What's good for hedge funds is destructive for Chrysler

There's creative destruction -- economist Joseph Schumpeter's term for the normal churnings of capitalism -- and then there's destructive destruction. Anyone interested in the latter should pay close attention to the arguments in federal bankruptcy court by attorneys for the hedge funds that held out for more in the Chrysler bankruptcy deal.

Thomas Lauria, who represents those funds, argued Monday that the court should block the federal bridge loan that will keep Chrysler afloat during the bankruptcy proceedings.

As Judge Arthur Gonzalez noted in denying Lauria's request, blocking the loan would force Chrysler (and, he could have added, many suppliers and dealers) to liquidate -- throwing tens (perhaps hundreds) of thousands of Americans out of work during the most serious recession since the 1930s and terminating medical benefits to tens of thousands of Chrysler retirees. Liquidation would also compel the public to write off the loans made to the company, rather than become shareholders in the slimmed-down Chrysler.

But the public, the retirees, the dealers, the suppliers and the workers be damned. Liquidation is what the hedge funds want, on the theory that they could realize more than what the Treasury's plan offered them, from the sale of -- well, it's not clear what they think Chrysler can sell off at a decent price.

If the hedge funds are standing on principle, it's the principle that holders of secured debt should always have first claim to a bankrupt company's assets. But they missed a 2006 speech to a group of investors by Ron Bloom, the onetime investment banker who left Wall Street for the Steelworkers union, which he represented in steel company restructurings, and whom President Barack Obama tapped, along with Steve Rattner, to head up the administration's auto task force.

The banks and bondholders that lend companies money, Bloom said, constantly track the value of the bonds they hold, which enables "those who like the risk-reward ratio to take it and those who don't to liquidate their position and move on." Compare that, Bloom went on, with retirees who deferred wage claims so they could have a pension and medical benefits in retirement. If the company can't honor those claims, the retiree can't "take the company's promise, convert it to its present value and sell it to someone who would like to own it."

The Treasury's plan for Chrysler, and its proposal for General Motors, gives those retirees stock in the company -- the only way to keep afloat their otherwise unredeemable investment in Chrysler. It gives the public a stake in the company in return for its loans. It scraps the old management and board, and downsizes the company to a point where the government believes it can become profitable again. It requires that 40 percent of Chrysler's production be performed in the United States -- a sensible condition to preserve and boost domestic manufacturing.

In other words, the Treasury's approach is equitable, responsible to taxpayers and economically sensible.

Harold Meyerson is editor-at-large of American Prospect. Distributed by Washington Post.