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Sources:

http://www.msnbc.msn.com/id/41521349/ns/business-us_business/

As BP was wrestling with stopping the oil leak in the Gulf of Mexico and cleaning up the oil, a controversy broke out between the company’s stockholders and the  US Government on whether any dividends should be declared and paid before the company has taken care of the Gulf.  BP earned more than $16 billion in 2009. Based on higher oil prices, in the first quarter of 2010 the company’s profit more than doubled to $6.08 billion from $2.56 billion  in the first quarter of 2010.  BP’s dividend payment accounted for about £1 of every £8 handed out by British companies in 2009. Given the higher profit in the first quarter of 2010, stockholders were expecting more in dividends.

The question was how much the company’s costs in regard to the Gulf would or should cut into the dividents; the political question was whether any surplus wealth should be paid to investors before the company’s legal and moral obligations were taken care of in the Gulf region.  Although not suggesting that their company was not obligated to stop the rupsure and fund the clean up, BP officials claimed that their company had already paid in other ways.

Already by mid June, 2010, BP shares had fallen more than 40 percent since the fatal explosion at the Deepwater Horizon drilling rig in April, wiping more than £50 billion, or $73 billion, from the company’s market value. The drop came after lawmakers in Washington called on BP to suspend its dividend and advertising campaign to pay for the cleanup, and a senior official said the Justice Department was “planning to take action.” Most shareholders rejected concerns that the costs of a cleanup and possible damages could force BP into Chapter 11 bankruptcy protection, and said the drop in the share price is not justified by the value of BP’s assets.  BP officials indicated the company’s executives would decide in July whether to keep the quarterly dividend at 14 cents a share for the second quarter. In 2009, the company paid about $10.5 billion in dividends.

By June 10 2010, the company’s cost in regard to the oil spill had reached about $1.43 billion. A BP official said it was “too earlier to quantify other potential costs and liabilities associated with the incident.”  Earlier in June, BP officials told investors that the company had $5 billion cash on hand and that it was generating “significant additional cash flow” as the price of oil remained above $60 a barrel. BP had 18 billion barrels of proved reserves and 63 billion barrels of resources at the end of 2009 that it could draw on.

Iain Armstrong, an analyst at investment manager Brewin Dolphin in London agreed with BP that the company had enough money to pay for the cleanup efforts and also rejected any potential concern that the company might not be able to pay for its debt. “It’s gotten completely out of hand,” Mr. Armstrong said. “It’s a totally overpoliticized situation. There is a disconnect between reality and BP being totally lambasted… . Ironically, by being extremely strong financially, BP has become a target here,” he said. I contend, however, that BP became a target because of its atrocious safety record and its culpability at Deepwater Horizon.

BP falsified regulatory documents by indicating that there was zero percent risk of an off-shore rig accident creating a rupsure and that the company had the technology to stop and clean up such a problem.  Tony Hayward admitted after the explosion that BP lacked the “tools you would want in your tool kit” to close a blown deep-water well.  In other words, the earlier claim to have had the technology was a lie (which MMS never bothered to disconver, as the agency had been captured).  Lest it be said that no group of people is perfect, BP’s history attests to justifiable blame.

In 2005, a blowdown drum overfilled with liquid hydrocarbons at BP’s Texas City refinery killed 15 and wounded 170.  BP was cited for old equipment, overworked and unsupervised employees and contractors, and managerial inattention to safety. The US Chemical Safety Board put the cause as “organizational and safety deficiencies at all levels.”  Meanwhile, a shoddy ballast system was found at BP’s offshore platform Thunder Horse.  In 2006, a corroded pipeline in BP’s Purdhoe Bay field in Alaska leaked thousands of barrels. In the following year, Tony Hayward became the CEO. He promised to make safety his priority. Yet in 2009, the Occupational Safety and Health Administration fined BP a record $87.4 million for more than 700 safety violations at the Texas City refinery. Nonetheless, David Nicholas, a BP spokesman, wrote, “Safe, reliable operations have been and continue to be our number one priority.”  Not only has this not been the case, BP managers (and lawyers) have been more interested in minimizing liability than being responsible for the consequences of the lapses.

At Deepwater Horizon, when an employee discovered that one pod of the blow-out preventer was leaking, a manager simply shut it down and used the other pod (rather than fixing the leak). Another worker found such low hydrolic pressure in the device that he knew it was time to leave.  In Congressional testimony, Tony Hayward said BP regarded the equipment as the fail-safe mechanism, even as blow-out preventers in general have a 44% failure rate and the device at Deepwater Horizon was known to have a broken pod. Furthermore, after the well fire, the company low-balled the estimated volume of oil going into the Gulf in order to minimize its future liability.  During the first week after the explosion, the company’s estimate was 1000 barrels per day.  During the second week, the company estimated 5000.  Meanwhile, company documents show an estimate of 100,000 per day as a worse-case scenerio. That the wider society would not be sufficiently informed of the magnitude of the clean-up required did not seem to bother the managers at BP, whose concern was mainly to minimize the company’s liability (and thus maximize their stockholders dividends).  Selfishness among the culpable is telling. At the very least, responsibility can be defined as paying for the harm consequent to one’s mistake.  Satisfying such responsibility has priority over dividends, which are residual, after all. In making the protection of dividends (and the stock price) a priority, BP’s managers evinced a reversal of priorities that was ahistoric for the modern corporation.

It is for these reasons, not because BP is a giant corporation or is British, that BP was the target of such scathing rebuke by the American public and the American governments. Mr. Armstrong said that President Obama should not forget that 40 percent of BP shares are owned by United States shareholders. “So he’s not doing them any favors either,” he said. Again, I beg to differ. Acting in the public interest, Barak Obama is doing us all a favor.  Of course, the politics of this matter were no doubt different in Europe.

London’s mayor, Boris Johnson, said Thursday that the drop in BP’s shares was slowly becoming a political issue in Britain. “When you consider the huge exposure of British pension funds to BP and the BP share price and the vital importance of BP then I do think it starts to become a matter of national concern if a great British company is being continually beaten up on international airwaves,” he told BBC Radio on June 10th. However, Reuters quoted Prime Minister David Cameron as saying, “This is an environmental catastrophe. BP needs to do everything it can to deal with the situation, and the U.K. government stands ready to help. I completely understand the U.S. government’s frustration.”

In a general sense, the governments are relatively oriented to the public interest, whereas BP, as a private corporation, has a fiduciary obligation to its stockholders.  Robert Reich referred to this obligation as a company’s “corporate social responsibility” on the Countdown with Keith Obermann show on MSNBC on June 14, 2010.  “Social” can admittedly be in reference to stockholders’ social concerns (though “social concerns” is rather vague); however, the term can also refer to society, which is larger than any group of stockholders. To BP’s management, it makes perfect sense in terms of corporate governance to declare and pay dividends as long as the company has enough resources to cover its actual and contingent liabilities related to the gulf.  Considering the billions that the company has in oil reserves, it could satisfy both. In an economic sense, the dichotomy may not make sense.  However, politically, there is resistance to the declaration and payment of dividends, and this “irrational” element is ignored by BP to its economic peril.  Essentially, the political reaction is challenging the right of the company to continue to exist. At the very least, the objection is that the company should not be run as normal.  In other words, the political claim is ultimately that BP has broken the social contract that legitimates its right to conduct business within the US.

Lest we have become too ahistoric, it might be worth our while to study the history of the modern corporation.  Originally, the modern joint-holding company was delegated a function to do for the public by a government.  If the company had enough left over after performing the function, it could give the surplus to the stockholders.  Through the twentieth century, the interests of the stockholders became increasingly central, eclipsing even the “delegated public function” aspect of the charters.  Essentially, a society gives a group of people permission to do a function. This implies that doing the function, and taking care of any adverse consequences caused by the company, are primary.  The political demand of the American governments is that dividends not be declared or paid until BP has rectified the Gulf region as required by law, societal norms, and ethical standards. From the standpoint of BP having been granted permission to operate in the US (leaving aside the billions in contracts from the US Government), the demand is not so much the product of irrational exuberance.

In effect, BP’s managers ignored systemic risk.  In being the closest we have to anyone able to solve the problem, BP is too big to fail. Managers at the company lied about being able to handle a major rupture. The MMS regulatory agency went along, having been coopted by the industry it was to regulate.  This is a failure of business as well as government.  All the emphasis on BP taking orders from the US Government in the wake of the rupture can be interpreted as “reaction formation” given the powerlessness felt in government having been so dominated by private interests ahistorically oriented to their stock price.  If the Gulf of Mexico seemed broken, this condition could be read as a symptom of a political-economic rupture.  I suspect that big business has gotten too big—taking too big risks, capturing governments, and acting with impunity.  As if the financial crisis of 2008 was not enough of a warning call, the oil spill of 2010 depicts too big to fail in very concrete terms.  Whether governments have sufficient power to reassume the driver’s seat in delegating public functions to private commercial associations depends on whether legislators have enough backbone to limit the size and wealth of big business.

Sources: http://www.nytimes.com/2010/06/11/business/11bp.html?hp
Countdown with Keith Obermann, MSNBC TV, June 21, 2010; Byran Walsh, “The Spreading Stain,” Time (June 21, 2010), pp. 51-59.

Testifying before the US Senate Finance Committee on his re-appointment, Ben Bernanke volunteered that the Fed had been “slow” in protecting consumers from high-risk mortgages during the housing bubble and that it should have forced banks to hold more capital for all the risks they were taking on.  “In the area where we had responsibility, the bank holding companies, we should have done more.” he told lawmakers.  The hearing provided new evidence of doubt among lawmakers about the Federal Reserve’s  role as the nation’s guardian of the financial system. “In the face of rising home prices and risky mortgage underwriting, the Fed failed to act,” said Senator Richard Shelby of Alabama, the senior Republican on the banking committee. “Many of the Fed’s responses, in my view, greatly amplified the problem of moral hazard stemming from ‘too big to fail’ treatment of large financial institutions and activities.”  Accordingly, Senator Dodd proposed that the Fed’s powers as a bank regulator ought to be transferred to a new consolidated agency. Even though Bernanke admitted that the Fed made mistakes as a regulator of the bank holding companies, he and other top Fed officials adamantly opposed Dodd's proposal, arguing that the Fed has unique expertise nonetheless and that the Fed's ability to preserve financial stability depends on having the detailed information that only a regulator has about the inner workings of major institutions.

The Fed has “unique expertise," and yet, “In the area where we had responsibility, the bank holding companies, we should have done more.”   In other words, the Fed’s Chairman admitted that his agency had not done a satisfactory job of regulating banks during the housing bubble and yet his organization should be given even more power as a regulator anyway.  Were we to trust the Fed to regulate systemic risk, given the agency’s squalid record leading up to the financial crisis of 2008? Regardless of what qualms this question may have raised, the Dodd-Frank legislation charged the Fed with guarding the financial stability of the United States. It gave the central bank the power to oversee the largest financial institutions, even if they are not banks. Finally, it gave the Fed a prominent role on the Financial Stability Oversight Council, a body of regulators that will have the power to seize a systemically important company if it threatens the stability of the economy. Testifying before the Financial Crisis Inquiry Commission on September 2, 2010, Bernanke signaled that the central bank was eager to embrace its strengthened role provided for in the Dodd-Frank law. This role ought to give us pause, given his remarks in 2007 in which he thought the subprime problems were “manageable.” To the Commission in 2010, he said, “What I did not recognize was the extent to which the system had flaws and weaknesses in it that were going to amplify the initial shock from subprime and make it into a much bigger crisis.”

Sources: http://www.nytimes.com/2009/12/04/business/economy/04fed.html?ref=business ; http://www.nytimes.com/2010/09/03/business/03commission.html?_r=1&ref=business

When he was running for US President, Barak Obama said that the financial crisis provided an opportunity for financial system reform beyond that which is in the interest of the big banks because the power of the latter is temporarily eclipsed and the US Government can take advantage of that.  His assumption is that during normal times, the banking industry essentially owns the Congress (Sen Dick Durbin’s statement just after the banking lobby defeated a foreclosure bill in the US Senate in 2009).  Sadly, the government did not use the eclipse; rather, it has been using the appearance of power and direction in the relumed post-crisis period to engage in window-dressing to assuage populist anger at the banks.

 Asserting that it “is among the strongest banks in the industry,” Citigroup announced in December, 2009 that it would soon repay $20 billion of federal bailout money. This from a bank that was in the red for most of the preceding two years, that was expected to limp through 2010 amid a torrent of loan losses, that saw its stock price close after the announcement at a measly $3.70 a share — and that, like other big banks, was still reluctant to lend. Citigroup’s planned exit from the bailout — like Bank of America’s earlier this month — would be welcome if the banks were the picture of health. But their main motive was to get out from under the bailout’s pay caps and other restraints. Perhaps the bankers were motivated to attract talent;  perhaps they were acting in their personal financial interests.  The Treasury Department’s approval was a grim reminder of the political power of the banks, even as the economy they did so much to damage continued at the time to struggle and the banks have benefited from taxpayer money.

Big bank profits, for instance, still came mostly courtesy of taxpayers. Their trading earnings were financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets were collateral. They benefitted from immense federal loan guarantees, but they were not lending much. Lending to business, notably, was very tight.  Barak Obama’s “urging” the banks to lend more to small business was not apt to be taken seriously by the big banks, given their financial power.   To exort banks to be good “corporate citizens” is only to twist “citzen” beyond its pale.

Let’s be clear. Organizations are not citizens.  For one thing, they can’t vote.  Exxon can’t mail in its ballot for president.  Nor can it be drafted to fight (rather, it can receive military contracts; its lobby knows how to procure those).  Moreover, they are designed (real citizens are not “designed”) to retain income without limit.  Extrinsic normative claims on the organizational machines do not register in the corporate calculus unless there is a financial cost.

Being called to the “woodshed” at a White House meeting is mere political theatre—something the bankers who bothered to attend in person must have known was something merely to sit through.  Some of the biggest recipients of taxpayers’ money, including Citigroup and Goldman Sachs, didn’t even bother making the extra effort to get there ahead of time to avoid the predictable winter weather that grounded their flights.  The acela train from NYC was running on time, yet the CEOs cited flight delays as making it impossible for them to attend in person.  Perhaps the CEOs correctly determined that Barak Obama’s meeting was mere political theatre.  The banking lobby was surely not being distracted from the financial reform legislation making its way through Congress.  That lobby has gained significant loopholes in the House’s passed bill (see my post on the House bill).  Aside from the loopholes (such as derivatives still not subject to regulation!), the apparently “strong” provisions of that bill are vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities. If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist.  But can you imagine our elected officials having the guts to split up Goldman Sachs?  Can you imagine what that bank would do to avoid such a fate?  … and yet such private power is not a threat to a republic?   As voters, we are asleep at the wheel, too easily taken in by the theatrics of impotent politicians.

In general terms, it is ironic that the banks too big to fail may be even more of a risk after the financial crisis.  What profits the banks have been making have come mostly from trading. Many big banks were happy to depend on the lifeline from the Fed and hang onto their toxic assets hoping for a rebound in prices.  Crucially in terms of the systemic risk in “too big to fail,” the whole system has grown more concentrated since the crisis. Bank of America was considered too big to fail before the meltdown. Since then, it has acquired Merrill Lynch. Wells Fargo took over Wachovia. And JPMorgan Chase gobbled up Bear Stearns.  If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the US Goverment has been moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.  In short, there is even more systemic risk after the financial crisis of 2008.  Creating a new consumer protection agency is a feckless attempt by the US Government to show some muscle to face entrenched (and even more powerful) financial interests on Wall St.  Even giving the government the power to deal with banks deemed too risky to the financial market itself does not guarantee that the power will be used.  Consider, for example, the lack of enforcement of anti-trust law.  For a comparison, look at the EU—not only in terms of going after big companies like Microsoft, but big banker bonuses.   In the US, we much face the fact that the big banks are on top.  If what is good for Goldman Sachs or Citigroup is not necessarily good for us, the American people, then there is a tremendous systemic risk for us in being appeased by Barak Obama’s public “scolding” of Wall Street and by the Swiss-cheeze financial reform bill making its way through Congress.  Neither branch is taking seriously the question of the existence itself of the banks too big to fail.  Moreover, the question of whether large concentrations of private power have become a threat to our republic—on account not only of the ability of a big bank to shaft its customers, but also of the relative power of the banks and their lobby over our government—has effectively been sidelined.   It as as though popular sovereignty here means charting a ship’s course without looking beyond the bow.   Some of the wealthy passenagers have told us: don’t look out there!  Don’t ask the real questions!  And we, being reduced to unconscious herd animals, happily comply and stiffle our anguish because we feel the big banks have already won.

Adapted from: http://www.nytimes.com/2009/12/15/opinion/15tue1.html

I  ran across a poll that showed the ranks of the independents growing.  Not coincidentally, movements independent of the two major US parties seem to be springing up.  The Tea Party amd the Coffee Party are just a few.  Remembering back to Ross Perot’s movement in the early 1990’s, I must admit to a tendency to consign the movements of 2010 to a similar “wave” pattern.  However, there might be enough independents relative to the two parties that one or more of them could be around for awhile and make a difference beyond one or two election cycles.  My sense is that they will not, but independents factor could mean that my projection is too pessimistic.

In any case, there are doubtlessly many American citizens annoyed at the office-holders representing the two major parties for being inordinately interested in serving the moneyed interests at the expense of the public good and too interested (relatedly) in getting reelected.

The question is perhaps whether We the People can muster enough power to change the equation.  We are far-flung and each making up our own minds, while the moneyed interests are getting ever more concentrated (and this reflects on their ability to influence our representatives).  The deck, as it were, is stacked against us.  Yet somehow my faith still lies with the little guy—that if enough of us stand up to greed and power we will be able to exercise our own and take back the government for the People.

Of course, there are citizens whose beliefs and values dovetail with the entrenched moneyed interests, so it is not so simple as to claim that the People are alienated from our government.  I think perhaps the US is rather unique in the world for the proportion of its citizens who support the interests of the financial elite.  There was even a book whose thesis was that what was good for GM was good for America.  The citizens whose ideologies match that of the major corporations and banks, the two parties are probably performing just fine.  Even some of the independent movements, such as the Tea Party, might have an agenda that dovetails with the corporate interests (e.g., lower business taxes and less government spending on the People).

So I don’t think I can generalize my position to say that “the People” are frustrated with the influence of the moneyed interests in our government.   Even so, I look back to US Presidents like Andrew Jackson and Teddy Roosevelt, the former taking on the banking interests and the latter taking on the giant trusts such as Rockefeller’s Standard Oil, and I wonder where those leaders are today and whether a sufficient number of supporters exist to put such leaders into office again.  It would be presumptuous of me to claim that such a mandate would be that of “the People,” though I do think it would be in line with “We the People.”

So here are some questions for your consideration. Do the entrenched vested interests of the status quo (i.e., those in line with the moneyed interests) have an exaggerated following among citizens in the US?  If so, how real, or deep, is the support?  Are those people simply being manipulated without them realizing it?  If their concurrence is superficial, can it be made transparent?  If we do not awake to the danger of “systemic risk” and “too big to fail” after having experienced the financial crisis of September, 2008 and its after-shocks, will we ever?  Or will the financial consolidation just have to take its course, capturing the US Government as it gains even more power?  We may well have a sizeable “the business of America is business” electorate that is not so because we are being manipulated by ads.  If so, it will be difficult for movements independent of the two major parties to wrestle the government from the grips of the titans.