Whose interests should Chrysler debt holders put first?

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Hedge funds have made easy scapegoats for nearly everything that has gone wrong in the financial system over the last two years.

Today, hedge funds that own Chrysler debt got the blame for the automaker’s bankruptcy: President Obama took to the bully pulpit to say the government’s hand was forced because ‘a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout.’

Rep. John Dingell (D-Mich.) labeled the dissidents ‘rogue hedge funds’ and ‘vultures’ -- perhaps not appreciating that so-called vulture investing is exactly what lures some investors to hedge funds.

While most Chrysler creditors (including major banks with government capital on their books) agreed to the firm’s proposed debt restructuring, the dissident group wanted more than the proposed 33 cents on the dollar for their loans to Chrysler. In fact, they wanted about 60 cents on the dollar.

At that point, the administration pulled the plug on the talks, and Chrysler headed into bankruptcy court.

So whose interest, exactly, should the hedge funds have been considering in the debt negotiations -- their investors’ interest, or the national interest (i.e., that of U.S. taxpayers and Chrysler employees)?

In a statement before the bankruptcy filing, about 20 of the dissidents insisted that they were ‘legally bound’ as fiduciaries to protect the interests of their investors.

‘Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well-established legal framework and cannot be rationalized as being commercially reasonable,’ they said.

They noted that as secured creditors, by law they ranked higher than unsecured creditors in the pecking order of claimants on Chrysler’s assets. . . .

‘Nevertheless, to facilitate Chrysler’s rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars,’ the dissidents said. The group of 20 didn’t list their names with their statement -- playing into their critics’ hands by further fostering the stereotype of the faceless, shadowy hedge fund.

Lamely, the group instead sought to put a face on its investors, saying it represented the money of ‘many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler.’

But at least one of the 20 identified itself: In a separate statement, New York-based OppenheimerFunds said it rejected the government’s offer ‘because they unfairly asked our fund shareholders to make financial sacrifices greater than the sacrifices being made by unsecured creditors.’

Which should prevail -- investors’ legal interests, or the federal government’s interests? The battle now moves to the bankruptcy court, with potential implications for a bigger financial restructuring on the horizon: the government’s effort to save General Motors.

-- Tom Petruno