The Lenders Obama Decided to Blame

Chrysler Bankruptcy
Chrysler Bankruptcy

Peter A. Weinberg and Joseph R. Perella are part of a band of Wall Street renegades — “a small group of speculators,” President Obama called them Thursday — who helped bankrupt Chrysler.

That, anyway, is the Washington line.

In fact, Mr. Weinberg and Mr. Perella, with sparkling Wall Street pedigrees, are the epitome of white-shoe investment bankers. And their boutique investment bank, a latecomer to Chrysler, played only a small role in the slow-motion wreck of the Detroit carmaker.

But now the two men, along with a handful of other financiers, are being blamed for precipitating the bankruptcy of an American icon. As Chrysler’s fate hung in the balance Wednesday night, this group refused to bend to the Obama administration and accept steep losses on their investments while more junior investors, including the United Automobile Workers union, were offered favorable terms.

In a rare flash of anger, the president scolded the group Thursday as Chrysler, its options exhausted, filed for bankruptcy protection. “I don’t stand with those who held out when everyone else is making sacrifices,” Mr. Obama said.

Chastened, and under intense pressure from the White House, the investment firm run by Mr. Weinberg and Mr. Perella, Perella Weinberg Partners, abruptly reversed course. In a terse statement issued shortly before 6 p.m. Thursday, Perella Weinberg Partners announced it would accept the government’s terms.

It was too late.

Whether the other Chrysler holdouts will capitulate as well remained unclear. At least one, OppenheimerFunds, insisted it would not back down.

But whatever the outcome, this bit of brinkmanship — which many characterized as a game of chicken with Washington — has become yet another public relations disaster for Wall Street.

Representatives for Perella Weinberg, which is advising the government on a wide range of banking issues, initially defended the firm’s decision to rebuff the government’s offer. They characterized the move as a principled stance against the administration’s growing intrusion into American business. Many in the financial and in the legal worlds said the investors were within their rights to challenge the proposal.

OppenheimerFunds, in a statement, said: “Our holdings in secured Chrysler debt are entitled to priority in long-established U.S. bankruptcy law, and we are obligated to our fund shareholders to support agreements that respect these laws.”

But now that Chrysler has tipped into bankruptcy, some industry executives worry the administration will try to turn this episode to its political advantage. Washington, these people contend, needed some political cover for the mess in Detroit — and Wall Street provided a handy scapegoat. A move is already afoot to tighten oversight of hedge funds and end certain tax benefits for private investments funds. The Chrysler bankruptcy, and Wall Street’s role in it, will make resisting those efforts more difficult.

What is striking to many in financial circles is how much Chrysler’s reluctant creditors gambled for what is, in the scheme of this bankruptcy, a relatively small amount of money.

After weeks of increasingly rancorous negotiations, Perella Weinberg and 17 other financial firms — including OppenheimerFunds and Stairway Capital, a hedge fund that specializes in troubled companies — rejected the administration’s plan. It was, they argued, simply unfair.

These investors together hold about $1 billion of Chrysler’s secured debt. The Treasury offered to pay all of Chrysler’s senior lenders $2.25 billion in cash if they forgave most of the company’s debts. Perella Weinberg and the others demanded more, arguing they would receive at least that much, and possibly more, under ordinary bankruptcy proceedings.

But this is no ordinary bankruptcy. JPMorgan Chase and other large banks involved in the negotiations are, to greater and lesser degrees, beholden to Washington. Many have received billions of taxpayer dollars, as well as other generous subsidies. For the banks, defying the administration was never a serious option, according to people close to the talks with lenders, who asked not to be identified because they had signed confidentiality agreements.

The other creditors, who sought to distinguish themselves from those who have received bailout money, believed they had a stronger hand. Many of them bought Chrysler debt for about 30 cents on the dollar, long after it became clear that the company was in trouble. Most of this debt is secured by Chrysler assets — factories, equipment, real estate and the like. The thinking was that in the worst case, these assets could be sold at a profit if Chrysler were liquidated.

The dissident creditors said they had a fiduciary responsibility to seek the best possible returns for their own investors — which, the group said, include teachers’ unions, pension funds and endowments.

“The government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades,” the group said in a statement Thursday. The creditors suggested banks that had received bailout money were being strong-armed by the administration, a view some of the bankers privately said they shared.

Now, however, Perella Weinberg and others will have to see what the bankruptcy court decides the creditors should get. If the other holdouts object to the reorganization plan — and it was unclear whether they would — they stand little chance of prevailing in court, bankruptcy lawyers said. The administration hopes to complete the proceedings within 60 days, and the political pressure to go along is unlikely to let up.

“Saying they have an uphill battle is an understatement,” said John C. LaLiberte, a bankruptcy lawyer with the firm Sherin & Lodgen.

Even those involved in the negotiations see little upside in fighting. “There’s zero chance this group will be able to get anything more in bankruptcy court given that 90 percent of the lenders are lined up against them,” said a hedge fund manager who owns about $10 million of Chrysler’s secured debt and voted for the government’s proposal.

Even before Chrysler filed for bankruptcy, another member of the group, Elliott Management, also accepted the government’s deal. In a six-line statement proclaiming its U-turn, Perella Weinberg said its Xerion Fund would do the same.

“We believe that this is in the best interests of all Chrysler stakeholders, and our own investors and partners,” the firm said Thursday.