Is It Fair To Call The Financial Bill A 'Bailout'?

The semantics war is on -- again.

Echoing the "death panel" rhetoric of the recent health care debate, Republicans have taken to labeling financial regulation legislation making its way through Congress a "bailout."

In fact, Senate Minority Leader Mitch McConnell has said that the bill would "guarantee perpetual taxpayer bailouts of Wall Street banks." Democrats, led by Connecticut Sen. Christopher Dodd, the bill's author, are not pleased.

Dodd took to the Senate floor this week to accuse McConnell of parroting an internal GOP strategy memo, penned by Republican message-meister Frank Luntz, which advises using the term "bailout" to derail efforts to revamp financial regulations. Polls have shown that wide margins of voters support such an overhaul, though support is softer for plans now being debated in the Senate. The House has already passed its own version of the bill.

One major point of debate: the bill's provision for a $50 billion fund, paid for by banks, to defray the costs of future bank failures. Republicans have called it a "slush" fund. Democrats say it's simply modeled after the Federal Deposit Insurance Corp., which monitors risk and insures deposits in banks and thrift institutions.

So is there a legitimate context in which the legislation could be characterized as a "bailout"? That's a politically loaded question, which is why NPR stepped away from Capitol Hill to pose it to leading thinkers in the fields of economics and finance.

Here's what we found:

Christopher Whalen, co-founder of Institutional Risk Analytics and expert on financial and regulatory issues

Both sides are posturing around meaningless buzz words, because that is their political agenda. The legislation is largely irrelevant, because the big banks will always be bailed out, regardless of what the law says. The crisis of the past few years merely confirms the breakdown of any rule of law in the U.S. when it comes to financial services or fiscal policy. The large banks and funds are driving the bus. The Fed is the apologist and enabler, and the Congress is their willing stooge. The American people are held hostage by a criminal gang comprised of the Washington political class and the large Wall Street dealers, a gang which masquerades as a government but in fact is acting only in its own best interest. I've called it an "alliance of convenience." Italy is the operative model.

James Gattuso, director of the conservative Heritage Foundation's Thomas A. Roe Institute for Economic Policy Studies

I do think that it is entirely appropriate to say that this bill provides for bailouts. The legislation very explicitly creates a $50 billion fund for the purpose of assisting resolution of firms by the FDIC. It is true that this money can't be used to save a firm from liquidation or to compensate stockholders. They wouldn't be bailed out. But other stakeholders and creditors would be.

The situation, I think, is similar to that of AIG, where stockholders took a big hit, but counterparties and other creditors such as such as Goldman Sachs and Deutsche Bank were made whole. That's a bailout, nevertheless.

John Coffee, Columbia Law School professor and expert on corporations and securities legislation

I do not know how he can describe the Dodd bill as a bailout. The bill contemplates only a tax on very large banks to fund an industry, or private, bailout fund, which works about the same as the FDIC. In general, the Dodd bill seeks to regulate those "too big to fail" so that they do not fail.

Scott Frew, of Rockingham Capital, a Connecticut-based hedge fund

While I think the legislative proposal is a lousy one, I can't understand the Republicans' stance. Essentially, they're aligning themselves with the banks everyone hates. The banks are like terrorists with a gun to our heads: Whether it's written or unwritten, those banks are, indeed, too big to fail -- they know it and the government knows it. Even if they would be broken up, they would all still be trading with each other and retain a daisy chain of interconnectedness that leaves them vulnerable to each others' failure.

There are also ways they can get around paying into the proposed $50 billion emergency rescue fund. So the "heads I win, tails you lose" situation with banks remains, and I'm not sure you can put the genie back in the bottle. I agree with McConnell that this is a bad bill, but for different reasons. He's trying to set it up as a "death panel" situation, knowing that there's clearly a negative connotation to "bailout." But that doesn't necessarily mean it's a mischaracterization.

Joshua Rosner, managing director at Graham Fisher & Co., advisers to regulators and institutional investors on housing and mortgage finance issues

Bailout is the right word. As a progressive, I have to say this is an interesting time. The progressives agree with the conservatives but cannot speak against their Treasury secretary's plan -- which is wholly inadequate and farcical. There are several areas where this creates codification of "too big to fail." It creates an expectation that those firms will become bailout recipients.

Simon Johnson, a professor of entrepreneurship at the Massachusetts Institute of Technology's Sloan School of Management and co-author of the new book 13 Bankers, about the recent financial crisis

"Dangerous and deliberately misleading" would be my headline. A bailout would be what [then-Treasury Secretary Henry] Paulson did in 2008, and what Obama did in 2009 -- it's when you specifically protect creditors 100 percent and you keep the same management in place. What this legislation tries to do -- and I think it should be tougher -- is more akin to an FDIC resolution structure. It doesn't protect management; it boots them out. It protects insured depositors, but unsecured creditors should lose their money. Nobody says that the FDIC does bailouts. This just applies it to larger banks and to nonbank financial institutions. It's a much better thing to have a proper, specific authority to handle this.

Tyler Cowen, an economics professor at George Mason University and the author of Create Your Own Economy: the Path to Prosperity in a Disordered World

I am suspicious of the Republican rhetoric. If a financial collapse comes, bailouts are inevitable. Many of the current complainers voted for the Paulson plan, which, of course, came from a Republican administration and was the biggest bailout of all time. Regulatory reform should focus on limiting the need for bailouts, not proclaiming they won't be necessary. That means some simple restrictions on leverage, clearer resolution authority for financial nonbanks, some derivatives reform, and real losses imposed on creditors and bondholders, in my view.

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