The biggest mistake the Chrysler hedge funds made was being hedge funds in the first place. If they’d been state pension funds or if they’d just been old grannies holding senior, secured debt, the President would’ve had a much harder time running roughshod over them.
So for this reason alone, GM (GM) bondholders are already doing a lot better than the Chrysler hedge funds in terms of winning the war on public opinion. That’s because they’ve been trotting out the old pensioners that bought GM bonds in the retail market and live on the interest.
They even got one, Dennis Buchholtz, to write an op-ed in the WSJ about how hard it’s going to be for him once he’s wiped out.
Felix Salmon sniffs that there’s a good reason, however, to put the union ahead of Old Mr. Bucholtz:
It’s not easy, as a retail investor in America, to purchase individual series of corporate bonds. It’s possible, of course, and GM did make an attempt to target such investors. But thankfully most stockbrokers and financial advisors will tell you that if you want credit risk in your 401(k) then by far the best way of doing that is to buy a bond fund, which minimizes your exposure to any one credit. As a result, there are — happily — precious few people in Buchholtz’s situation. Most bond investors are large institutions which watch their portfolios carefully and make sure they’re diversified at all times.
Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure. As such, if you’re worried about the well-being of retirees, it makes perfect sense to treat the UAW’s retirees better than those who either have a small amount of exposure via their bond funds, or those who actively sought out GM exposure by buying its bonds. “The government’s proposed restructuring plans benefit one class of retirees at the expense of another,” complains Buchholtz — and it’s entirely proper that they do so. Buchholtz has no one to blame for his current predicament but himself: caveat emptor, and all that. That can’t be said of the UAW retirees.
Yes, Felix has come up with a clever argument about one’s own ability to diversify risk. And yes, caveat emptor and all that.
But really, please.
The proper way to adjudicate these things is not by coming up with clever blog logic. The way to handle these things is the rule of law. Who’s senior? Who’s junior? Etc.
What kind of system do we have where matters of seniority and who gets paid are based on who can come up with cleverest argument over a cup of tea? The problem is that by law (law!) the union healthcare fund is junior to the bondholders. Correction: As Bucholtz even says, they’re equal by law.
Unlike with the Chrysler bondholders, you can’t make the argument that Old Man Buchholtz is a vulture and that all along he only went into GM because he figured it was too big to fail and that it would be bailed out (which is the argument Felix used to rationalize the trampling of the Chrysler hedge funds). Under the law, in a system where there were no bailouts, the small guy would be first in the line, but in this politicized system it’s not the case. We think the little bondholder has a point.