Editorial: Meet the new boss

Forcing automaker bondholders to take a bad deal will hurt the next time a troubled company needs a loan.

Bondholders of the world, unite! You have nothing to lose but the manufactured chains of negative public opinion that Washington, then Ottawa, unjustly used to redistribute your wealth and fast-track their joint bailout efforts of General Motors and Chrysler.

It is hard enough to accept the logic behind spending billions of tax dollars to try to save the dogs of the North American auto sector, when the only sure thing about the bailouts is the negative impact they will have on government finances, not to mention the healthier automakers. But there is no justification whatsoever for the pressure tactics used by both federal governments to coerce secured creditors to accept 33¢ on the dollar for their GM and Chrysler bonds.

Institutional investors (which include teachers unions, major pension and retirement plans and school endowments) that lent money to GM and Chrysler were convinced to ignore their fiduciary duty to their own shareholders by vote-seeking politicians who threatened to turn the working masses against them.

The bondholders should have stuck to their guns, gone to court and held out for more — a legal practice that plays a critical role in the restructuring of bankrupt companies.

As independent Wall Street economist Robert Brusca notes, President Barack Obama, the proselytizer of change, is acting pretty much just like his predecessor, the now-reviled George W. Bush. “[Obama] funnels money and changes rules to benefit friends — just a different group of friends,” Brusca told Canadian Business. “But this has consequences, because he has mucked up the way the whole system works and the notion of risk-reward.”

In Canada, Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty reportedly set up a news conference to allow GM officials to put bondholders on notice that they would be singled out for threatening the industry if they failed to accept terms dictated to them. The long-term costs of this abuse of power are clear.

General Motors and Chrysler bondholders were willing to take risks when other lenders were not. But the next time a troubled company, especially one with a powerful union, tries to tap private-sector funds, they will probably be forced to cry for a bailout sooner.

In other words, taxpayers will pay even more.