BP Shakedown?

June 21, 2010

by Mario Rizzo  

I do not know, at this point, whether BP was negligent or grossly negligent in its drilling and related activities leading to the Gulf oil-spill. They may well have been but I leave that to further investigation.  

It seems, however, the federal government’s regulatory policy was and continues to be a mess, as Chidem points out. The moral outrage of the Congress and the Administration in view of their “gross negligence” or worse is absurd, but not unusual.  

Nevertheless, these are not the only issues.  

Congressman Joe Barton (R. Texas) accused the Obama Administration of a “shakedown,” that is, some form of extralegal extortion, in getting BP to set up a $20 billion compensation fund. He was forced to apologize by his political masters. 

But Congressman Tom Price (R, Georgia) made the point succinctly in a press release entitled, appropriately enough, “Chicago-Style Political Shakedown”:  

“We all agree that BP should be held fully responsible for its complicity in the oil tragedy in the Gulf,” said Chairman Price.  “In fact, BP has already begun paying claims.  Any attempt by the company to sidestep that responsibility should be met with the strongest legal recourses available.  However, in an administration that appears not to respect fundamental American principles, it is important to note that there is no legal authority for the President to compel a private company to set up or contribute to an escrow account.

“BP’s reported willingness to go along with the White House’s new fund suggests that the Obama Administration is hard at work exerting its brand of Chicago-style shakedown politics.  These actions are emblematic of a politicization of our economy that has been borne out of this Administration’s drive for greater power and control.  It is the same mentality that believes an economic crisis or an environmental disaster is the best opportunity to pursue a failed liberal agenda.  The American people know much better.”  

The Economist also stressed the probable violations of the rule of law in Obama’s behavior:  

“After the macho rhetoric came the demands for cash. Mr. Obama decided to “inform” BP that it must put adequate funds to meet all compensation claims into an escrow account beyond its control, although he has no authority to do so. …. If he sees any impropriety in politicians ordering executives about, upstaging the courts and threatening confiscation, he has not said so. The collapse in BP’s share price suggests that he has convinced the markets that he is an American version of Vladimir Putin, willing to harry firms into doing his bidding.”  

On ABC’s This Week program yesterday, White House Chief of Staff  Rahm Emanuel didn’t tell us what exactly Obama said to the BP officials. He simply called it “jaw-boning.”   

But what went on? This is not an issue of political gossip. There are rule of law issues and well as substantive political ones. The news media worried about secret discussions between then Vice President Dick Cheney and oil company executives. They should be worried now too.   

One function of law is avoidance of regime uncertainty. When the state is unclear about the rules of the game private planning is made difficult and prolonged periods of economic stagnation may result.  

But apparently our law-professor president either never heard of this or is simply too concerned with politics to care.

12 Responses to “BP Shakedown?”


  1. Mario is surely correct to raise the rule of law issue. I would like to take it further.

    The Gulf Oil spill raises property rights issues that I sense have not been fully settled among classical liberals. Does anyone not believe BP will eventually put its US assets into bankruptcy? Asked another way, what would BP be doing differently if it were planning a bankruptcy filing?

    The stockholders of BP have the ability to mitigate their damages by taking advantage of two statutory shields against personal liability: the limited liability of corporations and the bankruptcy code.

    So was there a shakedown at the White House? Or was there a tough negotiation to get some assets from a foreign-domiciled corporation, for the benefit of harmed U.S. citizens, in anticipation of a legal action that would remove other assets from the jurisidiction of US courts? The questions are not mutually exclusive, and the answer depends in part on how much legal savy we credit the WH with having.

  2. Mario Rizzo Says:

    The existing law relative to BP’s liability is a patchwork of confusion. Although it is pretty clear that the $75 million legislated cap is not applicable (or will not be found to be applicable), it is unclear how far BP’s liability goes. This is part of the rule of law problem.

    If they were governed by a strict liability (or negligence) tort regime then we could adduce the relevant case law. But who knows ultimately what *kinds* of damages they’ll have to pay for?

    This link gives some idea of the complications:
    http://bpoilnews.com/legal/oil-spill-lawsuits/hello-world/

    I do not envy the task of policy makers here. If there were a strict liability regime, what would the price of domestic oil be? Anytime the price of oil spikes, all hell breaks out for politicians. If the government regulates them up the —, the price of oil will also rise.

    Then there are the alternative power sources. Nuclear power?? Does anyone remember Three Mile Island??? And now there is the fear of terrorists stealing nuclear material.

  3. Richard Ebeling Says:

    Mario and Jerry:

    All of the legal issues that you raise are absolutely true and essential to sorting out this situation. And it is true, even classical liberal law theorists would have to think this through — Richard Epstein dealt with some aspects of it in a recent “Wall Street Journal” piece.

    But, nonetheless, the “real reality” is that this is being played out for political purposes, not only for the November election but in the context of ideological motivations that clearly guide much of the thinking and attitudes of those in the White House.

    The tragedy of the Republicans is that some of them clearly sense this anti-business, anti-capitalist motivation and respond to it in “defense” of free enterprise.

    But they are not able to successfully defend the institutions of private property and competitive markets, and at the same time not make themselves appear apologists for “selfish” business interests want to avoid their full responsibilities in damaging other peoples’ property.

    This dilemma of defending “capitalism” without appearing to defend particular “capitalists” is notoriously difficult. Hayek despaired a form of it in his 1933 lecture on “The Trend of Economic Thinking.” And was pointed out even earlier in the 19th century by the British economist, Henry Fawcett.

    Richard Ebeling

  4. Mario Rizzo Says:

    Richard,

    This is indeed a problem. I am sure that some readers of this post will think, “Rizzo is defending BP” or “Rizzo just hates Obama.” The truth is this is much like a free-speech case. The freedom of speech matters most when an unpopular person or group wants to speak. It is no issue at all when someone praises motherhood or fatherhood or apple pie. In the same way, the rule of law matters most when the victim of extra-legality is unpopular.

  5. Walker Todd Says:

    There are some relevant precedents. Jerry O’Driscoll in particular is on the right track. Unless you want to have one hell of a mess in the Gulf region and no one around (with cash) to pay for it but Uncle Sam, then you need someone in the White House (you don’t want Congress trying to do this) rattling BP’s cage and trying to extract the cash in advance of a bankruptcy filing for BP’s North American subsidiary. And it begins to look like fraudulent bankruptcy (even if technically it wasn’t) if BP parent continues to pay regular dividends to shareholders while tossing BP North America into bankruptcy. Think about it a moment–what is the realistic alternative? Would you waive the escrow account requirement if, say, the UK government would put up a $20 billion letter of credit for the US Treasury? If you were a UK voter or taxpayer, would you want your government doing this?

    International financial disputes of this nature in the past include the extent of WWI reparations assessments against the Central Powers and the US response to the Iranian hostage seizure in Nov. 1979. To show the extent to which people might make claims against BP, at Versailles, the Central Powers were required to admit “sole guilt” in starting WWI. On that basis, all costs reasonably associated with the war, including veterans’ benefits and health care costs for injured veterans, plus property damage, were assessed against the Central Powers. I believe that even future pension costs for those veterans and their widows and orphans were thrown in. Thus, the Central Powers were assessed a tremendous amount, and I’ll give a lesson on the fallout of the assessment later to those who don’t know it. Richard Ebeling knows it very well. In this case, as with the WWI reparations, the total claims could become quite large quite fast. If you want to pretend to hedge against such claims, you need to ask BP now to suspend the dividend and begin to set aside moneys in an escrow fund.

    The Iranian case was as follows: After the hostage seizure, acting under the International Emergency Economic Powers Act of 1976 or so (IEEPA), a successor and updating of the old War Powers Act from WWI, President Carter ordered a freeze of all Iranian accounts and of all payments to and from Iran, including private funds. US companies with assets in Iran were required to report and eventually to remit them to the Treasury’s Office of Foreign Assets Control. US banks holding accounts for Iranians, either at home or abroad, were required to segregate those accounts and to report them to the Treasury. The total of Iranian funds then was used as a bargaining chip for the subsequent negotiations with Iran. I was part of those negotiations.

    Eventually, an escrow account for claims against Iran was established at the Netherlands Bank (originally at the Bank of England), and claims were to be presented to an arbitral claims tribunal in the Hague. The account was set up to hold $1 billion initially, with Iran required to top it up as it fell below $500 million. Over the next several years, all claims filed by a specified deadline were processed. The leftover amounts were supposed to go back to Iran, and frozen assets (on both sides) were released once the escrow fund was established.

    Applying this analogy to the present situation, I think I would ask a neutral third country to hold the escrow account (Netherlands or Canada come to mind), I would set up a claims review tribunal somewhere like the Hague with subsidiary tribunal offices in London, New York, and New Orleans, and I would start processing claims filed by a yet to be determined deadline (say, six months after they plug the well). In return for establishing the escrow fund and agreeing to the arbitral process (Prof. William Park at Boston Univ. School of Law would be a good choice as lead arbitrator, but there are others acceptable, too), we could agree to let BP operate freely again, as long as BP agreed to keep the fund topped up at $20 billion until and unless the aggregate of unresolved claims fell below that amount. BP could be asked to pledge its North American assets to secure that promise (future topping up).

    Something like this has worked before (Iranian claims) and is far better than the stupid reparations scheme that followed WWI. It avoids formal bankruptcy of BP North America and provides protection to the US authorities if BP did toss that subsidiary into bankruptcy.

    In general, bankruptcy is an intervention into the common law, but it is not a violation of classical liberal principles to have a bankruptcy (or arbitral claims) process. The original Constitution called for a bankruptcy code, and the Federalists enacted one in 1798 to get Robert Morris out of jail.

    One does not have to be a fool in business matters in order to be a classical liberal. And a foreign-owned corporation partly owned by a foreign government and whose activities are polluting our coastal waters through its own gross negligence or willful misconduct is about the worst case I could think of for mounting a defense of classical liberalism. Remember, there are no favorably commented upon for-profit corporations in the 18th-century classical liberal world. Such corporations did not exist at common law, were creatures of state power, and were voted down 8-3 when the Constitutional Convention took up the matter in 1787. It was subsequent judicial interpretation by Federalist Chief Justice John Marshall (McCulloch v. Maryland, 1819) that gave the stamp of blessing to banking corporations.

    Like rattlesnakes in Tennessee, I have to recognize the existence of corporations, and I have to learn to live with their being around, but I also need to know how to protect myself from them, and when to kill them, too. I have no obligation to love rattlesnakes or corporations as classical liberal creatures worthy of protection. BP North America now has turned into a rattlesnake, but the head of the snake is in London. –Walker Todd

  6. Mario Rizzo Says:

    Walker,
    My only interest in this post is: By what legal authority does the president “jaw bone” BP into setting up the fund? Law should be transparent. What exactly was said by Obama to the BP executives that caused them to do this? If there is no applicable legislation giving Obama authority, then — hey — what is $20 extra billion to this administration? They can increase the deficit and pay the costs. (Or even reduce spending by $20 billion in some other area — healthcare “savings”? ) The rule of law is more important.

  7. Richard Ebeling Says:

    Mario:

    Your point on the rule of law is crucial.

    I just read in “New York Times” today that Obama has told the health insurance companies that he will be personally watching them and their premium pricing policies.

    And that there will be consequences if he thinks they are raising premiums “unjustifiably.” So the president of the United States is taking on the role of price controller.

    The national “czar” is now going to be his own price control czar.

    It used to be said in the Soviet Union, in the 1930s, that Comrade Stalin “knows everything” about “everyone.” Comrade Obama, obviously, has a role model that he is following.

    Truly we are experiencing at an accelerated rate the “rule of men” over the “rule of law.” I hope that all those people who have been buying those copies of Hayek’s “Road to Serfdom,” recently, read the chapters on ‘Planning and Democracy,’ ‘Planning and the Rule of Law,’ ‘Economic Control and Totalitarianism,’ and, of course, ‘Why the Worst Get on Top.’

    Richard Ebeling


  8. Here is what the President said in his Oval Office speech:

    “Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company’s recklessness. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent third party.”

    It seems to me that determining if BP acted “recklessly,” determining if a claim is “legitimate,” and determining the amount of “fair” compensation, are all actions that fall within the judicial power of government, and should not be thought to be within the executive power of government. Thus, it seems to me we should say the President does not have the constitutional power to act in this way. And, with Mario, I am very interested in knowing how the President’s conversation with BP about this $20 billion unfolded.

    Jerry makes reference to property rights issues, and I suspect that there is significant confusion about ownership and harm to others in all of this.

    Who owns the oil under the ocean? Who owns the ocean? Who owns the wildlife? Who owns the beaches?

    Because the U.S. government leases the off shore wells, I think the implication is that the U.S. government owns the ocean as well as the oil under the ocean? It also seems to me that the U.S. government, or perhaps state governments, own the wildlife. The story of oil production on land owned by individuals was that ownership to the oil was only determined when the oil was captured in a barrel. I’m not sure who owns the oil when it is released but not captured. In some ways it seems to me that government is developing its oil by leasing production rights to BP, in return for a royalty payment. This development happens on land and ocean owned by the government itself. The accident has harmed government’s wildlife. And, the oil is coming ashore onto some lands owned by individuals, other lands owned by state governments, and still other lands owned by the U.S. government itself. In addition, the U.S. government has asserted that it can control aspects of BP’s production of oil. I believe there have been reports that BP asked the regulating agency for 3 changes to permits in the day or two preceding the accident. If we could think clearly about who owns what in all of this, would it be easier to determined who should pay what to whom? And, if we think about who owns what, can we avoid the conclusion that government’s actions are at least partly responsible for the damages, especially if it cannot be shown that if BP had completely followed the government regulations there would have been no accident?

  9. Walker Todd Says:

    I cited the precedents, one evil (WWI reparations mess post-Versailles) and one actually pretty good (Iranian hostage release escrow fund, established under IEEPA, later sustained by the Supreme Court, Rehnquist writing for the Court). Citation on the Iranian case is Dames and Moore v. Regan, 453 U.S. 654 (1981).

    The relevant precedent that Mario and others may be looking for on the “unauthorized action” side of the ledger is the Steel Seizure Case, Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952). Rehnquist was Justice Jackson’s law clerk at the time.

    It all gets down to one’s obligation to be more Catholic than the Pope. If William Rehnquist, who did know more about the subject than anyone else, thought the Iranian escrow arrangement was OK, and that is definitely the analogy for the BP case (Dames and Moore was a contractor holding claims against Iran and was protesting being forced to submit its claim to the President’s will under IEEPA), then who are we to say that Rehnquist was wrong and that the President lacks the authority? Because BP is a foreign-owned corporation with a substantial component of state ownership (both UK and Kuwait), IEEPA easily can be invoked if need be.

    The Obama crowd is a little naive on some things foreign, but one way of viewing what happened with the “BP shakedown” is that the President essentially said, “Give me a $20 billion escrow fund voluntarily or I’ll invoke IEEPA and take it from you.” Until we achieve either global government (hopefully not) or global classical anarchy (not impossible), foreign affairs both will and probably should be played this way. If we were a vast surplus nation akin to the way we were right after WWII, then you might want to exercise forbearance all over the place to encourage trade. But if the trader shows up from abroad and pollutes your back yard (or the swimming pool in your back yard), you do want a remedy. — Walker Todd

  10. Mario Rizzo Says:

    The best thing would be if a challenge could be brought and a court would rule on it.


  11. Mario,

    Who would have standing to challenge it other than BP? BP accepted the “shakedown.” In my opinion, it did so as part of a planned bankruptcy. In any case, BP accepted the arrangement.


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