What were they thinking?

by Gimpei | 09:18 in |

According to the New York Times, at least, a couple of distressed debt funds held up the negotiations over Chrysler, forcing it into bankruptcy. While I have absolutely no problem with distressed debt funds (I think they perform and invaluable service), I'm having trouble figuring out what the hell these guys are thinking. You don't play hardball on negotiations against the government when it is protecting blue collar jobs and at a time when wall street is reviled.

Is this part of the same phenomenon of banker indignation blogged about on Samuelcanread? Regardless, I hope that these guys are pilloried, not so much because they deserve it (although they do for being so stupidly arrogant: this is not an ordinary bankruptcy, the normal rules do not apply. You guys do realize you're going to start getting death threats?), but because we desperately need a scapegoat. We may very well need more tarp funds, if not a few nationalizations. I imagine this would be much easier to get if the American people saw a few more heads roll.

And Frank Rich thought he'd only be writing about Arlen Specter this week...


  1. Anonymous on 1 May 2009 at 11:10

    For once: i'm not giving up my reply for free. http://samuelcanread.wordpress.com/2009/05/01/anewfinancialterm/

  2. Anonymous on 1 May 2009 at 12:21

    Oh yeah, well take this, that's right I've stolen your IP:

    I want to introduce a term to this financial crisis which I think, seeing how the Chrysler talks have gone, will come in handy: To schopenhauer — to insist on getting your money back no matter what, in the name of a cause no one really understands. By extension: A schopenhauer — the last bastard at the table who insists after everyone else has compromised that there’ll STILL be no deal unless he or she gets what he or she came to the table to discuss in the first place: getting all their money back. But, let me explain….

    A distressed debt fund is the famous scorpion traveling across the river on the back of the frog. Gimpei shouldn’t be so surprised when a distressed debt fund kills itself by killing the thing that was carrying it (In this case, Chrysler and/or Detroit and/or the U.S. economy). “Logic!” cries the frog as it drowns. “What did you expect?” replies the scorpion. “It’s my character.” Distressed debt funds can only make money if lenders — be they countries, corporations, or politicians — are willing to settle for less than the largest percentage of the debt that it’s possible to recover. Sometimes they settle for less because they don’t have the power — the distressed debt fund can get that power by combining minor, powerless packets of debt into a powerful position at the bargaining table. Distressed-debt funds also have the necessary expertise that makes it easier and less costly to get those last few drops of blood from the stone.

    Other times, though, the lenders settle for less because they have considerations beyond getting the largest proportion of their loan back. People and politicians want companies to survive and jobs to be kept, even if the company doesn’t really do anything worth doing and the jobs could be done better by other people. Distressed-debt companies profit from not caring about that. “Our holdings in secured Chrysler debt are entitled to priority in long-established U.S. bankruptcy law, and we are obligated to our fund shareholders to support agreements that respect these laws,” as OppenheimerFunds puts it.

    To reshuffle the metaphor, they get the maximum mileage out of the frog before they sting and kill it. Others give the frog a few small stings, hoping that that will release the urge and be enough to keep the frog alive. It doesn’t and they both go down sooner. We actually want distressed-debt funds to do their nasty abattoir-like work, even if we don’t want to see them do it and we don’t want to do it oursevelves and we want to hate the people who do, which is unfair of us, really. So, I want to come up with a term that’s slightly less mean than Vulture, but that doesn’t totally let these guys off the hook for being incredible assholes.

    They actually have a proud precursor, and one they should embrace to give their venality the sheen of German romantic principle: Arthur Schopenhauer. How so? Here’s R.J. Hollingdale’s amazing introduction to the Penguin edition of the Essays and Aphorisms:

    In May 1819 Schopenhauer learned that the Danzig business house in which his mother and sister had most of their money invested had gone bankrupt. He himself also had a small amount invested. The company offered to pay 30 per cent; when Schopenhauer was told his mother and sister were going to accept this offer he wrote demanding 70 per cent of what was owed to him, and that if this should not be forthcoming instantly he would demand 100 per cent. He then fought a two-year legal battle to get his money back: his claim amounted to one-fiftieth of the total liabilities of the bankrupt house, but while every other creditor finally settled for 30 per cent he persisted in refusing to do so and at length received back the full amount due to him, plus the accumulated interest.

    Way to go, Arthur! I should revise the original definition of To Schopenhauer, actually, by adding this crucial phrase:

    …and whose stubborness and assholery is in the end rewarded with an incredible deal.

    Over the long term I think the term will work well in abbreviated slangy form: He’s going to Schop them… They’re going schopping… They’re a total Schop house. It would be fun to always sound out that German ch, no?

  3. Gimpei on 1 May 2009 at 12:22

    Nice term. I say we also add a term for economists: No Schopenhauer Condition–When making some model that relies on bargaining, assume there’s no asshole at the table like Schopenhauer. Unrealistic? Yes, but what part of economics isn’t?

    As for my original point, I’m not sure we’re in disagreement, except for the fact that I’m surprised and you’re not. Why am I surprised?

    Well, the operators of these funds live in the US, and they will be named and shamed at a level that they have never before experienced. Sure they’ve been vilified by countries like Argentina, but a lot of people in the states don’t even know where it is so its a lot easier to brush off.

    Maybe the explanation is that they are such assholes that they enjoy being treated like assholes–i.e. they enjoy dishing out punishment as much as they like receiving it. In which case, maybe Schaupenhauer isn’t a good term. Instead we should call one of these dudes a Marquis, after Marquis de Sade!

  4. John Barrdear on 3 May 2009 at 14:09

    But the hold-outs aren't demanding all of their money back. They're arguing that since they are secured creditors, then by law they ought to have a smaller haircut applied to them than unsecured creditors.

    You should also be celebrating the fact that it's going to bankruptcy court. The Rule of Law (tm) is important, after all ...