need to throw our support to an unlikely beneficiary.
Hedge Funds.
I know…I run the risk of being a hypocrite after long ranting about their over-the-top compensation structure. But no one held a gun to the head of the investors who clamored to climb aboard.
The Feds are the gang that uses implied threats and impending menace to muscle in on banks and auto companies. Compared to these rough tactics, the hedgies are a model of modest comportment.
I’ve long thought of hedge funds as carrion feeders, picking away at the carcasses of diseased and dying enterprises…not a pretty spectacle to be sure… but a vitally essential phase of the never ending cycle of birth, growth, decline, destruction and rebirth.
Today their role is defined by what they are not.
They are not recipients of government bailout money.
Which means they can act in support and in defense of their investors..and their own self interest…in standing up to the intimidation and shakedown tactics whereby our President is working to abrogate contracts and suspend the rule of law as it applies to bankruptcy.
The President singled out Chrysler’s bond holders as bad actors for pushing the company into bankruptcy…an action long overdue. Years..not months…overdue.
And what was the cause of their obstinacy? For starters, the elevation of the United Auto Workers Union’s unfunded wage and benefits liability into a majority ownership stake, vaulting their position from the end of the line by leapfrogging several tiers ahead of the secured creditors.
This is a violation of the constitutional amendment against unjust takings…so the bond holders have in fact been the principled and law abiding party in this fiasco.
As a reward for drawing this line in the sand…
…hedge funds can expect that the full fury of the government will be unleashed on them, in the form of punitive, retroactive taxation (again in violation of the laws against bills of attainder) and mindless, burdensome regulation.
Every excess sows the seeds of its own correction and reversal. The arrogance and hubris of the new administration will eventually result in legal challenges to be settled ultimately in the supreme court.
Just as the overreaching in FDR’s first term was quashed by the court (resulting in his attempt to pack the court with six new justices …another blatant end runaround our constitutional checks and balances)…we can expect history to repeat itself.
Or as Mark Twain said, history may not repeat itself, but it does rhyme a lot.
May 9th, 2009 at 2:32 am
It is certainly troubling if the administration is able to strong-arm the judiciary; that would be a serious violation of the constitutional independence between the branches of government.
Much like Democrats justifiably consider the blatant Bush violation of international treaties regarding torture a severe setback in the credibility of US foreign policy, Republicans have good cause to worry that violating the rights of investors and order of debtors will weaken the appeal of US as a destination for local and foreign investment… a damage far worse than the possible benefits of salvaging Chrysler.
So far, the steps of the Fed are questionable but legal: strong-arming the dissenting parties, ’shame’ (using public pressure to publicize the funds that hold back), etc. — these are all standard fare in legal battles, though hardly viewed as moral or ethical. The point to start or stop worrying is when the court reaches its decision, and the rationale it will be put forward. So, for now, while admittedly worried, I withhold judgment. My personal expectation is that the intimidation through exposure by the Feds will work, the dissenting lenders will back off, and the deal will go through, without the Fed exercising any pressure over the judiciary (which would set a dangerous precedent in the courts); because, unethical as pressure to other parties may be, it’s legal and constitutional.
May 9th, 2009 at 2:48 am
On a separate note, I am very curious to see what Chrysler will be like when it emerges from bankruptcy. UAW is a corrupt and greedy racket that has for decades lacked the business sense to see how its own greed carved the tombstone on the grave of the US auto industry. It was all “gimme, gimme, gimme”. And now its members are paying the price that was long overdue: poorly educated folks who believed the union boss’ propaganda that hid their personal goals of self-aggrandizement; much like corrupt CEOs, the bosses will remain unscathed and the poor masses will get shafted. Note to workers of the world: sure, unite if you want, but your union will screw you over worse than your boss.
But I digress… What will happen when the UAW owns the majority of an auto-maker? Hmmm… I recall workers owning auto-makers in Eastern Europe, and the cars that came out of those factories were absolutely non-competitive relative to their Western European counterparts; they were the joke of Western Europe when the privileged few Eastern Europeans who could get a passport drove them proudly into Western Europe just to be laughed at mercilessly (and justly so).
Will Fiat ever repay the government loans and achieve a majority stake? Doubtful, since that repayment requires sales. Supposedly, Fiat is bringing in competitive know-how. Um… no. Daimler made that bet and it was stupidity at its best. I know Fiat cars first hand… I’d rather have a Honda or Toyota any time. Italians may build Ferraris, but Fiats are no Ferraris, not in quality, durability, or depreciation (actually, Fiat owns Ferrari, as well as Maserati, but I am referring to Fiat models). Fiat’s strategy seems to be to focus on the Fiat 500 (photo); doesn’t look like a market miracle to me. Further, their small car fuel efficiency relies on obsolete technology, not hybrids and battery-operated cars that are the (near) future. So sales are unlikely to rise thanks to Fiat, and the UAW will probably remain in control. That said, Fiat may use non-US profits to pay off the government loans instead. That would be a truly stupid move by Fiat, but it won’t be the first (being involved with Chrysler already demonstrates the lack of good sense by Fiat).
Then what? The UAW will have nobody to blame: they will have ownership control after all. And thus it will be torn apart with infighting, and take the company down. Or Fiat will lead with majority control, but again the company will falter because Fiat’s involvement won’t make sales rise. Then the sharks will come in and buy Chrysler’s assets. Of course, proceeds will first go to the government in repayment of its loans (if Fiat had not paid them already). So, in the end, the taxpayers will be whole. The hedge funds that propped up Chrysler will have lost their money… assuming they willingly back down in bankruptcy court, well then, tough luck, that investment was a dud, it comes with the territory. Who gets shafted? As usual, the workers… who, to the extent they supported and nurtured the very unions who screwed them over, are not completely blameless for the outcome.
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