Felix Salmon

There are serious ethical questions surrounding whether or not investors should own stock in BP. But is it also unethical for art galleries and museums to accept money from BP? Time’s Frances Perraudin gives the people who think so a lot of sympathetic space:

The cozy relationship between the arts and major corporations has often proved a controversial issue. But now, thanks to the Gulf of Mexico oil spill, protesters — already angered by oil’s role in climate change and human rights abuses — are focusing their crosshairs on BP…

“It’s so galling to see every single cultural attraction in London that I care about stained with this horrible, horrible sponsorship,” says Liberate Tate member Tom Costello…

Critics accuse BP of using blockbuster exhibitions and arts awards (the highlight of the National Portrait Gallery’s year is the “BP Portrait Award”) to direct attention away from their environmental and ethical crimes. “These sponsorship deals give companies like BP the social license to operate,” says Dan Gretton, co-founder of Platform, an arts and research charity that puts pressure on arts organizations to dump their oil partners. “Having these links with cultural organizations is a way for them to launder their image.”

I’ve always thought of arts sponsorship from the likes of Phillip Morris and BP as the silver lining to their unpleasant activities. Yes, the sponsorship is a form of image laundering — but hey, if image laundering results in millions of dollars being spent on worthy arts organizations, what’s not to like?

I’m sad to see entities like the Tate being vilified for accepting money from BP. The job of the Tate is to present great art to the public, not to adjudicate on questions of corporate worthiness. There’s no inherent conflict between accepting BP’s money and exhibiting art. So if BP wants to assuage its guilty conscience by sponsoring a slew of arts organizations, let it do so. The alternative is to simply let that money flow directly to BP’s shareholders, which I don’t think would be much of an improvement.

Value investor Whitney Tilson is long BP, and answered my ethics question in a Q&A sent to his investors:

Q: Regardless of how cheap BP’s stock is, is it immoral to try to profit from owning it, in light of the company’s bad behavior?

A: As noted earlier, BP appears to have an atrocious safety record. In owning the stock, we are not endorsing its behavior, either before or after the Deepwater Horizon accident. But as value investors, we sometimes have to hold our noses when we invest because the cheapest stocks are often the ones of companies that have behaved badly or are otherwise tainted. Example include McDonald’s, which many believe bears responsibility for the obesity epidemic in this country (see Fast Food Nation and Super Size Me), and Goldman Sachs, which many blame for the global financial crisis (see The Great American Bubble Machine).

That said, we would have a problem owning stock in a company if we believed that its core business harmed people – most subprime lenders at the peak of the housing bubble, certain multi-level marketing firms and tobacco companies come to mind. BP certainly doesn’t fall into this category.

As for BP’s safety record, we don’t defend it, but we don’t think BP is deliberately blowing up its own rigs and refineries and killing its employees. If an email emerged that the CEO or board of BP were warned that the Deepwater Horizon rig was likely to explode and failed to act, we would certainly rethink the morality of holding the stock.

I don’t find this answer compelling at all. First is the language in which Tilson talks about his comparables, McDonald’s and Goldman Sachs. He writes about what “many believe” and what “many blame”, and cites the most shrill and stringent critics in both cases. Being a contrarian value investor is all about making your own mind up, and what’s germane here is what (and whether) the investor thinks about the ethics of the investment, rather than what someone like Morgan Spurlock or Matt Taibbi thinks.

Tilson then says there are companies he’d have a problem investing in, if they make harmful products. That seems to imply that it’s worth taking a serious look at the ethics of owning stock in BP. But his conclusion is trite, setting up a straw man of BP deliberately killing its employees, and saying that he’d only have a serious ethical problem with BP if it knew the explosion was likely.

Note the definite article here: Tilson is saying that he’d only have qualms if BP knew this particular explosion was likely. But the ethical case against BP is that it acted with reckless indifference towards safety standards in general, that it cut corners knowing that doing so increased the likelihood of disaster, and that it should have known that an explosion was likely, at some point, and that the chances of this explosion happening at a BP rig were significantly higher than the equivalent probability at other big oil companies.

This has important implications for the stock, of course. BP has thousands of oil rigs; the chances of one of them exploding are not much smaller today than they were a few months ago. The clean-up and other costs associated with the Deepwater Horizon are one thing, but how much will BP be forced to spend on upgrading the safety systems at all of its other rigs, now? We’ve learned our lesson, and surely all want to ensure that this kind of thing doesn’t happen again. But we’ve barely started to think about what that kind of root-and-branch revamp of BP’s physical and managerial safety systems might cost, both in terms of cash and in terms of opportunity cost. I’d be interested in what Paul O’Neill thinks — before he was Treasury secretary, he did amazing things for Alcoa’s safety record. If Tony Hayward’s successor wants to do something similar, it won’t be easy, and it won’t be cheap.

Quote of the day comes from Fitch’s Jeffrey Woodruff, in the wake of downgrading BP by a whopping six notches, to BBB from AA:

“We think the CDS market is overdone hence our decision to shift rating to BBB,” said Jeffrey Woodruff, senior director in Fitch’s EMEA Energy team and lead analyst for BP.

Inevitably, partly as a result of the downgrade, BP’s CDS gapped out: it seems that rising CDS spreads cause ratings downgrades, and ratings downgrades cause rising CDS spreads, in exactly the kind of death spiral that we all remember far too vividly from a couple of years ago.

In this case, however, I don’t think there’s much systemic risk. Real-money investors are buying BP cash bonds (Pimco’s just snapped up $100 million or so at double-digit interest rates), and BP has solved a lot of potential cashflow problems by suspending its dividend. I think we can leave the ratings agencies and the CDS markets to do whatever it is they feel they need to do: there’s no sign that the nervousness in the CDS market — or even the tone-deafness of BP’s chairman — is doing any damage to BP’s $100 billion market capitalization.

On the other hand, nervousness in the credit market is unpredictably contagious: it can have no effect for months, and then suddenly spill over into stocks and even the broad real economy if everybody starts getting worried about the banking sector again. That could, conceivably, happen if Obama signs a tough financial-reform bill.

Meanwhile, I’d love to hear from any investors in BP what and whether they think about the ethics of their investment. Does there come a point where a moral investor should avoid certain companies entirely? I, for one, wouldn’t feel comfortable buying shares in BP at any price. It just feels, well, slimy.

Michael Lewis addresses the fixed-income group at Goldman Sachs:

The masses will be curious to know, for instance, how you became blinded to the very simple difference between right and wrong. The more moralistic among them will ask the question mainly to fuel their own outrage; the more tactical will ask the question because they sense that the financial system doesn’t function unless you have the incentive to think in these terms — and you clearly do not.

He concludes:

There was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

That just changed.

This, it would seem, is the power of the SEC: by filing its complaint in public rather than seeking to settle in private, it might have significantly changed the culture of Wall Street in a way that Barney Frank and Chris Dodd and Paul Volcker and of course Barack Obama have been trying and failing to do ever since they took office.

Certainly the SEC seems to have changed the attitude of Michael Lewis towards these instruments: there was no hint of “tricks and bribes” in his book on this subject. I wonder whether he’ll add some kind of afterword for the paperback edition.

Let’s say you’re empty-walleted Tim Geithner, and a senior Citigroup executive offers to buy your home — currently being rented out for rather less than its monthly cost — for the full asking price of $1.575 million. Naturally, you suspect that your identity is responsible for the fact that the buyer isn’t looking to haggle over the price. What do you do?

(Thanks to Jon Weil for the inspiration)