On October 13, 2008, Treasury Secretary Henry Paulson summoned the CEOs of the nation’s largest banks into a gilded conference room at the Treasury Department just a stone’s throw away from the White House. Each CEO was then handed a one-page document that said their company would agree to sell hundreds of billions worth of equity to the federal government through the Troubled Asset Relief Program (TARP). “We plan to announce the program tomorrow – and that your nine firms will be the initial participants.” In case anyone missed the subtle message, Paulson added, “We don’t believe it is tenable to opt out, because doing so would leave you vulnerable and exposed.” Sure enough, just like a certain fictional band land leader once did, all nine CEOs signed their respective contracts.
Yesterday, history repeated itself. This time it was the executives of BP who were summoned directly to the White House to have a little chat with the President and Attorney General Eric Holder (who has threatened BP with criminal prosecution). The exact conversation may never be known, and by the end of their “no-nonsense business meeting” BP emerged from the Roosevelt Room to announce that they would “voluntarily” place $20 billion into an escrow account to begin covering claims associated with the Deepwater Horizon oil disaster and contribute another $100 million to a foundation that will support oil workers made unemployed by President Barack Obama’s indefinite ban on offshore oil drilling.
Don’t buy for a second any of the mainstream media’s line about this being good for BP. The White House made clear yesterday that the $20 billion was just a down payment and in no way represented a cap on BP’s liability. In fact, the President explicitly said that the fund would not preclude individuals or states from pressing claims in court, and that it would remain separate from BP’s liability for the damages to the environment. And these damages may include the costs of cleanup for damage far beyond what BP caused. The Washington Post today reports that a gulf restoration plan of the sort promised by President Obama could cost as much as $30 billion. That’s $50 billion in damages so far. And that does not include any future money, on top of the existing $100 million donation, the White House may press BP to pay to cover the unemployment caused by President Obama’s offshore drilling ban.
Yes, BP did get the White House to say they do not want to see BP driven into bankruptcy. But who does that promise really serve? Clinton administration Deputy Attorney General turned BP lawyer Jamie Gorelick explains: “We know what it looks like when a company is driven into bankruptcy. The claims that come first are the creditors, then the employees, then the environmental claims, and then the likes of shrimpers. This would not be a good result for anyone.” Now look at how the deal between the White House and BP is structured. BP is not handing over a $20 billion novelty check tomorrow. Instead they are set to pay $3 billion in the third quarter of this year, $2 billion in the fourth, and then $1.25 billion per quarter thereafter. In the meantime, BP has identified $20 billion worth of assets in the United States that the federal government now has a lien on. In the event of a bankruptcy, guess who gets to jump in line and have their claims honored first? Still guessing? Then ask Chrysler’s secured creditors.
Yesterday’s “voluntary” deal between BP and the Obama administration was nothing less than a continuation of President Barack Obama’s ongoing assault on the rule of law. Capitalism only succeeds if it is a profit and LOSS system. Well-managed firms should have every right to keep their profits, but mismanaged firms must be allowed to suffer losses. By all accounts of what transpired on the Deepwater Horizon, BP is a terribly mismanaged firm. If the damage they caused is great enough, they should be allowed to fail. Failure is a necessary component of capitalism. But this administration refuses to allow the rule of law to work. From Fannie Mae to Freddie Mac, from GM to Chrysler, from AIG to Citibank, our government continues to subvert the established rule of law. This lawlessness creates uncertainty in the business environment, and it is a huge reason why our economy is not recovering as it should be.
Last night on CNN former Clinton Administration message man James Carville said: “It looks as if President Obama applied a little old-school Chicago persuasion to the oil executives.” Making “offers you can’t refuse” may be a great way to run the mob, but it is no way to run a country.
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