Proposed: That the proper role of government regulation of the free market is to prevent companies from committing corporate suicide.
BP has now spent an estimated $1 billion on clean-up operations and compensation resulting from its continuing oil spill in the Gulf of Mexico. Meanwhile, on the London Stock Exchange...
[BP's] share price, which has fallen steadily since the start of the disaster, took a turn for the worse Tuesday, losing 15 percent to $6.13 in early afternoon trading....
That was the lowest level in more than a year. The shares have now lost more than a third of their value, wiping some $63 billion off BP's value, since the explosion at the Deepwater Horizon oil rig six weeks ago.
Note that yesterday was the first chance for the market to price in the weekend failure of BP's "Top Kill" and "Junk Shot" strategies. If those two Hail Marys were worth 15% of the company last week, what chance is there that BP will survive the Deepwater Horizons catastrophe as an independent entity?
This whole tragic, unfolding, unending, maddening saga - having brought BP to the brink of liquidation - is thus on the verge of embodying my summation of the proper place of government regulations in a "free market" system: that regulations and regulators exist to keep corporations like BP from committing suicide.
BP is far from the only recent example of this effect. Given that it has yet to implode completely over its mismanagement of a deep-sea drilling operation in the midst of one of the world's (formerly) most fecund oceans, it is probably not even the best. Consider these other case studies:
Lehman Brothers, Bear Stearns, Merrill Lynch. How could a single financial crisis bring the end of not one but three of Wall Street's greatest capitalist icons? I would point to two primary factors: the absence of a regulated, transparent market for derivatives contracts; and the relaxation in investment bank leverage requirements that preceded the crisis.
AIG, Citigroup. More poster children of the 2008 financial crisis. AIG: An insurance company that learned how to write insurance contracts (credit default swaps) without having to conform to insurance regulations (mainly for capital reserves). Citigroup: A bank that decided it wanted to be an investment bank, and changed the law of the land (Glass-Steagall) to make it happen. Both bailed out, at great cost to US taxpayers.
General Motors, Chrysler, Ford. Perhaps the most amazing combined tale of US corporate harikiri to date. For decades, spent vast resources lobbying against the two federal mandates that could have saved them from bankruptcy (GM, Chrysler) / market irrelevance (Ford): (1) Expansion of government health insurance (e.g. in 1993), which would have saved them billions in legacy health costs for retirees; and (2) Improvements in Federal gas mileage standards, including requirements that they develop electric or zero-emission cars.
What is the sickness that leads to corporate suicide, over and over again - and for which regulation is the most dependable cure?
Answer: The single-minded pursuit of profits, which leads corporate leaders persistently to value short-term gains in profitability and market share over the long-term sustainability of their enterprise. And if you think this springs from any moral failing of the leaders themselves, think again: Shareholder lawsuits exist precisely in order to allow shareholders to sue their corporate leaders when they think those leaders are failing to maximize shareholder value - for example, by taking too many precautions, and too much time, in opening new deep-sea oil wells.
The only thing that can protect the leadership from liability in such a situation is regulation - being able to point to the Federal lawbooks and say, "They made me do it!" This is the magic of appropriate regulation: It forces corporations to take the precautions they would take themselves, if only they were capable of adhering - over the long term - to a truly long-term perspective.
Finally, why should we as a society care whether corporations commit suicide or not? Again, an easy answer: We care because of the enormous human costs of these disasters: job losses, financial meltdowns, oil-soaked beaches, despoiled oceans. All of these are much better prevented than punished.
And this is where I part ways with fellow diarist Cedwyn: while Cedwyn takes the collapse of BP's share price as evidence that the system is working - take heed you fellow corporate titans, and mend your ways lest you implode! - I take it as the opposite. In a well-run, well-regulated market, these corporations would be pulled back from the brink - by force if necessary - and never get the chance to take that fatal leap into oblivion.
Because every time they do take that leap, they take too damn many of us down with them.
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(Please note that Cedwyn objects to my characterization of her diary in comments below; friendly debate continues...)
