We don’t yet have a full account of how the government negotiated a deal with the holders of Chrylser’s debt. But we know that JP Morgan Chase, Citigroup, Morgan Stanley and Goldman Sachs hold somewhere around 70% of Chrysler’s debt and each agreed to the Obama administration’s plan. Many believe that these banks, which are operating under the government’s TARP, had no choice but to agree to the administration’s plan.
Now there are allegations that the first stages of the negotiations excluded non-TARP creditors, perhaps so that the negotiation could be presented as already a done deal. The blog Finem Respice quotes a hedge fund manager who says that this was the dynamic at the negotiations.
The criteria for who sat down at the Chrysler negotiating table were never set out as “TARP recipients here, non-TARP out of the room”- but the distinction was crystal clear to the people outside of the room who were blamed for the collapse in negotiations and the TARP recipients in the room who wouldn’t dare cross the government when there are pay limitations literally on the negotiating table in the next room at the Treasury.
We told by a person familiar with the matter that some hedge funds are now worried that the banks could also be used pressure them into giving up opposition to the administration’s plan. The hedge funds involved have prime brokerage relationships with the banks that have agreed to the plan, and depend on leverage provided by these banks to conduct trading operations. A coordinated effort by the banks could probably force the funds to drop their opposition.