MichaelMoore.com

Obama Aims At Hedge Funds Amid Chrysler Bankruptcy

NEW YORK (Dow Jones)--President Barack Obama's scolding of hedge funds sparked an immediate backlash from fund managers who resent what they see as an increasingly heavy-handed approach from Washington.

Obama, during remarks about Chrysler LLC's bankruptcy filing, said a group of investment firms and hedge funds held out for "an unjustified taxpayer-funded bailout," hoping they could avoid the sacrifices that other stakeholders had made. "I don't stand with those who held out when everybody else is making sacrifices," he said.

The comments, which came after an unnamed administration official went so far as to say the holdouts weren't acting in the national interest, overshadowed some of the details of the historic Chapter 11 filing and news of Chrysler's alliance with Fiat SpA (FIATY). The fact that Obama expressed his displeasure more than once during his remarks seemed to indicate he was picking a fight with hedge funds, and it didn't play well with many on Wall Street.

"So what?" said Phil Goldstein, who runs Bulldog Investors, referring to the decision by some funds to hold out. "Aren't you entitled to reject a deal?" said Goldstein, who has railed against hedge-fund regulation in the past.

Henry Bregstein, who is co-managing partner at law firm Katten Muchin Rosenman and who represents hedge funds, said it is possible that accepting the government's offer could have theoretically exposed the funds that Obama criticized to lawsuits from investors.

"The managers of those investment firms and hedge funds have fiduciary responsibilities to their investors," Bregstein said.

A call to the White House press office seeking comment on whether Obama was criticizing hedge funds to send a message beyond the Chrysler negotiations wasn't immediately returned.

In speaking specifically about Chrysler, Obama was singling out three institutions - hedge-fund managers Perella Weinberg Partners LP and Stairway Capital Advisors LLC, and mutual-fund operator Oppenheimer Funds - which were the only firms publicly known to have been part of the group that rejected the Treasury Department's $2 billion debt-reduction deal. Perella Weinberg broke from the group Thursday, issuing a press release saying it has accepted the offer.

Stairway didn't immediately return a call seeking comment. The group of 20 creditors, calling themselves the "non-TARP Chrysler lenders," told their side of the story in a press release. The group refers to itself as non-TARP to distinguish it from the large banks that have received government bailout funds and that agreed to the Chrysler debt restructuring terms.

The group said it offered to take a 40% haircut on its investment, even though some groups down the legal priority chain were "being given recoveries of up to 50% or more and being allowed to take out billions of dollars." The group said its proposals were rejected or ignored.

"The government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades," the statement said. The group said it has a fiduciary obligation to its investors, naming specifically "many of the country's teachers unions, major pension and retirement plans and school endowments" that invest with those creditors. The group invested in $1 billion worth of Chrysler loans.

Oppenheimer put out a statement echoing many of the same things said by the group.

Other hedge-fund companies owning Chrysler loans, including Elliott Management Corp., took the government's deal.

A person at a hedge-fund firm that owns Chrysler loans, speaking anonymously, told Dow Jones Newswires that the difference between what loanholders would get in bankruptcy and out of bankruptcy wasn't that much, meaning the non-TARP lenders are making a political statement more than anything.

"Are they taking reputational risk for pennies?" asked the person. "Do the math on the recovery levels. It doesn't make sense for them to have held out for purely economic value."