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The rumor that all the Chrysler hedge fund investors have thrown in the towel is not true. Three of those hedge funds have filed a law suit to halt the bankruptcy deal because it violated their rights and because the govt. over-stepped their authority.

You may remember this is the group of which the President of the United States said:

In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout.

They were hoping that everybody else would make sacrifices and they would have to make none. Some demanded twice the return that other lenders were getting.

I don’t stand with them. I stand with Chrysler’s employees and their families and communities. I stand with Chrysler’s management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.

I don’t stand with those who held out when everybody else is making sacrifices.

Now, with the lawsuit, the group has a name and a “face.” Among these people labeled as “no goodniks” by the President is the Indiana State Teachers’ Retirement Fund. Yes the President of the United States is trying to intimidate retired teaches from exercising their rights as primary investors.  Nice going Mr. President, screw a bunch of retired teachers to reward the UAW for helping you get elected.

More Below:

Funds move to halt Chrysler restructuring By Bernard Simon in Toronto and Nicole Bullock in New York

Three of Chrysler’s secured creditors have asked a New York court to halt the carmaker’s Chapter 11 restructuring on the grounds that it violates their legal rights and the government’s authority under the troubled assets relief programme.

The three – all Indiana state pension funds – are among a group of 46 creditors that had appeared to back away this month from efforts to derail the process under which a “new” Chrysler would emerge from bankruptcy protection by July 1. The new entity would be owned by a union healthcare trust, the US government and Italy’s Fiat.

Chrysler, with backing from the US Treasury, has offered its secured creditors $2.25bn to settle claims totalling $6.9bn. Four big banks, holding the bulk of the claims, accepted the offer following political pressure from Washington.

However, the Indiana State Teachers’ Retirement Fund said Wednesday that it had a fiduciary responsibility to its members to continue the fight. The fund stands to lose $4.6m under the current settlement proposal.

Objections from the three funds could galvanise other lenders to renew their challenge. “I fully support their motion and believe a number of lenders (including us) will ultimately join their group,” said George Schultze of Schultze Asset Management, one of the creditors that had earlier dropped their challenge.

The funds accused the government in a court filing on Wednesday of adopting a strategy of “the ends justify the means”.

Echoing unease at the strong-arm tactics by Washington to speed the restructuring through bankruptcy court, the funds said “the Treasury department has taken constructive possession of Chrysler and is requiring it to adopt a sale plan in bankruptcy that violates the most fundamental principles of creditor rights – that first-tier secured creditors have absolute priority”.

The Indiana funds said the proposed restructuring would strip their collateral into the new company, benefiting more junior creditors.

The funds also alleged Tarp funds were meant to be funnelled only to financial institutions. Chrysler and its bigger Detroit rival, General Motors, are being kept afloat by billions of Tarp dollars.

“Whatever powers the Treasury department may have under Tarp”, the funds said, “it does not have the power to control the entire restructuring of a company to the detriment of the company’s secured creditors and for the benefit of other interest groups so that certain broader policy and political objectives may be achieved.”

The bankruptcy court approved the restructuring process this month over dissident creditors’ objections. But the ruling left the door open to later objections. The funds have now asked the district court, a higher authority, to intervene.

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