Wednesday, 16 June 2010

Obama puts BP in Deepwater

My first reaction to President Obama’s slating of BP was that those in glasshouses should not throw stones. I certainly would have liked to bring American business practices in this country to the President’s attention, particularly in relation to Kraft’s takeover of Cadbury and the leveraged buy-outs of our two most successful football clubs which leaves both now cumulatively £1.5 billion in debt.

However, while it is clear that the President is justifiably seething with BP, cold political calculation is also playing a part here. The President faces a difficult set of mid-term elections in November in which Louisiana, and in particular Florida, are likely to play key roles. He will be desperate to avoid the sort of backlash that hit the Clinton Administration in 1994 that ushered in Newt Gingrich and his ‘Contract with America’, which all but stopped the previous Democratic Administration in its tracks.

I also suspect that Obama sees opportunity in this crisis. One of the major stumbling blocks to reform in the US is the Senate, which remains precariously balanced with 57 Democrats, 42 Republicans and two independents, leaving the Democrats only a handful of seats short of avoiding a filibuster, by which a Senator can literally talk a bill to death without it ever coming to vote. Obama may be calculating that precious climate change and clean energy legislation can be rammed through the Senate with support of Gulf State Senators who dare not vote against such a bill at this moment in time.

Almost as big a question now is what happens to BP? Again, Obama has put them on the rack by demanding a $20 billion escrow account to compensate all those affected by the Deepwater disaster. The problem is that the money would most likely come from the shareholder’s multi-billion pound quarterly dividend which institutional investors are expecting in the coming weeks. The Board is therefore stuck between a seething President of the United States and very nervous, and potentially very angry, shareholders.

The smart money at the moment is that BP will muddle through in the short term before being taken out by a competitor once the furor has died down. This is infinitely preferable to bankruptcy, but whatever happens you have to suspect that this Board and the company is all but finished.


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