When we write about banks and hedge funds scamming the bailout, a lot of readers think we’re being too cynical. Why not assume good faith on behalf of financial institutions rather than persistent exploitation in favour of profits? And can’t well-designed rules and regulations prevent the would-be scammers from gaming the system?
Anyone who thinks along these lines needs to hear the story of what happened when Congress passed a tax credit meant to encourage industry to use alternative fuels. The deal was that business could get a 50-cent per gallon tax credit if they used an “alternative fuel” with a “taxable fuel” like diesel. It was written into a 2005 transportation bill and then extended in the TARP bill.
What happens next is extraordinary. We heard the story first from some Wall Street analysts. But Chris Hayes, the Washington editor of The Nation, tells it best in the April 2 issue.
“I’ve come to expect that even nobly conceived laws will be manipulated and distorted for private ends. But once in a while I hear a story that gives me the queasy feeling that I’m nowhere near cynical enough. Such is the case with the tale of the paper industry and the alternative-fuel tax credit,” he writes.
Here’s what happened.
- The paper industry has long employed a production process that has involved very little fossil fuels. Instead it fuels its plants with by-product of the paper making process, a carbon rich sludge left over after the cellulose fibres that become paper are removed. This process was very cost-effective prior to the introduction of a government subsidy.
- After the law was passed, however, paper mills started adding diesel to the sludge. Now that a “taxable fuel” was being used in the process, the paper mills were eligible for that 50-cent a gallon subsidy.
- No one knows who thought of this idea first. There are rumours, however, that it was “outside consultants”—perhaps investment bankers—who suggested adding the unnecessary diesel.
- The total cost of this might add up to as much as $8 billion this year, paid to to the 10 largest paper companies.
- So a program intended to reduce oil and coal fuel use in industry, wound up increasing it in the paper industry and accidentally enriching the papermakers.
All this has meant that the paper industry is receiving an enormous windfall. One company, International Paper, stands to make $1 billion this year. “If you look at the economics of this business, to make that kind of money today you’d have to be on another planet,” a paper industry analyst tells Hayes. (We highly suggest you read Hayes full account of all this.)
Tell us again how the bailout won’t be gamed by bankers.