How the Michael Lewis school of revisionism informs the gas debate
The shale gas industry might brush up on its John Lennon ("Life is what happens while you're busy making other plans."). Alerted numerous times of fast-coming federal regulation unless it goes transparent and begins to police itself, the industry's hard-liners have dug in under the assumption that -- as has befallen so many other seemingly inevitable business reforms -- this one too will die of its own accord.
There are signs that the industry may be left only with a rearguard action: The Obama Administration has assigned a team to examine the regulation of wastewater produced by hydraulic fracturing, or fracking. The Environmental Protection Agency is stopping the use of diesel fuel in fracking fluid. And -- in a decision announced last week -- the administration has a team studying how to "harness these resources safely," said Energy Secretary Steven Chu.
Yet the industry stays its placid course. For an understanding of why the shale gas actors may have solid logic behind their let-the-chips-fall-where-they-may strategy, consider what has happened with financial regulation. Between 2005 and 2007, our largest investment banks as a group nearly brought down the entire global economy by betting one-way on an inexorable rise in housing prices, and the capacity of budget-stretched Americans to pay escalating mortgage payments. None of them read -- or if they did, they did not choose to apply the lessons of -- Nassim Taleb's The Black Swan, or for that matter Sebastian Junger's A Perfect Storm. The main message in those books is that highly improbable events do happen, to devastating effect.
As a philosophical repost, Citigroup CEO Charles Prince a href="http://dealbook.nytimes.com/2007/07/10/citi-chief-on-buyout-loans-were-still-dancing/">famously told the Financial Times, "As long as the music is playing, you've got to get up and dance." Americans as a whole -- not to mention much of the rest of the world -- were less jolly about the mess. They demanded restored regulation. The result was the Dodd-Frank Act (here is a very good summary), which attempts to prevent the excesses that led to the collapse, plus provide legal recourse should one recur anyway.
The banking industry is absolutely up in arms about this. They, along with fellow-thinkers in the Fed and other industry groups, would like to roll it back. One reason is that their profits could fall, as Ben White reports at Politico. The other is that their feelings are hurt, according to Jamie Dimon, CEO of JPMorgan Chase. In the video below, Dimon makes a decent case that one should differentiate among the banking actors. The problem is that, among the big actors, very few were different. Some just got out earlier than others.
Yet there is a decent chance that there will be some rolling back of the act. One of the saving graces on which these bankers can rely -- apart from amnesia -- is that analysts, writers and titans from other industries will provide intellectual cover. Consider Michael Lewis, author of the best-seller, The Big Short. In it, Lewis writes chapter and verse on the hubris and incompetence at the banks that led to the financial collapse. He writes of negligence at the Securities and Exchange Commission. Over the weekend, I watched an interview of Lewis with Charlie Rose in which he heaped contempt on all of them, and hero-worship on the very few contrarians -- the folks he profiles in The Big Short -- who withstood the ridicule of their contemporaries and analysts, and walked away with billions in profits.
But one thing that Lewis does not mention in his book, nor to Charlie Rose or other interviews I've watched, is that prior to the collapse he was among the raucous crowd spooning out that bile on the contrarians. Contrarians such as Nouriel Roubini, Lewis wrote in an early 2007 column at Bloomberg News -- just a few months before the whole house came down -- were simply folks with "no talent for risk-taking." Lewis wrote:
None of them seemed to understand that when you create a derivative you don't add to the sum total of risk in the financial world; you merely create a means for redistributing that risk. They have no evidence that financial risk is being redistributed in ways we should all worry about. They're just -- worried.
What in the world were these Cassandras vexed over, Lewis pondered? He went on:
Even if these global financial elites knew something useful that you and I don't -- that, say, fifty hedge funds were about to go under and drag with them half the world's biggest banks along with a third of the Third World -- they would be unlikely to do anything about it.
The lesson, as far as the shale gas industry is concerned, is that it can afford to wait.
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