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Why the Senate vilified Biden nominee Saule Omarova for trying to protect their constituents
A deeper look at the Omarova nomination and the troubled finances of the fossil-fuel industry.
This morning’s Hill Heat discussed Saule Omarova’s nomination to be Comptroller of the Currency. John Kepner files a full report.
Last week, Axios reported that “centrist Dems” teamed up to “sink” the nomination of Cornell Law Professor Saule Omarova, President Biden’s pick to head the Office of the Comptroller of the Currency (OCC).
This is a sad development in a nomination fight that has drawn unusual attention for a top bank regulatory position. With assistance from the banking industry and right-wing media, Sen. Pat Toomey (R-Penn.) led a red-baiting campaign that viciously attacked Omarova over the fact that she was born in the former Soviet Union. The McCarthyism of Sen. John Kennedy (R-La.) drew the most headlines during Omarova’s confirmation hearing, but any close observer could have noticed that Omarova would have trouble winning unified support from the Senate Banking Committee’s centrist Democrats: Sen. Mark Warner (D-Va.) and Sen. Jon Tester (D-Mont.) devoted their questions to lecturing Omarova over her opposition to their 2018 bill weakening Wall Street protections, while Sen. Kyrsten Sinema (D-Ariz.) did not even bother to show up.
Throughout the hearing, whenever Omarova wasn’t patiently explaining that she didn’t control her place of birth or deftly restraining herself from pointing out to Tester and Warner that she was right to oppose their bill, she was defending herself against the Fox News talking point that she is hell-bent on bankrupting the fossil fuel industry. Omarova was repeatedly forced to affirm her understanding of the economic importance of millions of fossil fuel jobs and clarify that her proposals to resolve fossil fuel bankruptcies are actually aimed at helping displaced workers. A representative exchange occurred between Omarova and Sen. Steve Daines (R-MT):
Left unsaid during these exchanges was the fact that there is nothing that Omarova or any other Biden appointee can do to cause small fossil fuel companies to go bankrupt en masse, because it is already happening.
When the COVID-19 pandemic caused demand for oil to plummet to in March and April 2020, it caused huge distress in the oil and gas industry, and the Federal Reserve warned that “corporate default rates were likely to increase sharply, with acute stress in the energy sector.” As documented by the Center for International Environmental Law, the oil and gas sector’s problems preceded the pandemic:
“Fracking operators in the United States have been losing money for over a decade, with estimates of losses topping $280 billion. Since 2015, over 200 drillers have gone bankrupt, with 32 declaring bankruptcy in 2019.”
Many oil and gas companies, especially smaller operators, dealt with the lack of reliable profits in fracking by taking on more debt, and the New York Times reported at the onset of the pandemic that in “10 of the last 11 years, energy companies were the single largest junk bond borrowers.”
As both Omarova and her critics are keenly aware, this sort of disruption can have profound economic consequences. But under current law, these economic consequences are not felt equally. Bankruptcies are especially painful for the workers employed by the failing companies, but executives and shareholders tend to be shielded from the harms that corporate financial distress causes. Public Citizen’s analysis of oil and gas bankruptcies from 2018-20 found that “The U.S. oil and gas companies that filed the 25 largest bankruptcy cases from 2018 to 2020 paid a combined $199.4 million in cash bonuses, retention payments and severance to 76 executives, for an average of about $2.6 million per executive,” while “more than 10,500 workers lost their jobs.”
States that relied heavily on fracking for job growth during the Great Recession are now faced with the biggest costs. For example, former petroleum geologist and Colorado governor John Hickenlooper went so far as to drink fracking fluid to promote fracking in his state during the Great Recession, then handed the tab off to Coloradans. Hickenlooper left the governor’s office for the US Senate, but the abandoned wells from bankrupt fracking companies have left the public in Colorado with an estimated total of nearly $5 billion worth of cleanup costs. Public Citizen’s analysis of the 25 largest oil and gas bankruptcies found that “cleanup costs for more than 57,000 oil and gas wells controlled by the companies analyzed could be as high as $10.3 billion.”
Mindful that the public was already on the hook for so much of fossil fuel companies’ distress, financial regulatory experts such as former Deputy Treasury Secretary Sarah Bloom Raskin and newly confirmed Assistant Treasury Secretary for Financial Institutions Graham Steele warned against extending disproportionate emergency assistance to the fossil fuel sector during the 2020 pandemic response. Unfortunately, these warnings were largely ignored, as the Trump administration, along with Republican senators including Daines and Kevin Cramer (R-ND), pressured Federal Reserve officials to revise the terms of the Fed’s emergency lending facilities to help distressed oil and gas firms.
At least for the moment, that gamble by Trump and congressional Republicans appears to have paid off. Job loss from pandemic-induced bankruptcies was not completely avoided, but the oil and gas sector has been adding back jobs, albeit at a slower pace than other industries. A recent report from the Office of Financial Research (OFR) found that “during the pandemic, many businesses were able to refinance their debt and avoid bankruptcy due to extraordinary government intervention. These actions mitigated the adverse impact of mass unemployment, averted a capital markets crisis, and eased strains on bankruptcy courts.” In a crucial caveat, however, the OFR then continued: “But they may have also enabled inefficient and structurally challenged firms to remain afloat, which may have adverse, longer-term implications for the economy.”
Indeed, though the chaos of March 2020 may have dissipated, the threat of another bankruptcy or default wave still looms large, and the badly indebted fossil fuel sector remains highly vulnerable. As Federal Reserve’s November 2021 financial stability report notes, one of the defining threats to financial stability is: “Excessive borrowing by businesses and households leaves them vulnerable to distress if their incomes decline or the assets they own fall in value.” (The Fed’s report also notes that delinquency rates among oil and gas firms remain “elevated,” suggesting unstable finances.) According to the OFR, right now corporate debt is at an “all-time high,” and “If gross and net debt ratios remain at high levels, a much greater number of defaults may occur during the next economic downturn.” And it is not just small fracking firms that face these vulnerabilities. In January 2021, S&P placed 13 major oil and gas companies on watch for an imminent credit downgrade.
As the economy recovers from COVID-19, senators like Daines, Cramer, and Hickenlooper who celebrated the “fracking boom” as integral to the (long, slow, and inequitable) recovery from the Great Recession may be hoping for a repeat. But they should not hold their breath. As energy reporter Bethany McLean explained in 2018, the “fracking boom” that occurred during the Great Recession was precarious, and it relied in large part on unusual economic conditions that prevailed in the aftermath of the 2008 financial crisis:
“Because the industry has such a voracious need for capital, and capital costs money, fracking could not have taken off so dramatically were it not for record low interest rates after the 2008 financial crisis. In other words, the Federal Reserve is responsible for the fracking boom.
Amir Azar, a fellow at the Columbia University Center on Global Energy Policy, calculated that the industry’s net debt in 2015 was $200 billion, a 300 percent increase from 2005. But interest expense increased at half the rate debt did because interest rates kept falling. Dr. Azar recently called the post-2008 era of super-low interest rates the “real catalyst of the shale revolution.”
Fracking is such a fragile industry that it is not hard to make it go bust. Saudi Arabia almost succeeded in doing so in 2014, when oil ministers from OPEC decided that they would not cut production in order to prop up falling oil prices. This was seen as an attempt by the Saudis to kill off shale, by cutting prices below the point where American frackers could afford to produce a barrel. By mid-2016, American oil production had declined by nearly a million barrels a day and some 150 oil and gas companies filed for bankruptcy.
To sum up, the economy was so badly damaged after the 2008 crash that it took seven years for the Fed to raise interest rates. This contributed to a corporate debt buildup, and financial regulators are continuing to issue warnings about new loans to companies already facing huge debt.
It’s unlikely that sustained low interest rates will continue to allow frackers to paper over the problems in the same way they did ten years ago. In fact, market participants and analysts are currently projecting that the Fed will begin hiking interest rates next year. And recently, the OFR also warned “If the global increase in prices persists for longer than currently anticipated, it could lead to a faster-than-expected rise in interest rates and, potentially, a repricing of risky assets” and “If the current corporate earnings recovery falters or interest rates rise materially, the corporate sector could be prone to a wave of defaults. Such a scenario could impose large losses on lenders and investors and affect economic activity adversely.”
In other words, the trend of oil and gas bankruptcies that we saw amplified in 2020 is likely here to stay, and it poses some important systemic risks. The demise of the fossil fuel industry—already well underway—is to some extent inevitable. It will occur one way or another, whether through the sudden rise in interest rates that OFR warns about, government policies that finally align pollution reduction with the goals of international climate agreements, major shifts in consumer preferences brought on by climate catastrophes, or the collapse of global organized society. The question then is how to manage the fossil fuel industry’s decline, which brings us back to the Republican attacks against Omarova.
To protect the public from the systemic risks and costs that the collapse of fossil fuels can cause, Omarova has proposed the National Investment Authority (NIA). Omarova’s NIA would include a bailout manager to oversee emergency lending and public assistance to distressed companies in a manner that serves the public interest by minimizing job loss and addressing long-term financial stability concerns.
Whenever the economy enters crisis, the Fed and Treasury are forced to step in, sometimes with bailouts to the private sector. These bailouts are often unpopular and not always carried out in the public interest. A good example is the federal government’s bailout of General Motors (GM) in 2009, which saved millions of jobs, but lost public money because the government was so eager to exit its investment. If the government had held its stakes in the company just a few years longer, the public could have gained from GM’s return to profitability.
How should bailouts be handled at a moment like in 2020, when the short-term necessities of rescuing an economy in freefall are in tension with the long-term interests of the public? Omarova answered that question in making the case for the NIA during a discussion with Chris Hayes at the height of the COVID-19 crisis:
CHRIS HAYES: And I have to say, as someone who feels strongly about, extremely strong about the climate... This industry employs a lot of people. People are suffering the worst economic contraction since the Great Depression. The idea that like, "Welp, sorry, West Texas oil field workers, like you're s--- out of luck." It's very hard to be okay with that.
SAULE OMAROVA: It is very hard. The solutions to these kind of structural problems unfortunately cannot be fashioned overnight and solve all of the immediate problems right away. So my view is that we need a new public institution. We need a different entity. We need an entity that is not the Fed and that is not the Treasury, just the two public institutions we currently have on whose shoulders basically every problem falls during a crisis. But we need to create a permanent federal institution that would be charged with the task of devising and implementing and financing a coherent strategy of sort of economic restructuring, making sure that our US economy as a national enterprise, right, is structured in a way that actually has a future and that we actually work toward making our economy more resilient in the face of shocks, big pandemics, big climate change, big whatever kind of shocks we experience that we have resources that we can mobilize and reapportion in the way we need it. But more importantly that we actually build it in a way that creates jobs that are sustainable, that are long term, that are not some kind of temporary low wage jobs. You just shove people from one little place to another place and that doesn't reward the kind of speculative investment in some kind of financial instrument rather than investment in a sustainable longterm economic industries of the new age, new generation.
As Omarova attempted to clarify in her confirmation hearing exchanges with Sen. Daines and others, the NIA would ensure that the financial distress that oil and gas companies are already experiencing is handled in the public interest. The NIA could conduct the kind of emergency lending that the Fed carried out last year, but would be empowered to impose workforce maintenance and other conditions that the Fed’s lending did not. It would also be empowered to engage in corporate restructuring, thus facilitating a “just transition” that maintains workers’ jobs and wages without tethering them to an occupation that is sowing the seeds of the next financial crisis.
It’s still possible that Biden could override the Senate and place Omarova in an important leadership position at the OCC. Whether or not that happens, the senators who thwarted Omarova’s confirmation-- including Sen. Hickenlooper, reportedly-- must be held accountable. They must be asked why they oppose shielding the public from the messy costs of the fossil fuel industry’s decline.