When a login fails on setup.pl, we get a nasty error as follows (sample from 1.4, so line numbers may be different). Tracking down the error shows that this happens because the dbh did not get created due to a login issue:
Can't call method "selectrow_array" on an undefined value at LedgerSMB/Database.pm line 393.
This does appear to affect 1.3 and 1.4 equally. We should be sending 401's out in these cases.