The Gulf’s Uncontrolled Money Spill

The failed Macondo well in the Gulf of Mexico has stopped gushing oil, but the flow of money resulting from the disaster is still uncontrolled.

Rep. Joe Barton, R-Texas, had it right when he apologized to BP’s former CEO Tony Hayward for the government’s response. Barton called the White House’s decision to demand $20 billion from the company “a shakedown.”

Barton later retracted his comments after party leaders pointed out to him that they were, as a reporter from The Dallas Morning News put it, “politically indelicate.” In an apology for his earlier apology, Barton said, “I want the record to be absolutely clear that I think BP plc (BP) is responsible for this accident, should be held responsible and should, in every way, do everything possible to make good on the consequences that have resulted from this accident. If anything I’ve said this morning has been misconstrued in opposite effect, I want to apologize for that misconstruction.”

But, as politically indelicate as it may be to say so, the White House’s $20 billion money grab was a shakedown. On June 16, BP announced that following a meeting with the president, “Agreement was reached to create a $20bn claims fund.” Months later it is still unclear what share of the blame for the disaster can reasonably be assigned to BP, and there is still no evidence that the figure of $20 billion is in any way related to the actual costs of the damages.

BP was the only company pushed to contribute to the $20 billion fund. However, recent inquiries have revealed that Halliburton (HAL) may have used faulty cement to seal the well and may even have known in advance that the cement mixture could lead to problems. Tests performed before the blowout on mixtures similar to what was used for the Macondo well showed those formulas to be unstable and incapable of holding back oil and gas. Since the disaster, independent tests have been conducted on samples of cement made with the same recipe as was used by Halliburton at Macondo. The samples have repeatedly failed to pass the tests.

An internal investigation by BP also found that Transocean (RIG), the company which operated the rig, failed to maintain “critical components” of the systems designed to prevent blowouts.

None of this, least of all its own examination, exonerates BP. But the only rationale for having forced BP to ante up before all the facts were available is that BP had the deepest pockets and was most susceptible to White House pressure.

Meanwhile, Kenneth Feinberg, who was appointed to oversee the distribution of the claims fund, is busy trying to sort out the costs. As of Oct. 1, only $1 billion had been paid out of the $20 billion fund. Many outstanding claims come from businesses outside of the immediate area affected by the blowout, making the correlation between the spill and lost business questionable. Many claims also have been filed by businesses that say they operate primarily in cash and therefore lack records to demonstrate the magnitude of damages they suffered. Translation: “We cheated on our taxes, but you can trust us when we tell you we lost business because of BP.”

Other claims, including those from commercial fishers, depend upon the extent of the spill’s long-term damage to the Gulf, which is not yet knowable. Because of this uncertainty, Feinberg has suggested that it may make more sense to make interim payments, rather than “having to decide on a hunch.”

That’s fine, as long as the interim payments relate to damages that have already been suffered and which can be reasonably verified and measured. The politics of the oil spill, however, put pressure on Feinberg to err on the side of paying too much too soon. That way, people who actually suffered damages do not have to wait for relief, while the burden of any errors falls on BP and its shareholders – who get little sympathy, no matter the merits of their case.

The Gulf spill was a multi-dimensional crisis that demanded immediate response. But crisis is no reason to short-circuit investigation and reason. If the government felt that providing a relief fund was necessary to meet the needs of businesses and individuals along the Gulf coast, it should have created the fund itself, with its own money. It had no right to ask BP, or any other company, to front $20 billion based on guesses, hunches and the president’s political imperatives.

As the sole sponsor and administrator of the fund, the government would have been responsible for ensuring that the money was appropriately distributed. Then, when all the analysis and evidence was in, it could have gone to the companies responsible to collect reimbursement.

If, in retrospect, investigations revealed that Feinberg, as the plan’s administrator, had rushed through claims to quiet the demands of Gulf residents and ended up handing out too much money, the government would have had to bear those costs. There is no reason BP shareholders should have to pay for this potential waste. BP may or may not have botched the job of designing the well, but if the distribution of the claims fund is botched, that will be the fault of the government, not BP.

The Macondo well made a mess in the water and on the Gulf shoreline. The administration’s response has made a longer-lasting mess in Washington. Between expropriation of $20 billion in private funds and the unjustified drilling moratorium, the administration has reinforced the private sector’s perception that it is prone to grab first and ask questions later. President Obama’s economic team then wonders why it’s having so much trouble boosting business confidence and getting companies to start hiring again.

If Obama really wants to earn the trust of businesses, he should start by admitting that the BP fund grab was a mistake. He should then issue an executive order promising that nothing like it will happen again. He could do this in a single afternoon. But I’m not holding my breath.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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