Detroit: For Whom the Bail Tolls

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There is something puzzling about "bailout" --- the term, not the practice. The word is a euphemism. Nothing is literally bailed out; rather, money is given to people for a screw-up. That's not necessarily a bad thing. All of us screw up and can use a little help sometimes. Moreover the victims of a screw-up are not always, or even usually, the people who screwed up. Nonetheless, paying people for screw-ups sounds like a bad idea, so a euphemism is necessary. The puzzle is that everyone hates bailouts, which makes it a poor choice of euphemism. There are plenty of popular alternatives: rescue, disaster relief, victim aid, and catastrophe insurance, for examples. If you want government money for your friends, why not use one of these terms instead of "bailout"?

The reason is the object. If you rescue, relieve, aid, or insure X, X is the one who gets the help. But if you bail out X, Y gets the help, and Y doesn't appear in the sentence. Despite its unpopularity, "bailout" is a useful term, because it conceals the beneficiary. If you want money for an unpopular Y, it's better to use an unpopular verb, "bail," attached to a popular object, than to attach a popular verb to your unpopular client. So whenever you hear "bailout," ask not for whom the bail tolls; ask who tolls the bail.

For example, Steven Rattner, who administered the auto bailout, recently called for a bailout of Detroit . His specific plan was for the state of Michigan to pay $1.25 billion to retired Detroit city workers (technically, he called for the state to pay for reinvestment in Detroit infrastructure and for Detroit to take the same amount out of infrastructure investments and pay it to retirees, but that's a obvious shell game). While this formulation required him to admit to advocating bailout, it allowed him to make the object "Detroit" rather than "retired city workers."

While the plight of municipal workers with underfunded pensions is serious and may merit state or federal aid, no one would argue openly for an assessment on Michigan taxpayers to pay specifically Detroit retirees, especially with no systemic reforms attached. Moreover, the proposal has nothing to do with any recent news from Detroit. Clearly Rattner is taking advantage of the news of Detroit's bankruptcy and the tricky grammar of "bailout" to plead a special case by subterfuge.

Similarly, the auto bailout was not about saving GM ( GM ) or Chrysler. Both companies went bankrupt despite the government money, and this came as no surprise to anyone. Both companies survived in restructured form, which they would have done without the bailout. The point of the bailout was to change the distribution of proceeds to the various stakeholders -- for example, favoring unions over financial creditors, cars with foreign-made parts and US nameplates over cars with US-made parts and foreign nameplates, environmental goals over investors, and, of course, todo el mundo over taxpayers. Whether these things were good or bad policies, none would have been accepted by voters as either wise or fair had they been legislated openly. Thus it was worth accepting criticism for bailing out GM and Chrysler, to avoid criticism from forcing financial creditors to rescue unions, the US domestic auto parts industry to relieve the US domestic car nameplate industry or creditors to aid the environment.

In the Wall Street bailout, the government did not save Bear Stearns ( JPM ), AIG ( AIG ), FNMA ( FNMA ), or FHLMC ( FMCC ). Control of all these firms passed to others, and the surviving parts are shadows of their former selves. The government saved the shareholders and managements of creditors of these institutions. Again setting aside the question of whether this was a good idea, it is indisputable that the government went to great lengths (which were eventually ruled to be illegal lengths) to hide the identities of the eventual recipients, and that there was considerable public anger when the information came to light.

The reason "bailout" can be used in such sneaky ways is that it has no known etymology, or rather, several undocumented etymologies. The most obvious is to "bail" water out of a boat (from the word for a small wooden bucket used for the purpose). In this metaphor, someone is trapped by rising debt service payments, like rising water in a boat. If nothing is done, the boat will sink, which would be a complete disaster.

For example, Detroit kept spending more than it raised in taxes, and promising more benefits to workers than it could fund. This meant borrowing money, the interest on which meant more spending. That caused it to raise taxes to nearly the highest in the nation and make unrealistic property assessments, which led two-thirds of its people to leave and meant half the remaining people stopped paying taxes. This forced the city to cut services, which exacerbated problems. Property values fell, further reducing tax revenues, and causing many people to abandon properties rather than pay the unreasonable taxes and deal with inadequate services.

To bail the city out in the boat sense, we could relieve it of some of its debt obligations. This would allow it to cut taxes and improve services. This could lead to people returning, the local economy reviving, and property values increasing, thus leading to higher tax revenues in a virtuous circle. Eventually, everyone would be better off. Even the creditors would collect more under this scheme than if Detroit were to crash and burn.

While this is undoubtedly a good plan, it is never called a "bailout." It's called "bankruptcy." We don't send people to debtors' prison or destroy entities that cannot pay their bills. A federal bankruptcy court grants temporary relief (including allowing the entity to borrow more money), adjusts the bills to a payable level, and spreads the pain around according to rules. In some cases, entities are liquidated, but only when this is the best outcome in terms of total economic value. So the people who call for a bailout are never asking for this; it's what would happen if there were no bailout.

An older use of "bail out" means to provide security for a person to be released from confinement (from an old word for "deliver"). To bail someone out of trouble in this sense means to guarantee that they will fulfill obligations if freed from restrictions. In this analogy, Detroit cannot solve its problems because it is hemmed in with too many requirements. In order to revitalize the city, it must cut taxes and improve services, which leaves it no money to service existing obligations. To rationalize service delivery after two-thirds of its citizens have left, it needs to shrink, meaning abandoning urban services in many of its neighborhoods and relocating the residents. It needs to renegotiate contracts signed in more optimistic times, sell city assets, and reorganize government.

This kind of bailout is clearly good if the entity that is bailed out succeeds in fulfilling its obligations eventually. Everyone is made 100% whole. However if the entity fails (or doesn't try in the first place), we have compounded the problem. We threw money down a hole while letting the entity ratchet up its troubles.

Once again, this is not what people mean in modern political contexts when they ask for a bailout. The objects of the bailout are never entities that anyone has any faith can solve their problems on their own. Modern political bailouts come with more restrictions, not less, and usually replace the existing management. Moreover, no one has both the confidence to guarantee the outcome and enough money to pay off the losses if the outcome is bad.

The oldest possible etymology comes from a saying that exists in many forms in Old English and related languages: "When bale is hext, bote is next." "Bale" in this context means pain or evil (as in the modern word "baleful"), "hext" means highest, and "bote" means help. This is one of those irresistibly popular sayings that is silly at its core. Of course, bale is hext before bote, because once you get bote, bale declines. If bote never comes, bale keeps increasing.

Anyway, this is the source of "bale out," meaning to remove from pain or evil. It is likely also the source of "bail out" of an airplane as "bale" is the more common early spelling and the one that is preserved in English-speaking countries other than the US. The US spelling is likely a confusion. Bailing out of an airplane has no connection with either bailing out a boat (you don't save the airplane; you abandon it to save a person) or getting out of jail (you don't guarantee that the pilot will return; in fact, you pretty much guarantee the opposite).

Regardless of etymology, this is what people mean when they propose financial bailouts. They don't intend to save the airplane; they just want to protect some person or entity from the consequences of the crash. They like the grammar here. With boats and felons, the beneficiary of a bailout is the object, so you have to say what you are favoring. With airplanes, the subject benefits from bailing out of the object whose doom is sealed by the act of bailing out. Thus when someone calls for bailing out something popular, they are really calling for its destruction and for unrelated favors to be passed to an unnamed subject.

So, again, ask not for whom the bail tolls; ask who tolls the bail.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: AIG , FMCC , FNMA , GM , JPM

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