In a GM bankruptcy, UAW gets the best deal

General Motors' likely bankruptcy filing is being cast in some quarters as a fight between "money people" intent on making a killing and honest efforts by the government to save a company and jobs.

In reality, GM's demise comes down to a fight between retirees. On one side are GM's unionized retired workers. On the other are the rest of us - either in retirement or saving for it. Guess who will lose as things now stand.

Under the restructuring plan on the table, GM's retirees would get 39 percent of the company, along with the promise of a $10 billion payment into their health-care trust fund. That's in exchange for $20 billion GM owes the fund.

Not making out so well are current or future retirees who depend on the performance of mutual funds, 401(k) plans, and insurance companies that invested in GM bonds. These debt investors, who are owed about $27 billion, will get just 10 percent of the company.

And that probably won't change. GM CEO Fritz Henderson said during a conference call Monday that there are no plans to modify the terms on offer to bondholders, even as he said a bankruptcy filing now looks "more probable."

That's outrageous. The deal is nothing short of a political rip-off, with the Obama administration currying favor with an organized voting bloc, in the form of the United Auto Workers union, at the expense of unorganized retirees.

The current deal "can be seen as one that serves up bondholders on the altar of political self-interest," CreditSights analyst Glenn Reynolds wrote in a report last week titled, in part, "Waterboarding Bondholders." He added, "The powers that be will not face any major constituency risks by screwing some mutual funds, insurance companies, pension managers, and hedge funds ... out of their fair and equitable treatment."

Not that you'll hear much about the rights of these investors if and when the fur starts flying over a GM bankruptcy filing. Instead, we'll again hear talk about the "money people" - the label Obama pinned on debt investors at Chrysler who refused to swallow the terms foisted on them by the company and government officials.

Expect the fight at GM to be cast in similarly expedient terms of "working man vs. evil money people," Reynolds' report said. And those who object "will be dubbed Wall Street holdouts and obstructionists."

Yet the "money people" label will be particularly unfair at GM. Unlike Chrysler, whose debt was concentrated in the hands of a small group of institutions, GM's bonds are held far and wide.

The holders include Fidelity Management and Research, Franklin Advisers, and Pacific Investment Management Co., which manage the retirement savings of millions of Americans. The Polish Beneficial Association, the Knights of Columbus, and the Grand Lodge Sons of Hermann in Texas were also recent owners of GM bonds - not your typical "masters of the universe."

Then there are mom-and-pop investors, who may not be happy with the terms on offer. Some of them have gone so far as to create a Web site to air their grievances. The site is backed by the 60 Plus Organization, a senior advocacy group that bills itself as a conservative alternative to AARP.

That's not to say that the Chrysler experience won't cow some GM bondholders. Loomis Sayles & Co. said last week that it had sold all its GM bonds in April and had quit the bondholder group trying to negotiate a better debt-exchange offer.

The odd thing is that the administration probably recognizes that it can't, and shouldn't, rob bondholders. So it came up with a proposal that they will have little choice but to reject.

GM's offer "must look to bondholders like something Tony Soprano dreamed up," Gimme Credit analyst Shelly Lombard said in a research note late last month. No wonder GM's bondholders have groused that Steven Rattner, the Treasury Department's chief auto adviser, has acted as if he has them over a barrel.

The administration, meanwhile, will be able to blame the bankruptcy filing on the "money people." Then it can go out and attack the bondholders, scoring more political points.

While potentially bringing short-term political gain, this strategy has a long-term cost: further erosion in investor confidence in the financial system. After all, if bondholders know the government will try to trample their rights, or demonize them for trying to exercise them, there are two options: Shy away from purchasing debt that exposes an investor to the government, or charge more for the increased risk.

Neither is good for markets or the nonunion retirees who depend on them. It's also strange coming from an administration that, along with the Federal Reserve, has pledged $12.8 trillion to try to restore investor confidence in the financial system.