How to Break Up BP?

It got going last week — talk of a boycott of BP, as a way to protest its oil spill and its approach to oil drilling. A small organized boycott is underway, but I don’t expect it to turn into anything big. Even if it can be established that BP knew the risks it was taking, by drilling a well without first having the technology to operate it, it’s hard to look at the rest of the oil industry and convince yourself that they are doing better. It is impossible to boycott the entire oil industry, but people will be moved to cut back, at least in a small way. At the very least, people who were thinking of driving to the beach may be persuaded to stay closer to home if they are worried that the beach may be closed by an oil slick by the time they arrive.

Limits on liability ensure that BP will not be liquidated to pay for the restoration efforts, but even so, the oil spill is more than a serious problem for BP. Even if the well could be successfully capped this weekend, the oil will continue to wash up on beaches for the rest of the year, and the cleanup effort will continue for several years. All this means that BP is ruined as a company. Its name will forever be associated with tar balls and the frightening smell of decaying heavy crude. This will put it at a permanent disadvantage compared to most of its competitors. Even before the oil spill there were obvious problems with BP’s management of its oil business. All this points to a situation where it will be more profitable to sell off the assets than to continue to operate the company.

So it’s probably not, in the end, a question of how BP can carry on, but of how it can best break itself up and sell off the pieces, making sure for the sake of the stockholders that BP’s tarnished identity doesn’t stick to any of the pieces that remain.

This Week in Bank Failures

Investor fears have turned their focus to Europe, and banks there are being squeezed. Four large savings banks in Spain announced a merger on Tuesday; it is hoped that the combination will have stronger liquidity. While commercial banks in Spain are tightly regulated and have thrived through the economic slowdown in that country, savings banks were heavily exposed to the real estate bubble there, and their lending troubles are being exacerbated by the loss of investor confidence.

Mischaracterizing repo transactions in financial statements appears to be commonplace in banking. This week, both Citibank and Bank of America disclosed, after investigating the question, that they have done this in recent years. In both cases, though, the errors are too small to matter, and neither bank expects to restate its past balance sheets.

Little progress has been made in the planned Prudential buyout of AIG’s East Asia unit AIA, with the head of AIA now coming out publicly against the deal, hinting that it could lead to the collapse of both AIA and AIG if it goes ahead as currently structured. The deal is equally problematic for Prudential, which may need to raise $21 billion in a new stock offering for the purchase of a company that may not turn out to be that valuable. The spinoff of the insurance units was supposed to be the easy part of the AIG puzzle, but has become problematic since the discovery that they have not been nearly as profitable in recent years as was previously imagined. Winding down AIA is not seen as an option, so AIG is taking a new look at a stock offering for the unit.

The financial reform legislation in its latest form would appear to push banks out of large-scale, high-risk financial arrangements such as leveraged buyouts that traditionally have been done outside of the banking business. This change would increase the importance of private investors in large financial deals. The Wall Street banks might be forced to spin off their private equity operations if the reform bill passes in something close to its current form.

The three banking subsidiaries of Bank of Florida Corporation were closed tonight. The three banks, Bank of Florida Southeast, Bank of Florida Southwest, and Bank of Florida Tampa Bay, operated as separate companies, but shared a common problem: a desperate shortage of capital, and an April 17 deadline from regulators to raise enough capital to keep operating. The three banks entered into a consent decree with the FDIC last Friday, which followed earlier prompt corrective action orders.

The holding company, Bank of Florida Corporation, reported a negative net worth in its latest financial statements, and received a delisting notice from Nasdaq last week. The company released first quarter results on May 3 showing a loss of $33 million, giving it a book value of $10 million. The first quarter earnings were revised downward by $15 million last week because of additional problem loans, giving the company a negative net worth. The banks took losses on loans in real estate development loans for three years, and recently had been forced to write down loans to companies in the construction business, as new construction projects in the southern half of Florida have nearly ground to a halt this year.

The banks had a combined 13 locations, all in Florida, and $1.3 billion in deposits. EverBank is taking over the deposits and purchasing the assets.

Two West Coast banks were also closed. The larger of these was Sun West Bank, with $354 million in deposits and 7 locations, most in Las Vegas, but two in Reno. Sun West had hoped to raise capital with a stock offering, but in the end, could not line up enough investors to make it work.

Los Angeles-based City National Bank is taking over the deposits and purchasing the assets.

In California, Granite Community Bank was closed. Granite Community Bank had 3 offices in the northern suburbs of Sacramento and $94 million in deposits. Tri Counties Bank, one of the larger banks in the area, is taking over the deposits and purchasing the assets.

With these five closings, the FDIC has recorded 78 bank failures so far this year, or 16 per month, a pace similar to that of last year.

The Best Ideas Are Not Being Heard

One of the most frustrating things about watching the hapless efforts to stop the oil spill in the Gulf of Mexico is knowing that thousands of people who are observing the process have the answer. By now, people must have thought of 50 completely different solutions to the problem of an open well on the sea floor, any one of which would suffice to contain the oil, at least temporarily. These ideas are not being heard because the economy does not provide a mechanism for moving ideas from the people who have them to the people who need them.

BP, to its credit, is accepting ideas from the public, but doesn’t know what to do with the ideas once it receives them. Its engineers, quite properly, are focused on using known techniques to try to cap the well, and will never find time to consider the creative suggestions people are offering. It doesn’t help that engineering ideas that come in from non-engineers can be poorly described and further garbled along the way. It also doesn’t help that BP has publicly disparaged the ideas it has received — that doesn’t exactly encourage people to put their suggestions forward. I’m sure it’s true that many of the ideas are “crazy,” but if just 10 percent of the suggestions are constructive and 1 percent are workable, then it ought to be possible to find, among that group, the ideas that would actually be effective.

Or so you would hope. Yet there is no area of the economy that does well at collecting new ideas and putting them into practice. Science? New theories with strong evidence to back them up often languish for 40 years, until the old guard dies. Law enforcement? A building can be a “known drug house” for years before any surveillance is carried out. Books? Even if you are the star of a television show, most book publishers won’t look at your manuscript unless it comes through an intermediary. Speaking of television, it took MTV ages to get carried on cable systems, and even after MTV had become the best-known name in television, it still took years to get MTV2 on cable.

New ideas are often blown off with the free-enterprise excuse. If you have a good idea, it is an opportunity for you to start your own business and make a profit. That’s one of the kinder ways that people in a position to do something say, “Go away, and stop bothering me with your ideas.” Let’s apply this strategy to the people who know they have the solution to BP’s oil well problem. Can they get the funding to demonstrate their ideas? Perhaps — if they have an engineering degree and a track record in the field. Let’s say it takes 3 years to get the engineering degree, another 3 years to gain experience in an area of engineering, then 5 years to design and introduce a series of products on a smaller scale in order to gain credibility in the field, and finally, 2 more years to round up funding and have the original well-capping idea tested. I am certain this describes the pending career path of dozens of observers for whom the problems surrounding the oil spill have helped them become aware of their interest in one area of engineering or another. And the suggestion of the 13-year lag is not entirely silly — the way things are going, there is no guarantee that BP will have the well capped 13 years from now, and besides, the next deep-water well to blow will face the same difficulties. But it would be so much better if we could get those answers sooner, and not suffer through a 13-year lag that is really just an inefficiency in the structure of the economy.

And engineering moves faster than most parts of the economy. What do we do when we need solutions in less time than 13 years, or 20 years? At the very least, we need to be aware that many of the best ideas out there are being lost in the shuffle.

Dairy Industry Struggles to Find Balance

After last year’s turmoil, the dairy industry’s overconfidence continues to frustrate efforts to bring the industry into balance.

Consumer demand for milk is falling slightly, with high retail prices and nutritional concerns deterring consumers. Yet, even after a year that saw shockingly low prices paid to milk producers, U.S. dairy farmers produced the most milk ever last month. The increase in production, which is also occurring in Australia and Europe, is based on predictions of increases in milk prices, but with the excess supply, prices are sure to fall again.

Another indication that production is too high: U.S. cheese inventories are the highest in 26 years. U.S. consumers are eating less cheese, but unlike with milk, this has less to do with prices than with the association between cheese and restaurant food. It seems people mostly eat cheese in restaurants, and with the restaurant business off worldwide, the demand for cheese is lower. At the same time, excess milk supply tends to get turned into cheese, so cheese inventories will probably increase further, setting new records as the year goes along. Wholesale cheese prices have risen 10 percent in the last month, but with low demand and near-record inventories, prices seem certain to fall back at least to the previous levels.

With milk and cheese demand stagnating, cutbacks in production have to happen somehow. The problem is that governments are projecting higher demand and higher prices, leading dairy farmers to produce more milk than the market can support. Eventually, after being stung three years in a row, government authorities will have to lower their projections, or farmers will have to stop relying on them.

Decline in Crime Reflects Serious Mood

The FBI reported a drop in crime rates in 2009, and the decline surprised some economists. This is not just a continuation of a long-term trend that has held for about the last 20 years, but a significant step down, with a 5.5 percent decline in violent crime and a 4.9 percent decline in property crime, compared to the year before.

Ordinarily, crime correlates with economic pressure on consumers. Based on that, you would expect crime to go up with a broad decline in employment, as we saw in 2009. However, the context of events in 2009 was hardly an ordinary recession, and the crime report is consistent with other measures that suggest a new mood of seriousness took hold among U.S. consumers in 2008 and 2009. If we’re not messing around, that also means we’re not not making so many of the irrational, impulsive decisions that lead to committing crimes.

Declining beer consumption and unusually high voting rates are two other trends that seem to track with the serious mood of the economy. On the surface, it might seem that these trends may cause each other to a slight degree. For example, you can’t drink beer in a polling place, and beer consumption creates a state of mind that may lead to bad decisions, at least in country songs. Yet I believe these and other trends are mainly effects of a deeper spiritual change, perhaps having to do with people feeling determined to chart the course of their own lives.