Zack Malitz is an online organizer for WaterDefense.org. – With the endless parade of nightmarish news reports about earthquakes, radioactive wastewater, flammable tap water, carcinogenic air emissions, and planet-melting methane emissions, it’s easy to forget that the corporations responsible for fracking America have their feet firmly planted in the world of speculative finance. Reuters’ recent series about Aubrey McClendon’s criminal misconduct as Chesapeake Energy’s CEO is a stark reminder that even people who live far from any fracking sites stand to lose big as this rapacious industry digs its claws into our country.
As it turns out, McClendon isn’t just the self-proclaimed ‘biggest fracker in the world’ – he’s also a crook. A couple of weeks ago, Reuters revealed that McClendon had used $1.1 billion in personal loans to finance his 2.5% stake in Chesapeake’s drilling operations. For collateral, he used his stake in those very same wells and used a shell corporation to shield himself from responsibility for the loans.
If Chesapeake makes a killing, McClendon gets rich. If Chesapeake goes belly up, McClendon walks away unscathed and his investors are left holding the bag.
Then, yesterday, Reuters dropped another bombshell: between 2004 and 2008, McClendon and Chesapeake co-founder Tom Ward ran a secret $200 million energy commodities hedge fund out of the Chesapeake offices. There’s no need to beat around the bush, McClendon and Ward were engaged in insider trading, and they were brazen enough to do it out of the Chesapeake Energy offices. McClendon and the Chesapeake board insist that Aubrey never used the insider knowledge he gained as Chesapeake’s CEO to make investment decisions.
Sure they didn’t.
The scandal at Chesapeake is more than the story of a few bad apples. McClendon’s secret financial dealings helps to explain why Chesapeake Energy, which has a $10 billion revenue shortfall and no plan to recover, is on the brink of collapse. McClendon pays 2.5% of the cost of each well that Chesapeake drills, a fact that Chesapeake’s board claims aligns his interests with the company’s. However, Chesapeake is as much a land speculation company as it is an oil and gas company. It debt-finances huge land grabs in hopes of finding gas, then pays to drill on gas-rich land. Chesapeake eats the bill for every acre of land it leases and explores, whether it drills a productive well or not; McClendon only pays for the wells Chesapeake drills.
Not only is McClendon off the hook for most of the costs of the gas revenue he collects, but he actually has a financial incentive to drive Chesapeake towards ever-riskier, more expensive land speculation. The more land Chesapeake buys, the more productive wells it drills, the more McClendon makes. The costs of land speculation are passed on to the investors and McClendon goes to the bank.
Chesapeake’s investors are not just faceless corporations and billionaire fat cats, many of them are ordinary people who are trying to retire or send their kids to college. The bulk of McClendon’s off-book loans, for example, came from EIG, an energy investment firm that raised money from state pension funds that included Alaska, Connecticut, Louisiana, Maryland, Minnesota, Missouri and Texas, along with other large institutional investors like MetLife and a Teamsters pension plan. Other states, including Ohio, own Chesapeake stock, either directly or through an investment fund.
When Chesapeake goes under, it will be ordinary folks on Main Street who are left holding the bag. McClendon made a half-hearted apology yesterday, but that doesn’t pay back Ohio’s pension fund or remove heavy metals from our water. It’s the same story we’ve heard over and over again, from Enron to Worldcom to Wall Street bailouts. And it’s another good reason to join us in Columbus next month for the biggest anti-fracking mobilization this country has ever seen.