All Americans should read this.
Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC
The President has just harshly castigated hedge fund managers for being
unwilling to take his administration’s bid for their Chrysler bonds. He called
them “speculators” who were “refusing to sacrifice like everyone else” and who
wanted “to hold out for the prospect of an unjustified taxpayer-funded
bailout.”
The responses of hedge fund managers have been, appropriately, outrage, but
generally have been anonymous for fear of going on the record against a
powerful President (an exception, though still in the form of a “group letter”,
was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of
the points of which I echo here, and a relatively few firms, like Oppenheimer,
that have publicly defended themselves). Furthermore, one by one the managers
and banks are said to be caving to the President’s wishes out of justifiable
fear.
I run an approximately twenty billion dollar money management firm that offers
hedge funds as well as public mutual funds and unhedged traditional
investments. My company is not involved in the Chrysler situation, but I am
still aghast at the President's comments (of course these are my own views not
those of my company). Furthermore, for some reason I was not born with the
common sense to keep it to myself, though my title should more accurately be
called "Not Afraid Enough" as I am indeed fearful writing this...
It’s really a bad idea to speak out. Angering the President is a mistake and,
my views will annoy half my clients. I hope my clients will understand that I’m
entitled to my voice and to speak it loudly, just as they are in this great
country. I hope they will also like that I do not think I have the right to
intentionally “sacrifice” their money without their permission.
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals,
including very sweet grandmothers, lend their money they expect to get it back.
However, they know, or should know, they take the risk of not being paid back.
But if such a bad event happens it usually does not result in a complete loss.
A firm in bankruptcy still has assets. It’s not always a pretty process.
Bankruptcy court is about figuring out how to most fairly divvy up the
remaining assets based on who is owed what and whose contracts come first. The
process already has built-in partial protections for employees and pensions,
and can set lenders' contracts aside in order to help the company survive, all
of which are the rules of the game lenders know before they lend. But, without
this recovery process nobody would lend to risky borrowers. Essentially,
lenders accept less than shareholders (means bonds return less than stocks) in
good times only because they get more than shareholders in bad times.
The above is how it works in America, or how it’s supposed to work. The
President and his team sought to avoid having Chrysler go through this process,
proposing their own plan for re-organizing the company and partially paying off
Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically,
they thought it unfairly favored the United Auto Workers, and unfairly paid
bondholders less than they would get in bankruptcy court. So, they said no to
the plan and decided, as is their right, to take their chances in the
bankruptcy process. But, as his quotes above show, the President thought they
were being unpatriotic or worse.
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. Clients of hedge funds include, among others,
pension funds of all kinds of workers, unionized and not. The managers have
a fiduciary obligation to look after their clients’ money as best they can, not
to support the President, nor to oppose him, nor otherwise advance their
personal political views. That’s how the system works. If you hired an
investment professional and he could preserve more of your money in a financial
disaster, but instead he decided to spend it on the UAW so you could “share in
the sacrifice”, you would not be happy.
Let’s quickly review a few side issues.
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.
Let’s also mention only in passing the irony of this same President begging
hedge funds to borrow more to purchase other troubled securities. 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. That
hedge funds might not participate in these programs because of fear of getting
sucked into some toxic demagoguery that ends in arbitrary punishment for trying
to work with the Treasury is distressing. Some useful programs, like those
designed to help finance consumer loans, won't work because of this
irresponsible hectoring.
Last but not least, the 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. The TARP recipients
had no choice but to go along. The hedge funds were singled out only because
they are unpopular, not because they behaved any differently from any other
ethical manager of other people's money. The President’s comments here are
backwards and libelous. Yet, somehow I don’t think the hedge funds will be
following ACORN’s lead and trucking in a bunch of paid professional protestors
soon. Hedge funds really need a community organizer.
This is America. We have a free enterprise system that has worked
spectacularly for us for two hundred plus years. When it fails it fixes itself.
Most importantly, it is not an owned lackey of the oval office to be scolded
for disobedience by the President.
I am ready for my “personalized” tax rate now.
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