Chrysler: Who is right - Government or Hedge fund Managers?

Recently government tried to force Chrysler securitized debt holders to settle their loans to Chrysler at lower than market value. They were offered 33 cents per dollar of their debt. President Obama announced to media that due to their non compromising attitude Chrysler has failed. The entire media criticized the hedge funds because of that. Let’s take a step back and ask ourselves were they really wrong?

Chrysler problem explained in laymen terms:

Let’s break this problem into laymen terms for easy understanding. Suppose you are given an offer to invest in a company which is need of immediate cash. Company promises a 10% interest on your investment if it makes money. If the company happens to go in red and not make money, you are still guaranteed to get 66 cents for every dollar back, which is 66% of your total loan provided to the company. Your debt to the company is secured lawfully through bankruptcy and liquidating company’s assets such as selling the factories and other hard assets. Now the government intervenes and requests you to accept 33 cents per dollar for the debt that the company received because the company is not doing too great and the government is trying to rescue the company. Now answer the question “Will you accept the government offer?”

My Take on Chrysler problem

If you ask me, I will not accept this offer at all. That is exactly what the hedge fund managers did in Chrysler case. If they knew they could get a higher payoff even if company goes bankrupt, why should they be forced to take an offer which reduces their return to 50%. It is obviously not the hedge fund's fault that the Chrysler’s CEO did not perform well. They are also losing money here because the maximum return they are getting is 66% of the original money rendered to Chrysler in the form of loan. The hedge fund invested that money based on minimum 66% return guarantee.

Downside of government approach

Now let’s take a look at possible outcomes if hedge funds agreed to accept the 33% offer from the government. Had they agreed to take 33% of their debt to Chrysler, it would have meant a big blow to US credit rating as whole. It essentially meant that the US government can make any payments that are due as void on their will and not honor the agreement that was put in place lawfully between the two entities. This would have in turn increased the overall interest rate at which US can borrow money. Also the popular belief that US is a truly liberal economy would have been shattered.

This article is aimed to promote the campaign against making US socialist as the government is trying to do. That is totally against the principles that made America what it is now. If you think what the hedge fund managers did was right for the country, please be sure to indicate in the comments @
Govt or Hedge Funds Manager? Also be sure to spread the word around so that people are not led to believe the fabricated facts about Chrysler story.

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