ImageDebt has never had a very good reputation. Everyone hates it because it seems oppressive and mean - sapping the economic means of those who owe the debt and retarding their ability to spend their money on more fun things, like trips to Disney World and vanilla skim lattes. Lenders of money are mostly depicted as evil, grasping types like Mr. Potter, the character played by Lionel Barrymore in the film "It's a Wonderful Life".

At our house we often joke that Frank Capra's splendid 1946 film could not be made today because the premise of a decent, big-hearted, compassionate banker who helps his town and its people simply would not be credible. Today, the "good guy" in the story would have to be a community organizer or politician who brought government money to the town and tried to place good people in positions of public trust, purely for altruistic reasons. (Sorry, I couldn't resist.)

Debt's "name" - already besmirched by decades of contention, starting with farm foreclosures of the 1930s - has now been further blackened by the sub-prime mortgage crisis, wherein heartless lenders evidently forced huge, un-repayable loans on hapless, ignorant borrowers who really didn't want big homes that exceeded their financial abilities. Why did I never run into those lenders when I was a young guy, with a young family, trying to find an affordable house we could fit into? The mortgage lenders we met were all business - pleasant enough, but annoyingly cold-eyed about things like income. "Back in the day", the wife's income was typically ignored (even if she was a brain surgeon) because it was considered "unreliable" and subject to unpredictable interruptions, like babies. But I digress.

We bailed out the banks ($700 billion worth) in early October because financial gurus convinced the American people and their political leaders that the American economy would collapse unless we propped up financial markets. Maybe they would have - what do I know? At any rate, we shoveled hundreds of billions into banks so they would start lending again. Instead, they hoarded the funds - waiting to see which bank would stagger to its knees next and be ripe for takeover.

Debt is easy to hate because we believe banks are the holders of debt, and we don't like banks. Not all debt is held by banks, however, although one would not know this from reading news reports and analyses about the Panic of 2008. Much debt in the country is actually held in the form of bonds by individual investors, mutual funds, and pension funds.

A bond is a twofold promise: (a) that the borrower will pay the lender a fixed amount of interest at scheduled intervals; and (b) that said borrower will repay the entire original face amount of the bond at a promised time in the future. Thus, you might buy a $10,000 bond, which pays annual interest of 7%, from ABC Widget, Inc. Every six months you'll get a check from ABC for $350. If ABC is still breathing on the redemption date - perhaps in 2020, or whenever the bond "matures" - you'll get back the $10,000 you originally lent.

Bonds are also tradable commodities on securities markets. They typically sell in "shares" priced initially at $100. If your $10,000 purchased a new ABC Widget bond-issue, you bought 100 shares at $100 each. Over the life of the bond, its market value might fluctuate from the original $100 share price. If ABC's business is doing well, its bond price might increase somewhat - perhaps to $105. Thus, to buy $10,000 of ABC bonds, one would have to pay $10,500. This reduces the bond's "yield" from 7% to 6.67% (i.e., 7% x 100/105). Because the company's success has made the investment more secure, you get less interest for investing in it - a kind of inverse reward for success.

Conversely, if ABC is not doing very well - like home construction companies and automobile manufacturers today - its bond price will go down. The worse ABC is doing - or the less confidence investors have in its business, for various reasons - the lower its bonds go. This means their apparent "yield" increases. If ABC's bonds drop to $80 a share, for instance, you will buy 125 shares for your $10,000, giving you an effective interest rate of 8.75% (i.e., 7% x 100/80).

Companies that are in real financial trouble, like GM, have outstanding bonds that are selling for radically cut rates, like $20 or $30 - perhaps even less on today's markets. If you can stand the risk, you can earn high rates of return on their bonds. A bond selling for $25, instead of $100, effectively pays 4 times the face interest on the same money - e.g., 28% on those ABC Widget bonds. But you might risk losing a large part of your investment if that company fails.

This brings us to the Big Three automobile manufacturers and the current "crisis" in which they find themselves. Without going into the whys and wherefores of what got the companies to where they are, I want to note a very important fact that most analysts gloss over: i.e., that part of the contemplated "bailout" would make bondholders "forgive" tens of billions in expected interest. This would represent abrogation of part of the "contract" which a bond represents - i.e., the promise to pay a stated interest. A new law would require renegotiation of privately held auto-industry debt via legislation.

Since GM's bond-exposure is currently some $62 billion, the company is probably scheduled to pay at least $5 billion a year in interest on its bonds. (Exact information on this is very hard to find.) The unstated premise of the political solution to GM's (and probably Ford's and Chrysler's) financial problems is that bondholders will have to sacrifice expected interest payments in order to save these companies.

This sacrifice is considered acceptable, since the bondholders are thought to be banks and financial institutions. But this is far from true. Millions of ordinary people will also be affected because they hold these bonds as individual investors or through mutual funds and pension funds. The retirement incomes of uncountable numbers of retirees depend on the interest paid by such bonds. If automobile companies are allowed to evade their obligations via a political deal that skirts conventional bankruptcy law, many people could be hurt.

Democratic politicians want to "save" the Big Three short of bankruptcy because they dislike the prospective job losses that could result from a Chapter 11 filing. They also hope to preserve high wage-rates, medical insurance and pensions contained in the contracts unions have negotiated with the automobile companies. Bankruptcy would cancel those contracts and greatly diminish union influence in the entire automobile sphere, whereas a political deal might salvage union interests and essentially preserve the status quo. In that case, bondholders, not unions and workers, would bear the cost of reorganization. I saw one report that cited $16 billion in interest-givebacks from bondholders as part of a non-bankruptcy restructuring of GM. In such a deal, bankruptcy laws would not protect bondholders' interests. They would be the ones left hanging.

These plans and possible deals are far beyond the ken of individual investors (like this writer). If enacted, they could cost investors the income they expected when they bought the bonds, leaving them with worthless paper that can't even be given away, let alone sold to recover some part of their lost equity. No one will buy a bond whose interest-production has been cancelled by government fiat. The prospect is intolerable.

A truly equitable "bailout" of automobile companies - as it looks from here - would involve government buy-backs of those companies' bonds at a substantial fraction of original value, so investors don't take the whole hit. The buyout would let investors reinvest in other parts of the American economy, thereby boosting equity markets with a new infusion of billions in capital. The retirement incomes of possibly millions of people would be protected. And the Big Three would be able to renegotiate their debt with its new holders - i.e., the American people.

Equitable salvage of the Big Three should spread the pain around - not localize it to the investor segment. Politicians talk about keeping people in homes they can't afford by adjusting their mortgages favorably. They should also take a look at buying out holders of bonds in the car companies. Those bonds were bought in good faith by investors who don't deserve to be mugged because their money was managed incompetently.