The BP Charade

Posted by Jeff Carter
on June 17th, 2010

BP’s CEO Tony Hayward “testified” before Congress today. It was more like a bunch of speeches, then a Spanish Inquisition. I watched it as long as I could bear.

Most of the questions seemed sort of dumb to me. I am not the only one that feels this way. Mr. Hayward was very cagey with his answers. Basically, it sounded no different than any of the commercials you might have seen when watching television. There were a couple of moments. First, the various Congressman took their shots at BP, then just as Hayward was making his opening remarks, they broke for votes and lunch. Nothing like the government in action. The other set of manufactured fireworks was when Congressman Joe Barton apologized for the “shakedown” Obama gave BP.

I don’t think Obama shook down anyone. They had a brief meeting, and talked about the issue. BP offered 20 Billion. The clean up and damage will probably be more than that. Barton has since apologized. (see UPDATE 3)

Cutting through the malarky, it is tough to say the government, or BP did all it could. On the government side, they reacted extremely slowly. It wasn’t until it became a political football to be kicked that Obama started to take aggressive action. Before he was very passive. That’s not leadership. Micromanaging the event isn’t leadership either. But, Obama went from doing nothing to micro management-both actions are incorrect.

From the BP side, they clearly blew this before the well even exploded. They didn’t have a battle plan for a total disaster. They have had a very poor track record on safety in other areas of the energy business. It’s pretty clear that they try to cut as much fat, and corners out of the company as possible. It is beneficial to be efficient. It is negligent when the stakes are either success or total failure-and when total failure means annihilation of a irreplaceable resource. For BP, there was incredible risk in deep water drilling. They never accounted for the risks. Sounds just like the financial crisis.

Post explosion, it has been the Keystone Cops. BP certainly wants to fix it. But since Eric Holder rattled the legal sabers, they are trying to cover their ass so it doesn’t end up in jail. The execs also don’t want to bankrupt the company. However, it’s hard to imagine BP staying solvent once the PI attorneys get done with them. Look up what happened to USG and Owens Corning. BP bonds are trading in the area where junk bonds would be trading, yielding around 11%-12%. That’s a pretty premium over government treasuries. Just to give you a point of reference, Citigroup is trading at 8.5%, Ford at 9.75%.

Clearly, some sharp professor somewhere ought to develop a real good course in risk management. Certainly the risks ought to be quantifiable. It is clear that the environment today in the business world clearly misunderstands or fails to calculate correctly risk. Financial firms blew the world economy up over miscalculation. BP destroyed an ecosystem and possibly the entire economy of states like Louisiana by failing to account for risk properly.

If you are looking for a way to help, and who isn’t? The best thing you can do is take a trip down to the Redneck Riviera. A place like New Orleans. The restaurants are still great. The art galleries are fantastic. The nation’s World War Two Museum is there. In Biloxi, MS, they have some good golf and a casino. Gulf Shores, AL is a great place, as is Panama City Beach, FL. Your hard earned money spent down there will do a lot more good than any government earmark or program.

And if you are an entertainer, like a radio personality or television personality for goodness sake go down there and do your show. Letterman and Leno, Limbaugh and Oprah should go down there and do some entertaining.

UPDATE
This is why Obama gets blamed for a total lack of leadership. It’s also why we can’t rely on the government to solve all of our problems. The US Coast Guard stopped oil sucking barges for 24 hours to check if they had lifejackets and fire extinguishers on board. Bureaucracy in action.

UPDATE UPDATE

It gets worse if you can believe it. Bart Stupak, the guy that supposedly was holding out on health care because of abortion, thinks it is okay to take the 20 billion BP is giving the government to help people on the gulf and put it into the health care kitty. Politicians in action.

UPDATE 3

I would like to clarify the “shook down” comment in my blog. I don’t think Obama shook anyone down in a 45 minute meeting. However, pre-meeting there was a lot of intimidation from the Federal government towards BP. BP finds itself in a precarious position, and is really unable to defend itself. Obama clearly didn’t treat BP within the rule of law. There already is a process set up for this sort of thing. Whether you agree with the process or not makes no difference. It exists to bring legal certainty to these types of situations. Is there legal certainty today? No.

As evidenced by Stupak’s comments, the Coast Guard actions and the general disorganization of the whole affair, the only thing that’s clear is this is a colossal mess on all accounts. As has been typical in this administration, the only sure bet you can make is that anyone holding BP stock or bonds will get screwed in the end.

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