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  • Free Markets in Escrow: Obama to "Inform" BP to Pay Into Fund

    Today at 12:15, President Obama is scheduled to meet with a delegation from BP — including its CEO Tony Hayward — at the White House. The encounter should be tense. The stage was set for the meeting last night when the president, in no uncertain terms, told the nation that he would “inform” Hayward that he is to set aside funds to be put into escrow to compensate victims of the Gulf oil leak.

    The statement no doubt made for good public relations, making it look like the president was doing all in his power to help victims of the disaster. There’s one little problem, however: the president has no power to force BP to create such a fund. Despite all the bluster, neither the president nor his advisors have coughed up a single line from any law giving the president power to demand that any money be put in escrow.

    It wouldn’t be the first time, of course, that the Obama Administration has overlooked the niceties of legal authority. It did so blatantly last year, when it gave billions for an auto bailout that had been rejected by Congress (albeit following George Bush’s lead). And, given BP’s low public standing, and the president’s ability to pull regulatory strings, BP may find this to be an offer it cannot refuse.

    So far, however, BP has not agreed to the plan. And for good reason. The firm undeniably is liable for billions, and the many victims of the spill deserve compensation. That is not in dispute. But two not-so-little details have yet to be spelled out: how much money would be deposited in the fund, and who would administer it. The president was coy about the amount last night, saying only that BP should deposit “whatever resources are required.” But others have not been so coy, with many, including congressional leaders, demanding $20 billion for starters. Liability could possibly reach that high, but no one knows for sure. But the mere possibility that BP could be forced to pre-pay that amount, before any actual assessment of damages, has roiled the markets, sending BP’s credit rating into a tailspin. Yesterday, in fact, credit rating agency Fitch’s downgraded BP’s debt to near-junk levels, citing the escrow demands. That would make it harder for the firm to get much-needed financing, an outcome that would only hinder the clean up.

    A second detail yet to be worked out is who will administer the fund. The president insists that he wants an “independent” administrator. But independence is often in the eye of the beholder. And the political betting is that whoever is chosen will — directly or indirectly — take direction from the administration. In fact, the administration has already begun to receive special requests for a share of the fund, with three environmental organizations yesterday demanding $5 billion out of the presumed $20 billion kitty for environmental cleanup. Politicization will be hard to avoid.

    There is of course nothing inherently wrong with the general concept of an escrow fund. The concept could, at some point, play a useful role. But now is not the time. And if the time comes for a fund, it must be created within the bounds of law. To force a still-private firm to hand over cash, without legislative authority, simply puts political muscle and PR showmanship over the rule of law and the interests of the victims of this disaster.

    Posted in Economics [slideshow_deploy]

    5 Responses to Free Markets in Escrow: Obama to "Inform" BP to Pay Into Fund

    1. Tony, FL says:

      This is an obvious game of chicken. If BP complies, they will have to do so voluntarily, probably for the purpose of avoiding yet more negative publicity.

      If they should have the guts to decline, however, it would be interesting to see how Obama reacts, given that there's nothing that he can legally do.

      The independence of the management of the proposed fund is an interesting question I hadn't considered before. One could easily imagine, for example, that contracts paid out of money from the fund could be restricted to unionized companies, which wouldn't even be a first for this administration. One also wonders whether compensation to individuals would ever materialize once the government has it's hands on the money.

      I'm reminded of the tobacco company settlements. The government settled a class action suit on behalf of all smokers against tobacco companies. Part of the settlement was the indemnification of the companies against further claims, meaning that the government was collecting all damages that were owed to anyone who smoked, ever. To my knowledge, the government kept every penny of the money. My own mother contracted and eventually died of lung cancer after smoking for years. She was responsible for all her medical care (via Medicare, which paid claims from her own money that she had paid in over her lifetime), and no payment was ever offered to or received by my family following her death. The government essentially said "we think you're responsible for sickening and killing all these people – pay us a boatload of money and we won't let them sue you", and then they kept the money, using it for unrelated purposes.

      What are the odds that an escrow account, once it has been funded by BP and put under the government's control, would be handled any differently?

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