Self-Regulation Kills

In an example of how self-regulation could work, Nestle USA reportedly decided against buying peanut butter from Peanut Corporation of America, the company responsible for the recent, deadly salmonella outbreak. Nestle inspectors visited the company's plants in Georgia and Texas, witnessed how awful they were, and took their business elsewhere.

Inspectors saw "rat droppings, live beetles, dead insects and the potential for microbial contamination," according to an article in the Washington Post on Friday. Those conditions became known to the public only after several people died, hundreds were sickened, and the peanut industry was knocked to its knees.

But last week's House hearing, where the Nestle inspections were raised, ultimately revealed that self-regulation doesn't work, because companies are often going to go for the cheapest, most "efficient" solutions, even when the risks are high. Kellogg, for example, relied on third-party audits of the PCA plants and lost big as a result.

Those audits were conducted by the American Institute for Baking International, which bestowed a "certificate of achievement" on PCA and rated its repulsive facilities "superior."

The Institute's customer was not Kellogg, however. It was PCA.

"The company was selected by PCA, paid by PCA, and realized that if they didn't give PCA a glowing review, they were not going to get hired again," said Rep. Henry Waxman (D-Calif.), chairman of the House energy and commerce committee.

In other words, the auditor's position was much like that of like Moody's and other bond-rating agencies, which were paid by investment banks, and which told investors that those banks' credit default swaps and packages of subprime mortgages were A-OK.