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The BP bankruptcy scenario

Could the oil spill really drive a giant like BP into bankruptcy? Well, sure. Just ask Texaco.

This outcome might seem far-fetched right now. But on Wall Street bankers have already coined a term for it: “the Texaco scenario.”

In 1987, Texaco was forced to file for Chapter 11 because it could not afford to pay a jury award worth $1 billion to Pennzoil. That award had been knocked down by a judge from a whopping $10.53 billion. (Pennzoil successfully sued Texaco for “jumping” its planned merger with Getty Oil, in part, by moving the case to local court near its headquarters. The jury awarded triple damages.)

Imagine the BP case playing out in a Louisiana courtroom, against the backdrop of an oil-choked local economy, high unemployment and an angry public. How high can you count?

Under the Oil Pollution Act of 1990, BP’s liability for economic devastation — above the cost of the cleanup — is capped at $75 million, a number Mr. Hayward has already said he plans to blow through. But if BP is found to have violated safety regulations, which seems likely, that cap becomes irrelevant.

By Ezra Klein  |  June 8, 2010; 9:27 AM ET
 
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Comments

A "Louisiana courtroom" would probably be less inclined to penalize BP than would a jury in a socialist-leaning area largely unaffected by the oil spill: already, there is a move to begin drilling new wells, bringing jobs and financial recovery to a region still recovering from the Katrina disaster and the federal response thereto.

Coates and Bugbee, in their Principles of Fire Protection text, describe a parallel scenario. In a fire, those who are closet to the actual flames are more likely to respond calmly and rationally and ultimately have a greater chance of survival than those perceiving the concept of fire without being directly affected by the flames: in many instances, those far from the flames exit a burning building only to re-enter (to "help" or to retrieve a forgotten item) and then die.

Those closest to and directly affected by a problem -- passengers on a hijacked plane heading for the White House, people close to the flames of a fire, and people near an oil accident -- tend to do the right thing. Conversely, abstract problems draw abstract (and often faulty) responses, with federal response to the BP accident and the Katrina disaster serving as prime examples.

Regardless of ultimate legal outcomes, most seem to be getting three messages from the various disasters, accidents, and failures: (a) do not rely on an elite, distant "they" in Washington to offer any meaningful assistance, (b) the planet and its people are far more robust than many might believe, and seemingly redundant (c) the robustness of the planet and its people are unaffected, positively or negatively, by Washington governance.

Posted by: rmgregory | June 8, 2010 9:57 AM | Report abuse

Hrm. Seems to me we have "an angry public" precisely BECAUSE giants like BP emerge from crises like this intact. If there were really any chance that BP could go under, then the public wouldn't be "angry"--right?

Posted by: Bertilak | June 8, 2010 10:30 AM | Report abuse

the thing that limits BP's liability here is the supreme court's decision limiting damages in such cases to a 1:1 ratio between compensatory and punitive damages. for the award to be extraordinary, the compensatory damages would need to be demonstrably high, not an insurmountable bar, but one which would temper the doomsday scenario for BP.

Posted by: masterlevitt | June 8, 2010 10:45 AM | Report abuse

And in bankruptcy, would BP avoid having to pay out all the damages to those along the Gulf and Atlantic coastlines? This would effectively put the entire financial responsibility back on the American public.

Again, we have corporate cultures that encourage extreme risk/malfesance for personal (executive) profit to those who won't be held personally accountable. Hell, this already is a socialist state and the 'party' leaders are the ones with the Bowler hats on... now if we can just get more of those benefits pushed down to the plebes.

Posted by: Jaycal | June 8, 2010 10:56 AM | Report abuse

rmgregory,

oh i don't know about that. A Louisiana courtroom where people have had their lives destroyed could probably be less anti-socialist than you think.

I suggested as a possibility about a month ago. I'm thinking the American public had been hope that the stock price for BP doesn't tank otherwise we're on the hook for it.

Posted by: visionbrkr | June 8, 2010 11:09 AM | Report abuse

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