Indiana State Teasurer Harold WATB
Three Indiana pension funds are holding up the sale of Chrysler to Fiat, despite multiple losses in bankruptcy courts. We'll know sometime tomorrow afternoon if they were successful, as the Supreme Court decides whether or not to stay the sale. The Indiana Treasurer uses words like "fiduciary duty" to argue in favor of more compensation for their secured debt:
The appeal heard Friday had been filed by the Indiana funds, which objected to the sale because they sought more compensation for the Chrysler secured debt they hold. A federal bankruptcy court in Manhattan previously approved the sale, which would transfer most of Chrysler’s assets to a newer, healthier company run by a group led by Fiat.
Lawyers for Chrysler and the government argued that the sale to Fiat needed to be completed as quickly as possible to preserve its viability and to save thousands of jobs. Fiat can walk away if no agreement is struck by June 15.
Late Sunday, Judge Arthur J. Gonzalez of United State Bankruptcy Court for the Southern District in New York approved the sale to Fiat, overruling more than 300 objections. On Monday night, he agreed to shorten a customary 10-day stay of the sale to four days, though the Court of Appeals stayed the transaction pending its hearing.
When Chrysler emerges from bankruptcy, a union retiree trust will own 55 percent, Fiat a 20 percent share that could eventually grow to 35 percent and the United States and Canadian governments minority stakes.
Would a collapse of the national auto industry be positive for the state of Indiana? Its pensioners? Furthermore, the Chrysler debt represents less than one percent of the total fund assets. James Kwak explains further:
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.
So what’s going on here? Either (Indiana State Treasurer Richard) 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.
I think it's the latter. And let's not kid ourselves about this being an example of the "little guy" going up against the big bad gobmint.