‘There will be no more tax-funded bailouts—period,” said President Obama on July 21, the day he signed the Dodd-Frank financial reform into law. This week, the board of the Federal Deposit Insurance Corporation will use the new powers it received under Dodd-Frank to decide which bank creditors will receive . . . tax-funded bailouts.

On July 21, Mr. Obama said that “there will be new rules to make clear that no firm is somehow protected because it is ‘too big to fail,’ so we don’t have another AIG.” But under the new law, firms deemed too big to fail by the new Financial Stability Oversight Council can be protected from bankruptcy, if regulators so desire, and instead put into an alternative process managed by the FDIC. The idea is to provide the firm with taxpayer cash that would not be available in a bankruptcy, and then try to recover the taxpayer’s money over time from sales of the company’s assets.

If the taxpayers don’t come out whole, Plan B is to seek money from the firm’s other creditors after the crisis has passed. Failing that, the government will assess fees across the financial industry, including firms that had nothing to do with the failure. Regulators and the bill’s authors have unanimously agreed not to call this a bailout program.

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The Dodd-Frank financial reform bill passed by the Senate yesterday promises to generate historic levels of red tape. But apparently the 2,300 pages are so complicated that a debate has broken out over precisely how many new regulatory rule-makings it will require.

This week we reported on an analysis by the Davis Polk & Wardwell law firm that at least 243 new federal rule-makings are on the way, not to mention 67 one-time studies and another 22 new periodic reports. The attorneys were careful to note that this was a low-ball estimate, counting only new regulations mandated by the bill.

Now comes Tom Quaadman of the U.S. Chamber of Commerce, who doesn’t quarrel with the Davis Polk estimate but has added rule-makings authorized by this legislation to those that are mandated and says that American businesses should expect a whopping 533 new sets of rules. To put this number in perspective, Sarbanes-Oxley, Washington’s last exercise in financial regulatory overreach, demanded only 16 new regulations. Thus he reasons that Dodd-Frank “is over 30 times the size of SOX.”

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More remarkable is that a handful of Republicans are enabling this regulatory mess. Mr. Brown and Ms. Collins say they now favor Dodd-Frank because Congressional negotiators agreed to drop the bank tax. But lawmakers didn’t drop the bank tax. They only altered the timing and manner of its collection. Instead of immediately assessing a tax on large financial companies to pay for future bailouts, the final version simply authorizes the bailouts to occur first. The money to pay for them will then be collected via a tax on the remaining firms.

Because this tax will be collected by the Federal Deposit Insurance Corporation, even opponents of the bill have viewed it as part of an insurance system. It isn’t. Insurance is when you pay a premium and the insurance company agrees to replace your house if it burns down. A tax is when you pay the government and then the government decides which houses it wants to replace when there is a fire in the neighborhood.

Under Dodd-Frank, if Firm A pays to cover the cost of the last bailout, there’s no guarantee that the FDIC will rescue its creditors if Firm A fails in the future. This is fundamentally different from traditional deposit insurance, which guarantees the same deal for every bank customer. Dodd-Frank allows the FDIC to discriminate among creditors at its discretion.

This transfer of wealth is a tax by any reasonable definition, borne by the customers, shareholders and employees of the companies ordered to pay it. Is this how Mr. Brown plans to reward the tea partiers who carried him to victory last winter in Massachusetts? Is this the key to a small business rebound in Maine?

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