I am not an Asness fan but this is good stuff. Unafraid In Greenwich Connecticut Clifford S. Asness Managing and Founding Principal AQR Capital Management, LLC The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.” The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear. I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission. Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times. The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse. Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy. Let’s quickly review a few side issues. The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to “sacrifice” some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power. Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring. Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer. This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President. I am ready for my “personalized” tax rate now.
"The President’s attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. " Yep. That’s the idea.
+1 Welcome to the new age of Socialism (progressives) in America.
Nicely read. CFAI should put an ethics question on the exam where the president asks a PM to sacrifice client money.
YEEEEESSSSS!!! Someone finally has the balls to stand up to the communist…
Awesome, he is my new hero!
I forgive everyone who voted for Obama. Let just all agree not to make the same mistake in 2012. Obama must be stopped.
just like his campaign and books, he is much better in theory than in practice.
I feel sorry for all the people just getting out of college. There are no jobs, especially in finance. A friend of mine interviewed for a low level PE job where they had 350 applicants off craigslist. I live in SF, Obama is considered a God here.
I love this.
markbot Wrote: ------------------------------------------------------- > I forgive everyone who voted for Obama. Let just > all agree not to make the same mistake in 2012. > Obama must be stopped. In all seriousness who are the Republicans going to put up in 2012? It obviously needs to be a gay female of color in order to have a realistic shot of taking Obama down. Two boring white guys don’t cut it in national politics anymore.
Condi? Not gay, but she does play piano (not that there’s anything wrong with that).
Let me rephrase: the Republicans need to find someone of color who didn’t sell out their own ideology in favor of their own skin color to vote for Obama. That rules out Powell and Condi.
i’m holding out for a strong third party to emerge! i would like to see the republican dismantled and replaced with a new party realigned to being economically liberal, fiscally rational, and more “mainstream” on issues related to religion (abortion, stem cell, etc). and this party could attract people from the democrat party. of course, this will never happen…there would have to be an extreme scandal that basically destroys one of the 2 parties for this to happen…or one of the parties would have to become so unpopular that it gets marginalized.
“I feel sorry for all the people just getting out of college. There are no jobs, especially in finance. A friend of mine interviewed for a low level PE job where they had 350 applicants off craigslist. I live in SF, Obama is considered a God here.” Oh yeah Obama is to blame for all of this. The rampant offshoring of American jobs to slave labor overseas resulting in a non existent inustrial base and enormous trade deficits, the implosion of an artificial economy based on housing, wasting of taxpayer money on war and a blind allegiance to supply side economics has NOTHING to do with the shoddy economy.
MP is always good for a laugh. . . can’t stand fair criticism, huh? Sorry, not all of us are believing the hype (BS) of our new “dear leader.” Your posts really highlight how ill-informed you are.
Ill informed about what? There is no hype around our “dear leader” as I dont have high hopes of him being able to do much about the economy at this point…I am pretty moderate in my political views anyways. I suppose McPalin would have turned around the economy by declaring abortion illegal and mandating prayer every morning? Holy Jeebus would save our economy! And god forbid if McCain had passed away…imagine Sarah Palin as president! Talk about a moronic right wing extremist with the nuke button at her fingertips…
mp, your argument is non sequitur. we r talking about the economy and how obama is a bad president and how we should pick a better one next time. the next “better president” could be democrat. thus no one said that mccain would have been a good president. also, i should point out that mccain is a “moderate” on social views. thus, nothing u just said makes sense. u kind of sound like a NYtimes journalist.
He has been President for 100 days…you are so quick to judge. Today he announced proposals to curb tax evasion by multinational corporations…this is exactly what we need to stem the flow of capital overseas. Globalisation is all fine and dandy but we have to look after America’s interest first. Unlike Cheney gloating how he move the HQ of Halliburton to Bahrain. I am all for reducing taxes as long as the Companies adhere to OUR labor and environmental standards that our ancestors fought for. If they want a no rules market like China where people live like slaves in a country that is a freaking enviromental and social disaster, I say those Companies are free to leave USA for good and should not bother doing business here.
Brilliant letter, Obama’s HF rant was one of the most ignorant and disgraceful things I’ve heard in a while. I am constantly sickened by the undeserved bad press hedge funds get, and for someone to stick up for the industry has been a long time coming.