It's easy to see what happened. Obama and BP came up with an agreement of how much oil spilled out and what the cost per barrel would be and that BP would not lose government contracts along with some other concessions I would not doubt (maybe a no criminal charges to be filed etc...). Without a doubt the fines will be somewhat high (but no higher than needed to not raise too many eyebrows) but it is now set and BP can calculate (they already have with GS and the other bankers) what the government costs will be.
It's not like BP is going to pay workers for six months of watching TV because the BP board is full of nice guys. Besides, it would be against their fiduciary duty to have done so without a benefit. So a benefit was given even if it is not made publicly.
This was easy for Obama as well because it makes him look tough and in control when in fact it would not have taken much before BP pulled the plug and let the BP USA go BK. BK London could then set up a new shop and buy the assets and try to start over without the liabilities. What really gives the whole thing away is that all the money going into the escrow account will be money that is generated from North American operations anyway. The taxpayers take a hit though. Money that is paid into the escrow is better than paying fines. You can not deduct fines from income taxes but BP will be able to deduct all the expenses that are not fines. I would not doubt that many government costs are waived or reduced in a large amount.
Lastly, why would BP seem to be willing to lay down for this? BP USA was getting to the point of being dead money anyway. The main BP was not about to put any money into trying to save it when a BK would be the cheaper option. The dividend cut works for everyone as well. The company saves the money so they do not have to borrow and if they do they are stronger financially and again, it makes Obama look like he did something.
In the end this still may not work. The civil lawsuits could be big and it is a big unknown what the juries will award but with the 9/11 pay czar setting the amounts of the awards it would be reasonable to assume that claims will be paid not based on emotion but rather out of true financial loss. Since this will most likely be the fastest route to getting money lawyers may stand to lose large fees by suing BP if clients/victims decide to go the "mediation" route.
Lots of people in London will have woken up being pissed as hell to find out that a check they were expecting in a few days is not going to be in the mailbox. Even so I would not be at all surprised if they cap the well in August and by November BP gives an announcement that things are going well enough to start paying a dividend again.
Everyone wins except for maybe the taxpayer and anyone stupid enough to think that Obama actually "made" BP do anything that was not in BP's best financial interest.
I bought near the close and after watching after hours trading bought a few more shares. I am also short some calls and puts that expire Friday. slightly long but very long with lots of naked puts wrote with an Oct expiration date. I think the IV starts to really fall especially as more and more oil in terms of the percentage leaking is collected.
One last thing to note for those that bought yesterday. The dividend that is now not being paid out makes the company worth about 70 cents more valuable per share. Pretty much sucks for those that held through the x-date but for some of us it was almost as good as getting the dividend as the stock was priced as if it was gone.
All in all, I think yesterday was a much better day than the price reflected. I think the market will catch up quickly to what happened yesterday. Tuesday when Obama announced that he was going to "make" BP setup an escrow fund (something that did not appear possible without BPs cooperation) I thought it was time to start getting long but I did not know what the timing should be. So I did two main things. One, I shorted a lot of October puts at various strike prices providing a blend of higher return with lower risk for the far OTM puts. I also became somewhat neutral with the front month as I bought stock/sold puts but covered it with calls. With the wild price swings yesterday I was able and lucky enough to trade the day for a nice gain. I also now have a lot of October puts written that are in the green and hopefully will continue to stay that way. With each passing day the time decay will work its magic.
I do expect the next few days to be highly volatile as investors and traders position themselves for the lack of dividends that may not come along. At least anyone that only held on long enough to get the dividend payable this month are gone. I will be looking to short more puts this week especially if we start to see some real progress in the capture rate. As someone who has watched several hundred hours of video, yesterday was a day that appeared to me that less was leaking but of course I do not have any better of a view than the rest of the general public.
August is when the leak should be sealed and that is why I think the Oct puts make so much sense over buying the stock. Yes it is true that if the stock was to go back up to 60 before October some gains would be missed. On the other hand, by writing the October puts instead, one can sell today and lower the timing requirement and each and every day brings greater time decay so that even if BP stagnates and goes nowhere, a gain can still be made. For the lowest risk an OTM put is the best choice, and for the highest return if you feel the stock will move higher as time passes, selling an ATM or ITM put offers the greatest bang if you're right.
Disclosure: Long BP