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Monday, May 31, 2010

"Why Obama Should Put BP Under Temporary Receivership"

Robert Reich says the federal government should take over BP until the oil leak in the gulf is stopped:

Why Obama Should Put BP Under Temporary Receivership, by Robert Reich: It’s time for the federal government to put BP under temporary receivership, which gives the government authority to take over BP’s operations in the Gulf of Mexico until the gusher is stopped. This is the only way the public know what’s going on, be confident enough resources are being put to stopping the gusher, ensure BP’s strategy is correct, know the government has enough clout to force BP to use a different one if necessary, and be sure the President is ultimately in charge.
If the government can take over giant global insurer AIG and the auto giant General Motors and replace their CEOs, in order to keep them financially solvent, it should be able to put BP’s north American operations into temporary receivership in order to stop one of the worst environmental disasters in U.S. history.
The Obama administration keeps saying BP is in charge because BP has the equipment and expertise necessary to do what’s necessary. But under temporary receivership, BP would continue to have the equipment and expertise. The only difference: the firm would unambiguously be working in the public’s interest. As it is now, BP continues to be responsible primarily to its shareholders, not to the American public. ...
Five reasons for taking such action:

1. We are not getting the truth from BP. BP has continuously and dramatically understated size of gusher. ... Government must be clearly in charge of getting all the facts, not waiting for what BP decides to disclose and when.
2. We have no way to be sure BP is devoting enough resources to stopping the gusher. BP is now saying it has no immediate way to stop up the well until August, when a new “relief” well will reach the gushing well bore... August? If government were in direct control of BP’s north American assets, it would be able to devote whatever of those assets are necessary to stopping up the well right away.
3. BP’s new strategy for stopping the gusher is highly risky. It wants to sever the leaking pipe cleanly from atop the failed blowout preventer, and then install a new cap so the escaping oil can be pumped up to a ship on the surface. But scientists say that could result in an even bigger volume of oil – as much as 20 percent more — gushing from the well. At least under government receivership, public officials would be directly accountable for weighing the advantages and disadvantages of such a strategy. ...
4.  Right now, the U.S. government has no authority to force BP to adopt a different strategy. ... The President needs legal authority to order BP to protect the United States.
5. The President is not legally in charge. As long as BP is not under the direct control of the government he has no direct line of authority, and responsibility is totally confused. ...
The President should temporarily take over BP’s Gulf operations. We have a national emergency on our hands. No president would allow a nuclear reactor owned by a private for-profit company to melt down in the United States while remaining under the direct control of that company. The meltdown in the Gulf is the environmental equivalent.

I've wondered if BP's attempts to close off the leak also try to preserve the ability to tap the well again in the future. Are there other things that could be tried that might work better, but make it impossible to use the well again (and hence are last resort measures from the company's point of view, but no the public's)? Perhaps that's not the case, I don't have enough technical expertise to assess the options, maybe the public relations fallout, prospects of fines, lawsuits, etc., make the company do all it can to stop the leak in any case. But it's hard not to wonder given the present structure of responsibility for stopping the leak (including limits on financial responsibility). If the government were to takeover until the leak is stopped, this worry would be lessened (as would others).

However, if the administration does take over, then it will also take over responsibility for what happens. If the well continues to leak until August, and if the administration has taken BP into receivership, the administration will take the direct blame. It has that problem now, of course, the blame will be there in any case, but presently BP absorbs some of the fallout from the failed attempts to plug the leak and the administration can at least try to deflect some of the blame in BP's direction. If the administration takes over, it also takes full responsibility from that point forward, and it's not clear they want that, especially given the present prospects for stopping the leak (though, again, do we know the full spectrum of options, no matter how costly they are?).

So, in general, it's unlikely that an administration will want to take over a company when the problems are particularly hard to solve. It will take over when quick victory is assured, but why take the political risk when the problems are really hard? Better to blame the company.

I'm struggling a bit with this one. I am not very comfortable recommending a take over. I don't feel like I've thought it through enough to call for a government take over of BP, such take overs should be last ditch measures to prevent severe damage (which may justify a takeover in this case). They should not become government habits. I'd prefer that the prospects of charges for damages, fines from the EPA, lawsuits from people whose livelihood depends upon the fisheries, and so on give BP an unambiguous incentive to stop the leak as soon as possible, that its life would be just as threatened as the life in the gulf is threatened if the leak is not plugged relatively soon. There would still be a need for strict government oversight, and it would be important that the government have the authority to force or prevent certain actions and to force disclosure of information. But at least I'd be more sure that the company is doing everything it possibly can -- devoting every possible resource (and asking for government help if more resources are needed) -- to getting this fixed as soon as possible. However, it's not at all clear that the company has these incentives, and even if it did, I would still have doubts about its actions.

Again, maybe all that can be done is being done, but I'd be more confident that's the case if the company faced more consequences than it appears that it will, and if the company itself wasn't running the show and determining, at least to some extent, what I do and don't know about its options and actions.

No matter who is technically in control of the company, i.e. receivership or not, the one thing that is needed is for the government to have the authority it needs to force the company to fully disclose all the information it has about the leak, and about how to stop it. It also needs to be able to force the company to take particular actions to stop the leak even if the actions demand so many resources it results in the company going bankrupt. This is where the case for a take over seems to be the most compelling to me. Suppose that two strategies for stopping the leak exist, one that will work with near certainty and costs 1 billion, another that may or may not work that costs 200 million. If the company can adopt the 1 billion dollar strategy only by liquidating its business, but can possibly survive trying the 200 million method, it may waste valuable time trying the riskier strategy first, especially if it doesn't face the full costs of the damage it is causing (because there are externalities, or because there are legal limits on the damages it has to pay). If the potential damages are well in excess of 1 billion, enough to make the 1 billion dollar attempt the only logical choice from society's perspective, then the government should step in and force the company to finance the higher cost method of stopping the leak even if it means the company must liquidate itself. (If, say, the company only has 800 million in assets, then it can't choose the less risky option in any case. Here the government could force liquidation, and then add the extra 200 million needed to ensure the leak is stopped and the greater than 1 billion dollars saving in environmental damage is realized.)

I'm obviously unsettled on this one (and talking without enough thought behind it). Maybe you can help in comments?

    Posted by on Monday, May 31, 2010 at 04:05 PM in Economics, Environment, Oil, Politics, Regulation | Permalink  Comments (44)


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