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Did Obama Save BP?

June 17, 2010, 7:54 am

The media is portraying the $20 billion BP spill fund as a result of tough talk from the President.  I think it was a lifeline that BP grabbed with great relish (so does the stock market, as their stock price has risen slightly in the day and a half since).

BP faces absolute bankruptcy from the torts resulting form this current spill, along with some criminal charges.  Its best hope is to negotiate a deal, Chicago-style, with the US government.  In exchange for a cash fund that will sound really large in the press but likely will fall short of actual claims, Congress will pass a law limiting its liability to just+ the settlement fund.  The public justification will be that the settlement fund will provide much quicker and more efficient compensation to victims -- which might even be true.

If one wants a model, just look at the tobacco settlement.  While they vilified them, the government in fact made tobacco companies their partners.  Since the settlement, the government has in fact stepped in to protect the large tobacco companies from competition and price erosion, in large part to protect parties to the settlement from loss of market share to parties who are not on the hook to pay out large sums to the government.  By the way, note that the vast majority of the tobacco settlement money did not go to its stated purpose of tobacco education and health care costs, but into the general funds to support politicians' whims.

This is how things work in the corporate state (and, I suppose, in organized crime).  Once you have an entity like BP vulnerable and under your control, the last thing you want is for them to die.  You want to milk them for years, both for cash and political support, the quid pro quo for being kept alive.

Update: OK, it seems I can't be original.  Others are thinking this too

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Category: The Corporate State
  • anon

    It always amazes me the the largest organization in this country meeting the definition of "organized crime" is the one theoretically in charge of fighting it.

  • Michael

    I think Obama got played. When disbursement checks to injured parties get hung up in red tape, people are going to look at Obama, not BP. This was a great out for BP. Another win for BP is that they might now get a cap and trade law in the US for which they will reap billions. And we don't know what's going on, on the back end. BP is the largest supplier of fuel to the military. The US could be routing more fuel orders to BP. Remember, BP spent a lot of money on Obama and he'll protect his cash cow.

  • anon

    No, Obama did not get played.

    As with the Chrysler bankruptcy, he did an end-around the rule of law. Suppose BP went bankrupt paying tort claims for the damage caused by its negligent or reckless behavior.

    Once bankrupt, the assets get doles out according to bankruptcy law: first to secured creditors, etc.

    Now, $20B comes of the top to be handed out on the basis of political patronage. With Chrysler, it was the UAW. No mystery why, look at their political donations.

    With BP, we'll find out soon enough.

  • mesaeconoguy

    Apparently, Vice President Biden (dressed as the Village People “Bad Cop”) marched into the Oval Office during the BP/Obama “meeting” and said “Give us this money (the $20 billion “shakedown” fund) or we’ll take it.”

    Judge Napolitano states that this is a gross violation of the 5th Amendment due process clause. Loose cannon/village idiot Biden also opened himself up to extortion charges, and potential shareholder class action (including British pensioners).

  • Ron H.

    Anon @ 11:52 said:

    "Once bankrupt, the assets get doled out according to bankruptcy law: first to secured creditors, etc."

    Not necessarily, you may want to ask the senior secured creditors of GM about that.

  • Dr. T

    BP is in no danger of bankruptcy. Actual damages (not fake damages like most of those filed in the wake of Katrina) are unlikely to reach 20 billion dollars. BP's annual profits are around 15 billion dollars, so cutting profits to zero for just 16 months would cover 20 billion in clean-up and damage costs.

    BP was illegally forced by Obama to create the 20 billion dollar fund that Congress wants the power to allocate. Gulf state Congresspersons could disperse 20 billion dollars to their friends, family, and campaign contributors in about 45 minutes, leaving nothing for the people and businesses with real damages. BP is trying to retain the power to evaluate claims and control compensation, but our politicians desperately desire the good PR they'd receive for doling out the money themselves. Who do you think will win when the government gets to stack the deck?

    This is just another example of politics at its worst that screws-up capitalism and bypasses established legal channels (just like the GM deal, the AIM bailout, and the Fannie Mae and Freddie Mac bailouts). This isn't like the tobacco deal that was designed to save the big boys and screw-over the smaller tobacco companies, because forcing BP to set up a huge damage fund doesn't help or harm other oil companies.

  • Val

    BP earned north of $20B over the trailing 12. If this accident hadn't happened, earnings were projected to be much higher over the next few years. They almost certainly still will be, since actual demand projections are likely to be fairly accurate, though I think a little more to the downside than most analysts. BP isn't going anywhere. However, I fear that we are definitely looking at another serious toppling of columns in our free markets. Although BP and others will make the most out of this, and the administration may 'get played', it really doesn't matter to the powers in DC. Their prize is much bigger, further reaching, and long lasting. We might think of GM and the UAW a very successful test run. Now it moves to the major players.

    If anyone thinks that these people haven't just gone to a double time on their long march, they aren't paying attention.

  • Tom G., Chicago

    The $20B could be illusory anyway. If BP filed Chapter 11, $ in escrow is still sucked back into the bankruptcy estate. Escrow doesn't pass title to the funds--trusts do. The claimants against the escrow get the same as the other unsecured general creditors--maybe 3 cents on the dollar in 5 years or 5 cents in ten years.

  • mesaeconoguy
  • mesaeconoguy

    God I hate the last XP update…..

  • Tim Burton

    long time reader - first time comment - seen you on some TV - like your position on most things - re: your reference to tobacco companies (and an admitted smoker) I would argue that smoking is beneficial to society (but not the individual) ie. 1)taxes up front; 2)die sooner - shorter life span (I'm from Canada so CPP, Old Age Pension draws, etc(prepaid from our contributions and higher taxes)); and 3)all end of life health care costs (last 2 years) have an impact. Would like to see a serious study from an economist.

  • Michael

    @anon
    Now, $20B comes of the top to be handed out on the basis of political patronage. With Chrysler, it was the UAW. No mystery why, look at their political donations.

    That's my point. Come the elections, we'll still be getting sob stories from all the small businesses that had to close, people that lost everything, and an empty 20 billion dollar fund that went to the unions. Obama isn't going to look good. With the administration shutting down the 16 barges Jindal was using to skim oil, we know the only concern for Obama is the unions, not the coast or it's people. The Democrats are going to have a hard time pretending they care for the little guy.

  • tehag

    The slush fund can come as surprise or disappoint only to people who don't know America. American intellectuals, academicians, publishers, reporters, editors, politicians, et. al. have openly praised Castro, Ortega, Chavez, Allende, and the like for decades. They are the people they have been waiting for: corrupt, lawless, avaricious, selfish--they will govern as they see fit. No law can restrain them; the law is their will as expressed through their governors, not word on paper (which are means by which one class expresses its class hatred and justifies its persecution of its enemy classes).

    When the socialist son of socialist is voted into office by them and their dupes, how else would he govern? People will be lucky is $2 million is used for its actual purpose: the rest will be used to create, strengthen, and arm the political machine for the final dismissal of the Constitution. This is our Augustan age.

  • anon

    Michael, the fund is bottomless. The $20B is uncapped.

  • caseyboy

    $20 billion too much???? If they don't get this thing capped soon the damages to the region will bankrupt BP. The question will then be whether the government attempts to extort other oil companies to aid the effort or go deeper in debt. From what I've read about the integrity of the oil well sub-structure things are deteriorating quickly. BP is in a race to get the relief well dug and pressure diverted or things will blow and the outflow could exceed 150,000 barrels a day. The Gulf of Mexico will become a dead sea. Please explain to me again why we can't drill in Anwar?

  • caseyboy

    tehag - I hadn't thought of the analogy of the Roman Republic giving way to the Roman Empire. Unfortunately Obama is no Augustus (Octavian) Caesar. Whereas the Roman Empire's influence and wealth continued to grow for some time after Augustus, Obama has the US on a backward track politically, economically and spiritually.

  • Ignoramus

    We adopted the Oil Pollution Act back in 1990 to deal with situations like this. Back in late May, BP said it would ignore the liability caps in that Act, pay all legitimate claims for direct damages and not seek reimbursement form the Act's Trust Fund. BP should have gotten credit for this.
    Instead, Obama changed the BP liability narrative over the last few weeks for his own personal reasons. We're collectively worse off, because of it.

    Obama started vilifying BP to cover the personal criticism that he's been getting lately on the Deepwater spill. In so doing, Obama's been acting like a community agitator / plaintiffs lawyer -- but one with Presidential powers intent on kicking ass. He's gotten AG Holder to threaten criminal charges and other legal work-arounds. We had the President coerce BP dividend policy. We've had various Democrats -- and tag-along Republicans -- threaten retroactive changes to the liability caps, even on pre-existing drilling leases. We've had the concept of damages expanded to cover workers idled by Obama's policy shift on Gulf drilling.

    So what's happened is that Obama will claim credit for BP's paying up, when they had already said they would. The only things extra Obama got out of BP were commitments (1) to pre-fund $20 billion out of its control ... over several years, and (2) to cover the lost wages of oil drillers idled by Obama's drilling moratorium. Obama will claim credit for the checks that get handed out -- he may even sign them!

    But the way Obama went at this has set a bad precedent. We have courts and statutes and the common law of tort for a reason. Instead, the US has acted like a Banana Republic dictatorship.

    I'd go further to say that the net result of what Obama has done in the last month will kill drilling by the US in the Gulf -- that Obama has already decided this for us. Oil drillers will just work elsewhere -- the risks in the US are now just too high -- and you can't rely on contract or statute for protection. It may be uninsurable. Either (1) Obama wanted this outcome, or (2) came to it because he needed someone else to blame ... either way it's not good.

    Not drilling in the Gulf is a bad thing. We'll only end up more dependent on foreign oil and domestic coal -- the worst choices. Wind and solar are a pipe-dream to cover more than 10% of our needs.

  • anon

    TONY Hayward received a vote of confidence from one of business’s most notable axemen today, with Alan Sugar backing the beleaguered BP boss.
    As star of the BBC programme The Apprentice, Lord Sugar has uttered the phrase "You’re fired" more than most.
    But the Enterprise Tsar thinks the BP chief executive should not be asked to clear his desk quite yet.
    "I feel pretty sorry for him at the moment under the pressure he is experiencing," Lord Sugar told GMTV.
    Asked if he should be fired, the millionaire businessman replied: "Definitely not."
    He added: "There has been a disaster, obviously. One has to remember that this was an accident, BP didn’t do it deliberately.
    "Also a lot of the stuff they built there was approved by the Americans."
    Lord Sugar criticised President Barack Obama and other US politicians for "electioneering" over the issue.
    "It suits them to ignore disasters that their own American oil companies like Texaco and Exxon caused," he added.

    Complaining about an oil spill... That's rich coming from a country that produces more pollution and greenhouse gases than any other country in the World.

  • anon

    Yeah! When is the US gonna compensate the rest of the world for the damage it is doing on a daily basis to our planet. You oil guzzling, fuel consuming, hamburger munching lard arses.

  • http://gmsplace.com/ John Moore

    I think BP got played. Obama has a history of corporate state deals, which he then reneges on after he gets what he wants. Ask the health care industry suckers.

  • caseyboy

    anon: the rest of the world still owes us for keeping it free from oppressive, totalitarian regimes. Are you too young to have heard of Hirohito or Hitler? How about Stalin? The world may have a little more CO2 because of our lifestyles, but they should never forget what their lifestyles would be like in the absence of America.