Belmont Club

I will decide who gets what

Megan McArdle asks how you would want a hedge fund to behave if it handled your money. It’s not entirely an idle question. Hedge funds often represent institutional investors. The NYT reported in 2005 that one of pension funds that had moved assets into hedge funds was the General Motors fund. It’s been alleged, though I haven’t been able to find a hard citation, that the UAW pension fund is partly invested in hedge funds.

One of the first pensions to start working with hedge funds is also the nation’s biggest corporate pension fund, the $90 billion General Motors fund. It started with a small test investment in 1999 and increased it to about $2 billion in 2003, said Jerry Dubrowski, a G.M. spokesman. The company is using hedge funds, along with other unconventional investments, in hopes of getting something close to stock market returns without the market’s volatility, Mr. Dubrowski said. To pay out the $6.5 billion G.M. owes to its retirees each year, the pension fund must produce annual returns of a little more than 7 percent. Otherwise, G.M. will have to dip into the fund’s principal. At current interest rates, G.M. cannot get those returns with bond investments, and if it tries to juice returns by betting on the stock market, it will have to cope with market swings.

It is notionally possible for an individual or a class of persons to have interests on multiple sides of a dispute between creditors, provided the portfolio was diversified enough. Which means that for Barack Obama to favor one set of creditors ignores the fact that what they receive in one form they may have to pay for in another. It’s like giving you a “free gift” from money taken from your own pocket or charged to your credit card. More generally, the question is why the Executive Branch should be better than the markets and the courts at settling the very problem they were designed for. She writes that it:

brings us to the real question, which is, when did it become the government’s job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line? Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.

No, leave that aside for the nonce, and let’s pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions. What do you think this is going to do to the supply of credit for industries with powerful unions? My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit. Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit. Though it may well be the last time they get it, on anything other than usurious terms.

My guess is that all of McCardle’s questions, while logical, are immaterial. This isn’t about economics. It’s about politics. And that doesn’t have to make sense. But what do you think? Open thread.