Today I discussed the increasing pressure on BP to suspend its dividend with Matt Miller of Wealth-X, along with CNBC co-hosts Amada Drury and Larry Kudlow. Rep. Peter Welch (D-VT) has organized a letter signed by 50 members of Congress demanding such a suspension. Here’s a transcript:
Amanda (Mandy) Drury: Well, BP is of course facing a lot of heat about its dividend. Lawmakers are saying the oil giant should halt its payments to shareholders until it stops the leak and has a clear idea about the total costs for the spill. So, should BP be keeping its dividend or should it suspend it? Let’s ask Peter Flaherty from the National Legal and Policy Center and Matt Miller, chief research officer at Wealth-X and also former Forbes editor. Gentlemen, thanks for your time. Peter, why do you say, keep it?
Peter Flaherty: Having these Congressmen get involved strikes me as ready, fire, aim. They don’t have the slightest idea what they are doing. BP has the ability to clean up this mess and maintain its dividend. The dividend is paid to shareholders. Executives in the company do own stock, but the vast majority of the stock is owned by people that had nothing to do with this mess. And BP has thirty nine percent of its shares owned by people in the United States. Anybody who has a pension, anybody who buys mutual funds probably owns BP stock. This is counter productive and it hurts us all.
Mandy Drury: But Peter, why are you so confident that it does have the financial ability to be able to keep its dividend and also clean up the mess. Because, at this stage we really do not know how much it is going to end up costing.
Peter Flaherty: Well even in a worst case scenario, based on the fundamentals of the company, the company can meet those commitments. The threat now is not economic. The threat is political.
Larry Kudlow: No. No it is not Peter Flaherty. I beg your pardon.
Peter Flaherty: The only way BP can run out of money is if these politicians keep trying to dismember this company.
Larry Kudlow: Peter, oh heck, gee whiz, golly. Matt Miller, lets go to something sensible here for heavens sakes. They are facing the possibility of who knows, thirty five, forty five, fifty billion or more in liabilities. Matt Miller, that is so darn important. So they have eight billion dollars in cash according to Scott Combs report. They may have to go into Chapter Eleven. BP brought this on itself. They have to pay for this. I interviewed Senator McCain last night. I said is it conceivable that BP is too big to fail and the US government will have to bail them out? He said no way, absolutely it will be a cold day in hell, in Arizona before that. Matt, where do you make of the BP story? Whatever the House members say about dividends, who cares? That bill is not going to go through. This is about BP’s financial problem and their oil spill problem.
Matt Miller: And the PR problem. Did you just see that big plume of oil that was coming off your screen? Every single night on cable news we have oil coming out of this huge hole in the Gulf of Mexico. It is a major PR problem. And, you know, whether we like it or not, the world is looking at things through two prisms – Wall Street and Main Street, right now. If Wall Street gets its way and gets its dividend from BP, and I firmly agree, that yeah, there are shareholders out there, there are pension funds, a lot of people get that dividend, they rely on that for income. This is a major problem for BP stock. If I am a shareholder I don’t want them to pay this dividend because I don’t want them to tick off the government any further.
Peter Flaherty: Well I think most shareholders will disagree.
Larry Kudlow: And then, wait, Peter Flaherty, let me raise this point. Peter Flaherty. Credit default swaps markets are basically pricing in something very close to bankruptcy.
Peter Flaherty: That’s right.
Larry Kudlow: The corporate bond market, the junk spreads of BP have widened so much, along with some of the others involved in this, that it is on the verge of bankruptcy. This is a financial issue.
Peter Flaherty: This is what happens when you have a pack of hyenas after a company that they think is vulnerable. The stock lost something like seventeen billion dollars in market cap yesterday. Now it has come back nicely today, but the way to make sure that all the clean up is financed is to have a healthy BP. And it is time to call off the dogs and to allow this company to function. I would much rather have the management of this company worrying about stopping the gusher than the survival of the company.
Mandy Drury: But is it going to be able to function? I mean, back to Larry’s about the possibility of having to file the Chapter Eleven, Peter, do you think that is a realistic situation?
Peter Flaherty: I don’t know where Larry is getting these numbers. This is Britain’s biggest company. It is wildly profitable.
Larry Kudlow: I am getting these numbers from the credit default market. I am getting these numbers from the junk bond market. Come on, look.
Peter Flaherty: And those are measures of perception.
Larry Kudlow: The thing that killed them yesterday is that the spill rate is being reestimated.
Peter Flaherty: Those are not measures of dollars or British pounds.
Larry Kudlow: Peter the spill rate is being reestimated. These guys, they won’t tell the truth, BP. You know, Matt Miller…
Peter Flaherty: For the record, Larry…
Larry Kudlow: …BP is bringing this on themselves because they will not be square with the public Matt Miller. They will not tell the truth. Now you have got experts reestimating the spill rate at up to thirty thousand barrels a day. That thing started down at five thousand. BP is silent. They are lawyered up. They won’t tell anybody. That is what is killing them. The liabilities are growing by the minute as the spill rate grows, Matt.
Matt Miller: And I am just going to go back to the PR part of this, Larry. This is a huge problem. You have fisherman, you have people’s livelihoods that have been totally destroyed. You just can’t imagine how much litigation they are going to face over the next year, two years, three years.
Peter Flaherty: Well good. Let’s destroy BP. Let’s make sure these people don’t get paid and make sure that taxpayers have to pick up the tab. You know, Peter Welch, the Congressman who organized this letter…
Larry Kudlow: Taxpayers pick up the tab, are you nuts?
Peter Flaherty: …yesterday voted for TARP. Most of the other men and women on that letter voted for TARP. TARP is seven hundred billion which would be roughly fifteen times bigger than estimated clean up costs.
Larry Kudlow: There is not going to be an oil TARP my friend. Trust me on this. There is not going to be an oil TARP.
Peter Flaherty: Well the money is going to have to come from somewhere if you destroy BP.
Larry Kudlow: BP is not going to be too big to fail. They are not going to get bailouts. This is an election year. You must be joking about that.
Peter Flaherty: And they have plenty of money, don’t worry about BP.
Larry Kudlow: This is a free market issue. They made gigantic mistakes. They cut corners. They did not make the right tests. Now they are going to have to pay for it. I am sorry.
Mandy Drury: It will be interesting to see what the UK Prime Minister has to say about it as well later on today. Anyway, gentlemen, great debate, thank you for that.
Peter Flaherty: Thank you.
Matt Miller: Thank you. TRANSCRIPT END
I did not get a chance to point out that many people own BP because of the good dividend. If the dividend is ended, investors will dump the shares, further eroding BP market capitalization.
Although I tried when I said, “For the record, Larry…”, I was unable to state that I was a BP critic before the April 20 Deepwater Horizon accident.
The larger point here is what the public already realizes, namely that Congress can do little solve our problems and usually ends up doing harm. I wonder if the 50 signers of Welch’s letter have any idea of the ramifications of what they are demanding.
Rep. Ed Markey (D-MA), chairman of the Select Committee on Energy Independence and Global Warming, accused BP of “lining the pockets of its shareholders.” Funny, I thought that is what public companies do. Shareholders get the portion of earnings not reinvested in the company, don’t they?
In the letter, BP is also told to “cancel your advertising campaign.” Prior to the disaster, BP sponsored the ubiquitous “Beyond Petroleum” campaign, featuring lots of windmills, to which none of these 50 objected. BP tried to pretend it was not an oil company. Maybe if BP had stuck to its core mission of producing petroleum, instead of tilting at windmills, it would not be in this mess.
Members signing the letter are all Democrats. They include : Reps. Peter Welch, Ed Markey, Lois Capps, John Hall, Paul Tonko, Bill Delahunt, Chris Van Hollen, Steven Rothman, Jim Langevin, Tim Bishop, Raul Grijalva, James McGovern, Maurice Hinchey, Charlie Melancon, Betty Sutton, Pete Stark, Frank Pallone, Doris O. Matsui, Jan Schakowsky, Jared Polis, Mazie K. Hirono, Steve Israel, Russ Carnahan, Jackie Speier, Chet Edwards, John Olver, Rush Holt, Dennis Cardoza, Earl Pomeroy, Keith Ellison, Louise Slaughter, Mike Michaud, Steve Cohen, Bill Owens, Ron Kind, Rosa L. DeLauro, Anna G. Eshoo, George Miller, Bob Filner, Sander M. Levin, Ben Ray Luján, Leonard Boswell, Mike Honda, Ed Pastor, Jim McDermott, John A. Yarmuth, Deborah L. Halvorson, Phil Hare, and Charles A. Wilson.