The Fourteenth Banker Blog

June 19, 2010

On the Curious and Misguided Defenses of BP « naked capitalism

Filed under: Running Commentary — thefourteenthbanker @ 12:36 PM

On the Curious and Misguided Defenses of BP « naked capitalism.

Had BP demonstrated admirable intent earlier in the process, such as around May 17 when the 14th Banker called for suspension of the dividend as a statement that the owners of BP would take responsibility, they may not have had to be strong armed into the $20 Billion fund.  Doing the right thing is actually good business.

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20 Comments »

  1. All this is a rehash, as we have all been doing. I loved the fact that Yves got into Discretionary Disbarment. The regulatory power of the state may cross all lines of organization and do in the whole shebang based on an administrative finding. So find!

    It comes to mind immediately that such powers must have counterparts in finance and that the regulatory powers of the state in finance could have caused the termination of those Thirteen Bankers. What would litigatory rights of those afflicted by the state be? Slap injunctions on Obama? We would know a great deal more if that were the case early on.

    Next thing that comes to mind is that if the administrative regulation were as powerful as presented in situations like Discretationary Disbarment , which parodies the law practices of disbarment, the state could have seized operations and corrected spill remediation at will. Similarly, like the seizure of Montgomery Ward and the physical ejection of Chairman Sewell Avery in WWII by the Army, BP US units could have been seized militarily too. Business students in the fifties all understood that practically the state could seize unilaterally to pursue any issue it deemed national security. State of war or no. Particularly now when the power of asymetrical warfare haseen amply demonstrated.

    So, just why would Obama simply not have quickly seized outright? The state should have understood the problem in a few days. He obviously has the power. If he does not, then BP was truly deceitfully shaken down . No courage on Obama’s part to take the open and main chance?

    But here the state dallies and dallies when it has all kinds of powers to correct the miscreant? Obviously, the state has no idea about how to proceed and deliberately let a bunch of careless twits try to fix what they were empty headed about. It reminds me of T E Lawrence’s letter to the Times in 1920 about Mesopotamian failures. So the clueless take on airs of indignity to paper over their empty minds? Let even emptier minds muddle on and on while the spill really gets catastrophic? They did not know the heavy methane content of Macondo crude after seeing the explosion? They could not extrapolate as any field commander in combat is forced to do.

    This Naked Capitalism piece could be ever so much fun to mull over.

    Comment by Jerry J — June 19, 2010 @ 8:17 PM | Reply

  2. This is off the topic of BP. But related to business and “moral sentiment.” I have wondered what is meant by — social entrepreneurship — and I found a PBS video with a defining example. In this case it means taking a proven ability at business and technology, to a new level in the non-profit sector for “economic development.”

    Watch for the story about a farmer who after acquiring a new water pump, was able to increase the number of seedlings he grows from 800 to 10,000 a year. Five years later he has milk cows, a “piggery” and built a new house worth 40,000 shillings. This in a country where people are living on $1 a day. All because of a simple-modern technology, a water pump.

    Comment by tippygolden — June 20, 2010 @ 6:23 AM | Reply

  3. The $20 billion fund will keep damagen claims from being tied up in court for decades. (Exxon Valdez and Bhopal being two shameless examples of legal evasion of accountability.) The problem is that there are some things that money cannot make whole.

    In Canada, the East Coast fishery off the Grand Banks of Newfoundland for, untold millennia, was among the richest fishing grounds on the planet. Due to industrial fishing this fishery collapsed and Newfoundland-Labrador was impoverished. Something like this may happen in the Gulf of Mexico. The difference is the Grand Banks were not devastated by an oil spill. There is ecosystem damage in the Gulf of Mexico that money cannot make whole.

    Here is my thought for the day: BP should reverse the course of its diesel-driven ship of corporate profit and focus on social entrepreneurship. Re-organize as a non-profit? Fund projects that reduce energy consumption?

    Comment by tippygolden — June 20, 2010 @ 6:53 AM | Reply

    • The argument that our corporate ethic would make is no. They cannot. Their shareholders invested in order to make a profit and a switch to social entrepreneurship that cuts into that profit is an action against the shareholders, who would then make a tort claim against management. We have not discussed on this blog how the whole evolution of shareholder lawsuits contribute to management culture. It would be interesting.

      But, I like your thought process. Perhaps the Board of BP should consider whether the organization in its entirety is serving the purposes under which the entire notion of a corporate charter was conceived. Which by the way, is not strictly limitation of liability. I think you are breaking through our thought paradigms in more than one way. First, there is the possibility that if BP devoted some resources with social objectives in mind, they would in fact find a way to multiply productive capacity in some other area, and that might open up a profit center long term. I like your comment below about the water pump and I would offer up another one, which is the science of permaculture. This is a new agricultural science that uses certain natural and organic processes to greatly increase agricultural yields without the use of a lot of synthetic fertilizer. This addresses to a small degree Jerry’s point about how we need massive amounts of petroleum products for food production. Second, you open up the idea of rethinking the purpose and nature of the corporation itself, as it has come to be today. Does it give us the promised result of the “invisible hand”, or has it corrupted Smith’s economic theory?

      Comment by thefourteenthbanker — June 20, 2010 @ 12:23 PM | Reply

      • Well it would be a Black Swan event for BP to re-organize as a social entrepreneur focused on developing ways to reduce energy consumption. The Gulf spill and the 2008 financial crisis are two recent “Black Swan” events. Who knows what next? Most likely BP just wants to get back to “business as usual.”

        What I find ironic is that the Grameen Bank lends to the poorest, charges 10% per annum, and claims to have a 5% default rate. It seems to me this is way ahead of TBTF. After all the latter only exist because they got bailed out to the tune of billions and even trillions of dollars.

        Comment by tippygolden — June 20, 2010 @ 5:21 PM

      • As for fertile land without the use of industrial fertilizers … how about Terra Preta. Fascinating history with modern potential.

        Comment by tippygolden — June 20, 2010 @ 6:20 PM

  4. Tippy, I personally think it is very unlikely that the $20 bn fund will actally expedite things at all. It tramps on too many contractural rights. As for BP setting aside assets, what would they set aside that is not already encumbered in meaningful ways or subject to market impairment if they tried to sell? First, someone or some group is going to try and block this massive non settlement. First suit would try and force a shareholder vote to approve it. That seems a hopeless approval unless the asset fund is a total and final settlement of all liabilities related to the spill. I very much doubt that even the Board of Directors could waive their protections under the the Oil Spill Act of 1990 without shareholder approval. I would expect every CEO of reinsurers involved in liability payments to BP to instruct their people to litigate the idea that they relied on the Oil Spill Act of 1990. I would offer BP a refund of current year premiums to cancel the insurance as if it were never there. If BP waives the liability limitation they do so out of their own assets with no recourse to the reinsurers. Obviously, Anadarko will take the same position and I expect that Mitsui Oil Exploration will do the same. I also expect that they were damaged first and long before the spill damages on the coast were damaged. As to the damages of lost wages from Obama’s drilling moratorium , sue the government. It was their administrative act. BP almost surely will do without the $7 bn they will seek from Anadarko, MOEX and I suspect the insurance companies too. If I ran the insurance company I would already have suspended liability payments to BP pending the outcome of litigation. The lawyers will then go after precedence of damages to those first damaged. Any set aside of the BP assets for the government clouds recoveries of those damaged before the spill itself. Setting aside the $20 bn is a preferential item prejudicing other creditors. Even a hint at that going further and a number of parties should seek involuntary bankruptcy for BP. To keep the momentum going for the shareholders , creditors and those a’priori damaged like Anadarko. Suits should be field alleging that the US Government knew or should have known as owner of the oil and as lessor that BP was unreliable as a lessee . I would also throw in the idea that the government acted tortiously to the world by even engaging in leasing in deep water. Thus, the costs of the spill inflicted on the populace is a matter for Congress to consider as they did TARP. The government took far more risks for everyone than even an incompetent BP. Might there be a case for litigation, at least, that the USG be enjoined from allowing further drilling on their leases? That they be required to buy out those they induced to drill in deepwater. Someone, will try that argument too,I expect.

    Now Obama is trying to cut out the courts here. They are an independent branch of the government that is highly protective of their place in government. On that score alone, a lot of judges are going to allow suits. I cannot fathom the Supreme Court siding with Obama on this issue.

    So let Obama order the proposal of fines for spill well in excess of the BP equity. The propsal would be litigated and the courts would be the decider after Obama’s invading of their turf. That would suggest a BP bankruptcy. The fines would be well behind creditors. Of course, there would be consequences. Those consequences would be other producers shutting down and leaving deep water. Might this be the Obama goal anyway?

    Comment by Jerry J — June 20, 2010 @ 12:20 PM | Reply

    • Jerry J,

      There are people who are out of work because of the oil spill and whose livelihoods may have been destroyed. (I suspect some may not work for many years or possibly ever.) Where will funds for unemployment, welfare. retraining, relocation come from? The $20 billion fund should be dedicated for the clean up and to help these people. The Gulf states are neither remote nor “foreign” like Prince William Sound (Exxon Valdez spill) or Bophal. I don’t think the public will let BP get away with this.

      Comment by tippygolden — June 20, 2010 @ 5:45 PM | Reply

      • There certainly are and will be more people grievously hurt by the BP accident. We have a huge problem in that the people of the United States, through their Congress assembled. passed into law a limit on spil tort liability. Probably everyone involved in contracts with big oil exploration and production in the Gulf relied on this limit. The long and short of it is that the state is proscribed from changing law effective yesterday tomorrow. The protection limit event authorized by Congress has already occurred while the $75 million limitn was in place.

        Undoubtedly, BP is caving because of threats of catastrophic fines that would bankrupt them. Many of the fine structures may be very dubious as i have discussed. Assume that the USG potentially fines BP say $100 bn so they are willing to pony up $50 billion. None of that $100 bn fine, if collected, would go to the grievously damaged. The fine is government revenues no different than my income tax payment. Congress would have to appropriate payments to use the fine money to clear up the damages these people have incurred and to remedy the natural catastrophe.

        There is the rule of law. Stupid law maybe. Failed watchfulness by the state too. The people that relied on the law should come first because they relied on the state for protection.

        The remedy is for Congress to appropriate funds to cover these damaged citizens in their time and need. Then collect from BP. Perhaps even put the company in bankruptcy to wind up as sole owners. Oh hell, they cannot do that. BPplc is British domiciled.

        Look at the money put up to save GM. I read today that it will take around $150 bn to make good Fannie and Freddie.
        Lets not forget that the people of the US , through their government, leased land they claim ownership of for oil exploration deep under the Gulf. As lessor, did the people of the US lease for a fee and royalties what amounted to an unsafe commercial arrangement. In that case, what about enacting a special tax on refined products to cover the losses? The USG can fine BP and keep the proceeds.

        What will the unemployment be if all 70 rigs operating in Deepwater shut down for good?

        Maybe the whole issue will come to a blistering head and the US will be forced into adopting a permanent long term integrated energy policy that producers can rely on?

        Here is an interesting different way of looking at the problem. Obama through the EPA and others considers deep water exploration too dangerous and proscibes it permanently. Everyone involved in Gulf deep water becomes unemployed. Obama will have prevented the BP spill . The cost is massive unemployment accretions in Louisiana and Texas, in particular. The Massachusets V EPA decision suggests that Obama could do this. Naturally, Congress would override him if he did, which says a lot too.

        A really big structural political mess has been exposed by the BP accident. It might be too big to address and the result will be a lot small people paying catastophic gasoline, heating and food expenses.

        Comment by Jerry J — June 20, 2010 @ 6:40 PM

      • This is in furtherance of my post just below. I thought of an example of a catastrophe I was involved in. Liability insurers know the ordinary things involved in insuring general liability. They then look at specific risk and add on premiums for the risk. In the BP case they knew they could not be hit for more than $75 million per occurrence because of the statutory cap. They priced in premiums no more than the cap limits. Why would the insured pay premiums for insurance above the statutory cap?

        Now my little story. A contractor was putting up a very large prison. Prison wiring conduit and piping was embedded in the concrete floors and walls. The concrete subcontractor accepted quite a few loads of bad concrete that separated into two layers in the floors. The concrete subcontractor , to fix the problem,injected high pressure epoxy to meld the two layers together. Ooops, the epoxy filled all the conduits so that no wiring or piping was possible. The general contractor went broke, the concrete subcontractor went broke and the bonding insurer was in a world of hurt since the entire structure was to be demolished. The bonding carrier came to us desperate for a solution and we fixed for them cost plus a fee. The bonding company still took it’s worst loss ever. This risk was possibly unlimited because their was no legal cap on the loss. They priced the bond accordingly and still hit a real killer problem. Now what if the legal cap on this possibility was $100,000 and it hits for $100 million ? Should the bonding insurer make good anyway and by edict of the government that passed the law saying we did not mean to honor such a law?

        Comment by Jerry J — June 20, 2010 @ 8:04 PM

  5. I bet you feel the idea of the government acting tortiously against the world sounds far out. Check out the following. In 2007, the Supreme Court held that Green House Gases are a pollutant if the EPA promulgates a decision that GHG’s are pollutants. The EPA did just that. In the aftermath of hurricaine Katrina, a number of parties sued big oil claiming tort damages from big oil, notably Murphy oil because GHG’s they released in their operations helped increase global temperatures that increased the intensity of Hurricane Katrina which caused their resultant damages. The case was dismissed because the question was political and not adjudicable. Last October, a three judge panel of the Fifth Circuit Court of Appeals reinstated the suit as justiciable. Thereupon, a strange thing happened in the Fifth Circuit Court of Appeals. So many judges were forced to recuse themselves from personal interest that they lacked a quorum for the Court to continue. That means, the case gets kicked up to the SC. They can then revisit the Massachusetts V EPA decision or uphold the plaintiffs justiciable right to prove damages during Hurricaine Katrina from Global Warming.

    Clearly leasing out deep water lands for drilling present a far more cogent direct path to every plaintiff seeking damages in the Macondo Spill from the US Government. If the Government invokes sovereign immunity here and it sticks then does it follow that the government tenant/ operator is immunized too?

    Might the Congress have considered this in setting the $75 million liability cap back in 1990?

    Certainly, if thye lessor/ royalty earner in government waters is immunized and also the regulator why on Earth would anyone explore for oil and gas without immunization too? Get out and go elsewhere? Is this Obama’s agenda?

    14th Banker. Would you loan money under these circumstances to anyone operating on government lands where the government is the lessor for a royalty? Why would any liability insurer cover such arrangements?

    Comment by Jerry J — June 20, 2010 @ 3:01 PM | Reply

    • I would be curious to see what bank loans there are to BP. Banks do not generally finance exploration these days. I don’t know what Commercial Paper back up lines there may be. It could be that the bank participation in financing is to shore up collateral positions. Far more interesting will be any swap action and prop trading in equities and bonds of BP as well as energy futures. If BP is counter party to large hedging derivatives there could be time bombs out there for holders CDS could be triggered pretty quickly with more downgrades.

      Comment by thefourteenthbanker — June 21, 2010 @ 12:59 AM | Reply

  6. The Sunday Times reports today that BP plc is planning to raise $50 bn to cover the Macondo spill liability. They wish to sell $20 bn of assets. They want to do a bond sale of $10 bn and hit banks for 420 bn.

    That tells me, the BP plc accountants estimate the loss at $50 bn. Would they not accrue the loss this quarter or beg off that it is not calculable? BP had eqyity of around $103 bn at the end of 2009 in consolidation. They write off $50 bn leaving equity of $53 bn and borrow $50 bn of liquidty to pay off. That $50 bn funds a dead loss but does not stay invested in the company to earn even the cost of interest? Obnviously, BP plc assets sold will tend to be degraded. Below carrying value on their books? If so, equity further decreases. What would be the annual interest cost? It would be expensive. 10 %?

    The assets of BP Group, what Hayward runs, would presumably be US assets. The entire $50 bn hit would go against this portion of BPplc. Again, by presumtion, without a detailed organization chart.

    Might BP get money as GM did?

    One well catastrophe lost? half the equity of BPplc. One must draw some very hard conclusions about risk from this.

    Comment by Jerry J — June 20, 2010 @ 3:37 PM | Reply

  7. Speaking of risk and entirely off subject. Israel National News is carrying a piece that 11 US war ships and one Israeli ship transited the Suez Canal in the last few hours. Haaretz carries a piece that Rahm Emanuel will exit the WH after two years from being tired of the ideaism of the Obama inner circle. Al Quds, the British based Arabic paper claims the Suez canal was closed to other traffic during transit. A week ago the Times carried a piece that Saudi Arabia will allow transit over SA territory for an Israeli- US attack on Iran. Voice of Israel claims that Egypt refused to deny transit to Iranian ships on the way to Gaza.

    Clearly , Israel is in a poor patch over this Gaza move by Iran. They dare not simply sink these ships and stir up SA, if nought else. That suggests that any Iran caper must precede any Gaza confrontation.

    Something big looks to be underway. Any air attack would not require a fleet presence until issues were settled on Iranian offensive capabilities against the fleet. Thereafter, the fleet could be instrumental in mopping up. Or as a second force should things go awty as they usually do.

    Comment by Jerry J — June 20, 2010 @ 10:34 PM | Reply

    • A lot of brinksmanship going on. Israel is in a pickle because of heavy handedness but I find it hard to believe Iran is ready for this kind of showdown. It would be like us dispatching an aid flotilla to N. Korea. US wants pressure on Iran to stand down. I agree there is more than meets the eye.

      Comment by thefourteenthbanker — June 21, 2010 @ 12:50 AM | Reply

  8. More important information is coming out today about BP and Gulf Deepwater. There is a pice on Bloomberg quoting the Lloyd’s CEO that Deepwater insurances will have to go substantially up. Insurers have been questioning deep water insuranc profitability for some time. The article claims that BP carries no liability insurance . This explains their ability to ” waive” the Oil spill Act of 1990 damage cap. Their passive partners obviously do carry inurances and their liability insurance layers above $75 million would have even precluded insuring spill damage since their coverages exceeded the act. Consequently, Anadarko and MOEX would likely be uninsured abouve $75 million.

    Today , Drudge is carrying a red line that a US Judge has enjoined the application of the drilling moratorium. I can see this being valid unless the Federal Government picks up all costs of drilling underway while the moratorium is in force. Mobilization and semi fixed costs of deep water are massive and we have what amounts to a taking here. I wonder what the lease agreement from the government says about this? In any event, assuming the government can order a moratorium without compensation and taking into account the huge insurances involved the projects might be dead already. What we in the building buiness call a ” known Loss”. We know the project will lose without a make good change order. Increase spill liability to the talked about of $10 billion per incident and I would think every lease in deep water would be ” force majeure”. Abandon and get out.

    The self insurance position of BP might well have opened them up to attack by Obama. They do not have a dozen or more reinsurers in their corner who themselves would claim reliance on the spill cap.

    Example Lloyds says it insured Trans ocean for the vessel and general liability including spills . They say they have caps in place on the spill. If Lloyd’s has caps, it is safe to assume everyone does.

    I would think the BP shareholders, including big oil as shareholders of BP in concert, would contest the ability to waive the spill cap without a shareholder vote. This goes double with no liability insurances.

    Comment by Jerry J — June 22, 2010 @ 1:58 PM | Reply

    • Ocassionally someone utters the phrase, “don’t bring a knife to a gun fight”. This is going to be one heck of a fight. When you consider the full array of weapons, who has the gun and who has the knife?

      Comment by thefourteenthbanker — June 23, 2010 @ 10:11 AM | Reply

      • Obama went in with the knife in real world terms as I see it. Big oil has the courts and multiple strategies. Obama has now gone for the jugular of all oil going for one. Big oil is not public accounting and BP is not Andersen. Going the other way, BP people do not seem to be vicious fighters, too timid.

        The industry weapon is shutting down in Gulf Deepwater if liability limits are increased. The effect on employment would be quite serious in Gulf Coast Areas. If US production decreased the full million bbl a day, big oil could dispose of equivalent production permanently and put up new refining elsewhere. Right now 37 rigs working Deepwater are generating 1 million bbl a day. The present 33 rigs doing exploration would dramatically increase deep water production. Continuing exploration would increase it even more. Big oil anticipates more than doubling deep water production in the next few years. That means a lot of money and jobs go into refining upgrades too. Shut down Deepwater and it all goes kaput.

        Was Obama’s play here a massive political tap dance that got out of hand from political pressures.

        With spill liability caps foreceably waived by threats of massive fines if you do not and threatened cancellation of all leases, the battle is to the death and Obama used up all his aramaments in the first barrage. So indeed, BP could be Andersen. But the other players would be advised to use BP to get at the administration. Every major must own some shares in BP… use the courts for shareholder suits.

        Salazar is going to end run the judge by entering a new very detailed moratorium order and I presume vacating the old moratorium. Thus, a new suit would be required. As it is, the present suit was brought by small fry,all employers in the Gulf. That would be exactly what would be expected of Rahm Emanuel. What one would plan for inside big oil.

        At the end of the day is the question of ending participation in deepwater. Obama , if he get’s his way, has rendered the spill cap dead by a bar fight. That said, every company in the Gulf now risks their life on every single well they spud. They risk the shareholders’ entire position on one well and that should provoke or manufacture suits to get out of deep water.

        Comment by Jerry J — June 23, 2010 @ 1:28 PM

      • There are obvious things not usually commented on. Big oil before the Exxon Valdez spill tended to own their own transport. They spun it off and contract transport now. Similarly, deepwater rigs are subcontracted to avoid liability problems. Big oil was not publically happy in 1990 when the Oil spill Act of 1990 made it into law. Consider oil prices back thenand the nineties glut. That $75 million was a very large number, now infinitesimal from potential oil prices in the future. Effectively, back then, you wagered $75 million on every well you spuded. Compared to Big Oil equity back then the number is peanuts. Now BP puts out press releases that the seek $50 bn for the loss on one well. That is half BP’s equity and more than double the equity of Anadarko.

        So, the spuding of one exploration well , after spinning off transport and subcontracting well spuding itself still puts the lessee at risk of his entire net worth. Big oil must fight to the death or follow past practices of shedding direct risk on others. Obama’s attack is direct meaning the big oil response must be direct and overwhelming . That is, unless they simply opt out entirely. Sounds like a broken record but that is the either or. Totally defeat Obama to the point his administration is a mass failure or opt out. It might well settle out that both happen.

        Comment by Jerry J — June 23, 2010 @ 3:32 PM

  9. Another piece on Bloomberg today confirms the usual process that the Macondo partnership entity requires arbitration between the partners to decide the amount and liability itself for required partnership capital contributions of all three partners in a dispute. I fully expect that a subsidiary of Anadarko is the partner involved. In that case, the entire question of liability will be if the partnership agreement allows , or the partnership may be expected in usual business practice to allow, the waiver of the Oil Spill Act of 1990 cap. Sheer practicality would presume that such a waiver could not be beyond the partnership. That the waiver could not be a waiver of the partner itself or the partner’s owner. The partnership cannot waive itself and the partner in the partnership? Did the lawyer’s miss this contingency idea because they thought the issue preposterous?

    Then, assume that the arbitration allows the waiver to the partnership on behalf of the partners. That partner would almost surely be a subsidiary of Anadarko that has a well grounded claim against the Macondo operating partnership. The very same partnership would have to pursue BP for damages if BP interfered in the Macondo Partnership causing the spill. The operating partner is pursuing the passive partners on behalf of the partnership while the operating partner caused the need for the added capital contributions in the first place.

    Does this not ultimately reach down to the partnership entirely exempting the passive partners? Thusly, the partnership can pursue the operating partnership , presumably BP Production and Exploration, Inc for all costs. BPE&P would then compartmentalize the loss.

    We can expect the rest of big oil to litigate the hell out of this issue with the USG. The current injunction on the drilling moratorium is just the start. What would the cost estimate be if the USG had to make good the inherent cost on the other 32 E&P rigs operating in the gulf. Might they aggregate $1bn each for six months. That would be a hit of $32 bn. At the least, might these costs be construed as offsettable to royalties payable to the USG? That would be the first route I would look into as CFO of a big oil company involved. After having challenged the moratorium and lost as a precursor. The lessor ( USG) may not obstruct the E&P of the lessees ( rig operators) unless the costs incurred are offsettable against royalties due at some future time. So, the challenge won today in court is required either way?

    Comment by Jerry J — June 22, 2010 @ 4:16 PM | Reply


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