February 2016 Archives

Will Big Oil Survive Long Enough to Pay for Its Climate Sins?

“Times are tough, you’d almost call them brutal right now. But we will adapt. We will make it.” So insisted the deputy chief executive of BP at a conference in Houston where industry leaders put on a brave face amid a worsening crisis for the petroleum sector.

Other speakers were even more explicit about the Darwinian environment. “We will be one of the last guys standing,” declared the CEO of Suncor Energy, which once prospered from the tar sands boom in Alberta and is now selling off assets.

Several dozen oil and gas producers have had to file for bankruptcy protection since the beginning of last year. More such moves are expected. The business consulting firm Deloitte has issued a report estimating that more than one-third of all petroleum exploration and production companies are in precarious financial condition, with dozens likely to make the trip to bankruptcy court.

Even the oil majors are in trouble. Chevron reported a fourth-quarter loss of $588 million, while BP lost over $2 billion in the quarter and more than $5 billion for 2015 as a whole. Exxon Mobil and Shell are still in the black but their profits are down sharply. The industry’s problems are already depressing stock prices and are starting to cause heavy losses at the banks that lent extravagantly to the energy sector during the boom time.

It’s difficult to summon much sympathy for the oil companies, given the damage they have wrought. As shown in the Violation Tracker database I and my colleagues created, the petroleum industry has racked up more than $31 billion in environmental, health and safety penalties since the beginning of 2010, far more than any other industry. Much of this is the result of the massive fines and settlements paid by BP in connection with the Deepwater Horizon disaster in the Gulf of Mexico.

Yet there is one reason to hope for the survival of the petroleum producers: we need them to survive in some form so they can be taken to court over the role they’ve played in denying the reality of the climate crisis.

As Bill McKibben notes in a recent article, we’re now at the beginning of an investigation of what may prove to be one of the biggest corporate scandals in American history — the climate coverup.

At the center of the scandal is Exxon Mobil, the biggest fossil fuel corporation on earth and the one that is probably most culpable for suppressing evidence of the impact of its products on climate change. As path-breaking research by Inside Climate News showed, Exxon — reported to be the subject of current investigations by state prosecutors in New York and California — knew about global warming as early as the 1970s and quietly used that knowledge for its own benefit while keeping it from policymakers and the public.

Forty years later, the nature of the climate crisis is public information, but Exxon Mobil and the other oil companies continue to do business as usual. In fact, their obsession with exploration and production even at a time of softening demand has helped bring about the current price nosedive.

Exxon Mobil today has assets of more than $340 billion. Soon it may have to stop using those resources to produce more harmful fossil fuels and instead pay out substantial sums in damages to communities struggling to deal with the climate mess the industry has caused.

Business Fights FASB on Corporate Welfare Disclosure

Large corporations spend a lot of time complaining about their obligations to government, such as paying taxes and complying with regulations, while saying very little about what they get from taxpayers in the form of financial assistance. The organization that sets corporate accounting standards now wants to see the magnitude of that assistance disclosed in financial statements, and the business world is howling in protest.

In November, the Financial Accounting Standards Board (FASB) issued a proposal that would require publicly traded corporations to disclose details on a wide range of government assistance — such as tax incentives, cash grants, and low-interest loans — when that help is the result of an agreement between a public agency and a specific firm, as opposed to provisions in tax codes that any business can claim. The proposal mirrors the one adopted by the Governmental Accounting Standards Board (GASB) that will require state and local government agencies to disclose the amount of revenue they are losing as a result of tax incentive deals.

The FASB proposal has some flaws, such as the decision not to require companies to provide estimates of the value of multi-year subsidy deals and a lack of clarity on the degree to which the information would have to be disaggregated. Still, it would be a major advance in financial transparency, giving investors and others important information on the extent to which companies are dependent on the public sector.

The business world sees it differently. During a recently completed three-month comment period, about two dozen trade associations and large corporations submitted statements on the proposal that were overwhelmingly negative.

At the center of the backlash are the U.S. Chamber of Commerce and the National Association of Manufacturers, which submitted joint comments arguing that the scope of the accounting standard is “overly broad,” that compliance costs would be “significant,” and that companies could place themselves in “legal jeopardy” by disclosing the information proposed by FASB.

The big-business-sponsored Council on State Taxation also invoked the privacy rights of corporate taxpayers and warned that the disclosures would “assist those who wish to harass a company regarding credits or incentives received pursuant to an economic development agreement.” Similar objections were presented by the American Banking Association, which represents entities that received trillions of dollars in assistance from the Federal Reserve and the U.S. Treasury in the wake of the financial meltdown that some of those same entities brought about.

Perhaps most infuriating are the negative comments submitted by large companies that are among the biggest recipients of public assistance. We know who they are because numerous government agencies already reveal a substantial amount of company-specific subsidy data, which my colleagues and I at Good Jobs First have collected for our Subsidy Tracker search engine. Although we’ve gotten a lot from the agency disclosure, having more information in the financial reports of all public companies would allow us to make Subsidy Tracker even more complete.

Several of the corporations commenting against the FASB rule have received more than $1 billion each in federal, state and local subsidies, including two whose totals put them among the top ten recipients: General Motors ($5.7 billion) and Ford Motor ($4 billion). These totals do not include the tens of billions they received in loans and loan guarantees, whose value after repayments is difficult to calculate.

GM, which survived only after being taken over by the federal government, whines that the FASB disclosure proposal “would be costly and difficult to prepare given the complexity of global entities and the wide variations of such arrangements” and claims that the information could be “misleading” or could benefit “special interest groups questioning tax incentives offered by governments as perceived abuses of the current taxation system.”

In what might be a dig at its competitor, Ford Motor, which did not require a federal takeover, suggests that FASB limit its disclosure requirement to bailouts and exclude “incentives” that are offered in exchange for a commitment to invest or create jobs.

IBM, which has been awarded some $1.4 billion in subsidies, asserts that the costs of the disclosure would outweigh the benefits and says that if FASB moves ahead with the new standard it should “not require disclosure of specific terms and conditions, which may include confidential or proprietary information for both governments and entities.” In other words, make it as vague as possible.

In case there was any doubt, these comments confirm that big business is in favor of transparency only when what is to be disclosed puts a company in a favorable light. Let’s hope FASB stands fast and joins with GASB in bringing corporate welfare out of the shadows.

Dealing with Corporate Culprits

The Big Short movie and the Bernie Sanders presidential campaign are not the only things reminding us about the role of bank misconduct in the financial meltdown. Federal and state prosecutors are continuing to wrap up cases brought against the main culprits.

The Justice Department just announced that Morgan Stanley will pay $2.6 billion to settle allegations relating to the sale of toxic residential mortgage-backed securities, with another $550 million going to New York State and $22.5 million to Illinois. This comes a few weeks after Goldman Sachs disclosed that it expects to pay up to $5 billion to resolve similar allegations, while Wells Fargo is paying $1.2 billion to settle allegations that it engaged in reckless underwriting and fraudulent loan certification for thousands of loans insured by the Federal Housing Administration that ultimately defaulted.

These are the latest in a string of settlements that included a $16.7 billion payout by Bank of America in 2014 and $13 billion by JPMorgan Chase the year before.

Donald Trump harps on the notion that the government makes lousy deals. Can that be said of these bank settlements?

In one respect, they are a big improvement in the terms on which the feds resolved cases of corporate malfeasance in the past. Compelling companies to cough up billions of dollars begins to bring enforcement into the 21st Century. By comparison, regulatory agencies such as OSHA, bound by outdated legislation, are still fining companies only a few thousand dollars for serious violations.

The magnitude of the bank settlements is lessened by the fact, as U.S. PIRG tirelessly points out, that some portions of the payouts are tax deductible. Even so, the after-tax costs can have an impact. For example, Deutsche Bank, which last year had to pay out some $2.5 billion to settle charges relating to manipulation of the LIBOR interest rate index (and earlier settled a toxic securities case for $1.9 billion), recently cited legal costs as a key factor in announcing an annual loss of more than $7 billion.

The big U.S. banks, however, remain quite profitable and have had little difficulty handling their settlement costs, parts of which are stretched out over years. Their punishment has entailed limited pain.

By all rights, the discussion of this issue should not be framed simply in terms of dollars. We should also be talking about the appropriate length of the prison sentences for the banking executives who should have been personally prosecuted for the abuses.

Unfortunately, the type of criminal justice reform now being discussed for street offenses has already been in effect for many years with regard to white collar crime. Corporate crooks do not have to worry about mandatory minimums, given that they are rarely prosecuted at all. The decriminalization being discussed for the drug trade has long been the norm for the more respectable branches of commerce.

Even if the political will were present, it is too late to begin prosecuting those responsible for the financial meltdown. Yet there is little doubt that new frauds are in the works and will eventually break out into the open. Unless things change, the culprits will once again beat the rap. And that’s a bad deal for the rest of us.

Amazon’s New Assault on Independent Booksellers

My first reaction to reports that Amazon intends to open brick-and-mortar bookstores around the country was to assume it was a joke — an Onion satirical piece that somehow ended up in the business section.

While the claim by the CEO of General Growth Properties that Amazon was planning hundreds of such outlets has now been withdrawn, the online commerce giant is not denying its interest in physical bookstores at some level. In fact, it turns out Amazon already opened such a store in Seattle in November.

Whatever the scope of Amazon’s plans, such an initiative is infuriating. Amazon is responsible for decimating the bookstore business in the United States over the past two decades. It effectively put Borders out of business, crippled Barnes & Noble and brought about a steep decline in the number of independent booksellers.

Now it seems that Amazon cannot abide the fact that bookstores such as Powell’s in Portland, Oregon and Politics and Prose in Washington, DC survived its onslaught and found ways to survive in an age of online commerce.

On one level, the Amazon move simply makes no sense. This is a company whose success is based on replacing traditional retail outlets with a vast website and giant distribution centers that can process orders at lightning speed and in some cases can now deliver products within hours. Why would Amazon want to return to the inefficient approach it has worked so hard to eradicate?

Yet the company undoubtedly noticed that independent bookstores are enjoying a bit of a revival. Despite the ease of online ordering from Amazon (and the fact that in many cases no sales taxes were collected), it turns out that people like to browse shelves of physical books, value the assistance of knowledgeable booksellers and are drawn to the warm atmosphere of many small stores.

Although this mode of retailing is out of keeping with Amazon’s general approach, the company’s obsession with increasing its revenue is stronger than its commitment to a particular business model. After all, Amazon has been experimenting with other low-tech initiatives such as delivering food from local restaurants.

While it is far from clear that Amazon could succeed in the physical bookstore business, it is troubling to think what impact its effort might have on independent booksellers. How many locally owned stores might fail before Amazon ends its experiment and returns to an exclusive focus on web sales?

Amazon has already done considerable damage to the independent retail sector in America. A recent report produced by the research group Civic Economics for the American Booksellers Association estimates that Amazon’s operations have effectively displaced more than 30,000 retail outlets in the United States and eliminated more than 135,000 retail jobs. In the process, many downtown business districts have languished, and local governments are losing an estimated $420 million a year in property taxes.

It is true that Amazon has created many jobs of its own and is building many new distribution centers. Yet, as I noted in a previous post, the working conditions for those positions are often brutal. And in many cases Amazon has negotiated deals that minimize the property taxes it is paying on those facilities.

We may not be able to do anything about Amazon’s increasing domination of online commerce, but the company should not be allowed to destroy what remains of independent bookselling and other locally owned, human-scale retailing.