President Obama's Right to Free Speech
TSF - May 10, 2009
by Janet Tavakoli

President Obama enjoys the same rights as the average citizen, even when he engages in political grandstanding and advocates substantively bad economic policies.

Clifford Asness, Principal of AQR Capital Management, seems to disagree. He calls the president’s recent remarks about hedge funds “libelous,” but he may have meant to write slanderous. (Hedge Fund Manager Strikes Back at Obama, NYTimes Dealbook, May 5, 2009.)

President Obama called hedge fund managers “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout” of Chrysler.

Hedge fund managers are outraged, and Asness calls himself “unafraid” and paints himself a hero for speaking out against a popular President. He thinks hedge fund managers are caving out of fear.

I agree with Mr. Asness that neither the United Auto Workers nor its pension fund should receive special treatment. Hedge fund managers are obliged not to “sacrifice” their clients’ money or agree to payouts that would have been out of order under bankruptcy.

In Mr. Asness’s parlance it is “stealing” to “sacrifice” clients’ money. Mr. Asness says it is the job of hedge fund managers to maximize the outcome for its investors, but in this unregulated industry, many high profile hedge fund managers helped themselves to investors’ funds or made material misrepresentations to investors. I don’t recall Mr. Asness’s letter expressing outrage about outright theft by hedge fund managers. Then there is the more benign but galling hubris of “quant funds” that touted how their models enabled them to outperform the market—until they wildly underperformed the market during the current debacle. It probably felt like a “sacrifice” to their investors. Mr. Asness is not defending Eagle Scouts, albeit there are many hedge fund managers of high integrity, even when their returns are not high.

Mr. Asness writes that “the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large." He adds it is “because hedge funds have not taken government funds that they could stand up to this bullying.” Yet indirectly at least, some hedge funds have been beneficiaries of the taxpayer funded bailout, and some were direct contributors to the need for bailouts. Hedge funds may not have had a starring role in the financial meltdown, but they were supporting actors.

Where was Mr. Asness’s outrage about the role of certain hedge funds in value destroying securitizations that fueled the financial meltdown? In my opinion, several hedge funds deserve scrutiny by the Department of Justice for their role in disastrous CDOs. If the worst hedge funds get is a misdirected scolding, then some of them are getting off too lightly.

Taxpayers are on the hook both directly and indirectly. When the creditors of Bear Stearns Asset Management’s (BSAM) hedge funds demanded that Bear Stearns step in, it did. BSAM’s other hedge funds may have had their credit lines yanked if Bear Stearns had not bailed out the creditors of two of its problem funds. Those money-losing hedge fund assets ended up on the balance sheet of Bear Stearns. Now JPMorgan Chase is holding the bag. I’ll bet some of those assets or like-kind assets ended up in the $30 billion Maiden Lane vehicle that has already been written down by $4.4 billion. Citigroup took $9 billion of assets on balance sheet from Old Lane Partners, the hedge fund Vikram Pandit ran before he became CEO of Citigroup. Merrill Lynch, prior to its merger with Bank of America, supplied hedge funds with non-recourse financing, and those financed assets may boomerang back on its balance sheet. The U.S. taxpayer bailed out AIG’s credit default swap counterparty/creditors that included some hedge funds. Taxpayers handed over TARP money partly to fund these debacles. Many prime brokers are able to continue funding hedge funds only because the government (the taxpayer) is providing them with unprecedented funding. Saying that hedge funds have been truly off balance sheet is—to use Asness’s words—“the big lie writ large.”

Mr. Asness ends with this taunt: “I am ready for my ‘personalized’ tax rate now.” Would that be the ‘personalized’ tax rate currently paid by most of his fellow citizens on their income? Mr. Asness should not be suggesting that other citizens—even when that citizen is the President—should have fewer citizenship rights than he, especially since he (along with other hedge fund managers) enjoys tax breaks on his hedge fund management fees unavailable to the average wage earner. Perhaps Mr. Asness is afraid hedge fund managers are caving from fear that their privileged tax breaks will be revoked.

President Obama’s apparent financial naivete—or perhaps a willingness to destroy capitalism by changing the rules—is indeed annoying. It is especially annoying to me if it was partly inspired by the actions of some hedge funds. But Mr. Asness is correct when he says: “I’m entitled to my voice and to speak it loudly...in this great country.” That is why I take issue when Mr. Asness seems to characterize a public Presidential scolding as illegal.

In this great country, POTUS is equally free to vent his frustration as Mr. Asness. Nothing about President Obama’s remarks seemed slanderous; it is called free speech. POTUS has a right to spout bad financial policies in public. I disagree with POTUS that bond investors should take a back seat to union interests. But I also disagree that hedge fund managers should have the same easy access to leverage and tax breaks that they enjoyed in the past, since both investors and taxpayers have ultimately paid for the mistakes of hedge fund managers.



Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008), and
Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (John Wiley & Sons January 2009)


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