Questions the SEC Shouldn't Have to Ask
July 28th 2010 11:13
On July 26th, the Securites and Exchange Commission announced that it would be holding investigations into BP stock. The official announcement offered no detail, but one television commentator noted that BP stock, which had been selling for $60 a share before the Gulf of Mexico oil disaster, lost about 50% of its value, raising the question of whether the company had acted to protect the ordinary shareholder against such severe loses.
It’s not clear what BP could, or should have done. A stock buyback plan would have been effective, but probably neither affordable or ethical, since BP was obligated to maintain enough cash on hand to deal with the expenses related to the oil spill. A second approach would have been to minimize reports of the extent of the spill, to downplay the rate of oil release. There’s some evidence that BP tried this, but was found out – although it’s possible that the initial flow rate was as small as described, but grew under the effects of continued pressure. Details of how accurate the initial reports were should turn up in one of the investigations being conducted or planned.
A third method would have been to reassure shareholders that the expenses were manageable, that their investment wasn’t lost, and demonstrate this by paying the quarterly dividend as scheduled in June 21st. The company had announced its intention to pay the dividend, but on June 2nd, Senators Charles Schumer (D-NY) and Ron Wyden (D-OR) wrote a letter to Tony Hayward, President of BP:
Dr. Tony Hayward Group Chief Executive British Petroleum Plc International Headquarters 1 St James’s Square London, SW1Y 4PD United Kingdom
Dear Mr. Hayward,
We write to you out of concern that you will be announcing a dividend to your shareholders prior to fully covering the cost of the cleanup for the oil spill in the Gulf of Mexico. Today, several media outlets are reporting that you are expected to hold a conference call this week pledging to maintain BP’s dividend.
We find it unfathomable that BP would pay out a dividend to shareholders before the total cost of BP’s oil spill clean-up is estimated. The total cost of the clean-up estimates could reach $37 billion if the well leaks until relief drilling is completed in August, according to Credit Suisse Group AG. While we understand the need to reassure shareholders that the disaster in the Gulf will not substantially impact BP’s long term financial health, we are concerned that such action to move money off of the company’s books and into investors pockets will make it much more difficult to repay the U.S. government and American communities that are working around the clock to stem the damage caused by this devastating oil spill.
We urge you to reconsider your dividend pledge until accurate costs of clean-up and liability claims can be estimated. We are certainly not opposed to BP paying dividends after the well is capped, clean-up has been completed, and the victims have been justly compensated. But the families of those who have perished in this disaster, the industries that have been devastated from the ecological damage along the coasts, and the individuals who are sacrificing their health and safety to stem the damage deserve to know that BP will fulfill its obligations to them before its shareholders.
Sincerely,
U.S. Senator Charles E. Schumer U.S. Senator Ron Wyden
President Obama picked up on this idea, and insisted that BP set aside $20 billion to compensate victims of the Gulf of Mexico oil spill. On June 16th the Board of Trustees of BP agreed to suspend all dividend payments for the balance of 2010.
The problem is, BP was not a speculative stock. Rather, it was a widows and orphans stock, paying a dividend of about 5%. The Federal Reserve Board had already established policies that reduced bank interest rates to near zero, forcing the elderly who have to live on the income from their savings, into alternative investments, and BP stock was among the most common selections. The shares were held either directly or in retirement funds. In the UK, BP represented over 10% of all corporate dividends, so that people who were too old to work saw their incomes decimated. Their needs had been pushed aside, first by the efforts to stabilize the banks, and then by government concern for the people of the Gulf region. The retirees, or the money managers holding their accounts, did the only rational thing; sold the BP shares and invested in something else that paid a cash dividend. This could only drive the share prices down further.
From a macroeconomic viewpoint, this was at least unfortunate. A sluggish economy can only be revitalized by spending, but while the BP dividend would have been spent promptly for routine needs, and some would have gone to pay income taxes which would have reduced the Federal Deficit if only by a small amount, the $20 billion reserve will be paid out relatively slowly. The fall in investment income and retirement savings could only lead to a decline in consumer confidence, which leads to reduced spending. The money involved is small compared to the full economy, but each step produced a continuation of the downward spiral. Restaurants sold fewer dinners on Tuesday Senior Citizen’s Nights, and movie theaters sold fewer matinee tickets, so that there were fewer waiters and line cooks being hired, less need for ushers. The $20 billion will be disbursed, but not right away.
At the G20 meeting in Toronto, President Obama tried to encourage other world leaders to take steps to stimulate their economies, but he was in a weak position, particularly when dealing with David Cameron, the new Prime Minister of Britain, who has made deficit reduction his priority, both with spending cuts and tax increases. Although BP has most of its operations in the United States, the stock is very widely held in the UK, so that the role of the BP dividend in the national economy is proportionately far greater than in the United States. Forcing the discontinuation of the dividend reduced the level of personal income in the UK as well as the tax receipts of Mr. Cameron’s government. President Obama’s plea for more stimulus by other nations was not well received.
The United States Government, through the Securities Exchange Commission, is investigating whether BP took appropriate steps to preserve the share value for ordinary stockholders – this after the shares were in effect forced down by the United States Government’s own actions. It seems as if the SEC is asking a foolish question and won’t like the answer.
It’s not clear what BP could, or should have done. A stock buyback plan would have been effective, but probably neither affordable or ethical, since BP was obligated to maintain enough cash on hand to deal with the expenses related to the oil spill. A second approach would have been to minimize reports of the extent of the spill, to downplay the rate of oil release. There’s some evidence that BP tried this, but was found out – although it’s possible that the initial flow rate was as small as described, but grew under the effects of continued pressure. Details of how accurate the initial reports were should turn up in one of the investigations being conducted or planned.
A third method would have been to reassure shareholders that the expenses were manageable, that their investment wasn’t lost, and demonstrate this by paying the quarterly dividend as scheduled in June 21st. The company had announced its intention to pay the dividend, but on June 2nd, Senators Charles Schumer (D-NY) and Ron Wyden (D-OR) wrote a letter to Tony Hayward, President of BP:
Dr. Tony Hayward Group Chief Executive British Petroleum Plc International Headquarters 1 St James’s Square London, SW1Y 4PD United Kingdom
Dear Mr. Hayward,
We write to you out of concern that you will be announcing a dividend to your shareholders prior to fully covering the cost of the cleanup for the oil spill in the Gulf of Mexico. Today, several media outlets are reporting that you are expected to hold a conference call this week pledging to maintain BP’s dividend.
We find it unfathomable that BP would pay out a dividend to shareholders before the total cost of BP’s oil spill clean-up is estimated. The total cost of the clean-up estimates could reach $37 billion if the well leaks until relief drilling is completed in August, according to Credit Suisse Group AG. While we understand the need to reassure shareholders that the disaster in the Gulf will not substantially impact BP’s long term financial health, we are concerned that such action to move money off of the company’s books and into investors pockets will make it much more difficult to repay the U.S. government and American communities that are working around the clock to stem the damage caused by this devastating oil spill.
We urge you to reconsider your dividend pledge until accurate costs of clean-up and liability claims can be estimated. We are certainly not opposed to BP paying dividends after the well is capped, clean-up has been completed, and the victims have been justly compensated. But the families of those who have perished in this disaster, the industries that have been devastated from the ecological damage along the coasts, and the individuals who are sacrificing their health and safety to stem the damage deserve to know that BP will fulfill its obligations to them before its shareholders.
Sincerely,
U.S. Senator Charles E. Schumer U.S. Senator Ron Wyden
President Obama picked up on this idea, and insisted that BP set aside $20 billion to compensate victims of the Gulf of Mexico oil spill. On June 16th the Board of Trustees of BP agreed to suspend all dividend payments for the balance of 2010.
The problem is, BP was not a speculative stock. Rather, it was a widows and orphans stock, paying a dividend of about 5%. The Federal Reserve Board had already established policies that reduced bank interest rates to near zero, forcing the elderly who have to live on the income from their savings, into alternative investments, and BP stock was among the most common selections. The shares were held either directly or in retirement funds. In the UK, BP represented over 10% of all corporate dividends, so that people who were too old to work saw their incomes decimated. Their needs had been pushed aside, first by the efforts to stabilize the banks, and then by government concern for the people of the Gulf region. The retirees, or the money managers holding their accounts, did the only rational thing; sold the BP shares and invested in something else that paid a cash dividend. This could only drive the share prices down further.
From a macroeconomic viewpoint, this was at least unfortunate. A sluggish economy can only be revitalized by spending, but while the BP dividend would have been spent promptly for routine needs, and some would have gone to pay income taxes which would have reduced the Federal Deficit if only by a small amount, the $20 billion reserve will be paid out relatively slowly. The fall in investment income and retirement savings could only lead to a decline in consumer confidence, which leads to reduced spending. The money involved is small compared to the full economy, but each step produced a continuation of the downward spiral. Restaurants sold fewer dinners on Tuesday Senior Citizen’s Nights, and movie theaters sold fewer matinee tickets, so that there were fewer waiters and line cooks being hired, less need for ushers. The $20 billion will be disbursed, but not right away.
At the G20 meeting in Toronto, President Obama tried to encourage other world leaders to take steps to stimulate their economies, but he was in a weak position, particularly when dealing with David Cameron, the new Prime Minister of Britain, who has made deficit reduction his priority, both with spending cuts and tax increases. Although BP has most of its operations in the United States, the stock is very widely held in the UK, so that the role of the BP dividend in the national economy is proportionately far greater than in the United States. Forcing the discontinuation of the dividend reduced the level of personal income in the UK as well as the tax receipts of Mr. Cameron’s government. President Obama’s plea for more stimulus by other nations was not well received.
The United States Government, through the Securities Exchange Commission, is investigating whether BP took appropriate steps to preserve the share value for ordinary stockholders – this after the shares were in effect forced down by the United States Government’s own actions. It seems as if the SEC is asking a foolish question and won’t like the answer.
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