Obama was wrong to demonize Chrysler’s debt holders

President Obama was off-base to castigate the Chrysler secured debt holders who held out against the proposed deal to rescue Chrysler LLC. The holdouts, which included New York-based OppenheimerFunds and Perella Weinberg

Partners, and Stairway Capital Management of Roslyn, N.Y., were fulfilling their fiduciary duty to seek the best possible deal for their clients, who reportedly included some pension funds and many individuals who hold shares in mutual funds.

Many industry observers feel the proposed deal is unfair to the secured debt holders. These debt holders believed their investments were secured by Auburn Hills, Mich.-based Chrysler’s plant and equipment. Their claims are supposed to be paid before the claims of any other creditors.

But while the United Auto Workers’ retiree health plans will receive 55% of the company’s new equity for obligations totaling $10.6 billion, the U.S. Treasury will receive 8% of the new equity for $4 billion it lent to Chrysler, and Fiat of Turin, Italy, will receive 35% for taking over the struggling company, the secured creditors would receive only $2 billion in cash for their $6.9 billion in claims.

This kind of haircut would obviously have an impact on the returns of the funds holding the Chrysler debt, and thus hurts the interests of the fund shareholders.

The secured debt holders decided to take their chances in U.S. Bankruptcy Court. This was the only proper action once they decided the agreement negotiated by the government, the UAW, Fiat and major banks such as JPMorgan Chase & Co. and Citigroup Inc. was unfair to their clients.

They could not simply follow the lead of JPMorgan and Citigroup as those two New York institutions were in conflicted positions.

Both firms, which had taken Troubled Asset Relief Program money from the government, might need more help in the future and thus are dependent on the government’s goodwill.

The secured creditors had nothing to gain by surrendering their claims cheaply, simply to avoid annoying President Obama, Treasury officials and the UAW.

Their fiduciary duty requires them to seek the best deal they possibly can for their clients — a hissy fit by the president doesn’t change that — so they decided to challenge the agreement in court. To do less would be to invite lawsuits from those clients.

In bankruptcy court, the holdouts can argue that the proposed deal is unfair to the secured creditors, even those such as JPMorgan and Citigroup that agreed to it under pressure.

The firms can argue that their clients would do better in a liquidation of Chrysler, or that the deal should be renegotiated to provide better terms to the secured investors. The judge can weigh the claims on their merits, we hope without political pressure, and either accept or reject them. But even if the claims are rejected, the holdouts will have fulfilled their fiduciary duty to their clients.

It is simply unacceptable for the president and members of Congress, such as Rep. John Dingell, D.-Mich., to attack fiduciaries in public for simply doing their duty to their clients.

And U.S. Bankruptcy Court Judge Arthur Gonzalez will have to weigh the claims of the secured creditors carefully. If he rejects them, Mr. Gonzalez needs to explain clearly why he believes the deal is the best they could expect for their clients, and why liquidation would not yield more.

If he leaves the impression that a filing under Chapter 11 of the Bankruptcy Code can be influenced unfairly against secured creditors by the government, he will damage the credibility of the Bankruptcy Code and the protections it provides for creditors.

This would make borrowing more expensive for corporations in the future, and would be the real damage of Mr. Obama’s outburst.