(Reuters) - Bank of America Merrill Lynch (BAC.N) has ordered its traders not to enter into oil trades with BP Plc (BP.L) that extend beyond June 2011, a market source familiar with the directive told Reuters.
The order to the bank's traders came from a high-level executive and was made on Monday, according to a source familiar with it. It told traders not to engage in trade with BP for contracts beyond one year from this month.
The directive didn't state a reason for the limit on longer-duration trades with the oil company, which comes as the British oil giant scrambles to stop an oil spill in the U.S. Gulf of Mexico for which it could eventually face billions of dollars in economic liabilities.
Limiting the duration of trades with a counterparty is one way in which banks can seek to protect themselves against risk that a company will be unable to meet its long-term obligations.
A BofA spokesman declined comment.
BP spokesman Toby Odone said the company doesn't comment on market rumors or speculation.
The company's U.S.-traded shares (BP.N), which have plummeted around 47 percent since the disaster, rose 2.4 percent on Wall Street during Tuesday trading, then fell after the closing bell. At 5:45 p.m. EDT (2145 GMT), BP's shares traded at $30.66, after closing at $31.40.
Also after hours, a team of scientists appointed by the government to assess the flow-rate of the BP spill in the Gulf, boosted its estimate to as much as 60,000 barrels per day.
A source familiar with BP's trading operations said they have not been curtailed since the oil spill in April. BP wasn't informed of any new trading limits with BofA, which is a relatively small player in oil markets and not among BP's top trading counterparties, the source said.
The source familiar with the BofA directive said it reflects a cautionary stance toward trading with BP. However, the directive did not reference any reduction in overall credit volume the bank would extend to BP.
BP's credit rating was downgraded six notches on Tuesday by Fitch Ratings, which cited the high costs BP may face for compensating victims of the company's Gulf spill. Fitch downgraded BP to BBB from an AA rating.
A source familiar with the BofA directive said it could include any trades in physical commodities, derivatives and swaps for crude oil and products.
The British energy giant ranks among the world's top oil producers and traders in physical energy markets and derivatives.
BP's Macondo well in the U.S. Gulf of Mexico continues to spill oil into the Gulf after deadly explosions sank the Transocean Horizon rig in late April.
The potential for soaring liabilities related to clean up costs, economic damages and legal penalties that BP could face after the Gulf spill has led some analysts and bankers to speculate that the oil giant may throttle back its trading operations.
Several fuel oil traders have recently resigned from BP, including four traders from its Singapore office last week, industry sources told Reuters.
Banks typically require companies like BP to put up collateral to back trades in the private derivatives market, though for highly rated firms such as BP, the collateral may be a small portion of the size of the exposure.
BP's credit default swap costs have surged in the past two months on increasing concerns over the company's credit worthiness, and traders and analysts have said some of the increase has come from banks hedging exposure to the oil company.
Credit default swaps are used to protect against the risks of a company or other borrower defaulting on its obligations, or to speculate on its credit quality.
BP's five-year CDS costs have jumped to 515 basis points, or $515,000 per year to insure $10 million for five years, from around 40 basis points in April, according to Markit Intraday.
BofA Merrill equities analysts maintained a "buy" rating on BP's London-traded shares on June 10, but cut their price target to 575 pence a share, down from a previous 700 pence.
"I think it's part of this sort of blame-game society in the sense that it's always got to be somebody's fault instead of the fact that maybe sometimes accidents happen." —Rand Paul, on Good Morning America, speaking about the BP oil spill
Of all the crazy-ass things Rand Paul has said during his brief, disastrous turn in the national spotlight, this is the most insidious. A week after Paul's comment, David Brooks made the same point a touch more artfully, chalking up the disaster to "the bloody crossroads where complex technical systems meet human psychology," the inevitable result of "living in an imponderably complex technical society."
Society must have seemed "imponderably complex" to those living through the Triangle shirtwaist factory fire, but luckily for us, activists of the day refused to simply say, "Shit happens" and move on.
Pace Paul and Brooks, the public wants to see BP held accountable, and with good reason: early indications are that the company is guilty of a host of mortal sins—from ignoring repeated internal warnings about its safety procedures to harassing workers who raised safety concerns. According to reports from the Guardian and NPR, after the fatal explosion BP sequestered the surviving workers at sea, refusing to let them contact their loved ones, and bullied them into signing forms that indemnified BP for the accident.
After some initial foot-dragging, the Obama administration finally seems to understand that justice demands an aggressive stance. Attorney General Eric Holder announced that the Justice Department is opening a criminal probe into the accident, which claimed the lives of eleven workers; then the White House came out in favor of a bill that would raise the $75 million liability cap on damages from the spill under the Oil Pollution Act of 1990. And, of course, President Obama famously told Matt Lauer that he's trying to figure out "whose ass to kick."
That's all well and good. But despite the public outrage at BP and the thirst for justice from the battered residents of the Gulf Coast, there's a decent chance BP will, like Exxon before it, escape fairly unscathed. The reason is the legal and social shift in how we approach punishment for powerful corporations—a shift that contrasts sharply with the trends in punishment for citizens, particularly those without money or power.
First, let's look at corporate accountability. Ideally, this is the kind of thing you'd want the government to pursue, but as has been dramatically demonstrated, the state's regulatory apparatus has, in many areas, been gutted or co-opted. Which leaves it primarily to private parties to pursue accountability through the courts. In tort law, damages are divided into two types: compensatory and punitive. The former are designed to compensate victims of negligence for their economic damages: lost income, property destruction, etc. Punitive damages are awarded above these compensatory costs as a means of, well, punishing the wrongdoer.
For a long time, conservatives and big corporations have hated punitive damages. The amounts are decided by juries, who have a tendency, when faced with stories of corporate malfeasance, to stick it to the bastards. In the 1980s conservatives began a legal assault on punitive damages, in "an effort coordinated very closely with the Chamber of Commerce," says Stanford law professor Jeff Fisher. "The first few fits and starts didn't work, but they kept hammering away."
In the 1990s enemies of punitive damages found the perfect case when an Alabama doctor sued BMW for having sold him a repainted new car without disclosing the repainting to him; a jury awarded him $4,000 in compensatory damages and $4 million in punitive damages. The Supreme Court found that the punitive damages violated the due process clause of the Fourteenth Amendment; but it didn't specify guidelines for the level of punitive damages that would run afoul of the Constitution.
Which brings us to the last catastrophic American oil spill: the 1989 Exxon Valdez disaster. Five years after the spill, an Alaska jury found Exxon guilty of reckless disregard for allowing a drunken sailor to steer its ship. Exxon paid $507 million in compensatory damages, and the jury assessed it $5 billion in punitive damages.
After several rounds of appeals, the courts cut that award in half. In 2008 the Supreme Court invalidated the award, stating that in the Exxon case, no more than a 1:1 ratio between compensatory damages and punitive damages was allowable. As Senator Patrick Leahy pointed out at a recent Judiciary Committee hearing on liability caps, the decision profoundly altered the incentives faced by firms like BP: "It reduced the consequences of their misconduct to a discounted cost of doing business. That's almost like saying, 'We're giving you a green light to do whatever you want to do.' I can't imagine why anyone would be surprised that...oil companies cut corners and compromised safety." (Leahy's colleague Sheldon Whitehouse has introduced a bill that would overturn the 1:1 cap for maritime law.)
Aside from the practical consequences of altering the incentive structure, the Exxon case and other statutory caps on liability present a deeper threat to the American moral fabric. Set against the increasingly punitive posture of the state toward its citizens over the past several decades, the arbitrary limits on punishment available to a party like Exxon make a mockery of equal justice under the law. Our criminal justice system is the most punitive of any industrialized democracy. We have 2.3 million people incarcerated, half of them for nonviolent property and drug offenses. At least two dozen states have three-strikes laws, and in some cases citizens can face life imprisonment for minor nonviolent offenses. In 2003 the Supreme Court upheld a fifty-year sentence for a California man caught stealing videotapes.
And things are even harsher for Americans unlucky enough to need succor from the state to survive, a k a poor people. Just one drug-related felony conviction can get you booted from welfare, or from public housing (though if you own a house, the IRS will still allow you your mortgage-interest deduction). Under federal law, a drug bust disqualifies a college student from all federal student aid. As a result, between 2001 and 2006 almost 200,000 students lost access to aid. The greatest Congressional champion of this unforgiving policy was Mark Souder, the Indiana Republican who resigned after revelations of his affair with a staff member. In his farewell speech, he took solace in the possibility of forgiveness.
A punitive society is not the best kind of society: there's a real virtue in forgiveness, in second chances. But for years we've been applying Rand Paul's "accidents happen" principle to those at the top while heaping blame, scorn and draconian punishment on those at the bottom. Punitive damages are capped for corporations, while punitive policies proliferate for citizens. This tears the social contract apart, and the only way to repair it is to apply the same principles of accountability up and down the social hierarchy. We should start with BP.
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