By Felix Salmon (Left)
November 20, 2009
What are the consequences of allowing multi-billion-dollar systemically important multinational corporations to report their assets using proprietary mark-to-model tools involving discredited Monte Carlo simulations? I think we all know the answer to that one. But unbelievably, after such shenanigans contributed enormously to the greatest financial meltdown in living memory, the SEC is now set to allow more or less exactly the same thing in the oil industry.
Otto points to a stunning report by oil consultant Alan von Altendorf which spells it all out. Up until now, oil companies needed to actually prove they had reserves before they reported proven oil reserves. Now, however, the SEC is allowing them to use internal, proprietary computer models to essentially pull their proven reserve numbers out of thin air (or the nearest friendly Monte Carlo simulation).
Von Altendorf goes into great detail about how such numbers are useless and meaningless, and how the proven reserve rules should probably be tightened, rather than loosened, given the number of enormous write-downs in proven reserves which have taken place across the oil industry in recent years.
So whats the SEC thinking here? Frankly, its not thinking at all: This is just another case of regulatory capture. And a sign that, so far at least, nothing has changed at the unsalvageable and dysfunctional institution.
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