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Monday, May 31, 2010

Memorial Day 2010

Memorial Day weekend in America, 2010. A weekend of images of kids at the pool, barbecues in the park and piercing blue sunny skies shining down on former battlegrounds which have all the trappings of a beautiful park -- if one can overlook the thousands of well-tended graves marked with American flags set by young scouts to honor thousands who sacrificed their lives for the greater good as they saw it. For many years, the Norman Rockwell imagery of Memorial Day in American we'd like to have has been increasingly crowded out by the normal crassness of modern America that morphs the holiday into another opportunity for sales on furniture, autos, or whatever else Madison Avenue has decided to convince us to want and buy.

However, something's definitely different about Memorial Day today, May 31, 2010. The clash between the true purpose of the holiday (or even its Norman Rockwell idealization) and our current priorities and collective behavior as a country could not be more jarring. This holiday weekend, the failure of the latest effort to stop the leaking of tens of thousands of barrels of oil into the Gulf of Mexico became apparent and with that failure, a more important series of failures have become apparent. These failures go to the heart of what is really "American" and the causes for which so many American service men and women have fought and given their lives. These failures involve business, government and citizenship itself.


Business

To understand the true magnitude of the business failure of the Deepwater Horizon disaster, one only has to start with four key points raised in a story aired on 60 Minutes on May 16, 2010. (see #1) The story contained an in-depth interview with a TransOcean employee, Mike Williams, who worked on the Deepwater Horizon and survived the blowout of the well and resulting explosion on the rig. The Williams interview and that of another BP employee, Ken Abott, responsible for auditing thousands of engineering and disaster contingency documents for a similar deep-water rig named Atlantis operated by BP point out a chilling pattern of conduct by BP and its partners:

1) BP knew it was drilling beyond its experience and in unpredictable geologic formations when its first drilling attempt stretched from the predicted 21 days to six weeks, only to lose the first hole when they split open the hole, lost tools used to try to seal that failed attempt and had to start over.

2) BP continued drilling operations despite information that one of the two electronic control pods governing the blow-out preventer was not functioning.

3) Sloppy work by BP and TransOcean employees during a routine test of the blow-out preventer damaged a key seal in the BOP when someone moved the drill pipe FIFTEEN FEET up and down while the BOP was clamped around the pipe. The movement ground up large pieces of the seal which reached the deck of the rig and were identified as pieces of the crucial seal. BP continued operations despite proof the seal was irreparably damaged.

4) Despite all of the above -- high deep-sea pressure, damaged BOP control electronics, damaged annular seal around the pipe within the BOP and consequently suspect pressure tests -- BP operations managers wanted to save some time during the conversion from drilling to production by reducing the quantity of "mud" in the well before all of the three cement plugs had fully cured.

An article in the The Washington Post (see #2) referenced information that BP and its contractors also reduced the number of spacers -- from 21 to only 6 -- used within the well that ensure concrete poured around the center drill pipe produced an evenly thick outer casting. Fewer spacers along the length of the pipe increased the likelihood of the inner pipe shifting to one side, narrowing that portion of the outer wall, reducing the amount of pressure that portion of the wall could withstand. (see #3)

In short, the disaster in the gulf was not TECHNCALLY inevitable from an engineering perspective. Additional precautions could have been taken but weren't and those precautions that WERE taken produced incontrovertible data indicating that work should have been stopped and re-organized. Instead, those signs were CONSISTENTLY overruled by business managers in what can only be described as a COLLOSAL failure of imagination in considering what might be worse then spending a few extra days re-drilling or re-re-drilling a well.

Was the series of management decisions aboard the Deepwater Horizon that allowed the catastrophe to occur a one-time lapse in judgment on the part of BP and its contractors? Absolutely not. As Ken Abott indicated in the 60 Minutes piece, BP operates another deepwater facility called Atlantis for which EIGHTY NINE PERCENT of its disaster planning and engineering documents required by law are incomplete or unaudited. BP also recently lobbied the Canadian government to relax current Canadian regulations requiring secondary "relief wells" to be drilled in the same season as a primary well to ensure avenues to cut off deep-water leaks are already in flight once the primary well drilling nears the actual formation where oil could begin leaking. (see #4)

BP's behavior is most disturbing because it's not unique to BP. It's not even unique to the energy industry or even "dangerous" industries. The heads-we-win, tails-someone-else-pays mentality dominates every sector of business. Despite the pattern of behavior and its disastrous consequences, the default position in any debate over business ethics and limits on size, etc. remains one in which business MUST be trusted as corporate angels until (apparently) people die, billions are destroyed or stolen, miles of coastline are irrevocably fouled or ALL THREE occur in one event.

Is there anything in the Declaration of Independence or Constitution that places the well-being of even a single corporation above that of a single citizen? Do people really fight and die for America to defend the right of an oil executive to ignore dozens of safety regulations and test results and insist on drilling to increase profits for shareholders?


Government

The drilling disaster in the Gulf seems like the latest in a long series of bad 1970s disaster movies. We've all seen them. An interchangeable plot involving a giant cruise ship, modern high rise or jet airliner with all the latest technologies enabling us clever humans to ignore all the precautions required of "old technology" as we place higher and higher bets on everything working perfectly. Of course, the entire system is still crucially dependent upon one component -- humans -- that can NEVER work perfectly and disaster (and really bad theme music) ensues.

Let's review some of the more notable disaster movies of the past decade, shall we?

December 2, 2001 -- Enron, a firm ranked #7 on the 2001 edition of the Fortune 500 with $100 billion in "revenue" and $979 million in "profits" files for bankruptcy. Its bankruptcy filing listed about $63 billion in "assets" and $13 billion in liabilities. Among the genius firms heavily invested in the firm at the time of its bankruptcy were Citigroup ($3 billion), JPMorgan ($2 billion) and Bank of New York ($2 billion). (see #5) In essence, the bankruptcy was triggered after a single journalist, Bethany McLean, had the temerity to ask a simple question -- For a firm claiming ONE HUNDRED BILLION in revenues, shouldn't it be easier to find any sign whatsoever of the $979 million in profits? (see #6) Apparently, the only thing more difficult than finding cash in Enron's treasury was finding fraud in its books. At least for its auditors, Arthur Andersen. Despite the cover story question posed on March 5, 2001, it still took nearly nine months for the "professionals" on Wall Street to see through the fog and fraud and head for the exits.

July 21, 2002 -- Worldcom, the second largest long distance company in America and #42 on the 2002 Fortune 500, files for bankruptcy listing $107 billion in assets and $41 billion in liabilities. Interestingly, among the bankers willing to line and throw more dollars to the firm prior to its bankruptcy filing were Citigroup, JP Morgan and GE Capital. (see #7) The bankruptcy was triggered after identification of $3.8 billion in incorrectly capitalized charges for access circuits used to terminate calls to local telephone companies. The cost of trunk terminations is among the most basic components of a telephone company and can be predicted within single percentage points based upon minutes of use which are directly correlated to revenue. Yet Worldcom's auditors, Arthur Andersen, the same firm that failed to spot YEARS of fraud at Enron, failed to catch the fraud. In layman's terms, this is the equivalent of conducting an audit of the hot dog concession at Yankee Stadium and signing off on books stating

Hot Dog Revenue = $6,000,000
# Hot Dogs Sold = 1,000,000
Hot Dog Cost = $200,000 ($0.20 per dog)

The Year 2008 -- The entire American financial system experienced nearly eight months of cascading failures after millions of bad home mortgages triggered a meltdown in valuations of multiple layers of derivative securities manufactured from those bad mortgages and stamped with quality ratings manufactured out of thin air. In a nutshell, the entire collapse was caused by

* twelve years of blind faith in the infallibility of "free markets" on the part of the Federal Reserve
* legislation in 1999 removing any remaining separation between retail and investment banking
* legislation in 1999 explicitly protecting derivative contracts from ANY regulation
* artificially low interest rates created by the Fed's attempt to sustain growth after terrorist attacks

The banking meltdowns of 2008 destroyed TRILLIONS in (paper) wealth and cost taxpayers an additional $700 billion in bailouts and, perversely, triggered further concentration among the biggest surviving banks which will undoubtedly yield similar problems in the future.

As if to rub our collective noses in the sheer incompetence of the government entities responsible for enforcing any semblance of regulation in the financial sector, the year 2008 ended with the arrest of Bernard Madoff after his $50 billion dollar "investment management" firm was found to be a ponzi scheme. The Securities and Exchange Commission had the fraud case handed to them -- TWICE -- on a silver platter by an outside analyst who definitively proved it was impossible for Madoff's operation to have executed the quantity of trades claimed (and thus be exposed to the broader market and its performance) while producing the steady returns he claimed on his clients' monthly statements. Stop and think about that for a moment. A complete and total fraud of $50 BILLION DOLLARS operated in plain site for over twenty years, even after the authorities were notified TWICE over a period of nine years.

In the case of the drilling disaster, it's hard to blame the Obama administration for over twenty years of inertia that defanged virtually every applicable agency. The drilling permits for the Deepwater Horizon were approved under the Obama Administration but it would have proven very difficult for the Obama Administration to pick yet another battle and fight for tighter safety audits and more stringent safety designs for the permit in the absence of a prior disaster.

However, it's not hard to cite the Obama Administration for a failure of imagination in reacting to the blow-out once it occurred. It took a couple of days for reports to get out that the sinking of the rig had broken off the riser and disclose the fact that the blow-out preventer at the sea floor had in fact failed. Once that news became public, it shouldn't have taken more than a day for someone in the EPA, DOE, MMS and any other alphabet agency to do some basic math:

* oil is flowing through a 9-inch diameter drill pipe (63.5 square inches)
* reviews of the leak video reflect a flow of 100 centimeters per second (39 inches)
* 9 inch diameter = 63.5 inch area x 39 inches/sec = 2479 cubic inches / sec = 10.7 gallons/sec
* 10.7 gallons per minute = 924,480 gallons per day = 22,000 barrels per day

Curiously, an even simpler calculation yields almost the same result:

* BP attempted to accelerate drilling because NOT producing was costing them $2 million per day
* $2 million per day with $74/barrel oil equates to lost production of 20,000 barrels per day

So with a bit of sixth grade math to gauge the problem as MASSIVE in scale, why did agencies in the Obama Administration not IMMEDIATELY force BP to develop parallel path strategies (sub activation of remaining valves on the BOP, containment hat, siphon pipe, secondary wells, etc.) to solve the leak? Why didn't the simple leak estimate calculation drive a more aggressive plan with local communities for boom containment efforts or more booms closer to the accident site?

Even if one thought BP is "responsible" for the accident and capable of covering the damage, that's not really the point once the accident happens. The point isn't to simply accept the damage and send BP the bill. The point should have been to leverage every resource imaginable to MINIMIZE the damage. That concept seems to have been bred out of nearly every layer of government. If the Deepwater Horizon had been the first disaster to befall America in ten years, one might excuse the lack of worst-case imagination. America hasn't had that kind of luck and responsibility for the lack of imagination goes directly to Barack Obama.


Citizenship

Ronald Reagan declared war on government itself in his first inaugural address:

In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden.

Read those words carefully. Reagan didn't say BAD government or CORRUPT government or STUPID government was the problem. GOVERNMENT was the problem. All government. But self-rule of the corporations, by the corporations and for the corporations was the ideal.

Let's be clear. GOVERNMENT is not the problem. BAD GOVERNMENT is the problem. And that's exactly what the Reagan Revolution wrought. Government that did less yet cost us far more in direct terms and in indirect, long-term costs. The Reagan Revolution further cemented the habit of filling the smaller number of regulatory positions left with industry insiders. And to top it all, the Reagan Revolution didn't force ANYONE to bear the burden -- at least anyone in favored tax brackets. Instead, the Reagan Revolution ran up the cost of bad government and passed it on to future generations. American voters have continued to support the fantasy of defecit financed, do-nothing government for the next twenty eight years.

So how is a shell government filled with insiders bent on ignoring any regulations that might limit their friends in business any more effective than Reagan's alleged collection of "government elites"?

If you couldn't answer this question previously based upon the past thirty years, you should be able to answer the question now. And that's why the drilling disaster in the gulf also reflects a fundamental failure of citizenship. At this point, it should be crystal clear to every American what the true costs of our Potemkin, do-nothing government and outsized appetite for cheap energy are:

* an outsized military focused on maintaining stability (NOT democracy) around world oil supplies
* industrial policy aimed at protecting big oil until the last drop is pumped at the expense of developing any alternatives
* three wars fought in twenty years to protect oil resources financed with dollars borrowed from our biggest economic competitor, China
* big businesses engaging in repeated, multi-billion dollar criminal frauds who write off the few fines levied as a mere cost of doing business

There's nothing "American" about any of this. There's nothing American about using SUVs and trucks that get 18MPG as commuter vehicles. There's nothing American about building a 4000 square foot McMansion 30 miles from work and paying to air condition it or heat it. There's certainly nothing American about giving our hand-me-down gas guzzlers to teens to drive to high school, further clogging roads during rush hour. There's absolutely NOTHING American about sending other families' kids to war to protect cheap oil and forcing your own kids to foot the bill through trillions in deficit spending.

Memorial Day 2010 may very well turn out to be the first of a new kind of Memorial Day. But which kind? A day of remembering those who fought and died for ideals only granted lip service in our day to day decisions as individuals and citizens? Or a day of remembering an economic, ecological and social downward turning point created by that same lip service? Or a day of stepping back and remembering the ideals that drove generations to fight and die for something bigger than themselves -- for us and future generations.

There's no doubt about it. Things are going to be tough for many Americans in the coming months and years. But there's no day like Memorial Day to realize we still have it easy. They did the hard work.


===========================

#1) http://www.cbsnews.com/stories/2010/05/16/60minutes/main6490197.shtml

#2) http://www.washingtonpost.com/wp-dyn/content/article/2010/05/27/AR2010052705613.html

#3) http://www.chron.com/disp/story.mpl/business/deepwaterhorizon/7027665.html

#4) http://www.reuters.com/article/idUSN1326556220100513

#5) http://www.thestreet.com/story/10004757/enron-files-for-chapter-11-bankruptcy-protection.html

#6) http://money.cnn.com/magazines/fortune/fortune_archive/2001/03/05/297833/index.htm

#7) http://money.cnn.com/2002/07/19/news/worldcom_bankruptcy/