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Retconning, death panels, and bailouts

palinthumbs.JPG"Retconning" is, well, a nerd term for "the deliberate changing of previously established facts in a work of serial fiction." Say you want to change Captain America's creation myth to accommodate the plot of a new storyline: Rather than rail at the heavens about how your new plot won't work, you just go and do it. You rewrite the past so that it fits your needs in the present.

There's a similar dynamic on the right. A politician will make a hyperbolic, absurd claim that will catch fire but prove totally false upon examination. Shame, right? Not to worry! Members of the conservative expert class will quickly construct new arguments based on different parts of the bill that have no relationship to the original argument but save the claim, or at least allow members of the right-wing media to say it's still a live charge.

The paradigmatic example of this is Sarah Palin's allegation that the health-care bill included "death panels." Palin clarified that she was referring Section 1233 of HR 3200, entitled “Advance Care Planning Consultation.” But that section had nothing to do with death panels. It had to do voluntary visits with a doctor to talk about end-of-life care, and Sen. Johnny Isakson, a conservative Republican, turned out to be an key advocate. Not to worry! Soon enough, Cato's Michael Cannon explained that Palin was at least partly right, as the death panel "is right there in the legislation now before Congress, and it is called the Independent Medicare Advisory Council."

The words "Independent Medicare Advisory Council," of course, didn't appear in either Palin's original post or in her footnoted follow-up. In fact, the bill Palin was referring to was the House bill, and IMAC was only in the Senate bill. And we're seeing the same thing happen with Mitch McConnell's claim that the Dodd bill ensures "endless taxpayer-funded bailouts for big Wall Street banks."

At the center of McConnell's claim was the $50 billion orderly liquidation fund. But tapping that fund would wipe out the bank's shareholders, fire its management and liquidate the institution. Oops.

But not to worry. McConnell's actual argument might have died a quick death, but his high-polling claim hasn't. "Yes, it's a Bailout Bill," writes AEI's Phillip Swagel. The bill gives "the government discretion to bail out creditors," which "makes the Dodd proposal a permanent bailout authority." And again: "The Dodd proposal is a bailout bill, plain and simple."

Before we get to the bill's treatment of creditors, let's look back at what McConnell was saying. The word "creditor" never appears in his speech. He talks about "Wall Street banks" and the $50 billion orderly liquidation fund, which would destroy any bank that tapped it. So whatever the validity of this claim, it is not the claim that originally supported the “bailout” charge.

Now we're told the issue is creditors. Swagel says that the bill "gives the government discretion to bail out creditors" and that it should instead rely on bankruptcy proceedings, where "a judge would divide up a failing firm’s resources among its creditors and leave no possibility of a bailout without a vote of Congress."

So does the bill bail out creditors? Not really. Let's say McConnell Bank -- a systematically important bank that was based on a lot of bad information -- goes bankrupt. The rules for this are in Section 210 of the bill. Most creditors are limited to "the amount that the claimant would have received if the FDIC had not been appointed receiver with respect to the covered financial company and the company was liquidated under chapter 7 of the U.S. Bankruptcy Code or any State insolvency law."

Most creditors, in other words, will get what they would've gotten under bankruptcy -- or less. There are exceptions. One exception is for cases where paying off creditors is "necessary to minimize losses to the FDIC." The other is where paying the FDIC determines that paying off the creditor will "maximize the asset value of the company or maximize the present value of the proceeds (or minimize the amount of any loss) from disposing of the assets of the company." Another is when creditors survive in the bridge company that gets sold off.

In other words, in cases where it'll save the country money to pay a creditor above and beyond what bankruptcy would demand, the FDIC can do it. An example would be that McConnell bank has a bunch of branches across the country, all of which it pays rent on. McConnell bank isn't worth anything if it doesn't have any more branches, so the FDIC pays the rent until McConnell bank can be sold off to another company. But -- and this is important -- it can't use taxpayer money to do it.

The money it can use comes from out of the orderly liquidation fund, which the banks pay for, or borrowing against the existing assets of the failed bank, which selling those assets pays for. So either it's a tax on the banks or an estate sale of the failed bank's stuff that goes to pay out the creditors. Some taxpayer-funded bailout.

Now, there's regulator discretion here, and there's no doubt that it can be abused. This is a tough policy issue: Removing regulator discretion to pay off necessary creditors could lead to total chaos that would require Congress to vote for an actual bailout and create a Lehman-like situation that damages the economy. We can have that debate, and maybe there's a better policy.

Unfortunately, the debate we're actually having, as you can see in the title of Swagel's piece, is whether this is "a bailout bill." Is anyone really under the impression that a bailout is when the banks put up money for the FDIC to take over one of their number, and the FDIC then wipes out the shareholders and management and operates the bank -- including paying some, but not all, creditors -- until the institution can be sold off? I doubt it.

But it's important for conservative politicians to be able to say that the bill is a "bailout bill" and that requires conservative elites to have some argument in their back pocket that lets them say there's some truth to the claim, even if that truth has nothing to do with whatever the claim was originally describing. Fans of comic books will recognize this instantly: It's retconning, and sometimes it's the only way to make a new idea work under an old title.

Photo credit: Charles Krupa/Associated Press

By Ezra Klein  |  April 27, 2010; 4:16 PM ET
Categories:  Financial Regulation  
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I really don't know how this country can survive when one party can just lie about everything, with no consequences.

Posted by: AZProgressive | April 27, 2010 4:23 PM | Report abuse

I am shocked, SHOCKED, that Mitch McConnell or a GOP flack would lie for political gain.

Posted by: etdean1 | April 27, 2010 4:25 PM | Report abuse

Who's paying the consequences for the Citicorp-Travelers merger (April 6, 1998) and Gramm-Leach (Nov 12, 1999)? Should then-President Clinton (who signed it) and his Treasury Secretary Robert Rubin be held responsible?

I'd note that Citicorp, under the leadership of Robert Rubin, has made a considerable profit, as did Goldman-Sachs when Rubin was its co-chairman. The problem with financial sector legislation and regulation transcends party politics, often with those claiming to be the "good guys" actually at the helm of the sinking ship.

Posted by: rmgregory | April 27, 2010 4:35 PM | Report abuse

rmgregory, Gramm-Leach was passed by a republican house and senate, so they deserve the majority of the blame for the bill. Phil Gramm was the major force behind getting this passed not Clinton.

Exempting derivative trading from regulation was also a republican idea, slipped in at the last minute to must pass legislation. Clinton didn't request it. Gramm forced it into the legislation.

The dems don't have totally clean hand in this either. Certainly there are corporatist dems like Rubin et al. that wanted the financial sector less regulated, but the majority of the push for deregulation and mega mergers came from republicans.

Posted by: srw3 | April 27, 2010 4:47 PM | Report abuse

Shorter rmgregory: Hey, look over there!

Mitch McConnell, still a liar.

Posted by: vagueofgodalming | April 27, 2010 5:06 PM | Report abuse

Hey, Ezra, go consult your Perlstein: the GOP's method here can be traced back to Nixon.

Posted by: scarlota | April 27, 2010 5:07 PM | Report abuse

Best retcon example for anyone over 40: When they brought back Bobby with the whole "it was only a dream" nonsense.

People really get that.

Posted by: member8 | April 27, 2010 5:47 PM | Report abuse

Conservative Republicans and Tea Baggers like to portray themselves as plain talking, straight shooters who use simple language to tell it like it is. So let's respect them enough to do likewise: "retconning" is nothing but a euphemism for telling LIES.

Posted by: zippyzeph | April 27, 2010 5:52 PM | Report abuse

excellent point ezra. the same pattern repeated itself with the al-qaeda 7. the more respectable conservatives justified their criticism against doj lawyers as a precautionary measure to fend off a potential conflict of interest between these lawyers' former jobs and their current jobs at justice. even if you buy this unsatisfying alternative critique, it certainly never justified the original charge that these lawyers were 'al queda 7!' does a failure to observe conflict of interest rules make one a terrorist?

Posted by: bluesteed | April 27, 2010 6:59 PM | Report abuse

On April 18, 2006, Palin and I sat together in a hotel coffee shop comparing campaign trail notes. As we talked about the debates, Palin made a comment that highlights the phenomenon that Biden is up against.

"Andrew, I watch you at these debates with no notes, no papers, and yet when asked questions, you spout off facts, figures, and policies, and I'm amazed. But then I look out into the audience and I ask myself, 'Does any of this really matter?' " Palin said.

Posted by: allanbrauer | April 27, 2010 7:09 PM | Report abuse

Time for a new printing of AL Franken's "Lies and the Lying Liars Who Tell Them" with lots of updates on Mitch McConnell and hos merry gang of fabricators.

Posted by: RalfW | April 28, 2010 12:12 AM | Report abuse

One could drop the "ret" from the word and call it for what it actually is.

Posted by: humanmancalvin | April 28, 2010 10:18 AM | Report abuse

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