Wednesday, May 6, 2009

Hedge Funds Fight Back

. Wednesday, May 6, 2009

Hedge fund manager Cliff Asness has written an open letter to President Obama that has generated quite a lot of discussion in the blogosphere. Asness was apparently put off by Obama's claim that owners of Chrysler's debt should sell that debt to the government at whatever prices the government wishes to pay, and if they do not sell then they are "speculators" who "refuse to sacrifice like everyone else" and who are merely holding on "for the prospect of an unjustified taxpayer-funded bailout". Several of the juicier quotes:

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. ...

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. ...

I am ready for my “personalized” tax rate now.


Asness has a right to be angry. Hedge funds have not taken TARP money. Hedge funds are not seeking bailouts, nor would they expect them if they started to go under. Hedge funds are not part of the state bureaucracy, nor do they have obligations to the state, nor to President Obama's preferred interest groups. They have obligations to their clients, and their clients probably want them to get as much of their money back from Chrysler as they can. It is unreasonable for Obama to demand private corporations to act in his own personal political interests. If hedge fund managers did this, and sacrificed their clients money in the process, it would be theft. And if they did it under threats of duress from the government then it would be political cronyism, and possibly criminal.

There's already been some of this strong-arming: the forced axing of GM CEO Rick Wagoner without prior approval of the shareholders; the unilateral ouster of the heads of Fannie Mae and Freddie Mac; the coerced purchase of Merrill Lynch by Bank of America; the attempted punitive, retroactive, "personalized" taxes on AIG bonuses.

It is true that desperate times call for desperate measures. But in our haste to stabilize the financial system we should first guarantee that we leave our legal institutions intact. If we sacrifice one to save the other, we may soon find that we have retained neither. If we are willing to sell off long-standing rights of the debt-holder for temporary political gain, then the government will find itself unable to attract any new "partners" for future recovery efforts (such as the PPIP program).

We all want to help suffering autoworkers, but the Robin Hood model is unsustainable. Especially when the redistributor is King John.

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Hedge Funds Fight Back
 

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