Thursday, June 10, 2010

BP's choice: Plunder Company Assets...and the U. S. Taxpayer

It is a time-honored operation: Enrich owners and Insiders while you are able by plundering a troubled company's assets.

In 1999, Service Merchandise (a retail chain) was forced into bankruptcy by its creditors. The Bankruptcy court froze the company's assets...except, of course, for the normal fees associated with 'administering' the bankruptcy and paying remaining operating costs. The Board of Directors of SM prompty hired themselves to administer the bankruptcy, and began draining the company of its cash assets. One upper-level manager, disgusted with their actions, leaked the plan to a unnamed blogger (ahem...), who prompty posted the details (using an anonymous handle) on the Yahoo! Finance Message Board for the company. When the news hit, SMs stock fell to less than a penny per share. The now-infuriated Management (who owned plenty of stock themselves) sued Yahoo!, asking them to reveal the source of the leak, claiming there were violations of Insider Trading laws. The Court declined to grant their request.

The year before Enron collapsed, top Executives paid themselves 1.4 Billon (yes, Billion) dollars.

In the eight years before the collapse of Lehman Brothers - which ignited the financial crisis that still affects us - the Chief Executive, Richard Fuld, took home 480 million dollars from the company.

Citigroup's Executive was paid 31 million the year they requested a taxpayer bailout.

Which brings us to BP.

BP insists it will pay all 'legitimate claims.' Does that mean they will compensate fishing charter businesses and shrimpers for the loss of their future earnings when they go out of business? Loss of tourism on Florida beaches? What precisely *is* a 'legimtiate' claim in their eyes? The estimated daily flow of oil has increased from 1,000 barrels per day when the crisis began, to the current 40,000per day. While no one yet knows the extent of this disaster, what is known is that this will cost, at a minimum, in the tens of billions of dollars.

So, it wouldnt make sense for BP to give away its assets...or would it?

BP announced it would decide next month whether keep a quarterly dividend of 14 cents a share for the second quarter, a payout of about $2.6 billion.

To be fair, BP regularly pays out this dividend to its investors, so it's not as if they are seeking a new venue in which to squirrel away assets. However, the prospect of untold bilions in clean-up costs, and the growing long-term possibility of a BP bankruptcy - means that taxpayers, once again, would be left with a bill that ought to be covered by Corporate assets. Regardless of their culpability, if BP runs out of cash, BP can't pay the bill.

Writing for the New York Times, William K. Black, an associate professor of economics and law at the University of Missouri–Kansas City, and author of “The Best Way to Rob a Bank is to Own One,” said:

"...Dividends not only put money out of the reach of the U.S., but also reward the people most responsible for causing the damage. BP’s officers and employees, in their capacity as shareholders are the most obvious example of this, but shareholders are also responsible as owners of the corporation. The deal shareholders make when they invest is that if the corporation cannot pay its debts to creditors the shareholders get nothing."

Not surprisingly, many British shareholders are furious that the issue of their dividends is even being discussed. Even some U.S. news commentators have questioned "punishing" the shareholders.

To them, I quote Juan de Medina, a Dominican monk writing in Salamanca, Spain, in 1550, and one of the world's first 'free market' economists:

"Those who by their own will go into business...must expose themselves to profit and loss. And when they suffer a loss, they must not transfer it to the buyers or to the Republic."

What he said.

Should BP declare a dividend, Congress needs to pass legislation requiring that oil companies engaged in deep-water drilling place cash in a cleanup escrow account...and if they won't act, then the businesses and States of the Gulf Coast should file enough claims to force BP into a Reorganization, in which case a Bankruptcy Court could then order that BPs assets remain within the corporation and within this country to pay for the cleanup.

Wednesday, June 02, 2010

Deepwater Horizon, BP, and the Minerals Management Service: The legacy of "Capture Theory."

Am I the only one who simply can not fathom how a major oil company can be permitted to engage in potentially catastrophic activities, and not have back up and safety plans? Is it rational to believe that a break in an undersea oil pipe could go on for week after week and no one has a clue what to do about it?!

The events unfolding off of the Louisiana coast were not unimaginable or unpredictable. In fact, what happened on the ocean floor was very predictable – so much so, that in the industry it is routinely called a “blowout.”

Now, wouldn’t it makes sense that if a company is going to undertake an activity that could result in a known, predictable disaster, that they should have a contingency plan in place? And that the government agencies regulating them (in this case, the Minerals Management Service, or MMS) should require them to have such a contingency plan?

In fact, most offshore drilling operations are required to have such contingency plans. But two years ago, the MMS changed the rules of the drilling game mid-stream, and exempted deep-water drilling operations from the need to submit an emergency plan. The Deepwater Horizon Project – the very disaster unfolding in the gulf – was one of the projects that was suddenly exempted. Instead, BP was permitted to submit a “regional” plan for dealing with “general spills” anywhere in the Gulf.

Unfortunately, that ‘general plan’ didn't quite have enough detail to help BP stop THIS leak as a result of THIS blowout at THIS location.

According to one MMS official – speaking on the condition of anonymity – “the rules were changed because some elements were impractical for some deepwater drilling projects in the Gulf”

In other words, since a safe and effective contingency plan could not be established for the Deepwater Horizon Project – the MMS decided to eliminate the necessity of such a plan, rather than stopping the project form the beginning.

Such an action makes no sense...unless you are familiar with “Capture Theory,” a basic theory I cover in all of my introductory Economics classes. “Capture Theory” refers the fact that most citizens are too busy with survival and life to worry about every permit and hearing taking place before a government agency. A vested interest, however – such as BP before the MMS, or a pharmaceutical company before the Food & Drug Administration – has evry reason in the world to know exactly what is on the agency’s agenda, and who is making the decision on their application, and what the secretary’s name is and how the agency decision-makers like their steak cooked. Because the potential benefits of favorable treatment are so lucrative, it makes sense for corporations to hire lobbyists who wine and dine the agency officials. In the end, (to quote myself), “A vested interest will always capture the agency designed to regulate it, and then use that agency for its own advantage.”

Is this what happened here? Yes.

According to Fast Company,

“…[A] Department of Interior investigative report describes transportation to college football games on offshore oil company planes as well as offshore oil and gas sponsored golf outings, crawfish boils, skeet-shooting events, and hunting trips. A source also told investigators that MMS inspectors sometimes allowed oil and gas company employees onboard drilling platforms to fill out inspection forms [themselves].....many of the MMS inspectors had worked for the oil and gas industry and continued to be friends with industry representatives. “Obviously, we’re all oil industry...We’re all from the same part of the country. Almost all of our inspectors have worked for oil companies out on these same platforms. They grew up in the same towns. Some of these people, they’ve been friends with all their life. They’ve been with these people since they were kids. They’ve hunted together. They fish together. They skeet shoot together ....They do this all the time...”

So…the blowout occurred, 11 men lost their lives, and oil began pouring into the Gulf. Couldn’t something be done? (Of course, 24 hours into the spill, a US Coast Guard spokesperson assured ABC news correspondent George Stephanopoulos on “Good Morning America” that there was no oil spewing from the well..)

In 1994, the US Government developed its own plan (the “In Situ Burn Plan”) to contain spills through the use of devices called fire booms. Like so many government plans, this proved to be a thick document that at some point was much-heralded, and then put on a shelf to collect dust. The plan called for the immediate use of firebooms, as a first response, to contain a spill. These firebooms can burn off 75,000 gallons of oil per hour, enough to have probably contained the spill to its current location.

Unfortunately, 16 years after the recommendation was made, the federal government did not own a single fire boom.

Eight days later, they were able to locate one for sale in Illinois. Several were eventually ordered from South America.

Daily, we hear how this disaster continues to spread, and how livelihoods and ecosystems are both being ruined. And how BP is ‘hiring’ fishermen who are getting sick, and forcing them to sign non-disclosure statements. So the cover-ups and damage continue.

All because of an “accident?”

No, because of Corporate Fraud. And Corruption. And Government Inefficiency. And “Capture Theory.”

The result is, as far as I am concerned, has been a massive case of Criminally Negligent Trespass and Criminal Conspiracy between BP and the MMS.

Think about that the next time Vermont Yankee tells you that they are adequately regulated by the Nuclear Regulatory Commission, that contingency plans are in place, that every emergency situation has a well-thought out plan, that underground leaks are nothing to worry about, and that Strontium 90 in fish in the Connecticut River is no big deal