Oil Company Chutzpah

Exxon Valdez South?

"Chutzpah" - standard definition: killing your parents, then throwing yourself upon the mercy of the court because you're an orphan.

"Chutzpah" - oil company version: negligently spilling millions of barrels of crude into the Gulf of Mexico, then raising prices at the pump because of the resulting shortage.

Other random thoughts about the BP oil spill:

--Defending lawsuits -- especially ones likely to span decades -- are expensive. How nice to be able to raise your prices to help defray that (future) cost.

--Instantaneously raising prices at the pump all over the Twin Cities (they're up about 25 cents overnight) would make economic sense if the oil actually came from the Gulf of Mexico.

But it doesn't.

Practically all the gas sold in Minnesota comes from . . . Canada.

Whose Laws? The Political (vs. Business) Case for Ending TBTF

The Too-Big-To-Fail Debate

Advocates for cutting so-called "too big to fail" financial institutions down to (less threatening) size -- I'm one of them -- have rightly focused on the systemic risk such entities pose; the unfair, distorting effects on competition such a policy causes, due to the implicit federal guaranties backing TBTF companies (which drives down their borrowing costs); and the monopoly profits TBTF companies enjoy simply as a result of having survived when their smaller ("not-TBTF") competitors have all perished.

But there's an even more compelling reason to break up TBTF entities.

Namely, entities like Goldman Sachs wield far too much political power, which they've clearly used to game the system. (From Wall Street's perspective, showering money on politicians is no doubt just an especially shrewd form of "reinvesting profits.")

"Thumb -- and elbow, and thigh, and . . -- on the Scale"

Perhaps the most insidious aspect of the financial debacle the last two-plus years is to read about some especially egregious Wall Street conduct -- is it still possible to be shocked anymore? -- then to hear the perpetrators claim that "no laws were broken."

As a former corporate lawyer, I take strong issue with that: even given the watered-down (or non-existent) rules governing Wall Street, I can still toss out -- practically in my sleep -- multiple grounds for suing various investment banks.

Like breach of fiduciary duty; conflict of interest; self-dealing; fraudulent and/or misleading disclosure; gross negligence . . . . and ???

Still, my best guess is that the legion of clients screwed by Goldman Sachs and its ilk aren't suing -- yet -- not because of some decision on the legal merits, but: a) because they're broke; and b) Goldman Sachs very much isn't.

Litigation is a financial marathon, and there are plenty of plaintiffs who've walked away empty-handed and financially drained, years later, not because their arguments lacked merit, but because the defendants had more staying power (can you say, "Exxon Valdez?").

Who Made the Rules?

That said, there's no denying that Wall Street got the financial rules that it wanted the last 20-plus years.

A partial list would include:

--Repeal of Glass-Steagall, allowing commercial and investment banks to combine.

--Lax accounting rules for banks, allowing them to substitute "mark to make-believe" for "mark to market."

--Amazingly, no regulation --still -- of credit derivatives -- the instruments at the heart of the AIG debacle (and dubbed "financial weapons of mass destruction" years ago by Warren Buffett).

--Wall Street-engineered exemptions on leverage, allowing Lehman Bros., Bear Stearns etc. to borrow as much as $40 for every $1 of their own money.

So, the next time you hear someone on Wall Street defend their latest skulduggery by saying "no laws were broken," stop to ask, "who made the laws??"

Is Shiller Right About Trills, GDP?

The Search for New Currencies

Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved.

--Robert Shiller, "A Way to Share in a Nation's Growth"; The New York Times (12/26/2009)

In a piece in today's New York Times, Robert Shiller -- that Robert Shiller, of "the Case-Shiller index," "Irrational Exuberance," etc. -- calls for a new security, "the trill," that's pegged to U.S. Gross Domestic Product ("GDP").

He argues that a such a derivative instrument would satisfy demand for stable, new currencies -- and be a good deal for investors, to boot.

(Mis)measuring GDP

What jumps out at me is Shiller's comment about GDP measurement being a problem that has "largely been solved."

Oh, really?

The same way that Ptolemy "solved" the problem of the earth seeming to rotate around the sun, perhaps? (He came up with increasingly tortured models that placed the earth at the center of the solar system).

Just consider how GDP now accounts for a horrific environmental tragedy like the Exxon Valdez spill in Alaska's Prince William Sound.

The untold billions in environmental damage aren't counted, because "natural capital" is assigned no value in today's economic world.

Meanwhile, the $1 billion that Exxon spent on remediation efforts shows up as a spike in the "value" of services that go into calculating GDP.

Bottom line?

Society's putative wealth actually increased as a result of the spill.

Right.

"Tattoo GDP"

Or consider how GDP currently accounts for tattoo's -- both creating and removing them.

At one end of a shopping center I know, a tattoo parlor puts them on for $100 apiece.

At the other end, a tattoo "removal specialist" gets rid of them for $100.

"Tattoo GDP" thus comes to $200.

But how is society $200 richer as a result?

Accountants have a saying that people "count what matters, and what matters is counted."

Indeed, Mr. Shiller.