Bailout

Ken Feinberg?s other job

By Felix Salmon

If anybody other than Ken Feinberg were in charge, this would worry me greatly:

In the end, one aim of the fund?and a prime reason BP agreed to it?will be to minimize lawsuits against the company. To do that, Mr. Feinberg will offer big lump-sum payments to workers and businesses as an enticement to stay out of court.

“At some point, I will have to make an offer?’You take this amount in full satisfaction of your claim, but only if you waive your right to future litigation,’” Mr. Feinberg said.

Funny, the “minimize lawsuits against the company” purpose of the fund was nowhere to be seen in the initial news reports about it, or the BP press release, or the White House fact sheet. It seems that Feinberg has two jobs, not one: he has to pay out legitimate claims and he also has to prevent those claimants from suing BP. Obviously, at the margin, the second job is going to make the first job more difficult: there will always be some settlements that people won’t accept unless they retain the right to sue.

What’s more, there’s an enormous information asymmetry here. Most of the claimants are individuals and small businesses who probably have no idea what their legal rights are or how much they could receive in a court of law. BP and Feinberg, by contrast, are legal sophisticates who are well versed in the arts of persuading people to sign away their right to litigate.

Feinberg is (mostly) beyond reproach and I trust him to do the right thing here. But if he were to fall under a bus tomorrow, I don’t trust his successor similarly. To err is human, and when Feinberg or his successor makes an error, there should be some kind of grounds to appeal, even after the offer has been accepted.

This isn’t the first time that Feinberg has discovered a second, hidden purpose behind his ostensible job. When he was setting bankers’ pay, he eventually came out and said that his “primary objective” was not setting bankers’ pay at all, but rather TARP repayment.

I particularly worry about the status of claimants who put in for one claim and then put in for a second. If they sign away their right to litigate when they receive their first payout, it seems to me that they will have no leverage at all when negotiating with Feinberg for their second. As a result, Feinberg’s going to find it much harder to settle claims quickly: people will want to wait to settle everything at once, if they’re going to waive their litigation rights.

So I hope that Feinberg doesn’t treat this secondary aim too seriously — and I trust that he does treat it as a secondary aim, rather than a primary one. More clarity on this front would be very welcome.

Full post as published by Macroprudential on June 22, 2010 (boomark / email).