Washington's Crisis Checklist
Ian Bremmer and Sean West

The response of British Petroleum to its oil leak has followed the same traditional crisis-management life cycle as that recently employed by Toyota or big banks in their face of crisis: Try to stop the bleeding to limit damage, ask for government support if necessary, and employ a bevy of crisis-management consultants, public-relations specialists and lobbyists to mitigate business, brand and political impacts. A history of firms like Exxon that have survived crisis and of those like Enron that have disappeared provides a multitude of case studies in how firms should and should not respond to crisis. Can the steps of crisis fallout be anticipated?

While firm management may be committed to seeing a crisis through, markets are often skittish, moving out of firms and industries at the first hint of scandal. They update valuations to reflect the financial costs of an event as more information is revealed, and they discount to reflect uncertainty. But they often fail to appreciate that there is a pattern that political response follows. Those who do realize that there is more certainty than markets expect about political outcomes are prepared for dependable negative announcements related to lawsuits and congressional hearings. They can avoid overreacting in response to political noise, and they can take opportunities where others have overshot. They can pick whether the political process will impact individual firms or reshape entire industries. They can be prepared for legislative responses that usher through a host of negative regulatory changes, including some that barely relate to the crisis itself.

We are firm believers that political events can be anticipated -- especially in the wake of crisis. There is remarkable consistency to how Washington stakeholders respond to domestic U.S. catastrophes: In the last two years, the Obama administration and the Democrat-controlled congress have responded to financial, auto safety and environmental crises in strikingly similar ways. Indeed, it's almost as if there is a list of steps followed every time.

Understanding Washington's Crisis Checklist can help observers prepare and not be caught off-guard by a nasty CEO-drubbing by the Senate or by a regulator-led fishing expedition that leads to a government lawsuit based on even a hint of malfeasance. The general sketch of U.S. political response to domestic crisis has four steps.

1. Stop the Bleeding

The private sector tries to remedy the problem -- firms do recalls or try to plug a deepwater hole spewing oil or raise capital to cover losses. If they can't do it, they ask the government to help by stabilizing the market or providing technical assistance or whatever else is necessary. The longer it takes and the more expensive it is to stop the bleeding, the nastier the impact of the rest of the steps. If the crisis is easily mitigated, there may be only an individual firm impact, which presents opportunities for competitors. If it is hard to stop the bleeding, this may presage a more punitive response to industry as a whole.

2. Identify the Cause

The blame game starts immediately to identify culprits. Many politicians reflexively blame the private sector, asserting that profit motive (greed) has led to negligence. The media begins looking for evidence, and often trumpets even the most circumstantial proof that the private sector cut corners somewhere in the chain of events that precipitated the crisis. In today's world of 5-second sound bites and 24/7 news cycles, perception is reality: Regardless of whether there is truth to the assertions, claims of negligence can establish guilt in the minds of the public.

But private-sector negligence cannot be the only explanation in a market that is regulated by the government. Soon the media blames Washington, and administration officials and members of Congress try to deflect such claims, blaming predecessors for a legacy of deregulation. Politicians often openly speculate that the crisis is the fault of a specific regulator most people have never heard of: How many times before crisis did politicians grandstand about the National Highway Traffic Safety Administration, the Minerals Management Service or the Office of Thrift Supervision? The charge of cozy relationships drives home just how good a job the firm's lobbyists did at establishing influence until the crisis hit. This almost always precipitates later regulatory restructuring and new policies and pressures around public-private interaction and future government appointees.

In a quest to understand just how such a catastrophe could have happened, to look like they are on top of the problem, and to extract a pound of political flesh from the actors, Congress holds hearings scrutinizing both the firms and regulators in question. Special attention is paid to hints of evil deeds and incompetence. Such hearings often involve a stern talking-to of the relevant CEO. Investors who read firm-management tea leaves often look to see if the CEO appears strong or weak. At the onset of a crisis, impacts to share price are often as much a reflection of investor confidence in company leadership as an assessment of future costs. This judgment is influenced by the immediate actions taken by the firm, and its ability to communicate a clear strategy to rectify the situation. Public statements, including those before Congress, are critical. But hearings also provide additional, important information about the intent of politicians to use the crisis to strengthen their hand in opportunistically pushing new or newly prioritized reforms.

Congress or the president will likely establish a commission to put some distance between politicians and policy prescriptions and to try to co-opt bipartisan participation in finding the root causes. This gives a future reference point to anchor expectations for by when the government will need to act to make sure it "never happens again." Policies -- like that related to offshore drilling -- may be suspended until the commission reports. When the commission reports relative to other political milestones, and whether the commission is led by a major name or a bipartisan dealmaker, can often provide indications of how relevant it will be. If it reports far into the future, it can often trigger a new second round of regulation if changes are made in the interim.

3. Change Policy

If, as in the case of the financial crisis, the magnitude of the incident is catastrophic, it exposes the sitting president politically, and it resonates strongly with the general public, then the president will likely attempt to set the policy agenda and sell a proposal to Congress. If the event is more narrow, like the Toyota recall, concerned members of Congress promote legislation that seeks to fix the regulatory environment. Regulatory change is often accomplished by rewriting the mandate of the regulators, giving them more money to do a better job next time, moving agency boxes around in the bureaucracy, or some combination of the above.

But to rewrite regulation, Congress has to pass legislation. The risk emanates both from the regulatory fixes themselves and from the likelihood that legislation will be used to move tangentially related policies like new taxes or new industry rules that really have nothing to do with the cause of the crisis. Markets often underestimate just how impactful new rules will be in reshaping the industry in the longer-term or how related policies can hitch a ride on regulatory overhaul. Not all firms in the same industry will be affected in the same way by regulation, and this creates opportunities for those who can anticipate winners and losers.

While all this is going on, the existing regulator tries to anticipate congressional preferences by being more proactive in issuing rules and using existing powers to try to prove it deserves its mandate. Insofar as the regulator in question has the ability to sue, a deep investigation that results in lawsuits like that from the Securities and Exchange Commission against Goldman Sachs should be expected. Criminal investigations can often follow from the Justice Department, and state and local governments, as well as lawyers representing classes and individuals, will often pile on with additional claims, ensuring the crisis stays alive for years.

4. Enter a Post-Crisis World

After legislation has been passed, the media continues to monitor the story, but as time goes on the public and politicians gradually lose interest. The next auto recall or financial scandal or suspected oil leak elicits far more scrutiny than it otherwise would have, and markets may overshoot in response to the specter of another crisis simply because there is more focus on what is otherwise noise. Gradually, everyone assumes the new policies passed in the wake of the crisis have been correctly interpreted, but many often fail to properly appreciate that regulators have been given new powers and have refocused on doing their job more effectively and with less influence from the private sector. The full impact of this may only be clear many months later when their new powers are used. This is precisely the risk with the financial regulation package and for the oil and auto industries in the wake of their respective crises.

Available at Amazon.com:

The Feminine Mystique

The Disappearing Center: Engaged Citizens, Polarization, and American Democracy

The Virtues of Mendacity: On Lying in Politics

Bush on the Home Front: Domestic Policy Triumphs and Setbacks

The Political Fix: Changing the Game of American Democracy, from the Grassroots to the White House

Read the latest political news.