Too Much Rollin' the Dice by Government

Thursday, June 17th, 2010
Baton Rouge, Louisiana

RISK TAKERS STICK IT TO THE TAXPAYERS!

"And if thou stare long enough into an abyss,
The abyss will also gaze into thee.”
Nietzsche

Melville’s Moby Dick is a popular semblance right now for our unquenchable search for oil, and, like Captain Ahab, the consequences that often lead to self destruction. In days of old, whalers ventured further and further into unchartered waters to become excavators of oceanic whale oil that stroked the furnaces of the Industrial Revolution. The same unchartered path has been followed by oil companies pushing technology to new limits. But are they responsibility assessing the risk involved?

The BP gang has continually told us that such a spill never happened before, and therefore they had not anticipated such bleak scenario. That’s the same argument we heard during the financial meltdown from Ben Bernanke and Alan Greenspan when they argued that the housing market would not plummet because “it had never happened before.” But stuff happens. Part of the process is to assess the risk. Time and time again, both industry and government have minimized risk and, in a highly irresponsible way, just played the odds. And much too often, it has turned out to be a bad bet.

Lay the blame for BP’s irresponsible risk taking right at the feet of the United States Congress. Our representatives in Washington passed a little known 1990 law that capped an oil company’s liability, after cleanup costs, at $75 million. For now at least BP has agreed to waive the cap. But who knows for how long? BP stockholders, many of whom have retired on BP dividends, may well feel full justification to challenge disbursement of BP assets when the law says the company is not required to do so.

The federal law limiting BPs liability actually distorts the company’s decision making, so they can ignore the potential damage beyond cleanup costs. It is low probability, high cost, and with legal limits that have been put in to place, you and I are the real losers. How ironic that government policy encourages BP and the financial industry to underestimate the odds of a catastrophe.

In the financial sector, no single example better serves to show how the dice are rolled against the public interest than A.I.G. This insurance giant, which happens to be the single largest insurance conglomerate operating in my home state of Louisiana, ran amok forcing taxpayers to come to its rescue at a price of some $185 billion. This massive insurance bailout was fueled by U.S. Treasurer Tim Geithner’s testimony that the failure of A.I.G would threaten to bring down the entire financial system.

The company was playing “Wall Street Casino” by insuring financial instruments that were, in the warped opinion of the companies’ officers, “sure winners.” And as long as state insurance commissioners failed to examine the company’s books and turned a blind eye to pervasive faulty accounting, A.I.G had free reign to lend and spend, running up massive financial debt that was significantly beyond its ability to pay in case of defaults. Just last week, a new study released by McClatchy Newspapers found that insurance commissioners had “broken all the rules” by allowing A.I.G to continually defy regulatory oversight and become a “corporate Frankenstein.”
Former Louisiana chief insurance examiner W.O. Myrick, who has extensively studied the A.I.G. debacle, criticized state insurance commissioners for allowing companies like A.I.G. to cook their books and “falsify” their balance sheets by continuing to list bonds as assets while they were loaned to banks. Had something been done by insurance regulators at the time of A.I.G.s shenanigans, according to Myrick: “There would have been people that would have been speaking up to avoid long prison terms, leading to action that could have prevented the massive securities losses.”

In each of these cases, neither the regulators, nor those being regulated did anywhere close to an adequate job of estimating the risks involved. Many companies ended up incurring enormous costs both in money, and, in the case of BP, environmental destruction. The odds normally would not justify such a risk. But with the government backing up these calamities with bailouts and laws that gave perpetrators limited liability, why not go for broke? Companies like BP and A.I.G. did just that, and we as tax payers are the real losers.

With BP’s financial picture looking more precarious as each day goes by, how can those damaged be assured that losses will be recovered? Waiting around for payment, or possible bankruptcy, raises the possibility that, just like the Exxon Valdez disaster, the reimbursement process could go on for years. So what can be done to assure adequate recompense?

Simply seize the gushing oil well. It will eventually be capped, and there is a projected $70 billion of oil yet to come from this crippled hole in the ocean floor. Remember that BP is only leasing the drilling rights, and they have certainly and repeatedly violated the terms of the lease. The Minerals Management Service has the legal authority to terminate the lease due to the numerous safety and environmental violations incurred by the lessor, BP. Sure litigation will take place. But the value is there, and a number of legal scholars have concluded that the federal government has strong legal standing to take the well back.

Two things lulled BP into ignoring the possibility of a major catastrophic spill. First, these disasters rarely happen. It’s the proverbial “black swan” theory. In ancient literature, a black swan was a proverbial phrase for something extremely rare or non-existent. Certainly a good metaphor for the mindset of both BP and federal regulators. But this ignores the basic premise we all know as Murphy’s Law. "Anything that can go wrong, will go wrong". Then knowing full well their liabilities were limited by federal law, why not just go for broke?

The envelope has being pushed by Wall Street and now Big Oil. They rolled the dice and lost. But under our dysfunctional federal and state regulatory systems, it’s the taxpayers who are the losers.

******

"Living at risk is jumping off the cliff and building your wings on the way down."
— Ray Bradbury

Peace and Justice

Jim Brown


Jim Brown’s syndicated column appears each week in numerous newspapers and websites throughout the South. You can read all is past columns and see continuing updates at www.jimbrownla.com. You can also hear Jim’s nationally syndicated radio show each Sunday morning from 9 am till 11:00 am central time on the Genesis Radio Network, with a live stream at http://www.jimbrownusa.com.