Posted on Tuesday, March 22, 2011
Sheila C. Bair may unwittingly have discovered a simple litmus test for bank regulator effectiveness. As chairwoman of the Federal Deposit Insurance Corporation, she faced catcalls last week from a mob of community bankers. She was taken aback by the booing. But in fact, watchdogs should bask in such disdain if it means they are doing their jobs.
While a decent working relationship between regulators and the entities they oversee is helpful, harmony isn’t necessarily a good thing. It can, for example, be a sign of regulatory capture. That’s when a supervisor winds up in thrall to the industry he or she is meant to view critically.
That is arguably what happened before the financial crisis with the Office of Thrift Supervision, the savings institution regulator mercifully abolished by the Dodd-Frank Act. The agency tellingly called the firms it oversaw “customers” and failed to spot trouble brewing at some of the biggest financial crisis casualties, including Countrywide, Washington Mutual, IndyMac and the American International Group.
Regulatory capture isn’t just a financial phenomenon, of course. Officials at the Minerals Management Service, the agency within the Department of the Interior that was meant to ensure the safety of deep-sea drilling, took industry intimacy to extremes. A 2008 investigation reported that some of its people had engaged in illicit sex with oil industry employees. Needless to say, the M.M.S. did a poor job overseeing BP’s Gulf of Mexico rigs.
So the guffaws and snorts Ms. Bair elicited from small bank chiefs at Wednesday’s American Bankers Association conference may represent something of a badge of honor for her. The odd part was that the F.D.I.C. boss seemed surprised that the banking association’s members didn’t appreciate Dodd-Frank’s toughened rules. She even argued she’d been something of a friend to community banks.
That may be true, at least relative to America’s giant banks. Either way, Ms. Bair, who addresses the annual meeting of the Independent Community Bankers Association in San Diego on Tuesday, needn’t worry. Her job is to enforce rules that minimize government losses from bank failures, provide a competitive banking market and claw back ill-gotten gains. If bankers don’t like her for that, so be it.
Sobriety in Oil
Heads are spinning on oil trading desks. Markets are now weighing two competing tail risks: sliding demand from an injured Japan, versus no-fly zones in Libya and Saudi troops in Bahrain. But in the absence of another unexpected disruption, the relatively abundant flows of oil should eventually drive prices lower.
Uncertainty over developments in Japan complicates the oil price calculation. As the world’s third-largest importer — just over four million barrels a day — it’s big enough to move the needle on world crude. Initially the nation’s appetite will climb as it switches on oil-fired electric generators to compensate for nuclear failures, as happened after the 1995 Kobe quake. If this is followed by a modest growth slowdown, there could then be a fairly trivial reduction in oil consumption. Yet if Japan’s troubles worsen, and the economy freezes, the nation’s thirst for oil could dry up fast.
At the same time it’s rational for traders to brace for Middle East turmoil. The intervention of Saudi Arabia in Bahrain raises the risk of supply disruptions that would send the oil price rising fast. The situation in Libya is more complicated. Oil supplies have already largely been disrupted. If United Nations intervention brings a quick end to the Qaddafi regime, oil prices could even fall. But there’s also a risk that Qaddafi’s forces sabotage infrastructure, taking capacity out of the market for the long term.
Still, extreme outcomes remain unlikely. It is also worth recalling that nuclear energy and oil supply different types of energy: electricity and transportation fuel are not simple substitutes. And for those lacking a crystal ball, a reminder of the present oil supply and demand outlook is reassuring. For a start, energetic pumping by Saudi Arabia has more than filled the gap left by Libya. Indeed, the global surplus is running at 900,000 barrels a day, against a shortfall of 1.6 million at the start of 2008, according to Oil Market Intelligence. Ample inventories and plentiful OPEC spare capacity should also help soothe rattled nerves.
Traders would be foolhardy to ignore mounting tail risks. But absent another calamity, the comfortable balance of supply and demand should bring prices back to more sober levels.
By ROB COX and CHRISTOPHER SWANN, THE NEW YORK TIMES