Too Loathed to Fail
Welcome back to 2008 (if we ever left). Just as in TARP’s early days, stock indices fluctuate wildly. Investors clumsily try to divine the next move — not of the millions of actors in a free-market economy, but of a few big governments that dispense favors and punishments.
Why was the Dow up 273 points today, after a 323-point drop last Friday? Investors are starting to hope that Britain and her former colony will bail out BP, saving the marquee London-based oil firm from cutting its dividend or even going bust.
Ah, you scowl, but President Obama isn’t going to bail out BP. He has said mean things about the company, including that BP chief executive Tony Hayward “wouldn’t be working for me.” The president’s interior secretary, Ken Salazar, has said that the White House would keep its “boot on the throat of BP.” And Sen. Chuck Schumer (D., N.Y.) began the Beltway outcry against BP paying a shareholder dividend.
Perversely, the pols’ laments and threats should comfort BP’s shareholders and creditors.
Remember: At the height (so far) of the financial crisis, politicians from both parties demonized Wall Street, too. Washington hoped that the rhetorical clenched fist would distract the public from the reality that the Fed and the Treasury were handing fistfuls of money to “systemically important” financial companies.
Washington seemed to think — thankfully, wrongly — that if the pols channeled mob justice, the citizenry wouldn’t worry that an entire swath of theeconomy had made itself immune to the nation’s vital, if imperfect, market and legal forces.
This time around, Obama would serve citizens better if he would forego the rhetoric and let markets and courts do their work.
Investors can already see: BP faces a tremendous clean-up bill, one that could run in the tens of billions of dollars. The company must fund a months-long or years-long military-style campaign in the Gulf (and there’s a reverse moral hazard at work; the government, running the operation and desperate to create jobs, has no incentive to keep costs low). Then, too, BP potentially faces tens of billions more in economic and punitive claims.
Markets have plenty of reason, then, to impose discipline on BP without Washington’s help. Investors could quite reasonably wonder whether BP can afford these claims and invest enough cash in future projects. The self-inflicted damage to BP’s reputation alone is likely worth tens of billions of dollars in market value.
Sure, one could argue that Washington pols have a perfect right to bug BP on its dividends and even on its management. The U.S. government, too, is becoming a huge potential creditor to BP, and, just other creditors, may have a competing claim against an insufficient asset base.
But that is exactly the problem. In so many areas of the economy — from credit to healthcare to housing to oil — there seems to be no line between markets and government anymore.
In this case, Washington unavoidably has a big role. BP’s blow-up has harmed a critically important ecosystem and equally important regionaleconomy. The government rightly must collect hefty reimbursements and penalties on behalf of the public — costs that BP and its investors knew were part of the risk of doing business.
Precisely because government has such a big stake here as the steward of America's waters and coastline, its representatives should show restraint in their words. That way, nobody could question their motives.
Instead, Obama and others have played into BP’s hands. They’ve given reason for the British government and populace to think that the American government is treating the company unfairly.
Britain already faces a strong temptation to do something to help BP. The company provides one out of every six dividends in the British market, and is a mainstay of pension funds and conservativeinvestors.
And the London press is already raging against American rage. “It is difficult to imagine that the President would have been so remorselessly vituperative had BP been an American oil company such as the even bigger ExxonMobil,” the Daily Mail's Stephen Glover wrote last week — and he is far from alone.
Prime Minister David Cameron stepped in today, saying that “BP needs to do everything it can to deal with the situation, and the U.K. government stands ready to help.” Cameron will talk with Obama about the matter this weekend. He’ll reiterate “that we need constructive solutions and that we remember the economic value BP brings to people in Britain and America,” said British Treasury chief George Osborne.
Investors were happy today because they figure that “constructive solutions” include shielding shareholders and lenders from the full costs of BP’s actions. As Obama has unhelpfully politicized those costs, he’s made a BP failure — or severe BP distress — even more politically untenable in the UK.
BP, then, is maybe too reviled to fail — another blow to free markets.
This piece originally appeared in National Review Online
This piece originally appeared in National Review Online