Why Investors Are Bailing on BP

More

bp liability cashflow.png
President Obama's speech on the BP oil spill might have received yawns from cable news and the commentariat, but the government's dealings with BP are making serious waves in the powerful credit default swap market.

Credit default swaps, which take stock of the likelihood that a bond won't be paid in full, have skyrocketed for BP. One month ago, BP's risk of default on its debt was priced at 7%. Today it's 39%.

The concern for BP isn't the direct cost of clean-up, which analysts put around $3 billion. The real danger is in the economic damages, or liabilities, to third party businesses, individuals and natural resources, which could run many billions higher. In his speech, the president called for BP to dedicate a certain sum of money to be placed in a escrow account so that an independent administrator could handle the damage claims. Some are calling for up to $20 billion.

The Oil Pollution Act of 1990 caps liability payouts at $75 million. So BP's safe, right? Probably not. Due to alleged safety violations (which would void the cap), efforts on Capitol Hill to eliminate the liability ceiling entirely, and BP's own promises to pay up, everybody expects the company to dole out billions to local Gulf businesses and the government. Even with a cash flow of more than $30 billion, BP's ultimate responsibility -- to the clean-up, the economic damages, and to civil and criminal penalties -- could run just as high in a worst case scenario.

[Image: New York Times]


Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

Why Do People Love Times Square?

A filmmaker asks New Yorkers and tourists about the allure of Broadway's iconic plaza


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Why Do People Love Times Square?

A filmmaker asks New Yorkers and tourists about the allure of Broadway's iconic plaza

Video

A Time-Lapse of Alaska's Northern Lights

The beauty of aurora borealis, as seen from America's last frontier

Video

What Do You Wish You Learned in College?

Ivy League academics reveal their undergrad regrets

Video

Famous Movies, Reimagined

From Apocalypse Now to The Lord of the Rings, this clever video puts a new spin on Hollywood's greatest hits.

Video

What Is a City?

Cities are like nothing else on Earth.

Writers

Up
Down

More in Business

Just In