How much should BP Plc pay in damages for the Deepwater Horizon catastrophe? The Gulf of Mexico could be as emulsified as vinaigrette by the end of summer. One model shows oil may have migrated up the East Coast by then. No one really knows how bad it will be, only that it keeps getting worse.
President Barack Obama has proposed that BP set aside a substantial escrow fund, modeled after the Sept. 11th Victim Compensation Fund, that will ensure the company meets its obligations. But the 9/11 fund, while an obvious comparison, is the wrong precedent to use for this case.
The most important flaw in Obama’s plan is that it has no way to balance current claims against unknown claims that emerge over time. Almost all of the 9/11 claimants were known immediately, whereas a slowly developing disaster like this one may have effects that span decades. The most practical way to address them is to create a trust fund for future claims and cleanup. Yet no one can know how large a fund is required.
The better precedent to use is roofing maker Johns Manville Corp., which sank under asbestos claims in 1982 and became the then-largest bankruptcy in U.S. history. The Manville Personal Injury Settlement Trust came into being in 1987 and has since paid $4 billion in claims to 718,757 victims of asbestos-related injuries such as mesothelioma. As of March 31, the trust still held $1 billion of assets that will be used to pay 15,866 remaining claims, along with any new ones that may arise.
Manville was plagued by class-action lawsuits, which delayed claim resolution and enriched plaintiffs’ lawyers. The Manville Trust and the bankruptcy court modified payouts, bundled claims and streamlined the settlement process. Eventually, the company was sold to Berkshire Hathaway Inc., with the majority of the sale proceeds going to the trust.
Applying a Manville Trust-like solution to BP would achieve many goals. BP earned $16.6 billion last year, a huge stream of income. If America negotiated a deal with the U.K. to settle U.S. lawsuits against BP by moving it into prepackaged bankruptcy with a court-appointed receiver and replacing its management, the company could repay victims and cover the environmental costs from its continuing operations.
A bankruptcy has a benefit in that it isn’t an anti-British move; it is a way of prioritizing claims on earnings. Bankruptcy preserves the rights of BP’s lenders. Although it would be a harsh outcome for shareholders, the expected role of equity investors in a bankruptcy is to be paid last-dollar, subordinated to other claimants.
In my proposal, instead of simply selling BP to raise funds, the bankrupt BP continues to operate as an independent company and begins to pay earnings into a trust fund for future claims and cleanup, as overseen by the court.
Even though the trust fund would begin to pay claims to victims immediately, the residual earnings in the trust could over time amount to billions or tens of billions of dollars. Such a large amount means that today’s and tomorrow’s claims would be paid using consistent formulas, providing relief for years to come.
Whatever BP earns, pays and sets aside, this proposal also would ensure that for some period of time -- a decade, say -- everything goes to restitution for the Deepwater Horizon calamity. After that, BP would emerge from bankruptcy and be sold, becoming independent once again. This would yield another one-time lump-sum addition to the trust, and possibly a residual for equity holders.
Implicitly, I am proposing more money be set aside than Wall Street estimates currently contemplate, now as high as $70 billion. The reason is that the costs of the Deepwater Horizon debacle, the largest environmental disaster in history, are indeterminable. Yet it is clear they shouldn’t become socialized as long as BP has earnings available to pay them. Minimizing any taxpayer burden must be a key goal of any resolution.
The widespread, long-lasting and lethal asbestos damages that led to the Manville bankruptcy are the closest analogy we have to the potentially global, unknowable, long-tail risks posed by Deepwater Horizon. We should learn from this precedent that a planned, efficient bankruptcy and restitution trust would enable BP to survive and eventually return to private hands. It would preserve jobs while compensating all victims. It would avoid windfall payments to lawyers.
This template is just as applicable to Transocean Ltd., BP’s partner, which set a benchmark for moral despicability in the guise of shareholder value when it fruitlessly petitioned a U.S. federal court under an 1851 maritime act to limit its liability to less than $27 million.
Last week, the British government begged the U.S. to “remember the economic value BP brings to people in Britain and America.” Of course we will remember. The economic value of the Gulf of Mexico, the coast of Florida, and other maritime and coastal areas sit on the other side of that ledger.
Give BP’s earnings to the public, and maybe we’ll call it even.
(Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life” and a former managing director at Morgan Stanley, is a Bloomberg News columnist. The opinions expressed are her own.)
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