BP and irrationality

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
SAYS

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:

barack-obama-s-attacks-on-bp-hurting-british-pensioners

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?

Author: Tim Short

I went to Imperial College in 1988 for a BSc(hons) in Physics. I then went back to my hometown, Bristol, for a PhD in Particle Physics. This was written in 1992 on the ZEUS experiment which was located at the HERA accelerator in Hamburg (http://discovery.ucl.ac.uk/1354624/). I spent the next four years as a post-doc in Hamburg. I learned German and developed a fondness for the language and people. I spent a couple of years doing technical sales for a US computer company in Ireland. In 1997, I returned to London to become an investment banker, joining the legendary Principal Finance Group at Nomura. After a spell at Paribas, I moved to Credit Suisse First Boston. I specialized in securitization, leading over €9bn of transactions. My interest in philosophy began in 2006, when I read David Chalmers's "The Conscious Mind." My reaction, apart from fascination, was "he has to be wrong, but I can't see why"! I then became an undergraduate in Philosophy at UCL in 2007. In 2010, I was admitted to graduate school, also at UCL. I wrote my Master's on the topic of "Nietzsche on Memory" (http://discovery.ucl.ac.uk/1421265/). Also during this time, I published a popular article on Sherlock Holmes (http://discovery.ucl.ac.uk/1430371/2/194-1429-1-PB.pdf). I then began work on the Simulation Theory account of Theory of Mind. This led to my second PhD on philosophical aspects of that topic; this was awarded by UCL in March 2016 (http://discovery.ucl.ac.uk/1475972/ -- currently embargoed for copyright reasons). The psychological version of this work formed my book "Simulation Theory". My second book, "The Psychology Of Successful Trading: Behavioural Strategies For Profitability" is in production at Taylor and Francis and will be published in December 2017. It will discuss how cognitive biases affect investment decisions and how knowing this can make us better traders by understanding ourselves and other market participants more fully. I am currently drafting my third book, wherein I will return to more purely academic philosophical psychology, on "Theory of Mind in Abnormal Psychology." Education: I have five degrees, two in physics and three in philosophy. Areas of Research / Professional Expertise: Particle physics, Monte Carlo simulation, Nietzsche (especially psychological topics), phenomenology, Theory of Mind, Simulation Theory Personal Interests: I am a bit of an opera fanatic and I often attend wine tastings. I follow current affairs, especially in their economic aspect. I started as a beginner at the London Piano Institute in August 2015 and passed Grade One in November 2016!

8 thoughts on “BP and irrationality”

  1. Current share price 369p i.e. much worse than the number in the article.

    Also note that to the extent public sector pension funds are invested in BP stock, it’s my problem – or one for all taxpayers. Why are we holding that risk for postmen…?

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  2. Even *I* think the US gov’t is being internally inconsistent if they think BP should pay *other oil companies* because they can no longer engage in deep-water drilling. All this was a bit predictable though – never waste a good crisis.

    Even the non-political costs are basically unforeseeable – this thing could plausibly keep gushing for the next 10 years. BP probably were negligent (it is usually the case in this sort of accident), but the gov’t is also culpable for having less regulation than, say, Norway. If I were Hayward I’d be going on TV and telling people how much money Obama accepted in donations and lobbying – try and throw some of the dirt back at him.

    Obama once said of Cameron “what a lightweight.” Perhaps there is an element of that, too. It’s a big enough annoyance to Britain that eventually our gov’t will do something.

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  3. Obama has loads of step-brothers, I believe. It’s statistically likely that one of them would get into trouble.

    I had the same thought about Afghaniraq, but I’m sure there are plenty of ways we can annoy the US if we need to. That’s without even involving the EU.

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    1. The seven years of illegal immigrant status is slightly more of a concern than some bar story which may or may not be cooked up.

      It may be that we don’t actually want to annoy the US but just look as if we might. This is what the FCO did when it said it was worried that this might affect transatlantic relations.

      I don’t imagine they care militarily whether we are in Helmand or not because our force presence is so much smaller that theirs. We are just providing political cover.

      Intelligence sharing arrangements and NATO provide reasons to pause for thought.

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  4. The way this will play out now is that the company is finished. The way to retain some shareholder value is as follows:

    1). Full dividend suspension for foreseeable future; either to conserve cash or if the former is not warranted by eventual cleanup costs, then just for political reasons. [Though perhaps the company should sue the US administration for unwarranted value destruction. That would definitely be a courageous decision though.] The div yield at these prices is 9% which represents the market view that it will not be paid.

    2). PR driven demerger of US assets (the former Arco and AMOCO) ideally not on a firesale basis with return to shareholders via spec div.

    3). The UK rump to be renamed, though note that in theory BP no longer stands for anything.

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