Parallels

There are several interesting parallels between the concerns and resolutions proffered to address the current Gulf oil spill and the recent financial crisis. Each of these crises has generated significant and, in certain instances, irreversible harms. Financial markets and environmental regulators are working diligently to develop and adopt effective prophylactic measures to prevent a repeat of either disaster.

Regulators, legislators, academics and pundits are now debating whether implementing ex ante rules that require market participants to contribute to a collective disaster relief fund may effectively address these concerns. Under the current financial reform bill passed by the House, ex ante pre-pay rules would require banks to pay into a $150 billion rainy-day reserve fund. The monies collected in the fund would be distributed to an ailing bank whose insolvency threatens to trigger a daisy-chain collapse of multiple systemically significant financial institutions. Pre-paying into a fund is an attractive proposal because it suggests that the need for public funding will not be necessary in the event of a future crisis. Some are skeptical and challenge the presumption that the reserve fund will be sufficient and ask whether developing a pre-pay system is even possible in light of the current market instability and lack of liquidity. As a result, the Senate version of the bill, supported by the White House and Wall Street firms, does not include a pre-payment program.

The use of a superfund is not unprecedented. Following the Exxon Valdez oil spill which involved the release of 250,000 barrels of oil into Alaska's Prince William Sound and $3.5 billion in cleanup costs, Congress adopted the 1990 Oil Pollution Act creating the Oil Spill Liability Trust Fund. In addition to arguments challenging their constitutionality, the Act and the trust fund have also faced practical limitations that leave many unsatisfied. Under the law, BP’s current exposure would be limited to clean up costs and a fine of $75 million. Although BP has waived the $75 million limitation, there are many questions about what BP will legally be required to pay to assist the many communities and businesses economically impacted by the recent oil spill. The long-term losses experienced by many who enjoy the Gulf area, like my family in Texas, may be genuinely immeasurable and will likely fail to be fully captured in any payout.

-- Kristin Johnson