Audit Notes: Grand Oil Party, The Limits of Anecdote, Mod Investors

The Economist’s Matt Steinglass reports on an egregious government giveaway to the oil companies—one that started accidentally and has now been intentionally enshrined by Republicans in Congress.

The Minerals Management Service was supposed to give free leases to oil drillers in the Gulf in areas in which paying royalties would make drilling uneconomic.

So apparently, in 1998-99, the folks at the MMS were too busy flirting with each other, or accepting private-jet rides to college football games, or whatever, to notice that the price of oil had gotten pretty high and they shouldn’t be handing out free leases anymore. As a result, 24 companies got free leases they shouldn’t have gotten. And ever since, they’ve been making extra money that they really ought to be returning in the form of leases on public property to the American taxpayer.

How much extra money? About $1.5 billion this year and an estimated $53 billion over the next twenty-five years. That money goes straight out of taxpayers’ pockets and into oil companies—at a time when gas is creeping up on $4 a gallon.

Democrat Ed Markey offered an amendment to change this last week, but it was rejected by House GOP, which is trying to gut everything from Head Start to Pell Grants but won’t reclaim wrongfully gotten money from Big Oil. The vote wasn’t even close.


There is no rationale for continuing to oblige regular taxpayers to pick up the tab for these distortionary favours to major oil companies except that the oil companies want the money. For this Congress, that’s plenty reason enough

If you’re like me, you didn’t hear a peep out of this from the American press. Don’t you think we should have heard more about this story?

— Anecdotes are good, but they’re not enough.

The Huffington Post has an all-anecdote story today that clearly shows their limits and why they need to be backed up by data and other reporting.

It’s headline asks “Are These People Overpaid?” and it goes on the ground in Madison, Wisconsin, to talk to a retired firefighter, a paramedic, and a teacher about how much money they make as the right is in full attack mode on government pay. It’s a great idea for a story and there are some good anecdotes here, but there’s little substance.

Even if you don’t get into a full discussion of the debate over how much government employees make relative to private-sector workers, you should at least acknowledge it. The data’s readily available. For instance, the liberal Economic Policy Institute says Wisconsin’s government workers make far less in total compensation than their private-sector counterparts who have similar degrees.

A paragraph or two about that would have made this story so much better.

— Yves Smith of Naked Capitalism has covered the foreclosure fraud scandal better than anybody, and she dissects today the news of a possible settlement. You should read the whole post for her take on that.

But what particularly interests me is this:

RMBS investors thus have a nuclear weapon in their hands. If they want deep principal mods, and we are told in no uncertain terms that they do, a credible threat of litigation on this front ought to bring recalcitrant banks and trustees to heel, quickly. The last thing the mortgage industrial complex wants is litigation on an issue that would both call into question the validity of RMBS and if successful, would leave the banks with massive damages. And you don’t need to do this publicly and rattle the markets; some investors with the right legal top guns could spell out the consequences if the banks failed to get off their duffs and enter into serious negotiations.

Smith is saying that the owners of the mortgage bonds at the heart of the financial crisis want the mortgages they own to be changed dramatically with “deep principal” modifications for the borrowers in the homes. But it’s not happening. It’s the opposite of what mortgage servicers have been saying about why they won’t modify mortgages so they’re payable.

Smith herself has written why:

But servicers have lots of reasons not to go there. First, they get lots of fees upon foreclosure and have organized streamlined processes to make it a profitable activity for them. Second, they are obligated to keep advancing principal and interest when borrowers default. Technically, they can stop when the borrower looks irredeemable, but in practice, they keep advancing P&I until they reach the mortgage balance. So they also are driven to foreclose to recover P&I advances. Third, they are just not set up to do mods. Not only do their contracts not allow for them to collect fees to do mods, but for a mod to have any hopes of success, you need to do some borrower assessment. Servicers are factories, highly routinized, so doing anything on a one-to-one basis is difficult given their operating parameters.

Doesn’t it seem like the fact that MBS investors want servicers to modify mortgages but the servicers won’t do it is a much bigger story than what we’ve gotten from the mainstream press?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,