Thursday, June 17, 2010

BP's Liability

Mistermix at Balloon-Juice,

One of Josh Marshall’s readers calls BP’s agreement to put $20 billion into escrow a “mind boggling accomplishment” on the part of the Obama administration.

I agree that this was a good example of the administration using its leverage at the right time, and I don’t want to take away from their accomplishment. But, man, is BP in a jam. Credible analysts are making estimates of BP’s liability that range from $40 billion to $63 billion.

This is essentially what I just wrote about over at TFT. I think what mistermix is missing from his analysis though is that while there may be estimates that BP's liability is in the $40 billion to $63 billion range in the real world massive judgments are almost never sustained. As I noted in my column, the Exxon case was just finished and ultimately Exxon is on the hook for 1/100th of the original judgment - and that's without accounting for inflation. In reality Exxon is paying far less than even that.

$20 billion delivered in the next 4 years is the equivalent of probably $35- 45 billion delivered begrudgingly by BP 20 years from now. And in reality there is simply no way that BP was going to be on the hook for anywhere near that amount of money at the end of a civil appeals process. So BP just agreed to significantly more in both real and inflation adjusted dollars than they otherwise be obligated to. BP's lawyers know this so we can assume that BP's board knows this - and yet they succumbed anyway.

BP's agreement to the escrow funds is not simply a rational economic act. There were other considerations that made BP act now and agree to that high number.

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