?“Who watches the watchmen?” It’s a classic line by ancient Roman satirist Juvenal that begs the question of just who is in charge of making sure our appointed sentinels do not abuse their powers.


These past months have seen the worst rattling of the U.S. economy since the 1970s. At press time, President Bush signed into law a historic $700-billion bailout of financial institutions that have lost the end-game through faulty financing.


So what effect does this have on the E&P business? A few financings have been canceled, and the number of A&D deal closings has begun to wane. Potential sellers are likely to hold onto assets for a while, unless forced to sell to raise cash, while equity markets are down and debt terms are less pleasing to E&Ps’ balance sheets than they were a few months ago.


For example, Denbury Resources has withdrawn its $600-million bid for a Conroe, Texas, asset package, taking a $30-million hit for breaking off the deal, to preserve liquidity. And, the emphasis by presenters at IPAA’s annual OGIS-West meeting in early October was on dry powder and cash flow.


Everyone is holding their breath.


Where is the accountability? A free market gives people a shot at offering new services and products. But a free market swings both ways. A faulty business model must pay for its developers’ miscalculation.


Here’s a real-life example. In the 12th grade, we had an Economics Fair as part of my economics class. People teamed up, and each team created some new product. We were given a small amount of fake money, and wandered around the room, shopping at each merchant tabletop.


My team was selling a product called Vladimir’s Bears. Basically, they were Gummi Bears impaled by a toothpick. (My friend and I shared a twisted sense of humor, and we thought sheer morbid curiosity would bring people over.) It turned out that, while Vladimir’s Bears were indeed a hit, we were not able to sell them for a profit. Potential customers would buy them only as long as they were underpriced.


Teams that did not sell out their inventories still managed to make more money than we did, simply because the equilibrium price for our product wasn’t high enough to encourage us to stay in business. In short, we failed, and that’s why good citizens can’t buy Vladimir’s Bears in fine stores today.


But when our business failed, we didn’t run to the teacher and demand she subsidize our enterprise as a going concern. We took it as a learning experience. Besides, I’m now a journalist and my friend is an electrical engineer; business wasn’t our forte.


My point is this: In economics class and on Wall Street and Main Street, businesses are responsible for their mistakes. They profit when they judge markets, create products and execute sales and management well, and fail when they don’t. Business needs constant minding, constant oversight and constant feeding.


When one of these breaks down, so does the system. If the company has become so complacent that it is no longer checking itself, it should fail.


Lehman Brothers, Merrill Lynch, Wachovia Bank, Washington Mutual and Bear Stearns have failed because of bad fiscal policies. They built a house of cards that fell when the mortgage-crazed market began to correct itself.


But ultimately, if Americans are searching for a guilty party, they need look no further than the nearest mirror. Nearly five decades of conspicuous consumption—urged on by easy credit, constant advertising of better lives through the ownership of material things and a belief that keeping up with the Joneses was a given way of life—created a society ripe for this type of corruption.


And, correction.


In the 1980s, the E&P industry experienced numerous business failures, while oil prices plummeted. The remaining industry leaders gathered up assets for pennies on the dollar, applied their risk-management acumen to their new portfolios and are here today—all successes.
The financial industry needs some culling now. Many will go the way of Vladimir’s Bears.


Who watches the watchmen? Free markets do.

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