Interview

Never underestimate the emotional side of Gulf oil spill: Kenneth Feinberg

BP claims fund administrator Kenneth Feinberg

BP claims fund administrator Kenneth Feinberg   | Photo Credit: Julia Rendleman

One year after the worst oil spill in U.S. history, in the Gulf of Mexico, oil major BP is still making payments out of a $20 billion fund to compensate many thousands of individuals, families and businesses for incomes lost and livelihoods destroyed. One man, appointed by the Obama administration, has been at the centre of the compensation process – Kenneth Feinberg. Mr. Feinberg, an astute lawyer and experienced compensations negotiator, was also President Barack Obama’s “pay czar,” charged with setting executive compensation for top management at seven Wall Street firms caught up in the financial crisis of 2008. He also led the disbursal of compensation for victims of 9/11. On the first anniversary of the oil spill he spoke to The Hindu about some of the thorny issues involved in setting post-disaster compensation.

To begin with clarifying what the status quo is with regard to the Gulf Coast claims, could you please outline how many claimants there are in total, and how many of them have been paid to date? Also, what is the total amount paid and when do you see the entire exercise winding up?

There have been about 500,000 claims from the Gulf, and really from many other states as well. We have paid about 200,000 claims. There are about 135,000 being processed. The remaining claims have been denied as either ineligible, lacking any proof, or what have you. In seven months we have paid out about $3.6 billion to 200,000 people and about 100,000 people have signed a final release that they are done, that they will not be back and that they will not sue. That is the statistical summary.

Could you tell me more about the claims that have been denied?

About 200,000 claims have been denied, primarily because they lack any real proof of damage. The rest have either been paid or are in the process of being paid.

I had a question about how that damage is assessed and you have mentioned elsewhere that a direct causal link was quite important. Have many of the claimants been denied due to the indirectness of the causal link and do you have a way of mitigating that? The sheer scale of the disaster was so massive was it not?

We will not deny, outright, indirect causation. We will not. We have decided that anybody, however indirect, can file a claim. Whether or not they will be able to prove that their indirect damage was caused by the spill is an interesting issue. But I think it would be a bad idea under the credibility of this programme, to automatically deny somebody the right to file a claim. Instead I think they should be able to file. Whether they can prove a causal connection to the spill is the issue.

Shortly after you released a draft Eligibility and Substantiation Criteria and Final Payment Methodology proposal in early February the Justice Department sent you a letter urging him to speed up the payment process for the GCCF (Gulf Coast Claims Facility). What do you make of this criticism?

I can understand why the Department of Justice would like accelerated payments. I have taken that to heart. We are trying to accelerate the process, but I must say that I will not pay claims that cannot be proven. About 380 people who I either denied, or gave them much less than they wanted, under the Oil Pollution Control Act – when I denied them, they went to the United States Coast Guard’s Liability Trust Fund. In every single case the Coast Guard has agreed with the GCCF. Every single one – 380 for 380. We are doing something right.

Has anyone gone to the courts directly?

After they go to the Coast Guard, they may go to court. I do not know how many of them have gone to court after being treated by me and then treated by the Coast Guard.

On the subject of comments by the courts, since U.S. District Judge Carl Barbier issued a court order that you could not identify yourself as an independent administrator, what have been your thoughts on whether in fact you are independent in this role? Are you? Or is this role quite different from your role as the TARP Special Pay Master, which you did, I believe, pro bono, and the 9/11 fund administration, where I also believed you were independent with regard to your own pay?

The judge concluded that since I stand in the shoes of BP in setting up the programme, I should not say that I am truly independent. On the other hand the judge pointed out in that opinion that I am independent when it comes to the treatment of any particular claim and that neither BP nor the government nor anybody else has any control over my decisions.

How would you be independent of BP if they were paying you?

They are paying the freight for the entire programme. Who else is going to pay me?

The government?

The government is not responsible for this programme. The government is not responsible for the spill. The government is like any claimant. The government was not any kind of wrongdoer here. So BP is the only one that can pay me. Otherwise there is nobody available to pay. BP is paying the freight for the whole claims process and all the accounts and all the claims evaluators and the adjustors. BP as the wrongdoer has to step up and pay the freight.

Another recent headline that I noticed was that a BP official had said that some of the awards that you had made were “too generous.” Do you in some senses feel torn by the tension of serving justice to all concerned parties?

You cannot win. The claimants, the victims of the spill, all say I am not being generous enough. BP filed an official report to the GCCF saying, “We are looking at what you are proposing and we think you are being much too generous.” I take the position that if one side thinks I am being too generous and the other side thinks I am not being generous enough then I am probably doing the right thing.

What have you learned from the 9/11 fund experience, in terms of the sensitivities of people, that you applied in the case of the BP spill fund? I know that in the 9/11 fund case you met personally with many of the families involved.

Yes, never underestimate the emotional side of this. In the 9/11 fund case it was families who lost loved ones on 9/11. Here it is individuals, families and businesses worried about their financial future. In each case, for different reasons, [people were] very emotional, angry, frustrated, disappointed, sceptical. It is very important, when you design and administer these claims programmes, to take into account the emotional side of this.

So when people express these feelings to you directly, what do you say to them?

You try and stand in their shoes the best you can, you try to be empathetic, sensitive to their concerns. I think it is very understandable. You do the best you can.

My understanding of the structure of payouts for the BP spill fund is the following. First, affected persons are receiving an immediate emergency payment without any obligation as long as they have a demonstrably legitimate claim. However the claimant will be required to give up his right to sue to receive full compensation. Has this approach been seen as too harsh by some of the parties?

I do not think so. Everybody who wanted an emergency payment from August 23 2010 to November 23 2010 could take an emergency payment and come back again. Now everybody has three choices. One, [they can] take a final payment. [They would] document [their] past damage, I would consider [their] projected future damage, [they] would take a lump-sum payments, they would release no lawsuits, [they] would not be back. [This is] Option One.

Option Two [is one where each claimant would say,] “I am not too sure about the future. I do not want a final payment. I will document my damage for the last quarter, take an interim payment. [There will be no release [from bringing lawsuits] – like the emergency payment I can come back and sue. I will wait and see what happens in the Gulf.”

The third option [is for the claimant to] take a quick payment – $5,000 for an individual, $25,000 for a business. [The claimant] may have no more documentation [and] may have been over-paid. [He would provide] a final release [from lawsuits] and will not be back and will not sue.

Final payment, interim payment and quick payment – those are your three choices.

The amounts are fixed at $5,000 and $25,000 respectively?

That is correct. Regardless of individual need or size of business, or whatever -- $5,000 and $25,000.

Has anyone signed a final payment deal and then regretted it and wanted to go back? They probably would not have any legal recourse?

Not that I have seen. Maybe they do have legal recourse – I do not know. But I know that right now we have got about 100,000 quick payments and final payments so far.

Did you develop a business interruption methodology for deciding on compensation? Was that not difficult given the likely long-lasting effects of the spill? How would you calculate this?

We went back and talked to all the experts, gathered together as much information as we could. On February 18 2011 we posted our final rules that explain the methodology. We invited a two-week public comment period. That was when BP said that we were being too generous. We are now implementing that methodology.

So to drill down a bit into that – did it involve questions surrounding what the individual’s or business’ income stream had been, what it was likely to be in the future and an appropriate discount rate?

Absolutely. Let us contrast what you made before the spill versus what you made after the spill. Let us look at trends in your business before the spill and after the spill. Let us look at any specific evidence that you were damaged directly by the spill. [For example a claimant could say,] “Mr. Feinberg I had a contract, and here it is, cancelled because of the spill.” For new start-up companies [we look at] projected growth rates and prospective budgets estimated.

I noticed that among the people compensated are real estate agents and brokers – in their case would you consider long-term values of property along the coast and is that not a bit more tricky given the length of the time horizon and unpredictability of values there?

We do not compensate for diminution of value. We do compensate for lost commissions, brokerage fees, sale of property at a loss. [For example if a] property was worth $500,000 before the spill and had to be sold at $250,000 – that would [qualify as an eligible claim.] So we will consider real estate claims but not diminution of value.

All this presumably involves a lot of economics, calculations – do you have a very big team working with you?

We do have a huge team, we have about 3,200 people. We have got 35 claims officers in the Gulf. We have got hundreds of accountants and claims adjustors looking at each claim.

What has been the attitude that BP has taken throughout all this? They have obviously cooperated to the extent that they have put $20 billion into the escrow account for compensations, but anything beyond that?

BP has been fine. BP basically set up this programme [and] asked me to do it. I am doing it, and they have provided me with inputs the way the public has. I listen to what they say, I listen to what the public says, I read everything and then I do the right thing.

That is a good point to segue to my next set of questions on your former role as Special Paymaster because there too you were trying to find consensus between private parties and the public. To kick that off, what is the status quo on that? [The U.S.] Congress has said it might ask you, year-on-year, to continue setting pay. Is that continuing this year as well?

Under the statute that created the Executive Pay Programme [as associated with the] Troubled Asset Recovery Programme (TARP), seven companies were subject to the jurisdiction of the programme until they paid back what they owed the taxpayer. Three – Bank of America, Citigroup and Chrysler Financial – paid back the taxpayer. They are out. Now the programme continues as to four companies – AIG, General Motors, GMAC and Chrysler. As long as they owe the taxpayer money that they borrowed, the pay restrictions continue.

I resigned last year and Patricia Geoghegan is now the Special Paymaster at [the U.S.] Treasury.

So the three companies that repaid all the TARP funds are completely off the hook?

Gone. Completely out from under the Treasury’s jurisdiction.

You said in one of your earlier comments that in six out of seven initial pay proposal submissions sent to you by the companies the compensation urged of you was “contrary to statute, contrary to regulations and contrary to the public interest.” They wanted “too much cash guaranteed salary, they wanted stock that would be immediately... transferrable,” and so forth. Did this lack of sensitivity towards the consequences of their excesses shock you?

No, nothing comes to me as a shock, over executive pay practices! Nothing comes as a shock. I expected, frankly, that the companies, in making these submissions, would inflate the importance of their top executives.

Right, but the degree to which they did that, and the fact that it was in the immediate aftermath of the crisis itself...

It may have shown a certain degree of political insensitivity but I think they believed it, probably.

When you first accepted the role of Special Pay Master, you said that many “variables listed in the statute” had to be considered including competitiveness, profitability, merit pay, avoidance of excessive risk, general market conditions. Given that there are tensions between some of those variables, such as competitiveness and avoidance of excessive risk, how did you see that playing out and which way did it go, finally?

Well, we looked at every case and concluded that those were all statutory principles that we had to follow. We concluded, in most of the cases, that competitiveness would not be harmed by reducing overall cash-based salaries and compensation packages.

You have said before that you hoped to achieve this through consensus rather than by edict – did you ultimately have to resort to change by edict in some cases?

[Yes,] threat of edict. But in almost every case the threat was enough to convince the company to work out the pay packages and we did so.

Regarding the firms that repaid the TARP funds and the many that were involved in the crisis in some way but did not come under your mandate, you have said quite eloquently that the culture of compensation needed to changed if such crises were to be avoided in the future. Looking back, do you think that that has actually happened, especially given that executive pay has started to rise again and multi-year guarantees have re-emerged?

I do not know the answer to that; it may be too soon to judge. I think it is very important that you do not paint with too broad a brush here. I think you have got to look at every company and look at the culture of that company, how it pays its people, what are the factors that enter into pay. I read a lot – for example that Wall Street has returned to its old pay practices. I would like to know, what is Goldman [Sachs, a leading investment bank] doing, what is J.P. Morgan doing? What are all these institutions doing? I do not think you can reach conclusions across the board.

So let us say Goldman has a practice of typically paying very highly in order to demand very high performance. That is acceptable even given the externality effect that this has on the whole market?

No, I do not think so. Goldman spoke with me on a couple of occasions, even though they were not subject to my jurisdiction. They pay a cash-based salary of under $600,000 per year. The rest of the compensation package is, I guess, in the form of stock which cannot be redeemed for five years. You have to look at each company [separately]. The problem with Goldman is that they make so much money that no matter how you divide up the pie it still looks very, very large!

Do you think the international dimension matters here? Foreign banks such as Nomura and others may, because of different types of regulation in their home countries, not have to implement such compensation reform, and obviously they have an impact on markets here.

I think when you think of competitiveness you have to look internationally – it is a global market. Secretary of Treasury [Tim] Geithner has been very, very vigilant in recognising that executive pay has to be studied – not simply in the U.S. but how it impacts foreign economies and foreign markets such as in London, Paris and the G20. The Secretary has taken a lead in that regard.

Any sense as to whether that has showed any results?

Might be too early to tell, I do not know.

The outcome of your engagement as the so-called “pay czar” was significant -- cash salaries were cut by 90 per cent, average compensation fell by 50 per cent, base salaries paid in stock could not be sold for three or four years, and bonus stock could not be cashed out until TARP money was repaid. Yet one noticeable point of contention was the claim that base salaries at the companies you worked with on average rose 14 per cent to $437,896 a year – is this true and if yes did that reflect your struggle between addressing populist rage over corporate misdeeds and the need to keep compensation at levels where it would still attract the right talent?

Yes, that is right, between populist rage and Wall Street. You have got to try and come up with a formula: let us reduce guaranteed cash-based salaries, let us tie the individual’s total compensation to the company’s performance in the form of stock, and do not let it get redeemed too quickly. Long term impact – that was the way to go.

But was there even resentment that the base salaries should rise? In a sense was it not your mandate to put the brakes on everything?

[There was] plenty of Main Street resentment that people were getting a pay increase even if it was framed the way I framed it.

How did you deal with that?

I dealt with it by explaining that competitiveness is a factor and if in fact the bulk of the compensation is tied to overall company performance over two, three or four year periods, giving people a little more in the way of upfront cash made a lot of sense to me.

What lies ahead for Kenneth Feinberg?

The BP fund is very important and I want to continue to do that as long as the Administration and BP want me to do it. Congress, as you know, during the lame duck session [towards the end of 2010] re-enacted the 9/11 victim compensation fund for first responders at the World Trade Center. Somebody is going to have to do that. I do not think I can do it because I am tied up with BP but I would be glad to help. You know, I do not welcome these jobs, they occur after horrible disasters in this country.

So in that sense I should hope that you do not have a job!

Yes, you hope that these disasters that you have seen are few and far between. You do not plan these [jobs,] but if people want to set up a $20 billion fund and want me to administer it, I will administer it.

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