Jack Baruth argues that an unfair GM bailout could prove disastrously problematic.

A buried impropriety in the General Motors restructuring is finally coming to the light of day in court - and a New York judge may hold the power to force the company into the bankruptcy it has struggled to avoid.

When the United States government chose the winners and losers of the "New GM" process, it was generally acknowledged that unions won and individual investors lost. It turns out, however, that not all the losers of the process lost equally. A lawsuit filed by former unsecured GM creditors against a group of hedge funds alleges that, during the restructuring, those funds received a very different deal from the one offered to everyone else.

It turns out that, back in 2009, GM Canada had an outstanding loan in the amount of approximately one billion dollars (said in the Dr. Evil voice, of course) to a Nova Scotia-based "financing unit." That unit, in turn, sold financial instruments based on that debt to hedge funds. According to the lawsuit, the governments of both the United States and Canada collaborated with the parties in the loan to negotiate a sweetheart payout of $367 million to the hedge funds, who then agreed to drop their opposition to the restructuring.

Thirty-six cents on the dollar may not sound like much, particularly compared to the completely free 17.5 percent of the company handed to a UAW-controlled fund at the creation of New GM, but compared to the deal the other creditors got, it was very special treatment.

The judge in the case, Robert Gerber, has stated that "There was a lack of disclosure to the court on the matter with the potential to injure 'Old GM' creditors to the extent of hundreds of millions, if not billions of dollars."

GM, on the other hand, has merely stated that "A lawsuit over some Canadian notes may harm the company by as much as $918 million, or 50 cents a share." Although that is the most likely outcome - a distribution of funds to other creditors who didn't get the hedge fund deal - it is possible, albeit unlikely, that Judge Gerber could invalidate certain aspects of the restructuring and effectively force GM into a true bankruptcy.

Make no mistake, if you owned a small business and you pulled a hustle like this, that's exactly what would happen. But the disturbingly close ties between GM and the Obama administration are likely to come into play here, preventing the logical course of legal action from taking place. Some sort of realpolitik compromise will be made. The squeakiest wheels among the former creditors will get some grease, which is ironic given that the lawsuit alleges squeaky-wheel-greasing as the primary offense. But the UAW and the Treasury Department will keep their shares in the enterprise and the whole crooked deal will be allowed to continue slouching towards Gomorrah.

The worst thing about the alleged improprieties detailed in the lawsuit is the completely cavalier nature of the governments involved. While the "bailout" was always going to be a complete mess, and while it became apparent during the process that the unions were literally going to receive a financial reward for allying themselves to the Democratic cause, there was still a general consensus among Americans that it was necessary to do something in order to save the jobs of their friends and neighbors.

As a country, we looked the other way so a helping hand could be extended to people who clearly needed it. We didn't want to end up like Great Britain, selling its once-great automotive industry at a discount to predatory competitors who swallowed its market while simultaneously participating in a policy of denying access to their own home markets for British products. We wanted to have American cars, built by Americans, with the profits staying at home. It turns out that the government couldn't even manage to do a bailout in a fair and equitable manner. GM may not wind up in bankruptcy court immediately, but when it does wind up there, at least part of the blame will go to politicians who used a genuine emergency to disguise playing favorites.