BP and irrationality
June 10, 2010 8 Comments
This has gone beyond sensible levels, with BP now being asked to pay theoretical costs like those relating to people not visiting Florida beaches which are clean because they might not have been and also the wages of oil workers at other companies who have been laid off because of the moratorium on deepwater drilling. The shares are off 16% overnight, prompting an RNS announcement by the company that it believes the share price move is unjustified by the financial state of the company. RNS stands for Regulatory News Service and is the stock market channel for officially mandated announcements, like this one (dramatic unjustified price action) or other reasons (e.g. someone buys 5% of the company).
This is worse: BN 8:50 *BP 5-YEAR DEFAULT SWAPS SOAR 208 BASIS POINTS TO 594, CMA
The CDS (Credit Default Swap) price represents the price of insurance against insolvency of the company. This means the market thinks there is 6% of that now. Unfortunately I am forced to agree. The trade is no longer ‘will the reasonable costs of the cleanup be less than the share price decline?’ – that continues to be true with the latter number now around £49bn. But it is clear that costs way beyond ‘reasonable’ will be imposed because, remarkably, Obama is suffering on approval rating on this more than Bush did with Katrina.
Now I chose to take this risk, I can take the loss and that’s what markets are about. So if I get screwed, it’s no one else’s problem. I am also still confident that if the company survives, it will be worth 650p again in three years. But look at this:
Of course, the political asymmetry is that none of those people vote in the US. But maybe we need an ad campaign featuring suffering grannies. And maybe this gets diplomatic now. After all, it is hard to see what BP have done wrong here. We are still at the level of punishment being exacted on a no fault basis: if it is proved that BP were negligent in some way, this will kick off. But right now, as far as we know, they were engaged in a legal operation, they conducted it in accordance with regulatory standards, they have worked hard at fixing the problem by various means, it is admitted on all sides that what they are trying to do is unprecedentedly hard and they have paid a lot of compensation claims. What else do the Americans want?