President Barack Obama said Chrysler LLC lenders who turned down his buyout offers are a "small group of speculators" who forced the automaker into bankruptcy.
"A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout," Obama said today in Washington before Chrysler filed for bankruptcy protection.
What do you expect, President? The American government has made clear their willingness to backstop large failing companies in any politically sensitive industries. Given this, bondholders should be expected to make rational decisions with the goal of maximizing their returns. This is how financial markets work; they have always worked this way and always will. The beauty of these markets is that they are amoral. Because of this, they will behave in predictable ways. President Obama's crew should take this into account when they craft plans to alter economic outcomes instead of calling foul on rational investors when their plans don't work out.
Recently I had a conversation with a friend about a group at Case whose purpose was getting the school's endowment fund to divest from companies related to Sudan. This is a similarly misinformed perspective formed from the idea that financial markets should incorporate morality. They don't. Unlike a boycott program which harms the financial health of the target company, these divestment programs only make investor participants lose out to better informed investors. Divestment drops stock price, and other participants in the market will see that the asset is underpriced relative to its long-term earnings potential. They will then buy at the lower price until the price has risen to its intrinsic value. It's a hopeless battle that does no good to further the actual cause.
Financial markets are amoral. They always will be. Know this, and work around it.
