Tuesday, June 8, 2010

BP's Fateful Discovery: Bottomless Liability



June 2010

How does BP stay in business here? I'm honestly not sure why anyone is buying the stock these days, even with the company's market capitalization slashed by $70 billion or so (it has bounced back up from $36 to $39 the past two days).

The problem is liability. The greatest Gulf of Mexico oil spill in history has created unending damages to wildlife, ecosystems and countless human activities - with human health, fisheries, leisure travel, waterfront real estate (and property values) impacted, presumably for many years to come.

No corporation (or mega-corporation), BP included, could possibly ever muster the funds to reimburse all affected for the damages unleashed by this disaster. Apparently 1/6 of all British dividend payments originate from BP. I don't see how that lasts either.

I haven't seen much discussion of this issue. There was talk on CBC radio today about the immense value of BP's assets - but that calculation disregards the company's liabilities. We saw
Johns Manville plunge into bankruptcy over asbestos insulation claims.

BP in the gulf is bigger than that - far bigger by at least an order of magnitude. Once again - the US taxpayer will foot the bill, and I predict that many of the damages will never be paid (think about Florida Gulf Coast real estate values, just for a starter).

Once again, we are facing a paradigm shift, and the market hasn't caught up with the concept of "bottomless liability." Take my word for it, this case is not over until BP is in bankruptcy court. No corporation on earth could bear liability on this scale.

Click here for one forum that is discussing this somewhat complex issue. For example, BP's total liabilities may be limited by law, at a small fraction of the total damages.... As to insurance coverage - they insure themselves through a sub-venture known as "Jupiter."

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