bp and the "too big to fail" argument - Tilted Forum Project Discussion Community

roachboy · 06-10-2010, 07:03 AM

this spins out of the long thread in general discussion about the deepwater horizon fiasco in the gulf of mexico. alot of the background information (to the extent we know the really relevant background information---and that's not obvious) is there, so for convenience sake, here's the link:

http://www.tfproject.org/tfp/general...oil-spill.html

but i think what's happening to bp financially and the political fallout that's starting to take shape is interesting and raises some awkward questions for just about everyone---i think no matter your viewpoint there's something about this that'll piss you off. so.

from this morning's financial times:

Quote:

BP shares continue slide after US attacks

By Jean Eaglesham in London, Matthew Green in Kabul and Michael Hunter in London

Published: June 9 2010 18:36 | Last updated: June 10 2010 15:06

Shares in BP lost further ground on Thursday on growing concern about the impact of the Gulf of Mexico oil spill on the company’s financial health.

The potential cost of the crisis, and fresh fears over whether BP will pay its dividend, sent the shares tumbling 11 per cent at the open, The stock, which on Wednesday closed below 400p for the first time since October 2008, recovered some of those losses to stand 3.2 per cent lower at 380p by midday in London on Thursday.

But as US trading started, the stock was under more pressure, losing 7.3 per cent to 361.6p, even as its American Depositary Receipts, instruments that allow US investors exposure to its shares without a full listing on an exchange there, recovered from 14-year lows in a sell-off over the previous session. As New York markets opened, BP’s ADRs rose from their Wednesday close of $29.20 to $32.14.

The fall in the share price followed a near-16 per cent drop in New York overnight for the company’s American Depositary Receipts, which have now halved since the accident on April 20.

The cost of insuring BP debt against default also rose sharply, with five-year credit default swaps quoted at 510 basis points at one stage, having closed at 386 basis points on Wednesday. That means it would cost $510,000 a year over five years to protect $10m of BP bonds from default. At these levels, the market is indicating a “junk” rating on BP’s debt.

BP said in a statement on Thursday that it was “not aware of any reason” for the sharp fall in its ADRs. It said that its “strong and valuable” asset base , and its strong cash inflows and outflows, “gives us significant capacity and flexibility in dealing with the cost of responding to the incident, the environmental remediation and the payment of legitimate claims.which justifies this share price movement.“BP share price

The severe market reaction came as UK industry expressed alarm at the “inappropriate” and increasingly aggressive rhetoric being deployed against BP by Barack Obama, US president, and warned that the attacks on the oil company could damage transatlantic relations.

Adopting a more emollient tone, David Cameron, UK prime minister, said on Thursday that the British government stood ready to help BP with its clean-up efforts and that he completely understood US frustration. Speaking on a visit to Kabul, he said he would be discussing the “environmental catastrophe” with President Obama, with whom he is due to talk on the telephone over the weekend.

The concerns of the UK business community come amid mounting unease in Britain that attacks on BP for its handling of the Gulf of Mexico oil spill are being dictated by the politics of November’s midterm Congressional elections rather than normal regulatory considerations.

Repeated references by senior US politicians to “British Petroleum” – which has not been the company’s name since 1998 – have fuelled fears of a wider backlash against UK companies.

Richard Lambert, director-general of the CBI, the UK employers’ group, said the presidential attack was “obviously a matter of concern – politicians getting heavily involved in business in this way always is”.

Mr Lambert suggested the White House strategy was misplaced. He said: “Apart from anything else, BP is a vital part of the US energy infrastructure. So the US has an interest in the welfare of BP, as much as the rest of the world does”.

Miles Templeman, director-general of the UK’s Institute of Directors, said he was “very concerned – this sort of political rhetoric is inappropriate”.

He said that British business appreciated the gravity of the spill but warned: “There is a danger that ... there will be a prejudice against British companies because of it.”

The White House has kept up pressure on BP, telling the company to pay the salaries of all workers laid off by an offshore drilling moratorium as well as the other costs of the disaster.

Robert Gibbs, White House press secretary, said: “We believe it’s an economic damage caused by this, not unlike losing business at your bait-and-tackle shop.”

The White House did not respond to requests for comment. The British Embassy in Washington said it had not received any specific request for help from BP but was in contact with the administration and the company.

BP added on Thursday that the cost to date of the response to the spill was approximately $1.43bn, including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid, and federal costs. It repeated that it was too early to quantify other potential costs and liabilities associated with the incident.

FT.com / Companies / Oil & Gas - BP shares continue slide after US attacks

at one level, what we have here is bp's information management program, which was far more prepared for this than was the production side (that's another matter) is responding to the rapid tank of bp share prices, which are down some 47% over the past 50 days or so of unmitigated ecological disaster and which took a considerable dive (11% at opening) yesterday. problems are starting to surface at the level of short-term commercial paper for bp. the spike in default insurance rates means that bp's paper just acquired the status of junk bonds.

this is not good for poor corporate person bp.

David Cameron admits sympathy with Obama before discussing BP crisis | Business | guardian.co.uk

this is a wider-angle story from this mornings guardian that talks about the understanding of cause for this financial scenario: that the bullies in the obama administration are being mean to poor corporate person bp who clearly made a giant mess but didn't mean to. the administration has the audacity to demand that bp address the impact of their disaster on a range of stakeholders in addition to make their disaster stop and clean up their disaster. worse, from the enlightened viewpoint of the holders of capital, the administration is threatening to block bp's payments of dividends.

the response from bp is interesting, if predictable: they are now painting themselves as a victim. and they are combining what the administration is doing with grassroots responses like seize bp and silly things that have been said about people with uk accents who speak on behalf of bp are lying to make of themselves the victim of some xenophobia. it's amazingly cynical. conversely, bp sees itself as the victim of a political vendetta. bp sees itself as anything and everything but responsible for a massive disaster and in the process of paying the consequences. along with everyone and everything that depends on the gulf of mexico. but that's all less real than money.

what's happening to bp financially, that the consequences of the gulf disaster, economic and political, are endangering the whole of bp.
and the argument is being constructed that bp is too big to fail.
it's too important to the uk.
it's shares are held by a very wide range of pension funds and muncipalities.
it is a very large employer.
it is a significant source of state revenues
it is the only entity capable of stopping the disaster in the gulf (thanks to the petro-capitalist regulation system that the us adopted)

so what happens if bp goes out of business?
can it?
should it?

what do you make of this "too big to fail" argument?

{{for example, i would imagine that a situation like what's befalling bp should encourage people and the institutions they animate to seriously reconsider the wisdom of allowing pension funds and municipalities to play the stock market. that **only** makes sense if you assume expansion is a steady state, that risk is an abstraction in the way that winning is an abstraction in las vegas.

what is the point of allowing institutions that control the retirement funds of regular folk to invest in stock?
one thing it does is break up the distinction between the interests of capital and the interests of working people---so buys a form of political consent for the cowboy capitalist order---but it also exposes vulnerable people to potentially catastrophic situations that no amount of schumpeter banalities about "creative destruction" will change.}

what do you make of this situation?
it looks to me like the possibility of financial implosion places an arbitrary brake on the capacity for a state to hold a corporate person accountable for the actions undertaken by that corporate person.

do you think bp should be seized?
what would happen then?
do you think bp should be allowed to reorganize in order to quarantine the deepwater losses in some special fictional corporate person whose corporate person head is full of toxins?

how is a transnational corporation ultimately held accountable for its actions by a national government if there's no transnational legal system to appeal to?

lots of questions. i've only thought of a few.

Seaver · 06-10-2010, 08:39 AM

The too big to fail is a stupid move in my opinion. One only has to look at the general mood in America... the majority are pissed off at the outcome of the banking bailouts, the arrogance of Goldman having gigantic bonuses with taxpayer money after wrecking the economy and causing high unemployment to those that saved Goldman's asses. The American public in NO WAY would support saving BP regardless of how "important" they see themselves.

In regards to how many people are employed, I have no doubt Exxon and others would buy up all BP divisions, personel, and equipment, in a heartbeat so the consumer end wouldn't even notice.

And finally a transnational company is held accountable by the amount of assets it has in that country. For Example, if BP tries to pull the "we're British, we're not privey to your laws" approach... the US simply replies "Ok... that's a nice oil refinery/depot/etc too bad it has no owners." In addition, the long term market loss of that country is a gross deterrent. True, it sucks for smaller/poorer countries... but it would work in this case.

BP should be held 100% accountable for all cleanup operations. Their assets should be seized if they fail on that part.

That being said, this is America and both parties are ridiculously corrupt and BP will stop payments after 4 years and the media move onto something else.

roachboy · 06-10-2010, 09:11 AM

Quote:

David Cameron risked the wrath of the City today when said he sympathised with the frustration of the White House at the "environmental catastrophe" in the Gulf of Mexico.

Speaking in Afghanistan, the prime minister urged BP to do all it could to clear up the mess and he said he would discuss the matter with Barack Obama over the telephone ahead of a visit to Washington next month.

As BP's shares continued to fall today, touching an 13-year low at one point, Cameron said: "First of all this is an environmental catastrophe. We need to be clear about that. We need to be clear that BP needs to do everything it can to deal with the situation and the UK government stands ready to help. We have made offers of help and stand by to do more.

"I completely understand the US government's frustration because it is catastrophic for the environment and obviously everyone wants everything to be done that can be done. Yes of course it is something I will discuss with the American president when we next talk."

Asked whether it was right of the White House to blame BP when US contractors, such as Halliburton shared some of the blame, Cameron said "we are not going to solve the problems of BP and the Gulf" in Afghanistan.

His comments contrast with calls from British business leaders and London's mayor and fellow Tory Boris Johnson for the White House to tone down their attacks.

Johnson accused President Obama's government of "anti-British rhetoric", warning that the near 50% slump in BP's share price since the spill was bad news for UK pensioners.

"I would like to see a bit of cool heads rather than endlessly buck-passing and name-calling," Johnson told BBC Radio 4's Today programme.

"When you consider the huge exposure of British pension funds to BP it starts to become a matter of national concern if a great British company is being continually beaten up on the airwaves."

David Cameron admits sympathy with Obama before discussing BP crisis | Business | guardian.co.uk

and
BP on the Defensive as Shares Drop - WSJ.com

this, from the daily telegraph, explains the view of bp that allowed pensions to invest

Quote:

BP's position at the top of the London Stock Exchange and its previous reliability have made it a bedrock of almost every pension fund in the country, meaning its value is crucial to millions of workers. The firm's dividend payments, which amount to more than £7 billion a year, account for £1 in every £6 paid out in dividends to British pension pots.

BP oil spill: David Cameron backs Barack Obama's hardline stance - Telegraph

that last sentence is crazy.

hiredgun · 06-10-2010, 12:02 PM

I think there is a pretty compelling parallel here to what we saw in the financial crisis. In both cases, we saw the effective privatization of profits and collectivization of losses.

Suppose BP went out of business tomorrow - belly-up, defaulted on its debts, sold off its assets in a fire sale. The executive set at BP would walk away fabulously wealthy - the kind of wealth that means working another day in your life is optional. Strictly speaking, it is true - as it was with the financiers - that sticking around to help clean up their mess, accepting reduced pay of any kind - this is all charity from their perspective, according to the system we have now. They are under no obligation to stick around.

So we have a situation where there are enormous incentives to seek short-term profits at the expense of long-term stability. This is not a matter of individual malice but rather the character of the system we've built.

All of which makes it clear to me that we need to rethink the profit mechanism in these large, systemic industries, in which a catastrophic failure poses a major threat of some kind. There ought to be a way to distribute present profits over a longer time horizon, and link them to the long-term health of the systems that these corporations serve (e.g. the financial system, the Gulf ecosystem).

First, I think this is a really difficult and messy regulatory problem.
Second, I'm not sure it goes far enough. Let's say that a corporation can make a gamble on an enormous profit, which is held in escrow for 10-20 years pending the long-term health of the corporation, its clients and its attendant ecosystem. What if the withheld profit is completely dwarfed by the potential damage of a catastrophic tail event? (i.e., a banker makes a $1b profit through some high-risk behavior, which blows up into $1trillion worth of damage to the economy?) The good news is he doesn't walk away with $1b, which reduces his incentive to take the risk. But the bad news is that he might have walked away with $1b, which might be incentive enough...

Apologies, I realize I've gone off the rails from the OP, which talks about "too big to fail". The thing is, once $Xb of damage has been done, the shortfall has to be made up somewhere. In the case of the oil spill, we can a) let the Gulf economy eat all the losses, b) force BP to provide compensation (ultimately hurting ourselves as pension-holders, c) use public funds (again coming out of our own pocketbooks through taxation), or d) organize a private bailout (i.e. charity - again our own pocketbooks). In no case is there a way to simply avoid the loss - the loss has been incurred, and will hit us one way or another. It is a mere matter of distribution.

roachboy · 06-10-2010, 12:38 PM

i haven't got time at the moment to really respond but wanted to say that the idea behind the op was to use what looks to be happening around bp to think about a range of issues and not merely the "too big to fail" canard...i was just struck by the presence of that claim this morning when i first saw the reports in the guardian. while i was making the op i got kinda sidetracked onto the question "well, if bp taking a pounding because they created an environmental catastrophe in the gulf such that they are pressured not to pay out dividends this quarter to shareholders....and that effects pensioners all over the uk....what the hell are pensions doing playing the stock market anyway?"

so i hope this will go in any number of directions.

Baraka_Guru · 06-10-2010, 12:49 PM

Quote:

Originally Posted by roachboy

"well, if bp taking a pounding because they created an environmental catastrophe in the gulf such that they are pressured not to pay out dividends this quarter to shareholders....and that effects pensioners all over the uk....what the hell are pensions doing playing the stock market anyway?"

The thing is, until this oil slick, British Petroleum was a shiny blue chip, which means it belonged quite rightly in any UK pension. The pensions cannot foresee this kind of disaster, and so you get this kind of scenario where the pensions have to decide whether to cut it loose (and therefore their losses, depending on what price got into the stock) or to hold onto it in hopes that BP can recover from this as blue chips are wont to do from bad situations.

As for the "too big to fail," I'm not sure how I feel about the idea. I'd be more willing to accept "too good to fail," or maybe "too important to fail," but I don't know if BP fits into either of the latter two.

There is a difference between a poorly managed company and an otherwise well-run company who happened to make a stupid mistake regarding all available safety mechanisms. If the accident didn't happen in the first place, none of us would be talking about BP, and some might even be shareholders.

For the record, I'm not sure if BP is a well-run company. They're profitable, though, and so to many shareholders, that was enough.

Seaver · 06-10-2010, 01:26 PM

Quote:

Apologies, I realize I've gone off the rails from the OP, which talks about "too big to fail". The thing is, once $Xb of damage has been done, the shortfall has to be made up somewhere. In the case of the oil spill, we can a) let the Gulf economy eat all the losses, b) force BP to provide compensation (ultimately hurting ourselves as pension-holders, c) use public funds (again coming out of our own pocketbooks through taxation), or d) organize a private bailout (i.e. charity - again our own pocketbooks). In no case is there a way to simply avoid the loss - the loss has been incurred, and will hit us one way or another. It is a mere matter of distribution.

Read more: http://www.tfproject.org/tfp/tilted-...#ixzz0qUIHnnCN

I'm sorry but that's acting as though the people who owned BP stock were mere bystanders. In our 401k setup, even though intermediates buy/sell our stuff for us usually, we ARE owners of the corporation. If everyone was so worried about it they could easily give the CEOs a huge hassle of keeping their job/pensions/parachutes.

Owning stocks means you own the company. You're not a bystander.

Honestly I'm surprised those pension funds who are losing their ass don't rise up and fire the CEOs to save their stocks from plunging.

hiredgun · 06-10-2010, 06:35 PM

Seaver, I agree. Reform of corporate governance - exactly the set of rules that would allow shareholders of a company to prevent individual employees of the company from profiting as individuals at the expense of the enterprise - is a good response here. This could in theory be accomplished entirely in and by the private sector - though in reality, I don't know. I don't think that the rules currently in place at most corporations make it feasible to claw back pensions and parachutes from these individuals, though.

06-10-2010, 08:39 AM	#2 (permalink)
Seaver Junkie Location: Fort Worth, TX	The too big to fail is a stupid move in my opinion. One only has to look at the general mood in America... the majority are pissed off at the outcome of the banking bailouts, the arrogance of Goldman having gigantic bonuses with taxpayer money after wrecking the economy and causing high unemployment to those that saved Goldman's asses. The American public in NO WAY would support saving BP regardless of how "important" they see themselves. In regards to how many people are employed, I have no doubt Exxon and others would buy up all BP divisions, personel, and equipment, in a heartbeat so the consumer end wouldn't even notice. And finally a transnational company is held accountable by the amount of assets it has in that country. For Example, if BP tries to pull the "we're British, we're not privey to your laws" approach... the US simply replies "Ok... that's a nice oil refinery/depot/etc too bad it has no owners." In addition, the long term market loss of that country is a gross deterrent. True, it sucks for smaller/poorer countries... but it would work in this case. BP should be held 100% accountable for all cleanup operations. Their assets should be seized if they fail on that part. That being said, this is America and both parties are ridiculously corrupt and BP will stop payments after 4 years and the media move onto something else. __________________ "Smite the rocks with the rod of knowledge, and fountains of unstinted wealth will gush forth." - Ashbel Smith as he laid the first cornerstone of the University of Texas

06-10-2010, 12:38 PM	#5 (permalink)
roachboy Super Moderator Location: essex ma	i haven't got time at the moment to really respond but wanted to say that the idea behind the op was to use what looks to be happening around bp to think about a range of issues and not merely the "too big to fail" canard...i was just struck by the presence of that claim this morning when i first saw the reports in the guardian. while i was making the op i got kinda sidetracked onto the question "well, if bp taking a pounding because they created an environmental catastrophe in the gulf such that they are pressured not to pay out dividends this quarter to shareholders....and that effects pensioners all over the uk....what the hell are pensions doing playing the stock market anyway?" so i hope this will go in any number of directions. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

06-10-2010, 12:02 PM	#4 (permalink)
hiredgun Addict	I think there is a pretty compelling parallel here to what we saw in the financial crisis. In both cases, we saw the effective privatization of profits and collectivization of losses. Suppose BP went out of business tomorrow - belly-up, defaulted on its debts, sold off its assets in a fire sale. The executive set at BP would walk away fabulously wealthy - the kind of wealth that means working another day in your life is optional. Strictly speaking, it is true - as it was with the financiers - that sticking around to help clean up their mess, accepting reduced pay of any kind - this is all charity from their perspective, according to the system we have now. They are under no obligation to stick around. So we have a situation where there are enormous incentives to seek short-term profits at the expense of long-term stability. This is not a matter of individual malice but rather the character of the system we've built. All of which makes it clear to me that we need to rethink the profit mechanism in these large, systemic industries, in which a catastrophic failure poses a major threat of some kind. There ought to be a way to distribute present profits over a longer time horizon, and link them to the long-term health of the systems that these corporations serve (e.g. the financial system, the Gulf ecosystem). First, I think this is a really difficult and messy regulatory problem. Second, I'm not sure it goes far enough. Let's say that a corporation can make a gamble on an enormous profit, which is held in escrow for 10-20 years pending the long-term health of the corporation, its clients and its attendant ecosystem. What if the withheld profit is completely dwarfed by the potential damage of a catastrophic tail event? (i.e., a banker makes a $1b profit through some high-risk behavior, which blows up into $1trillion worth of damage to the economy?) The good news is he doesn't walk away with $1b, which reduces his incentive to take the risk. But the bad news is that he might have walked away with $1b, which might be incentive enough... Apologies, I realize I've gone off the rails from the OP, which talks about "too big to fail". The thing is, once $Xb of damage has been done, the shortfall has to be made up somewhere. In the case of the oil spill, we can a) let the Gulf economy eat all the losses, b) force BP to provide compensation (ultimately hurting ourselves as pension-holders, c) use public funds (again coming out of our own pocketbooks through taxation), or d) organize a private bailout (i.e. charity - again our own pocketbooks). In no case is there a way to simply avoid the loss - the loss has been incurred, and will hit us one way or another. It is a mere matter of distribution.

06-10-2010, 06:35 PM	#8 (permalink)
hiredgun Addict	Seaver, I agree. Reform of corporate governance - exactly the set of rules that would allow shareholders of a company to prevent individual employees of the company from profiting as individuals at the expense of the enterprise - is a good response here. This could in theory be accomplished entirely in and by the private sector - though in reality, I don't know. I don't think that the rules currently in place at most corporations make it feasible to claw back pensions and parachutes from these individuals, though.