Let's Make a Deal -- and then Renege

BP was in the news again Monday as rumors of its CEO's departure swirled around Wall Street. (Rumors are true; Hayward out)  That, along with analyst expectations of a good financial report Tuesday, drove BP share prices about five percent higher in the day's New York trading.

But Charles Ortel, managing director at Newport Value Partners, isn't convinced that the war between BP and the Obama administration is over.  In a Yahoo Finance interview, Mr. Ortel said that the June 16th White House deal supposedly limiting BP's liability to 20 billion dollars might not be a deal after all.

Yahoo interviewer Aaron Task contacted BP after the interview and learned this:

A spokesman says $20 billion is "not a ceiling or a floor" for BP's liabilities but couldn't provide an update on timing of a finalized escrow agreement.  "As a practical matter that hasn't limited the payment or processing of claims," which have exceeded $240 million to date, he said.

Mr. Task then confirmed that response with the Obama administration:

A White House spokesperson declined to comment on the expected finalization of the escrow agreement but reaffirmed "the $20 billion is not a cap on liability; if the liability is greater than $20 billion, then BP will have to pay directly."

In other words, BP's liability is indeed unlimited -- in theory at least. [Task's emphasis]

Given that Mr. Obama seems bewildered as to why his unprecedented fiscal and monetary stimuli have not worked to improve the economy, perhaps he should look in a mirror.  Put bluntly, businesses simply can't trust him, and the BP fiasco is a perfect example of that.

According to Mr. Ortel, when the government originally sold its deep-water offshore oil leases, it capped each potential bidder's liability at $75M to help mitigate the large risks inherent in such exploration.  It essentially gave the bidders a $75M-deductible insurance policy.  Regardless of whether that deal was overly generous or not, that was the deal and it led to successful sales of government oil leases by bringing some certainty to the risky business ventures.


But after the April 22 BP oilrig accident polluted the Gulf of Mexico and its shores, Mr. Obama reneged on the government contract in June, and seemingly upped BP's contractual liability to $20B.  Perhaps such renegotiations were illegal, but BP was in no position to argue.
 
Conversely, by agreeing to cover 267 times as much as it was obligated to pay, the company probably built some desperately needed goodwill among its customers and oil spill victims.  An alternative was to spend billions of dollars on big media advertising, hoping to repair the company's reputation, but the money probably is better spent on Gulf fishermen than on Manhattan television and newspaper executives.

In renegotiating the deal, BP executives also seemed to assure their shareholders that the company's liability was limited to a certain amount -- albeit an amount much larger than shareholders expected when they purchased the stock.  But now even those hyper-inflated shareholder assurances seem to be at risk.

Perhaps Mr. Obama believes that his dithering on BP's actual liability cap is doing "social justice".  But how much justice are young black men are getting when a third of them are out of work?  No doubt some of them are former energy industry employees.

Because he is not trustworthy, Mr. Obama is causing uncertainty among American business executives.  Uncertainly paralyzes free enterprise and such paralysis means that few businesses are hiring more employees.  No amount of fiscal or monetary stimuli will reduce the current level of legislative and regulatory uncertainty that you are causing, Mr. President.

And how exactly does "getting revenge" against the energy industry help poor single mothers that are forced to spend more for gasoline as they drop the kids off at daycare and drive to their jobs?  --Assuming they still have jobs.

Even Mr. Obama's most loyal supporters, union members, must wonder how their pension funds will fare as the president seeks more energy taxes under the guise of Cap and Trade legislation.  Those energy taxes will reduce the profits and share prices of virtually all companies in virtually all retirement portfolios.  When union leaders used tens of millions of dues dollars to get Mr. Obama elected, did they realize it would cost them tens of billions in the value of their pension funds?

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