The original punitive damage award in the Exxon Valdez incident was $5 billion, which at the time equaled one year of Exxon’s profits. BP made a little over $20 billion last year. So, in reality, this is probably a smart move by BP to agree to the $20 billion escrow account at this time.

Some Republicans are calling this a shakedown, and maybe it was. Jack Welch, formerly of GE, is not happy with the payment as well. But what people are missing is that it was the debt capital markets that were demanding that there be some sort of agreement between Obama and BP on what the damages might be. Business Insider reports from this morning:

The market has suddenly become much more confident in the prospects for BP, as shown by an enormous rally in the company’s credit default swaps (CDS). BP’s CDS spread dropped nearly 20% to just under 462 basis points according to CMA Datavision.

462 basis points is still a huge spread, indicating that substantial risk of default remains priced by the market, but, as shown by the CDS spread chart below, it was a record drop. This comes as BP shares have rallied on news the company would suspend its dividend and set up a $20 billion escrow account for potential U.S. legal claims.

And from the Wall Street Journal:

Shares in oil giant PLC jumped as much as 9.8% in London a day after the company struck a deal with the Obama administration to set aside $20 billion to cover costs of the oil spill in the Gulf of Mexico.

BP shares recently were up 7.1%, or 24 pence, at 361 pence, leading the FTSE 100 index. The company’s shares have plunged since the April 20 explosion aboard the Deepwater Horizon drilling rig that killed 11 workers and lead to the spill.

Several analysts upgraded the embattled company to a “buy” recommendation, despite BP’s promise to cancel at least $7.8 billion in dividends, sell off $10 billion in assets and reduce capital expenditure by at least $4 billion as it looks to build up the $20 billion fund over the next 3 1/2 years. The fund won’t cover any civil or criminal penalties.

All the measures were announced after European markets had closed on Wednesday, following a meeting with U.S. President Barack Obama, whose criticism of the company has played a big part in a steep collapse in its share price recently.

“BP’s package agreed with President Obama should cool the political heat and provide some degree of comfort to equity and bond markets, shareholders,” said Evolution Securities analyst Richard Griffith.