Tuesday, May 4, 2010

Oil Spills and Financial Hemorrhages

I don't know why BP's Deepwater Horizon rig blew up, but it's pretty clear that the ensuing environmental mess results from the failure of the blow-out preventer, a gadget whose job, I have to assume, is to prevent blow-outs. So, while President Oblamer has assured us that BP is responsible and that BP will pay - that, as Interior Secretary Salazar put it, we will "keep the boot on their throat" - that'll help fend off some of that nasty Nazi imagery the Right favors - we should probably be looking into who made the BOP.

The BOP sounds like the ratings agency of the deepwater drilling world. The thing worked fine while the demand was manageable, but eventually, the demand got so strong that the agencies got in over their heads, in deep water, so to speak, and failed to stop a leak of toxic assets into the environment. Until the BP rig explosion, I had been analogizing the financial crisis to a flood, and the ratings agencies as the leak in the dam holding back the inflow of sino and petrodollars. But the demand for AAA-rated paper and demand for safely drilled oil are a pretty good match. Someone had to make sure that investment value could be safely extracted from US real estate, and the ratings agencies were the blow-out preventers.

The real problem facing deepwater drillers right now is the possibility that none of their BOPs work. If, as would make sense, the companies carry insurance against the failure of their BOPs, there must be some scared insurance companies out there, and one can imagine that premium costs will rise for companies that buy such insurance in the future. There is some sort of limit on the damages that BP can be made to pay for this mess - although the costs of repairing the leak, which may not be insured, and which BP will pay, at least until it can collect from the BOP maker, if that was not BP itself, will dwarf those statutory damages.

In contrast, I don't think anyone carries insurance against the failure of the ratings agencies. But then, who needs insurance when the only way to prevent collapse of the financial system is for taxpayers to bail out anyone hurt by the blow-out. Presumably, the same will hold true of this oil spill. What if BP just walked away? Wouldn't we "bail out" the marshes?

There's more to be written about this spill, but I'm betting its genesis and treatment will look a lot like the financial mess through the right set of lenses. Just replace the red ink with black goo...

1 comment:

  1. Here is NYT coverage of B.O.P. and here is the website for Cameron, the company that made it.


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