3 ms·

It Pays to Not Pay Your Debts

59 points by feross 5y ago

legitster 5y ago
Another amazingly good writeup from Matt Levine. It should be said that natural gas is far, far from the only resource extraction industry that gets away with this. This is also the standard operating procedure for mining operations as well. A large multinational mining company closes down a mine, and sells maintenance of the tailings pond to some cut-rate local company stood up on the spot for the purpose (and can subsequently eat up a bankruptcy no problem). The difference I guess in mining is that (now) local regulators generally require the tailings pond and maintenance plan to be locked down before permits are even given.
- willcipriano 5y ago
  Can't the laws be modified to require whomever mined the mine is responsible for the cleanup? That way if they hire a fly by night company they are still on the hook. Seems like a loophole that was created on purpose.
  - allturtles 5y ago
    I think it would still be hard to write the regulation in a way that couldn't be gamed (e.g. the big, well-capitalized companies lending money to fly-by-night operators to dig wells for them). It would probably be easier for the government to just levy a tax on all well-owners for every year the well remains uncapped and then use that revenue to pay for capping the well themselves. This would make it impossible to wiggle out of paying and discourage dragging out the use of a well that's leaking methane but producing a tiny amount of gas for many years.
    - jnwatson 5y ago
      The government could force the driller to escrow the money to cap the well.
      - toomuchtodo 5y ago
        These are called surety bonds.
  - Tanjreeve 5y ago
    This is called a negative externality and it's what political economists spend a lot of their time fighting about. The bit of "how to determine who pays" is very complex/impossible when you're talking about something like air pollution.
alexfromapex 5y ago
The title is misleading. In general, you want to pay off debt. However, sometimes leveraging debt to gain assets which make even more money is good. Convincing a lender to reduce liabilities is strange and probably won't work in many scenarios.
- xnyan 5y ago
  There's a very common and overused saying along the lines of "If you owe the bank $100,000, you have a problem. If you owe the bank 1,000,000,000, the bank has a problem." The point is that in a debt relationship, the lender has given you something today and while you have a legal obligation to pay that back tomorrow, the fact remains that the borrower has The Thing and the lender does not, which often creates leverage to the advantage of the borrower. The lender knows/accepts that not everyone will pay them back (this risk is controlled by interest), leaving the borrower wiggle room to pay back less than what they owe by threatening to not pay back anything at all. This is why it pays not to pay back your debts - some entities can and have borrowed and used that borrowing as leverage to extract better-than-agreed-upon terms to pay it back.
- villasv 5y ago
  The title is fine. It's not a general purpose aphorism, it's the theme of the article (using bankruptcy/defaults to profit from liabilities).
wkjej32ioj32 5y ago
Official inflation will be 5% in Germany at the end of year and grocery prices already increased by 13%. So, just take a long-term debt and it will be automatically "paid" by inflation. All countries in the EU have huge debt and inflation is the only way the European central bank can do anything about it.
dkobia 5y ago
You should watch this after you read the article: https://youtu.be/6c-WCg2Y7sE https://youtu.be/6c-WCg2Y7sE (How Dying Gas Wells Are Making One Company Rich) — I imagine it’s all Bloombergs effort to expand on this story. Fantastic journalism.
deleted 5y ago
[deleted]
dandotway 5y ago
This article says Big Energy corps drill methane wells and then cheat the cost of plugging them by selling them to smaller companies that can't afford the plugging cost, thereby abandoning these wells to leak the potent greenhouse gas methane. I just tried to research how much methane is leaked and found this EPA report saying unplugged wells leak an average of 10.02 grams/hour of methane compared to 0.002 grams/hour for plugged: https://www.epa.gov/sites/default/files/2018-04/documents/ghgemissions_abandoned_wells.pdf https://www.epa.gov/sites/default/files/2018-04/documents/gh... But 10.02 grams doesn't seem like very much, considering livestock methane emissions (like cow farts and burps) were estimated in 2011 to produce 120 trillion grams of methane per year: https://www.forbes.com/sites/samlemonick/2017/09/29/scientists-underestimated-how-bad-cow-farts-are/ https://www.forbes.com/sites/samlemonick/2017/09/29/scientis... So it certainly is a Big Energy sin, but there are graver stakes (involving gravy and steaks).
- Wowfunhappy 5y ago
  I was initially concerned that you were comparing a single well to an entire industry, but I did the math and while it does add up, the emissions are still small by comparison. 80,000 (possible wells) * 10.02 (grams per hour) * 8,766 (hours in a year) = 7,026,826,600 grams per year from uncapped wells, which is 0.006% of 17 trillion. That said... the difference to me is that in exchange for those livestock emissions, we get, well, food! I totally respect vegans, but personally, I do quite like milk and cheese. By contrast, what good is coming from these spent oil wells?!
kristianp 5y ago
https://archive.is/g6vFr https://archive.is/g6vFr
deleted 5y ago
[deleted]

59 points by feross 5y ago

Another amazingly good writeup from Matt Levine. It should be said that natural gas is far, far from the only resource extraction industry that gets away with this. This is also the standard operating procedure for mining operations as well. A large multinational mining company closes down a mine, and sells maintenance of the tailings pond to some cut-rate local company stood up on the spot for the purpose (and can subsequently eat up a bankruptcy no problem). The difference I guess in mining is that (now) local regulators generally require the tailings pond and maintenance plan to be locked down before permits are even given.

willcipriano 5y ago
Can't the laws be modified to require whomever mined the mine is responsible for the cleanup? That way if they hire a fly by night company they are still on the hook. Seems like a loophole that was created on purpose.
- allturtles 5y ago
  I think it would still be hard to write the regulation in a way that couldn't be gamed (e.g. the big, well-capitalized companies lending money to fly-by-night operators to dig wells for them). It would probably be easier for the government to just levy a tax on all well-owners for every year the well remains uncapped and then use that revenue to pay for capping the well themselves. This would make it impossible to wiggle out of paying and discourage dragging out the use of a well that's leaking methane but producing a tiny amount of gas for many years.
  - jnwatson 5y ago
    The government could force the driller to escrow the money to cap the well.
    - toomuchtodo 5y ago
      These are called surety bonds.
- Tanjreeve 5y ago
  This is called a negative externality and it's what political economists spend a lot of their time fighting about. The bit of "how to determine who pays" is very complex/impossible when you're talking about something like air pollution.

alexfromapex 5y ago

The title is misleading. In general, you want to pay off debt. However, sometimes leveraging debt to gain assets which make even more money is good. Convincing a lender to reduce liabilities is strange and probably won't work in many scenarios.

xnyan 5y ago
There's a very common and overused saying along the lines of "If you owe the bank $100,000, you have a problem. If you owe the bank 1,000,000,000, the bank has a problem." The point is that in a debt relationship, the lender has given you something today and while you have a legal obligation to pay that back tomorrow, the fact remains that the borrower has The Thing and the lender does not, which often creates leverage to the advantage of the borrower. The lender knows/accepts that not everyone will pay them back (this risk is controlled by interest), leaving the borrower wiggle room to pay back less than what they owe by threatening to not pay back anything at all. This is why it pays not to pay back your debts - some entities can and have borrowed and used that borrowing as leverage to extract better-than-agreed-upon terms to pay it back.
villasv 5y ago
The title is fine. It's not a general purpose aphorism, it's the theme of the article (using bankruptcy/defaults to profit from liabilities).

wkjej32ioj32 5y ago

Official inflation will be 5% in Germany at the end of year and grocery prices already increased by 13%. So, just take a long-term debt and it will be automatically "paid" by inflation. All countries in the EU have huge debt and inflation is the only way the European central bank can do anything about it.

dkobia 5y ago

You should watch this after you read the article: https://youtu.be/6c-WCg2Y7sE https://youtu.be/6c-WCg2Y7sE (How Dying Gas Wells Are Making One Company Rich) — I imagine it’s all Bloombergs effort to expand on this story. Fantastic journalism.

deleted 5y ago

[deleted]

dandotway 5y ago

This article says Big Energy corps drill methane wells and then cheat the cost of plugging them by selling them to smaller companies that can't afford the plugging cost, thereby abandoning these wells to leak the potent greenhouse gas methane. I just tried to research how much methane is leaked and found this EPA report saying unplugged wells leak an average of 10.02 grams/hour of methane compared to 0.002 grams/hour for plugged: https://www.epa.gov/sites/default/files/2018-04/documents/ghgemissions_abandoned_wells.pdf https://www.epa.gov/sites/default/files/2018-04/documents/gh... But 10.02 grams doesn't seem like very much, considering livestock methane emissions (like cow farts and burps) were estimated in 2011 to produce 120 trillion grams of methane per year: https://www.forbes.com/sites/samlemonick/2017/09/29/scientists-underestimated-how-bad-cow-farts-are/ https://www.forbes.com/sites/samlemonick/2017/09/29/scientis... So it certainly is a Big Energy sin, but there are graver stakes (involving gravy and steaks).

Wowfunhappy 5y ago
I was initially concerned that you were comparing a single well to an entire industry, but I did the math and while it does add up, the emissions are still small by comparison. 80,000 (possible wells) * 10.02 (grams per hour) * 8,766 (hours in a year) = 7,026,826,600 grams per year from uncapped wells, which is 0.006% of 17 trillion. That said... the difference to me is that in exchange for those livestock emissions, we get, well, food! I totally respect vegans, but personally, I do quite like milk and cheese. By contrast, what good is coming from these spent oil wells?!

kristianp 5y ago

https://archive.is/g6vFr https://archive.is/g6vFr

deleted 5y ago

[deleted]