07.13.10

Sheldon Discusses Regulatory Capture in Response to the Gulf Oil Spill and the Financial Meltdown

Mr. Whitehouse: Mr. President, the majority leader indicated today that he would be preparing legislation on energy to deal with a number of different issues, among them the response we should make to the terrible spill, geyser of oil gushing into the Gulf of Mexico and all the damage that has ensued in the gulf States as a result.

I come to the floor this evening to say a few words about a problem I believe we need to address in the context of this catastrophe. That problem is the problem of regulatory capture of the captive regulator. Although it comes up in the context of the failure of the Minerals Management Service to do its job to see that the private sector deepwater drilling in the gulf was done properly, it is a problem that is not limited just to the geyser of oil gushing into the Gulf of Mexico and the failure of MMS to have taken adequate steps to prevent it. It occurs in other areas as well.

One that leaps to mind is the Securities and Exchange Commission, the so-called securities watchdog which was sound asleep at the switch as the economy careened towards the huge financial meltdown with repercussions we are still seeing today.

The Senator from Michigan, Ms. Stabenow, was just talking about the catastrophes in her State and the pain that the lack of unemployment insurance is creating. That goes back to the original Wall Street meltdown, and that launched a tsunami of misery across the country that we are still dealing with today.

So if you take a look at those two catastrophes--the giant financial meltdown catastrophe, the consequences of which we are still living, that families in Rhode Island, families in Illinois, families in Michigan are still dealing with; and the disaster in the gulf that has created a catastrophe throughout Louisiana, Alabama, Florida--they have a common theme. The common theme is this issue of regulatory capture.

My hometown paper editorialized pretty trenchantly about the gulf problem. They said:

The Deepwater Horizon accident has made it painfully clear that, in its current form, MMS is a pathetic public guardian. Neither it nor BP was prepared for a disaster of this magnitude, and MMS' cozy relationship with industry is a big reason why.

The issue of regulatory capture has been written about for a long time. In 1913, Woodrow Wilson wrote:
If the government is to tell big business men how to run their business, then don't you see that big business men have to get closer to the government even than they are now? Don't you see that they must capture the government, in order not to be restrained too much by it?

`` ..... they must capture the government, in order not to be restrained too much by it.''

The first dean of the Woodrow Wilson School, Marver Bernstein, wrote, 55 years ago, that regulators tend over time to ``become more concerned with the general health of the industry'' and that they try ``to prevent changes which will adversely affect'' the industry. He said, it ``is a problem of ethics and morality as well as administrative method.'' He called it ``a blow to democratic government and responsible political institutions.'' And ultimately he said it leads to what he called ``surrender.'' He said, ``The commission finally becomes a captive of the regulated groups.''
Even recently, the Wall Street Journal editorial page contained an article by a senior fellow at the Cato Institute, saying:

By all accounts, MMS operated as a rubber stamp for BP. It is a striking example of regulatory capture: Agencies tasked with protecting the public interest come to identify with the regulated industry and protect its interests against that of the public. The result: Government fails to protect the public.

So from Woodrow Wilson, in 1913, through Marver Bernstein, 55 years ago, to the Wall Street Journal editorial page just this month, the identification of the problem at MMS with the doctrine of regulatory capture I think is clear.

So the question is, What are we going to do about that? It has been a recurring problem, and the difficulty is that for the regulatory agency, they are constantly engaged with the regulated industry. The industry is there all the time. The industry is pushing on them all the time. The industry is on the other side of the revolving door of jobs, often. The industry has lawyers and lobbyists working the agency. The industry threatens lawsuits if it gets regulations it does not like, and is accommodating and friendly when it gets regulations it does like. In some cases, such as MMS, the relationship gets completely toxic and you get social events with industry representatives, including illegal drug use and sex. You get staff failing to collect millions of dollars in royalties owed to the American people. You get senior executives steering contracts to an outside company created by those executives. You get district managers telling investigators: Hey, obviously we are all oil industry. You get employees accepting gifts from the companies regulated by MMS, trips to the Peach Bowl on a private airplane, skeet shooting contests, hunting and fishing trips, golf tournaments.

You get an MMS inspector inspecting the oil drilling platforms of a company that he has a job application in with. While they are considering whether to hire him, he is inspecting their oil drilling rigs. I guess it comes as no surprise that in those oil rig inspections he found no violations. But that is an environment in which the regulatory agency has yielded to this long recognized problem of regulatory capture. So I think it is time we did something about it.

It is a doctrine that has been known for many years, and clearly both at the Securities and Exchange Commission and at MMS it has been realized, and it has been realized in ways that are extraordinarily painful and damaging for America. It has been realized in ways that are truly catastrophic--in one case, for our economy, in another case, for the environment of the gulf area.
What I have proposed is that we authorize the Attorney General of the United States, at the direction of the President or upon the invitation of a Cabinet official who senses a concern about that agency, to make a determination whether that agency is still truly independent of the industry it is supposed to regulate. If the President or the Cabinet official deemed that component no longer credibly independent of the corporation or the industry it is supposed to regulate, then the Attorney General is allowed to step in and clean up.

It is as simple as that. They would be charged to hire and fire and take personnel actions; to ensure the integrity of the personnel within the component; to establish interim regulations and procedures; to ensure the integrity of a process in the component of government. They would be charged to audit the permits and the contracts and ensure that the component of government has signed off on them legitimately, and if it appears that the permits or contracts have been affected by improper corporate influence, to recall them and renegotiate them so that they are done fairly and squarely and not a friendly negotiation in which both sides of the negotiation are, in effect, working for the industry and no one is representing the public interest. They would be charged to establish an integrity plan for that component and then to clear out once his or her job is done.

We have known about regulatory capture now for a century. We have seen it in action throughout that period. We have had two of the most catastrophic examples of regulatory capture happen just now on our watch, and in all this time we have never really come up with a mechanism for addressing it, because the pressure on these regulatory agencies is systemic, because it is constant and persistent, because it is done quietly. The industry doesn't come in and say: We are taking over. News flash to the world: This isn't going to be an independent agency any longer.

No. Quietly, as quietly as they can, they slip their tentacles deeper and deeper and deeper into the agency until they quietly control it--surreptitiously, stealthily, but they own it--and the interest that agency wants to serve is now the corporate interest and not the public interest.

So if we are going to face up to a problem that is that persistent, that constant, which has been recognized for a century and has recently yielded the two biggest disasters, economic and environmental, this country has recently seen, we have to create a persistent counterpressure. I think the threat of the Attorney General of the United States, our top law enforcement officer, coming in and cleaning house is that kind of persistent counterpressure we need.

So I urge my colleagues, as we discuss the different provisions we are going to bring to bear that are going to be our lessons learned from the gulf catastrophe, that we not overlook what is probably the biggest lesson of all: the lesson we have known for a long time about the problem of regulatory capture and the incidence of regulatory capture in these particular cases bearing such painful, damaging fruit, such bitter harvest for the American people.

I will continue to push. If colleagues have ideas they think would improve it, I would be delighted to discuss those ideas. I think we will have failed in our duty to the public if we do not take away from the financial disaster caused by the deliberately blind eye of the Securities and Exchange Commission and the catastrophe caused by the complete co-opt of MMS--if we don't take away from those the lesson that this can't be tolerated anymore.

Regulatory capture is no longer a theory; it has been proven to be a disastrous practice in at least those two agencies, and we don't know how many more agencies are in a similar position. The disaster may not yet have happened, but they may be just as captive. When you think of the billions and billions of dollars of taxpayer value in Federal land, in timber leases, in mining leases within the continental United States, in contrast with giant corporations; when you think of that huge pile of public wealth from which the giant corporations feed, it is hard to imagine they are not working just as hard to co-opt the regulators who protect that wealth as they work to successfully co-opt the regulators who are supposed to be watching the Wall Street financiers and who are supposed to be watching big oil as it drilled in the gulf.

So let's not overlook this lesson. I am willing to consider a lot of ideas that will help get us there. I put this out because it is the best one I have come up with yet, and I look forward to working with folks. It is too important that we don't go away from this having failed in our duty to protect the American public from the next disaster.

I thank the Presiding Officer.

I yield the floor, and I note the absence of a quorum.