Chrysler vs. Indiana: The Little Pension Fund That Could

By James Kwak

Those following the Chrysler bankruptcy know that the final holdouts are a set of Indiana pension funds, who have appealed the bankruptcy judge’s approval of the restructuring plan, attempting to force the company to explore other alternatives under a trustee who is independent of the government. They were lustily cheered on by The Wall Street Journal, elated to find good sturdy workingmen and -women willing to stand up to the Obama Administration and its “disdain for legal contracts,” and who could not be dismissed as speculators.

Well.

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.

Their cheerleaders, like the Journal, think that the little pension funds are standing up to the big evil government and defending the rule of law – namely, the order of priority of creditors in bankruptcy. (The issue is the relative treatment of the UAW and the bondholders.) But that’s not the job of a fiduciary; a fiduciary isn’t supposed to stand on legal principles and win Pyrrhic victories that harm the people it is supposed to serve.

Indiana Treasurer Richard Mourdock claims:

This is about the law, the law, the law. This is an unprecedented action to say that secured creditors can have their rights stripped away. We think it`s clearly illegal. As a fiduciary, I had no choice but to act.

The fiduciary duty is to get the most for the beneficiaries, not to enforce the law; Mourdock’s “no choice” language is pure bravado, especially when the law is as unclear as it is.

Steve Jakubowski wrote the most in-depth analysis I’ve seen. In short, there is a tension between the competing principles of (1) following the order of priority and (2) the “fresh start” policy of Chapter 11. There is a question of whether the Chrysler plan is an asset sale or a surreptitious reorganization. And there is also a question of whether it is more important to follow the order of priority or to get the most for the secured creditors. In that case, those might not imply the same outcome, since some of the key parties, including the government and Fiat, are free to walk away from the deal instead of giving the secured creditors a bigger share of it; that would lead to liquidation, which may be even worse for the secured creditors. (That was the conclusion of all the other secured creditors, although granted many had their arms twisted by the government.) Jakubowski says that the pension funds have a reasonable legal argument – perhaps a better one than Chrysler – but it’s by no means an easy case. And from a financial standpoint, they could still be shooting themselves in the foot.

Joe Donnelly, a Democratic Indiana congressman, is opposing Mourdock, saying that the action is likely to leave the pension funds worse off than the restructuring plan, and in addition threatens thousands of Chrysler jobs in Indiana (many in his district).

So what’s going on here? Either 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.

In politics, anything is possible.

Comments

[techristian:]

Unbelievable. And in the process I and 10's of 1000's of other Canadian and U.S. Chrysler workers sit at home and wait for the legal process to finish.

Dan

Jun 05 03:21 PM

[casey00001:]

None of this would be taken place if Obama has sliced the pie fairly in the first place.

Jun 06 09:50 AM

[CJ Heinbockel:]

I have to agree with Mr. Mourdouk. This is a nation of laws and those laws such not be suppressed for the sake of expediency. Pres. Obama's action regarding GM and Chrysler are unconstitutional and it's time someone calls him on to the carpet.
What other laws will fall by the wayside if the current trend continues? What rights under the law are you willing to cede to the government in return for a simple fix?
The White House is continuing to work under the premise that it is easier to ask for forgiveness than for permission. This Must Stop!

Jun 06 09:54 AM

[a. palmer jr.:]

The White House doesn't need permission for anything, or forgiveness.....so they think.

Jun 06 06:58 PM

[Big Bubbette:]

How is this action by our government Constitutional? Anyone watch the news in Russia where Putin forced the owner of a factory to re-open? And question how Putin supporting the unions and workers is any different that Obama supporting the unions over the investors? themoscowtimes.com...

Hopefully the Supreme Court will take this case and restore the Constitution and stop the Presidents take over of banks and private enterprise. While the bail-out bill, rubber stamped and not read or debated by our Congress may impact this issue, Youngstown Sheet & Tube is still good law. The only question is if the Supreme Court will take the case and cut back on the action being taken by the President:
law.cornell.edu/su...

Jun 07 01:47 PM

[slee12dent:]

Why can government have a strong hand in this case? Nothing to do with the constitution. Government is the one who injected billions of dollars to Chrysler. Without this government money Chrysler is worth nothing.

Jun 08 01:10 PM

[slee12dent:]

Government does not want to reward speculators when it brings a company to bankrupcy. Equity holders are wiped out. Bondholders are getting pennys on the dollar. When no one else wants to rescue, the government will reluctantly help out but at a steep price to the investors, who are getting something instead of nothing. So why is Indiana pension fund whining about 28 cents on the dollar when it should be getting less when everything is liquidated? Sounds more like a coverup of a bad investment to me.

Jun 08 01:34 PM