A story worth noting, courtesy of the Dow Jones Newswires:

General Motors Corp.’s (GM) small bondholders became the latest group to protest the auto maker’s survival plan, gathering Wednesday to speak out against a debt exchange offer that would leave them with just cents on the dollar. GM has said at least 90% of bondholders must agree to a debt-for-equity swap launched on Monday or else the company will be forced to restructure in bankruptcy court. While they hold a small share of GM’s debt – around one-fifth – relative to larger financial institutions, the strong negative reaction from individual bondholders underscores the challenge GM faces in getting its offer to succeed. On Wednesday, a group of bondholders gathered in the town center of Warren, Mich. to protest GM’s plans. Several bondholders shared stories of how they came to own GM bonds. Organizers strove to strike a folksy tone with a guitar singer in the background and signs about saving “Main Street” investors.
According to the story, GM is asking bondholders to swap up to $27 billion in unsecured debt for a 10% company stake. If bondholders tender less than 90% of the debt, GM says it is prepared to file for bankruptcy protection. Under GM’s plan, the U.S. government, supporting the auto maker with $15.4 billion in loans, would get half its debt repaid. The United Auto Workers would get 40% of what GM owes for a retiree health care trust. One person said, “Bonds are a loan, they are not a speculative stock.”

This is what happens when the government picks winners and losers: big unions walk away with GM and small investors get thrown by the wayside. Sooner or later, we’re going to have to return to some kind of normal economic activity, and when that happens we will need investors, large and small, to feel it’s worthwhile getting back into the market. Deals like this one are going to make that awfully difficult.

People are reeling from having their 401ks wiped out in the current market slide. And now those who had for years bought what they thought were “safe” blue-chip corporate bonds are discovering they were only safe until they were told by the government to go fly a kite because government wants to pay off the unions instead. That is deeply unfair to small bondholders, and it’s dreadful economic policy. As a friend of mine put it to me, “Who in their right mind will buy corporate bonds now? And if nobody’s buying bonds, how exactly are our debt markets going to get humming again? What a mess.”

Indeed. This could be the continuation of the Tea Party phenomenon, manifesting itself in a different way.