Those following the Chrysler bankruptcy know that the final holdouts are a set of Indiana pension funds, who have appealed the bankruptcy judge’s approval of the restructuring plan, attempting to force the company to explore other alternatives under a trustee who is independent of the government. They were lustily cheered on by The Wall Street Journal, elated to find good sturdy workingmen and -women willing to stand up to the Obama Administration and its “disdain for legal contracts,” and who could not be dismissed as speculators.
The pension funds in question bought the Chrysler debt in question last July for 43 cents on the dollar. (They stand to get 29 cents on the dollar in the restructuring.) I guess the difference between that and speculation is that “speculation” is something that bad people do; when pension funds by distressed debt, it’s called “investment.” I have no problem with pension funds buying modest amounts of risky investments, but they are taking the same risks that hedge funds are taking, and if they lose money on bad investments, that’s the fault of the pension fund managers.
Now, the popular defense of the Indiana pension funds is that they have a fiduciary duty to their beneficiaries to maximize the value of their assets. (Hedge funds should have the same duty to their limited partners, unless I’m missing something, but let’s set that aside.) There is a deal on the table worth 29 cents on the dollar. Apparently they think Chrysler can do better by finding a a higher bidder (not likely at this point), or they can get more in liquidation. But that is far from a certainty, and the value of Chrysler is deteriorating as time passes; and if they manage to drag this out past June 15, Fiat can back out of the deal. So it’s not at all clear that their actions have a positive expected value for their beneficiaries.
Their cheerleaders, like the Journal, think that the little pension funds are standing up to the big evil government and defending the rule of law – namely, the order of priority of creditors in bankruptcy. (The issue is the relative treatment of the UAW and the bondholders.) But that’s not the job of a fiduciary; a fiduciary isn’t supposed to stand on legal principles and win Pyrrhic victories that harm the people it is supposed to serve.
Indiana Treasurer Richard Mourdock claims:
This is about the law, the law, the law. This is an unprecedented action to say that secured creditors can have their rights stripped away. We think it`s clearly illegal. As a fiduciary, I had no choice but to act.
The fiduciary duty is to get the most for the beneficiaries, not to enforce the law; Mourdock’s “no choice” language is pure bravado, especially when the law is as unclear as it is.
Steve Jakubowski wrote the most in-depth analysis I’ve seen. In short, there is a tension between the competing principles of (1) following the order of priority and (2) the “fresh start” policy of Chapter 11. There is a question of whether the Chrysler plan is an asset sale or a surreptitious reorganization. And there is also a question of whether it is more important to follow the order of priority or to get the most for the secured creditors. In that case, those might not imply the same outcome, since some of the key parties, including the government and Fiat, are free to walk away from the deal instead of giving the secured creditors a bigger share of it; that would lead to liquidation, which may be even worse for the secured creditors. (That was the conclusion of all the other secured creditors, although granted many had their arms twisted by the government.) Jakubowski says that the pension funds have a reasonable legal argument – perhaps a better one than Chrysler – but it’s by no means an easy case. And from a financial standpoint, they could still be shooting themselves in the foot.
Joe Donnelly, a Democratic Indiana congressman, is opposing Mourdock, saying that the action is likely to leave the pension funds worse off than the restructuring plan, and in addition threatens thousands of Chrysler jobs in Indiana (many in his district).
So what’s going on here? Either Mourdock really thinks that the chances of getting more than 29 cents outweigh the very real risk of getting less (and of blowing up Chrysler in the process). Or Mourdock (and Mitch Daniels, the Republican governor of Indiana?) believes that the order of priority of creditors in bankruptcy is more important than maximizing value for their retirees. Or Mourdock is trying to shift the blame for losing pension fund money on distressed Chrysler debt. Or he wants to score political points and embarrass President Obama.
In politics, anything is possible.
Originally published at The Baseline Scenario and reproduced here with the author’s permission.