The Next Big Short

Mark Moseley: BP bankruptcy is a real fear

But, did we really get $20 billion “the next day”? Most U.S. news reports describe the fund as if $20 billion is already in hand, but it isn’t.

“BP has agreed to contribute 20 billion dollars over a four-year period at a rate of five billion dollars per year, including five billion dollars within 2010,” a White House statement said.

Hmm. So the escrow account is really only a $5 billion fund for 2010, with additional $5 billion installments in each of the next 3 years. This assumes BP doesn’t renege, or its stock doesn’t tank, or its liabilities don’t grow exponentially, or oil prices don’t plummet, or their shareholders don’t revolt, or it doesn’t pursue bankruptcy or insolvency protections. Given the circumstances, $5 billion in escrow seems like paltry insurance against the possibility of BP bankruptcy. Perhaps the loss mitigation specialists at BP look approvingly at this arrangement, as the $5 billion payment buys BP six months of precious time. And what is with the 4-year payment plan, anyway? BP couldn’t afford $20 billion over 2 years? That’s disturbing. Won’t they need to, if they are going to pay all the claims in a reasonable amount of time? The terms of this escrow deal raise more questions than they answer.

So BP is on the hook for 3 additional $5 billion payments over the next three years. You could look at that as three years of increasing risk, or an opportunity to start shopping right now for someone to sell you a credit default swap on these escrow payments. If BP goes bankrupt and misses a payment, you clean up big time. It's what Goldman Sachs would do.