Obama’s Hedge Fund ‘Bullying’ May Hurt Rescue Plan

Date: Tuesday, May 12, 2009
Author: Tom Cahill, Bloomberg

U.S. President Barack Obama’s “bullying” of hedge fund managers may cost him their support for his plan to jump-start lending, according to Cliff Asness, managing partner of AQR Capital Management LLC.

Obama blamed hedge-fund “speculators” for forcing automaker Chrysler LLC into bankruptcy after they rejected government offers to buy their debt at a discount in April. A group of firms that had rejected Obama’s plan, saying it violated creditors’ rights, dropped their opposition last week.

Asness, who left Goldman Sachs Group Inc. 11 years ago and today manages $20 billion at his Greenwich, Connecticut-based firm, said Obama’s use of political pressure over Chrysler may deter the funds from investing in the government’s Term Asset Backed Securities Loan Facility. The plan to generate $1 trillion of lending for consumers and small businesses relies on getting private investors such as hedge funds to invest.

“That he expects them to do so, when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous,” Asness said in a May 4 blog posting entitled “Unafraid in Greenwich, Connecticut.” “Useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.” The posting was reported in The Wall Street Journal today.

Asness said his firm wasn’t involved with Chrysler and added that his views were his own, and not his firm’s.

The group of Chrysler lenders argued that a plan to sell the automaker’s assets to a new company controlled by Fiat for $2 billion violated U.S. law because claims by unsecured creditors, including a United Auto Workers union health-care trust fund, were given priority over claims by secured lenders.

Making ‘Sacrifices’

The dissident lenders owned less than $300 million of Chrysler’s $6.9 billion of senior debt. Owners of 90 percent of that debt by value supported Obama’s plan.

Obama said on April 30 the investors weren’t willing to make “sacrifices” and “decided to hold out for the prospect of an unjustified taxpayer-funded bailout.”

The group dubbed itself the “Non-TARP” lenders in reference to the government’s Troubled Assets Relief Program for banks. Some of the banks that agreed to the Chrysler’s Obama- backed deal with Fiat had taken money under the program.

Because the group of lenders hadn’t taken government money, “they could stand up to this bullying,” Asness wrote.

Disbanded

Still, that wasn’t enough for the group, which disbanded after funds dropped out. That decision may smooth Auburn Hills, Michigan-based Chrysler’s path toward an alliance with Italy’s Fiat, which has the backing of Obama’s auto task force.

“After a great deal of soul-searching and, quite frankly, agony, they concluded they just don’t have critical mass to withstand the enormous pressure and machinery of the U.S. government,” Tom Lauria, the group’s attorney, said in a May 8 interview.

Asness said in an e-mail today the dissident Chrysler lenders may still have won a moral victory.

“It’s not important that you win every, particularly the first, fight against a bully,” he said. “You already win when you simply show up.” He declined to comment further.

Asness isn’t alone among hedge funds in vocalizing opposition to government policy. Paul Singer, founder of New York-based hedge fund Elliott Management Corp., said that Washington’s investment programs such as Term Asset-Backed Securities Loan Facility, won’t clean up the balance sheets of banks.

The programs are “overly complicated, and could lead to cozy deals, conflicts of interest, massive taxpayer losses and concentrated large profits reaped by a small group of anointed gatekeepers,” he said in a quarterly report to investors.

Scott Tagliarino, a spokesman for Elliott, declined to comment on the letter.

To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net