Bankruptcy is Obama's worst nightmare

Posted: Monday, June 28, 2010

It would be a "horror," a "disaster," according to lawyer Kenneth Feinberg, who was appointed by President Barack Obama to administer British Petroleum's $20 billion compensation fund for victims of the Gulf oil spill. "That is not an option."

Feinberg was talking about a bankruptcy filing by BP in a Fox News interview.

"Bankruptcy absolutely is an option, and the U.S. needs to recognize that," said Peter Kaufman, president and head of restructuring and distressed Mergers and Acquisitions at the Gordian Group, an investment bank in New York.

Which is it?

No company has the ability to pay unlimited claims, even one that earned $16.6 billion last year and more than $20 billion annually in the prior four years. At the same time, no one has any idea how big BP's damages will be. That hasn't stopped Wall Street analysts from churning out estimates that move up in lockstep with the number of barrels thought to be leaking from the collapsed well each day.

How many companies are willing to face unlimited civil claims, the prospect of criminal prosecution and daily excoriation by the U.S. government before going on the offensive?

That's Kaufman's argument for why BP should consider filing for Chapter 11 bankruptcy. And the U.S. should consider the implications of such an outcome. In the U.S., unlike in most countries, "you can file for bankruptcy even if you are perfectly solvent," said Jay Westbrook, professor of law and a bankruptcy specialist at the University of Texas.

BP can't try pulling a fast one to avoid paying the bills. The courts have developed a "doctrine of good faith," Westbrook said. "If you are abusing the bankruptcy code, they will throw it out."

If BP's damages, or even "reasonably probable damages," exceed the value of the company, or if it faces a liquidity crisis, bankruptcy would be a way to organize the claims into a "sensible, orderly, fair process," he said.

U.S. Interior Secretary Ken Salazar may think keeping the "boot on the neck" of BP is a good strategy, but he should understand that BP has a stiff boot of its own. What if the company were to utilize its considerable financial and legal resources and the insolvency laws of the U.S. or Great Britain "to make it extremely difficult and time consuming for legitimate claimants to get succor?" Kaufman said.

BP is already the most reviled company in America. Two of its refineries accounted for 97 percent of the violations (a total of 862, of which 760 were "egregious and willful") in the refining industry over the last three years, according to the Center for Public Integrity. It holds the record for the largest fine ($87 million) ever levied by the Occupational Safety and Health Administration. Its public relations couldn't be worse if it disbanded its PR department.

In the court of public opinion, BP is already about as low as it can go. So why shouldn't it try, as a matter of business, to limit its liability?

The government isn't the only one with leverage. If BP were to file for bankruptcy, who would compensate Gulf residents whose livelihood and sole means of support were destroyed by the spill?

The U.S. taxpayer. To avoid being seen as someone who bailed out Wall Street and abandoned Main Street, Obama would probably ask Congress for money to compensate victims and line up to be paid with other creditors.

What if BP chose to file for bankruptcy in Britain, something that's well within its rights? No doubt London courts would deliver an outcome more favorable to BP. And they're apt to be less generous when it comes to paying damages to folks three times removed from directly affected claimants.

No wonder Congress wants to shut down that option. House Judiciary Chairman John Conyers, D-Mich., introduced a bill that would, among other things, prevent BP from seeking bankruptcy protection in Britain.

If the goal is to get relief as quickly as possible to the legitimate victims of the oil spill, then using BP as a piñata isn't a great idea, Kaufman said. Nor was sending Attorney General Eric Holder to New Orleans to threaten BP with criminal prosecution a way to foster an environment of cooperation on the clean-up.

No one knows whether BP agreed in writing to the $20 billion escrow fund or to Feinberg's power of attorney. Jon Pack, a London-based BP spokesman, couldn't comment.

BP has huge assets and tremendous earning capability, at least until we figure out how to power our cars with wind. While Kaufman is right in theory that BP should consider the bankruptcy option, in practice it would make life hard for the company.

Why? Energy is already a highly regulated industry - at least that's what everyone says. And it's bound to become more highly regulated following the BP spill.

The next time BP applied for a drilling permit, it might find that regulators had found religion. While a company can't be denied a permit solely on account of bankruptcy, according to Westbrook, regulators could likely find enough "egregious and willful" violations to prevent BP from expanding its U.S. business.

• Caroline Baum is author of "Just What I Said."

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