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Janice Nadler

Serving up a bailout, with a side of justice

October 8, 2008

Serving up a bailout, with a side of justice

Chicago Tribune, October 3, 2008

By Kenworthey Bilz and Janice Nadler

Just after Treasury Secretary Henry Paulson's original proposal was made public, an e-mail, deliciously rumored to be from a member of Congress, began bouncing around the Internet. After acknowledging the need to bail out "the most unsympathetic human beings on the planet," the writer argued that he wanted the bailout bill "to be as punitive as possible." He went on: "I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring [executives whose firms are aided by the bailout] to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt."

Though it is unlikely that a member of Congress actually wrote this colorful missive, the indignation it expresses should sound familiar to anyone who has participated in water-cooler conversations this week, and explains better than anything else why the rank and file have been reluctant to support the bailout plan.

Americans are deeply outraged over the events in the financial markets. They see the current credit crisis, rightly or wrongly, not as an unfortunate consequence of free markets, or as a failure of regulation, but as the product of a greedy and reckless disregard for the economic well-being of the rest of the country. In other words, the crisis is perceived as the product of wrongdoing. And wrongdoing must be punished.

Whether these sentiments are well-placed is beside the point; they are real and they are not going to dissipate soon without a meaningful outlet for expression. If members of Congress want a bailout package that their constituents can stomach, they should address this public anger within the bill itself.

Economists merely dance around the problem when they speak of "moral hazard," meaning the need to structure the bailout to force executives to bear the risks of their own actions. In the mini-bailouts that recently preceded this "mother of all bailouts," the Fed and the Federal Deposit Insurance Corp. have been careful to wipe out shareholders and sometimes even bondholders when tossing firms a lifeline. Some executives have lost hundreds of millions of dollars after their government "rescue."

On the upside, the $700 billion package under consideration by Congress allows the Treasury to demand warrants for equity if we accidentally overpay for distressed assets. Not only will this dilute shareholders, thus deterring firms from taking unwise risks in the future, but as a bonus, it protects taxpayers.

But this is not enough. Congress must also address the "moral" half of moral hazard. We want to make sure wrongdoers do not misbehave again. But more crucially, we want punishment to express our outrage in a way that declares fundamental moral truths. We want punishment that will tell the offender he was wrong to have put his own interests or pleasure above the well-being of the rest of us.

No matter how severe the punishment, if it fails to deliver this message, the public will not accept it.

It would not take much to address the moral outrage. We do not have to require executives to take part in humiliating counseling sessions for credit deadbeats (as appealing as that might sound to some). Perhaps executives taking part in the bailout plan could be required to issue a public apology. Or maybe they could be required to perform a hefty amount of pro bono work to serve the people facing the loss of their homes.

The possibilities are endless. But unless party leaders salt any solution to this crisis with just deserts, the public is not likely to go along with it.

Kenworthey Bilz is an assistant law professor and Janice Nadler is a law professor at Northwestern University School of Law.

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