The High-Stakes Negotiating Game Between Obama and BP

President Obama has has asked BP to pay $20 billion into an escrow account to pay economic damages and liability claims stemming from its massive oil spill in the Gulf of Mexico, and while BP has said at every step of the way that it will cooperate with the government in full, some intense negotiations could happen Wednesday when Obama makes his demand of top BP executives.

Here are some factors at play:

Obama wants to get the money up front to ensure BP doesn't hide behind the $75 million liability cap for oil-spill damages, instituted under the Oil Spill Pollution Act of 1990, a law written in response to the Exxon-Valdez spill. BP has said it will not hide behind this liability cap and that it will pay "all legitimate claims," but the cap could signifiy an implicit threat as BP doles out claim money--since BP will not be legally obligated to pay those claims, as the company itself deems what is "legitimate."

"I think [the liability cap] puts BP in a position to bargain with the claimant on the amount of compensation, under BP's implicit threat to the claimant--that if the claimant does not agree to settle with BP for the amount that BP deems appropriate, BP will then hide behind the cap," Georgetown Corporate law professor William Bratton said when I asked him about the liability cap earlier today.

The president, meanwhile, wants to take that power out of BP's hands, letting a third-party entity dole out the money, presumably determining the legitimacy of damages claims on its own. Obama's threat, implicit or explicit, will be the bills in Congress to retroactively raise the cap and damages to BP's public image.

After mentioning the "evidence-based legislative solutions" being considered in Congress, Obama writes in his letter:
Establishment of this account would serve as an act of good faith and as a first step towards ensuring that there will be no delay in payments or attampt to evade responsibility for damages. Although creating this account at this level in no way limits BP's liability, we believe it will do more to improve BP's public image than the costly public relations campaign your company has launched. 

That public relations campaign includes this TV ad, in which BP CEO Tony Hayward pledges that his company is dedicated to Gulf recovery and will pay out damages claims. As president, Obama has a bully pulpit to further demonize the oil company.

Meanwhile, two Democrat-sponsored bills in Congress--one proposed by Rep. Rush Holt a similar one proposed by Sen. Robert Menendez--would raise the damages liability cap to $10 billion [UPDATE: Menendez's bill lifts the liability cap entirely]. There appears to be consensus that liability should be raised, either for BP or for all oil companies. House Minority Leader John Boehner has said BP should bear all costs of the spill.

Under the Oil Pollution Act of 1990, which provides for the liability cap, the cap does not apply in cases of gross negligence, willful misconduct, or violation of federal safety, construction, or operation regulations. A House subcommittee, led by Reps. Bart Stupak and Henry Waxman, is investigating the spill for potential negligence by BP and the other companies involved in the well.  Waxman and Stupak sent a letter to Hayward today suggesting BP had ignored warnings from its own employees about the well. Presumably, if the committee finds that gross negligence or violation of regulations occurred, BP would be held liable for all damages.

If Obama threatens BP with passage of a bill raising or eliminating the liability cap, BP does have another bargaining chip to use: the threat of bankruptcy. Corporations can go into bankruptcy preemptively, and New York Times financial reporter Andrew Ross Sorkin has reported on Wall Street speculation of a BP bankruptcy arrangement that would allow other oil companies to purchase BP. In 1987, Texaco filed for bankruptcy after a $10.53 billion judgment against it.

Were BP to file for bankruptcy, damages claims would presumably not be paid in full.

President Obama cannot force BP to pay $20 billion into the proposed escrow fund, but he will provide several reasons why BP should go along with the plan: saving its own public image, the consensus in Congress that BP should pay damages without limit, and the potential that BP's ignorance of warning signs could be construed as negligence. BP, on the other hand, will want to evaluate claims on its own and has bankruptcy in its back pocket.

It's possible BP will calculate that it has no way out from a high damages bill, and that the public-relations value is worth agreeing to Obama's plan. If not, tense negotiations will likely follow.