http://www.economist.com/node/16377269?story_id=16377269&source=features_box_main
I know The Economist philosophically supports the free market and neo-liberal capitalism, so I guess they wanted to come to poor BP's defense after the angry American mob grilled stonewalling Tony Hayward (Dickens would call him "Tiny Tony") in a public spectacle. How dare the descendants of colonist farmers show such disrespect to their mother empire! The Economist had the nerve to compare Obama to Putin over this matter. Obama's been called a lot of horrible things by a lot of stupid people since he hit the mainstream, but that's a new one. Obama is not harassing BP to "do his bidding" for his own lust for power and personal gain, as Putin does. He is prodding them to own up to their responsibilities, repair as much damage as can be repaired, and compensate all who have unjustly suffered for their mistakes. Because as we have seen from previous corporate disasters, companies will do all they can to delay and minimize payments (sometimes for decades). And are we surprised? That is what they exist to do - maximize production and profit, minimize loss.
Sure Obama is trying to score political points in the process and use the crisis to push his clean energy agenda (which may be offensive to some voters), but that isn't really hurting the country, unlike the previous administration giving energy companies the green light to regulate themselves. Yes his secretary Ken Salazar vowed to clean up the corrupt culture at DOI, and doesn't have much to show for it over 18 months, or at least not enough to have averted this disaster. So sure, BP is not 100% at fault. Westerners, and particularly Yanks, are addicted to abundant, cheap energy (we are now reminded of the true costs of "cheap energy"). Our leaders took industry money, gutted regulations, and got out of their way. But the bottom line is no one forced BP to tell Transocean to drill in an unsafe manner, low-ball the oil leak estimates, and half-ass the clean-up effort.
I understand that the Economist would want to remind us that BP's mistakes should not be an indictment of business as a whole. Have they been living under a rock for the past few years? Look how "big business" has performed in our lifetimes (and especially since Obama took office), and maybe they do deserve a blanket indictment. I'm not talking about the mom-and-pop restauranteurs, veterinarians, or freelance architects of the world that just want to make a living and provide great customer service. I'm talking about the big corporations who spend millions courting politicians, even to the point that the biggest oil money recipient in Congress, GOP Rep. Barton from TX, went so far as to open the BP hearings by apologizing to Hayward for his government's angry rhetoric and "shakedown". The companies that give their inept, short-sighted executives huge compensation, globalize their businesses to tap slave-wage labor markets and nonexistent regulatory environments, layoff thousands to appease Wall Street, and in many cases, commit fraud and break the law.
http://news.yahoo.com/s/ynews/20100617/ts_ynews/ynews_ts2660_2
Plus it seems that the bigger or more prominent the corporation, the worse their infractions. Toyota and GM are the biggest auto makers on the planet, and Toyota's quality control practices were hailed and replicated the world over. One problem, in their manic quest to rapidly overtake GM, they forgot their own teachings, and initially denied everything rather than fess up to their responsibility for putting some drivers in mortal peril. GM once ruled their industry, and millions depend on them for their livelihoods. But last year they were reduced to taking government handouts, even though tiny Hyundai posted record sales (so you can't just blame the recession). Fortune magazine gave Enron the title of "most innovative company" for 6 straight years (even Kobe Bryant couldn't win 6 straight titles), and we know how that turned out. Goldman Sachs is one of the best-performing and shrewdest firms on Wall Street, and now they are under investigation for multiple infractions. The world's biggest pharma, Pfizer, had to pay the biggest government fine in history (at the time), for improper drug marketing. Massey Energy, one of the biggest coal miners, permitted lax and negligent safety standards, which claimed the lives of dozens of its workers. And now BP, the world's 4th biggest oil company, has presided over the worst environmental disaster in the New World, stealing the dishonor from the world's biggest oil company, Exxon, after the Valdez spill. The list goes on and on.
One can argue that the sheer scale of these mega-companies makes it more likely that there will be some sort of problems under their umbrella, vs. smaller outfits at least. But their oversight/safety/compliance infrastructure should grow with the rest of the business. A 200 pound person can't survive with a child's kidneys. These businesses I mentioned may be too big to fail (apart from Enron), but maybe they're too big for their own good too. As Hayward said, he was "out of the loop" regarding the Deepwater Horizons drilling project. Many of the big banks caught in the subprime crisis claimed that they had no idea they were even dealing in those securities. When a company's leader has no idea what his or her company is doing, maybe that company needs to rethink the way it does business. I know one CEO can't micro-manage a billion-dollar organization, but the chain of command and communication should at least include the execs. Otherwise you just have a chaotic, out of control, short-term-profits-driven entity that is under tremendous pressure from shareholders, employees, and investors to cut corners and cheat to make more money.
In the Olliver Stone film "Nixon", the president confronts an anti-war protester. Both want the Vietnam War to end, but Nixon explains that it's not so simple because of the complex military establishment. The protester said it sounded like a beast that can't be controlled. I hope that is not what big business has become, but many warning signs point to it. I know that big corporate disasters and fraud are still relatively rare (the ones we find out about at least), and many companies follow the rules and behave ethically. But just because disasters like BP and Enron were possible in our free market society should be enough cause for alarm for us to rethink our entire economic system. I'm not saying a command economy would be any better (see North Korea), but when the status quo is failing, we have to contemplate alternatives. Unlike The Economist, I feel that it's better in this case to over-react to a potential problem rather than pretend none exists and the system is working fine.
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You've omitted the primary reason they make the comparison. This should be a republic, a nation of laws and not men. Instead of pursuing the law, Obama is calling BP into his office to strong-arm them into extra-legal requirements: for the good of the nation, or for his own political good, depending on your spin. But good or bad, it's outside the law, and that's why the Economist comments that the "collapse in BP’s share price suggests that he has convinced the markets that he is an American version of Vladimir Putin, willing to harry firms into doing his bidding."
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No, the collapse in BP's share price is due to their spill and poor damage control thereafter, both of which Obama had nothing to do with. BP's stock price actually went up on June 16 when Obama met with BP execs to "strong-arm" them into agreeing to open the $20B escrow account (from $30 to almost $33). And the next day the share price held pretty steady at $32, so maybe investors were just happy that some sort of positive agreement was reached. So the data don't support the Economist's claim.
We are a nation that respects the rule of law, but we have no laws to date to handle an environmental disaster of this magnitude. If the $20B account is extra-legal, then BP doesn't have to agree to it. Deals are cut all the time in Washington, and sometimes what's good for the politician/party is also good for the country. Obama doesn't strike me as the shake-down kind of leader. BP would only agree to the $20B account if the alternative was worse (criminal action maybe?). Maybe Obama threatened to revoke BP's drilling leases on Federal land or confiscate assets. Both actions are completely LEGAL and acceptable for a president to do considering BP's horrible safety record in the last 10 years and their duplicity in their promises to improve (see the long ProPublica article below if you're curious).
I find it amusing how some people in the media/politics are getting so outraged about Obama "kicking around" BP (ostensibly for petty political gain, and not because it's the justified thing to do), yet they don't seem to exhibit a similar level of anger over the worst environmental disaster in American history that is affecting at least 5 states and millions of people/jobs for decades. And the critics seem to forget that Obama was pretty calm and rational during the first month of the spill, almost to a fault, and didn't take it to BP when he could have.
http://online.wsj.com/public/quotes/main.html?type=djn&symbol=BP
http://www.propublica.org/feature/years-of-internal-bp-probes-warned-that-neglect-could-lead-to-accidents
http://www.npr.org/templates/story/story.php?storyId=127561853
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Regarding the share-price question, I look at
http://www.google.com/finance?q=NYSE%3ABP and see the stock closing at 31.40 on the 15th, 31.85 on the 16th, and 31.71 on the 17th, so effectively no change. More interesting is that on the 16th, a CDS on BP's debt jumped 400 basis points, from 600 to over 1,000.
http://www.zerohedge.com/article/bp-cds-curve-goes-nuts-1-year-passes-1000-bps-no-offers-market Basically, the cost of insuring against BP defaulting (bankruptcy) increased almost as much on June 16th as it did over the previous two months. The market thought the chance of BP ceasing to exist was a lot higher on the 16th than on the 15th.
I agree that the spill is absolutely outrageous. But the problem isn't just BP, and focusing just on BP isn't going to fix it or prevent it happening again.
Why weren't there laws in place? This isn't the first time there's been a big spill in the US, nor the first time that BP's created problems - they had 760 pre-spill OSHA violations, something like 97% of oil-industry violations (
http://www.businessinsider.com/bp-has-been-fined-by-osha-760-times-has-an-awful-track-record-for-safety-2010-6). Why weren't they more closely regulated? I'm sure you've seen that BP's Gulf Spill Response Plan was so unbelievably shoddy that it listed walruses as a local species (
http://www.americanscientist.org/science/pub/bps-gulf-spill-response-plan-lists-walrus-as-local-species): what regulator signed off on that?
The ideal situation would have been that lawmakers in DC identified these problems and put laws into place to handle this situation. That's a failure of leadership. Big companies have been profit-driven since Adam Smith: why are we surprised by this? Look at Standard Oil, or the big railroads of the past. The job of government is to put the rules into place to set the proper incentives for those companies. Instead, we have no laws to handle this situation.
The second-best situation would be to start putting those laws into place now. Fix the regulatory scheme. Reform tort law: why does the Oil Pollution Act limit the legal damages from an oil spill at a hilariously-low $75M (
http://www.lawsuitfinanceblog.com/2010/06/bp_disaster_highlights_that_to.html)?
Even better, turn this energy and fury into a change in American energy policy. That would be real leadership: refocus popular anger from the short-term immediate cause to real long-term change. The simple reality is that America's use of oil contributes to this. The amount of oil spilled in the Gulf gets spilled *every year* in Nigeria (
http://www.boingboing.net/2010/06/14/more-oil-spilled-in.html). We only get upset when it's in our backyard.
Instead, we've got Obama publicly shaking down BP. That's certainly easier: westerns work better when one guy has a white hat and the other has a black hat. But it's not leadership, it's public theater. And it ensures that this will happen again.
To be clear, I do think BP should go under as a result of this. Given their current cash position, I don't think that's impossible. They have a big line of credit from JPM right now ($50B) which could keep them afloat, but with CDS spreads widening and the various debt problems in Europe, I wouldn't be surprised to see JPM pull that. They have something like 13B in cash and another 10B in yearly profit, but if the estimates of daily oil spill increases, or they don't fix it, their liabilities could be much higher. Then we might get to see whether BP is too big to fail (it's like the too legit to quit of the 21st century!).
I'd just like to see the blame and fixes extend beyond just blowing up BP :)
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Thanks for the links and your comments!
I don't think this crisis is about putting BP in front of a firing squad like that inmate in Utah. I think it is about them owning up to their responsibilities for the damage they caused to the US and its people. We allow them to do business in our country with certain expectations, and when they fail to meet their obligations, some punishment is in order. BP and its execs have acted pretty callously and unapologetically for the first 1.5 months of the crisis, and now the best they can give us are alligator tears before going to a sailing regatta. The people and Washington don't appreciate that. Yes, maybe we're using BP to score political points and serve as a warning to other would-be violators, but as you said, destroying BP won't help us avoid another disaster, and won't bring the Gulf back. But let's remember that there's a good chance BP will be just fine in a decade, since much of their business is outside of the US, and they can write off all their fines and penalties. Everyone predicted the death of Exxon after Valdez.
FDR also made public spectacles and called out big industry and the banks whose business practices led to the Depression. From the NYT:
Mr. Obama wanted to transcend partisanship. Instead, however, he finds himself very much in the position Franklin Roosevelt described in a famous 1936 speech, struggling with “the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.” And that’s not necessarily a bad thing. Roosevelt turned corporate opposition into a badge of honor: “I welcome their hatred,” he declared.
As you said, during last week's BP-Obama meeting, the closing price was pretty much unchanged, so their stock didn't "collapse" in response to the $20B settlement that Vlad Obama forced upon them. But as I said, during the day of the 16th, the stock went up, not down. So if the meeting was so disastrous for business confidence, the share price didn't reflect that. Regarding the jump in basis points, that's how third-party bankers evaluate BP's prospects. Their debt status is near junk like Greece, but it may be irrational and inaccurate. It's just a guess, and has little to do with BP's actual financial viability and obligations to the US government. As we saw during the credit crisis, debt rating agencies were way off target and contributed to the collapse. BP and Greek debt are still much safer investments than a lot of stuff out there.
No one ever said the problem was all BP. In multiple emails I said it was also on the oil-thirsty public and our high-consuming way of life (not to mention our out-of-sight-out-of-mind political mentality), and also the lax regulators and politicians who took oil money and let the companies police themselves. But in this case, the spill is 100% the fault of BP and Transocean. Obama didn't blow up the rig. Problems with the cleanup and repair effort are on the industry and government both. But for the spill, I don't think BP can come out and blame the government for not regulating them better. Because that is an admission of their own incompetence (even though they assured everyone that they had deep water drilling down to a near-foolproof science), and contradicts the oil industry's efforts to ease regulations and expand drilling over the last decade. "It's not our fault, the government should have watched us more carefully!" Well they're not allowed to pull that excuse when they're the ones who told the government and public that everything was fine and to leave them alone.
As you probably know, pro-oil legislators wrote a loophole in the offshore drilling permits process. Regulators have only 2 weeks to review and sign off on drilling proposals before companies are allowed to start their projects. Everyone damn well knows that the MMS is understaffed, undertrained, underpaid, and the ones that do make decisions are often pro-oil former industry lackeys looking to buddy up to companies to earn a cushy return to the private sector. There is no way they can read thousand-page reports with complex data in 2 weeks. So essentially, it's like they don't even need to get an approval. This is the fault of industry lobbyists and corrupt public "servants". Energy extraction should be as scrutinized as financial accounting and food/drug safety (and we're still not perfect in those areas).
I completely agree with the need to have newer, better, stricter laws on the books. But we're just 2 months after the rig explosion. It's going to take Congress some time (universal health care took over a decade after all). We're still collecting the data, and the GOP are being assholes every step of the way, pulling the "government stifling business and taking away our rights" card every chance they can. But we can't have it both ways - either we want to roll out strong, effective, rational regulation of businesses in the national interest, or we just accept the status quo with the conservative ideology of deregulation and short-term profit-taking. If we have to temporarily trample on the rights of the "poor, defenseless corporation" when real flesh-and-blood people are getting screwed, then that's a sacrifice I'm willing to accept.
I don't think Obama will rest now that he has "shaken down" BP; that was never the end goal. Of course he used this occasion and his prime time address to stress the need for energy alternatives, and he will continue his push for a greener economy like he promised years ago on the campaign trail (of course the energy industry will fight him tooth and nail). He was under fire for not getting madder about the situation, so he responded. Maybe he went too far with the $20B, but the Dem Congressional leaders were also involved, and we'll let the historians decide in the future There were some concerns that BP would drag its feet to "honor all legitimate claims", so he cut through the red tape and made sure the victims got some help before the next ice age. He works for the people, not BP. The money is part of the process, but not the objective. Give Obama some credit, I think he knows that we have to change the way we do and regulate business so that we're less dependent on risky energy exploration and have more peace of mind that strict safety measures will avoid catastrophes. As you said about Nigeria, it is also sad that our dependence on imported oil conveniently allows us to ignore all the environmental and social harm energy extraction causes in the Third World. Well once we have more energy flexibility at home, we can be more selective with our sources of imports, and hopefully boycott the companies and nations that commit gross violations.
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I thought it was pretty clear, as per a speech given by Obama, that he WAS using this as a stepping stone to a new improved energy policy focusing on clean and sustainable energy, is that not the case?
And if i had to address point 1, why weren't laws in place? I would say that it is because businesses own government on this kind of thing. Kind of addresses the difficulty of point 2, make some now.
I think t's point of washington deal making is what makes or breaks the Putin reference. The understanding is that when Putin makes a deal behind closed doors, it was an offer you couldn't refuse. I don't think we believe that is the case with Obama. It may ACTUALLY be the case, which would make him Putinesque for sure, but i don't think that is public perception at this point.
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Thanks M, that was my point exactly regarding the difference with Obama and Putin. Plus BP has an army of litigators who are much better than government lawyers, so if Obama played hardball with them and overplayed his hand, they would find a way to roast him for it.
For all we know, the $20B fund may be a LUCKY BREAK for BP. As J said, they made over $10B in profit last year, and their cushy royalties agreements with the government mean that they shortchange the American people millions each year too. Maybe they won some government concessions and guarantees that they wouldn't revoke their licenses or whatnot. History has shown us that oil companies often escape full punishment, and I wouldn't be surprised if their allies in government helped them this time too.
Thanks for your comments, G. I'm proud of Obama for doing this much so far and not being scared to be publicly anti-business (at least corrupt business). Actually my "approval rating" for him is the highest it's been since his inauguration. He didn't want this crisis; it's distracting the government and people from all his other policy initiatives. But he's doing what he can to fight for the victims and use the crisis to show us how we have fallen so far during the Bush years. We need more regulation (as if the recession wasn't proof enough), and cleaner ways of getting energy - plus we need to use energy more sparingly, which I wish he would stress more, instead of riding around in a big motorcade of Chevy Suburbans. And I hope he would use the BP crisis to show how horribly the GOP is behaving and how they are truly bad for America. As if health care wasn't bad enough, the GOP are just acting outrageously regarding BP and the financial reform bill. He's got to nail them to the cross for this, and even dare to call them unpatriotic (they called the Dems that during the War on Terror anyway).
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To add to this, I think no one (at least no one I've read) suggests that BP shouldn't be fully liable for all costs that result from the spill. As long as the escrow account is only used to pay all the legitimate damage claims that result from the spill (and, if it turns out to be less expensive than $20 bil, the rest is returned to BP), then the escrow account, on a net-net basis, doesn't really change BP's ultimate cash position.
What it mostly does is in the name of efficiency. First, it saves a lot of litigation and time costs on both sides. If BP doesn't set up the escrow account, then the government would have to sue (assuming BP initially refuses to pay), or keep sending individual bills to BP. Likewise for private parties. It is therefore in both parties interest to set up some means of expediting claims (if you assume BP actually is interested in a good-faith effort to pay legitimate claims and not on releasing packs of lawyers to try to get out of every damage payment).
I think ultimately the escrow fund is a pretty minor achievement by Obama (not that he's in a position to do much anyway). For it to be a Putin-esque style shakedown, it would require Obama forcing them to hand over private shares/monies to the government without compensation. Instead, he asked them to set aside some money on a contingency basis to meet all legitimate outstanding damage claims against them, to be refunded to them in the event that the fund is not exhausted. Any competent corporate bod/executive does this anyway for expected litigation costs, they just don't publicly make deals with the president to do it.
Basically, Obama gets some face for making BP do "something". BP does what it was going to do anyway (set up a contingency fund) and gets some positive press for "owning" the disaster. I think that's probably why the stock price was largely unaffected: the agreement doesn't really mean much one way or another for BP's ultimate fate. Maybe it spooked some bond investors by the size of the fund, but that has to be because BP is revealing to the market information about how much it thinks the damages may be, not because the government "shook them down".
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I think your reply is very well stated and sums up my feelings to a great extent.
One thing to note about the CDS market is that volumes are *way* down (like 90%) from the highs in 2007 so you do have a point about the pricing perhaps not being as aggressive as it could be (though I should mention that CDS prices are based on mathematical models and it might be a bit haphazard to characterize them as nothing more than a guess)...
PS: I think you're right about blame for the disaster but I have a feeling of dismay to think that only now (2 months later?) the media is talking about how the redundant control mechanism was compromised (i.e. there was only one of two working safety mechanisms) and that no one seems to be asking why the safety systems aren't passive control mechanisms (like the kind in a nuclear reactor) rather than active control mechanisms.
PPS: I think the administration can't be blamed for the clean-up; once a disaster has occurred there isn't much that can be done (especially when the technical challenge is the thing requiring management). The government can definitely change the shape of the incentives which are in place and the regulations which give rise to the systems which are utilized in practice... but come on - Bush was the oil man, not Obama!
