Why BP but not Wall Street?

Just 35 days after the explosion on BP's Deep Horizon offshore drilling rig, (and two months after President Obama himself opened up vast swathes of the outer continental shelf to offshore drilling), the federal government has launched a criminal probe into the massive oil spill in the Gulf of Mexico, U.S. Attorney General Eric Holder said last Tuesday.

All well and good. But it invariably begs the question as to why, some three years after the start of the greatest financial crisis since the Great Depression, there have been ZERO criminal investigations launched by Justice against Wall Street. The contrast is striking. Perhaps there are investigations proceeding as we write, but it does seem curious that Justice has held its fire against Wall Street (a large donor to the Democrats), whilst aggressively going after Big Oil (which happens to have been one of the bigger paymasters for the GOP in the last few elections).

The U.S. has two severe problems that could be in crisis next year. Commercial real estate is a disaster (another burst bubble), and banks are largely not recognizing their losses in this area. The banks used their political power, and Ben Bernanke's blessing, to cause Congress to extort the Financial Accounting Standards Board to gimmick the accounting rules to prevent loss recognition. The Department of Justice even failed to act after the release of the Examiner's Report on Lehman's bankruptcy, which provided clear evidence that as one of the largest banks in our nation teetered on the brink of bankruptcy, its executives were masking accounting gimmicks that inflated their quarterly earnings. It's worth asking again, as Eliot Spitzer and Josh Rosner asked in a blog on New Deal 2.0: where were the Treasury, the SEC and the Fed? (The Fed's inaction is particularly alarming given the new regulatory powers it is about to receive under the new financial reform bill.)

Imagine the uproar today in the US (even in oil loving states, such as Louisiana) if BP was involved in the watering down of legislation to govern energy policy and offshore drilling. Oh wait, that did happen... under the Bush Administration, where he drafted Enron's Ken Lay precisely for this purpose. We are reaping the consequences of that perverse executive action, much as I suspect that in a few years hence, we will be reaping the consequences of our failed financial regulatory "reforms" that do nothing to effect structural change and prevent a recurrence of the current crisis.

The other severe problem is nonprime mortgage paper (where losses range from 50 to 85 cents on the dollar). These losses are not being recognized. Worse, they are being hidden by the Fed and dumped on Fannie Mae and Freddie Mac while the politicians and Treasury declare that we "resolved" the greatest financial crisis in 80 years at virtually no cost to the taxpayer. We've now had a number of narratives to that effect, no doubt spun aggressively by the Geithner Treasury: Joshua Green's "Inside Man" and John Heilemann's "Obama is from Mars, Wall Street is from Venus" are two obvious examples of this genre which spring to mind.

As my friend Bill Black has noted repeatedly, our government and our regulators continue to sanction accounting fraud to hide losses that are, in fact, the product of accounting fraud. The losses are still there. Indeed, as Black argues, they've grown.

The fundamental perverse incentives that cause recurrent, intensifying crises remain in place, almost entirely untouched by the reform bills: executive and professional compensation, bad accounting, "control fraud," regulatory black holes and the appointment of anti-regulators who have a track record of failure and don't believe in regulating. Many of those regulators have been reappointed by the Obama Administration, including the non-regulator in chief, Ben Bernanke.

As awful as the BP spill is, the magnitude of its regulatory failure is dwarfed by what has happened on Wall Street over the past 30 years. The same people who have presided over the mess are still in power. There have been zero criminal charges.

Perhaps the criminal charges will come. In the meantime, Obama has an opportunity to harness public anger in a more productive direction than has been the case with financial or health care reform. There is an alternative to our addiction to oil, but as long as deficit hawks dissuade us from supporting government-funded initiatives needed to strike out on another energy path, we will not realize it.

In addition to my work in finance, I happen to do a lot of work in clean tech and come across endless science programs on alternative energies. There is no magic bullet, but there are technologies in existence today that can reduce our addiction to oil. But most require a massive government push, on a scale along the lines of the Manhattan Project. The concentrated effort of the Manhattan Project produced a bomb perhaps decades earlier than it would have otherwise, in a mere few years, literally from theoretical scratch. The government diverted 11% of the nation's electric power to produce those few handfuls of uranium and plutonium for the first bombs. The facilities were the biggest ever built by mankind. The government did it and it worked.

The Manhattan Project was done in secret, which I do not advocate. But it represented an extraordinary historical precedent. If we could devote ourselves in similar fashion to energy, just imagine the possibilities. A number of experts argue that in twenty years pushing existing technology, solar will be less than fifty cents per installed watt, which is the cheapest energy there can be. With government funding, we could vastly accelerate that timeframe (and create jobs at the same time). Many will say that we cannot store solar power. Nonsense. It can be converted it into hydrogen, which can be stored. The units are small. It works perfectly well in autos. Iceland uses hydrogen. The Swedes have a new hydrogen highway that works. We just need to change the entire gas station infrastructure. The private sector will not do it. Governments can.

The prevailing motto surrounding energy for the past few years seems to have been "Drill baby, drill." The Palinites have gone curiously quiet on that score as we've encountered the horrible ecological calamity that awaits us thanks to "Spill baby, spill."

In finance, we let a crisis go to waste. One hopes that the same will not apply in energy and that criminal investigations will lead to something far more substantive than the Swiss cheese of "change you can believe in" which has characterized the Obama response to our respective health care and financial crises.

This post originally appeared on New Deal 2.0.