First off, its too late to offset with a Credit Default Swap at this point if they haven't done so already. These "rebels" actually do have two valid points:

1) Legally, these creditors should be higher up on the claims list in recovering what they can. What the government offered and what they can, by law claim, the spread is enormous. The government offered about 33 cents on the dollar knowing that in a normal bankruptcy, these folks would probably end up with more than that (this assumes asset sales). Estimates I heard was between 45 cents to 90 cents on the dollar.

2) Many of the firms aren't hedge funds, but vechicles for pension funds. They may be mandated by the bylaws of their charters to pursue the maximum amount in recovery. The managers of these firms could face lawsuit because they could be seen as violating their fiduciary responsibility.

You as a bondholder, by law, have higher priority than many others. In the case of an automaker, your senior debt would be higher than the liabilities from a labor agreement. I can see the anger, but the President should not be bashing bond holders. They are simply going by what the law tells them what they're rights are.

Ok, now that I've gotten this out of the way. Let me tell you where they may have made a big mistake, a la the "gamble." For starters, most of the creditors have already agreed to the government's terms. It wasn't all the bondholders that said no, indeed it was over half (as of this morning, some have been reversing course). The banks will not object, they probably where the first to offset with a CDS. Hedge funds and pension fund managers worth their salt probably did the same. Lastly, many of these firms will simply write this off as a tax loss.

The judge has a lot of leeway here. But, like I said, these debt holders are senior in claims. But the judge can say "yes but over half of the creditors are willing to take a shave." The judge needs to preside over an orderly chapter 11 procedure, which is the payment of creditors while keeping the going business concern. If he sees that meeting the bondholders to their maximum recoverable levels would require liquidating assets beyond the critical point that keeps the company alive, he may take a different route.

Now these confederates could go and push to the hilt and essentially drive Chrysler to Chapter 7, complete liquidation, but then they would run into political risks. This is not normal times. We are in an era where government is taking a more active hand, to say the least. A year ago, we had two seperate banking industries (commercial and investment), today we have the government owning half of a unified financial industry. Who is to say, given political pressure, that the government doesn't take steps to do to these institutional investors what they did to the banks?

Trust me, the last thing they want, is Uncle Sam finding a way to be part owner or dictate their pay. But if liquidation comes to Chrysler, it raises the odds that we could see the same for GM. How? If the courts agree with these bond holders, then those holding GM debt will have presidence. At this point, Washington is going to have to face a stark reality...that these pension funds and hedge funds could spark the anhilation of an industry. Ok, that's a bit drastic, because we would still have Ford (and whatever domestic start up automakers are left like Tesla). Now this site showed a map what would happen if we lost GM and Chysler. This would be a political nightmare and would move to stop this. Many would demand some kind of retaliation against those who helped liquidate these companies.

Wall Street knows this, which is why you didn't see a uniform vote on the this issue. They don't want to see a "retaliatory move" by the government. Which is why I them sabotaging these confederate investors.