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Driving the Bond Markets to Ruin
...The G.M. debacle is déjà vu all over again. In the Chrysler bankruptcy arranged by the government in April, bondholders also got short shrift, while the union, which might have received little or nothing in a normal bankruptcy, was awarded 55 percent of the company.

What’s my interest in this? I head a nonprofit group that encourages developing nations to adopt policies that will lead to prosperity — starting with transparency and the rule of law — and hold up America as a model. Yet in its high-handed dealings with Chrysler and G.M., the Obama administration reminds me of an irresponsible third-world regime, skirting the law and handing economic prizes to political cronies.

Under the complicated G.M. plan, bondholders — ranging from large institutions to low-income retirees — would receive just 10 percent of the reorganized company, plus warrants that would enable them to get 15 percent more should the company’s value reach certain levels, in return for their $27 billion in loans. The government, which could end up putting $70 billion into G.M., would initially get 72.5 percent of the company.

In return for money G.M. owes its health trust, the auto workers’ union would get 17.5 percent of its stock, warrants to raise that share to 20 percent, along with a $2.5 billion cash payout over eight years and $6.5 billion in preferred stock paying a 9 percent dividend. I agree with bondholders who feel the union is getting at least four times as much of G.M. in return for claims that are, at best, equal to those of the creditors.

Even if the courts were to reject the plans for G.M. and Chrysler, the administration’s actions in trying to force the deals may damage the credit markets for years to come. The treatment of the bondholders is a warning to investors that the federal government won’t hesitate to push them aside in a crisis.

Perhaps it’s no coincidence that in the wake of the Chrysler deal we have seen a decline in prices for long-term Treasury bonds and a sinking dollar. The Chinese, for example, could view things this way: If the United States is willing to skirt the law to help some of the president’s closest political supporters gain large pieces of two of the world’s biggest companies, will Washington necessarily stand behind any Treasury securities we own when it becomes politically inexpedient?...