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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

June 17, 2010 at 9:50 AM

BP’s $20 billion compensation fund: It ain’t over ’til it’s over

At first glance, the $20 billion “escrow account” BP has agreed to fund to begin to cover damage from the Gulf oil spill would seem like a major victory for President Obama. It certainly goes far beyond the federal government’s efforts after the Exxon Valdez. Still, unknowns and pitfalls abound.

One of the least noticed developments is the report that BP has retained Goldman Sachs and Blackstone Group as “financial advisers.” While in theory, these two Wall Street playerz perform a number of duties for clients, they are mostly known in these circumstances for their mergers and acquisitions work. As in, shopping BP to another oil company or trying to fend off a hostile bid (and how long before major BP institutional shareholders and the board rebel?).

Who would want a company saddled with a $20 billion initial obligation to the United States, and, according to a Credit Suisse estimate early this month, facing a tab of $37 billion for the cleanup? Nobody. Unless, of course, the cleanup liabilities were quietly shifted into segregated corporate subsidiaries while the highly profitable ($14 billion in 2009) remainder of the company was sold off.

This would put the government in a difficult legal situation, to put it mildly, depending on what exactly is put in that $20 billion compensation fund. The agreement states U.S. assets will be “set aside” as a guarantee that the company fulfills its obligations. But what if the company as we know it — the feared British Petroleum that for decades pushed around governments — no longer exists? (And are some of those “assets” derivatives, IOUs, etc.?).

It puts us in the uncomfortable position of having to root for the continued viability of BP. Even worrying about its share price and cleanup costs. Otherwise, a successor company could tie settlements up for years in court leading up to an Exxon-like denouement, all the while making huge profits from BP’s worldwide reserves and production.

We live in Milton Friedman’s world. That is, the popularizer of the “free market,” rather than the brilliant economist who gave us key insights into the Great Depression. In that world, companies exist only to make profits and serve their shareholders. Effective regulation and corporate responsibility are either frowned upon or seen as frills. And the economic benefits of healthy oceans and “natural security” don’t factor into the balance sheets, whatever popular sentimentality.

As long as the world and America refuse to wean themselves off oil, expect more of this. It’s been happening in the Third World for decades. Now it’s hit home and we’ll stew about it all day, driving in the car.

Today’s Econ Haiku:

End of free checking

The banks give credit unions

More than a toaster

Comments | More in BP Gulf spill oilpocalypse, Energy

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