World Business

British bankruptcy for BP is Obama's worst nightmare

By Caroline Baum (China Daily)
Updated: 2010-06-26 14:04

It would be a "horror", a "disaster", according to lawyer Kenneth Feinberg, who was appointed by President Barack Obama to administer BP Plc's $20 billion compensation fund for victims of the Gulf oil spill. "That is not an option."

Feinberg was talking about a bankruptcy filing by BP in a Fox News interview.

"Bankruptcy absolutely is an option, and the United States needs to recognize that," said Peter Kaufman, president and head of restructuring and distressed M&A at the Gordian Group, an investment bank in New York.

Which is it?

No company has the ability to pay unlimited claims, even one that earned $16.6 billion last year and more than $20 billion annually in the prior four years. At the same time, no one has any idea how big BP's damages will be. That hasn't stopped Wall Street analysts from churning out estimates that move up in lockstep with the number of barrels thought to be leaking from the collapsed well each day.

How many companies are willing to face unlimited civil claims, the prospect of criminal prosecution and daily excoriation by the US government before going on the offensive?

That's Kaufman's argument for why BP should consider filing for Chapter 11 bankruptcy. (And the US should consider the implications of such an outcome.) In the US, unlike in most countries, "you can file for bankruptcy even if you are perfectly solvent," said Jay Westbrook, professor of law and a bankruptcy specialist at the University of Texas, Austin.

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Don't try pulling a fast one to avoid paying the bills. The courts have developed a "doctrine of good faith", Westbrook said. "If you are abusing the bankruptcy code, they will throw it out."

If BP's damages, or even "reasonably probable damages", exceed the value of the company, or if it faces a liquidity crisis, bankruptcy would be a way to organize the claims into a "sensible, orderly, fair process", he said.

US Interior Secretary Ken Salazar may think keeping the "boot on the neck" of BP is a good strategy, but he should understand that BP has a stiff boot of its own. What if the company were to utilize its considerable financial and legal resources and the insolvency laws of the US or Great Britain "to make it extremely difficult and time consuming for legitimate claimants to get succor?" Kaufman said. (It wouldn't be a first for an oil company.)