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Fratto: For BP and Washington, an Escrow Fund Pays Dividends


The White House this week will attempt to finally get right the President’s response to the oil spill in the Gulf of Mexico after a month of confusing messages, and the one tangible result could help to lower the temperature in both Washington and in the markets.

Over the first 5 weeks of this crisis the White House has been alternately in charge, and pointing fingers; too slow, and yet making rash decisions – like announcing the 6-month moratorium, which now appears overly cautious and likely to incur political backlash in the region.

Also, the President’s wayward comments about firing BP CEO Tony Heyward and halting dividend payments – in addition to daily speculation of the scope of liability claims – have added to uncertainty about BP’s future. The markets have responded by hammering BP stock.

President Barack Obama
Photo by: Pete Souza
President Barack Obama

Meanwhile, the political process in Washington is holding to form: the Administration trying to show it is “doing something”, and Congress looking for scalps.

The proposal to have BP create an escrow account to deal with potential claims has the opportunity to calm both the political environment and reduce uncertainty in the markets.

For the President and Congress, getting BP to set aside funds now allows them to show Americans they are holding BP accountable.

They seem to have finally come to understand that destroying the company will not help the situation, but making BP pay gives them something tangible to point to.

BP has always said it will pay legitimate claims, but having the account in place will help to give the company credibility with lawmakers at a time when its credibility has been questioned.

From a market perspective, the escrow account gives some shape and size to the potential liabilities facing the company.

There have been wild estimates about what the spill will cost BP, and that uncertainty has severely damaged BP share prices – so much that it prompted a call between President Obama and UK Prime Minister David Cameron this weekend.

No one will say that an escrow account represents the upper bound of potential claims against BP and other potentially liable firms, but it will put a real number upon which market participants can begin to work from to diminish uncertainty.

It will help to dispel the wildest estimates of the potential hit to BP.

There are a lot of questions regarding the formation of an escrow account – its size and scope, the independence of overseers of the fund, not to mention its impact on future legal claims. But for once in this crisis we would see tangible and positive actions by BP and the government.

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Tony Fratto, a CNBC contributor, is Managing Director of Hamilton Place Strategies – a strategic economic policy and communications firm based in Washington, DC. He is a former White House Deputy Press Secretary for the George W. Bush Administration and Assistant Secretary of the Treasury. You can follow him on Twitter at http://twitter.com/TonyFratto.