As we assess the results of the massive oil disaster in the Gulf of Mexico -- "Our job basically is to keep the boot on the neck of British Petroleum," says Interior Secretary Ken Salazar -- it's worth noting that we have a situation where massive environmental and economic damage has been caused by a private company, but the costs would be born by the public. Except it turns out we have an Oil Spill Liability Trust Fund, which assesses a small tax on oil companies and saves the money to cover the economic costs of an event such as this one. (The Obama administration has said the direct costs of the spill will be covered by BP.)
It's not unlike the financial crash -- as some lawmakers have noticed -- although ironically on a much smaller scale. Private firms caused a much broader economic disaster, and the government had to step in to help ease the cost to the public. Lawmakers learned from the crisis, and the current financial-reform bill includes a special assessment on the largest banks that would be put in a special $50 billion fund and only be used to cover the costs of putting down a bank whose management and owners have been fired, and whose creditors have received haircuts.
Opponents of financial reform have erroneously criticized this fund as a permanent bailout, arguing that it will create a moral hazard because companies will have an incentive to fail to get at the fund. That's absurd -- which CEO do you see angling to get into a situation where he gets fired, loses all his stock (and all of his investors' stock), and then sees the government spend money that his bank and others have contributed ... to put your firm out of business.
But because of critics' complaints, and to give Republicans a chance to save some face and vote yes on the bill, it looks like the fund will be cut from the final legislation. That won't necessarily screw up the liquidation procedure itself -- regulators will borrow the necessary funds from the Treasury and get banks to pay them back after the fact. But if we're going to have industries seek to escape the public costs of private actions, we need to make sure they're paying their fair share of the bill.
-- Tim Fernholz
