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View Full Version : Economics A bankrupt BP would be worse than the Wall Street Crash...


Stewie
06-22-2010, 04:18 PM
The BP crisis in the Gulf of Mexico has rightfully been analyzed from the ecological perspective. People’s lives and livelihoods are in grave danger. But that focus has equally masked something very serious from a financial perspective, in my opinion, that could lead to an acceleration of the crisis brought about by the Lehman implosion.



People are seriously underestimating how much liquidity in the global financial world is dependent on a solvent BP. BP extends credit – through trading and finance. They extend the amounts, quality and duration of credit a bank could only dream of. You should think about the financial muscle behind a company with 100+ years of proven oil and gas reserves. Think about that in comparison with what a bank, with few tangible assets, (truly, not allegedly) possesses (no wonder they all started trading for a living!). Then think about what happens if BP goes under. This is no bank. With proven reserves and wells in the ground, equity in fields all over the planet, in terms of credit quality and credit provision – nothing can match an oil major. God only knows how many assets around the planet are dependent on credit and finance extended from BP. It is likely to dwarf any banking entity in multiples.


And at the heart of it all are those dreadful OTC derivatives again! Banks try and lean on major oil companies because they have exactly the kind of credit-worthiness that they themselves lack. In fact, major oil companies, conversely, spend large amounts of time both denying Banks credit and trying to get Bank risk off of their books in their trading operations. Oil companies have always mistrusted bank creditworthiness and have largely considered the banking industry a bad financial joke. Banks plead with oil companies to let them trade beyond one year in duration.
Banks even used to do losing trades with oil companies simply to get them on their trading register… a foot in the door so that they could subsequently beg for an extension in credit size and duration. For the banks, all trading was based on what the early derivatives giant, Bankers Trust, named their trading system: RAROC – or, Risk Adjusted Return on Credit. Trading is a function of credit bequeathed, mixed with the risk of the (trading) position.

As trading and credit are intertwined, we might do well to remember what might happen to global liquidity and markets if BP suffers what many believe to be its deserved fate of bankruptcy. The Intercontinental Exchange (ICE) has already been and will be further undermined by BP’s distress. They are one of the only “hard asset” entities backing up this so-called exchange.
If BP does go bust (regardless of whether it is deserved), and even if it is just badly wounded and the US entity is allowed to fail, the long-term OTC derivatives in the oil, refined products and natural gas markets that get nullified could be catastrophic. These will kick-back into the banking system. BP is the primary player on the long-end of the energy curve. How exposed are Goldman sub J. Aron, Morgan Stanley and JPM? Probably hugely. Now credit has been cut to BP. Counter-parties will not accept their name beyond one year in duration. This is unheard of. A giant is on the ropes. If he falls, the very earth may shake as he hits the ground.



As we are beginning to see, the Western pension structure, financial trading and global credit are all inter-twined. BP is central to this, as a massive supplier of what many believe(d) to be AAA credit. So while we see banks roll over and die, and sovereign entities begin to falter… we now have a major oil company on the verge of going under.

Another leg of the global economic “chair” is being viciously kicked out from under us. Ecological damage is not just an eco-event on its isolated own. It has been added to the list of man-made disasters jeopardizing the world economy. The price tag and resultant knock-on effects of a BP failure could easily be equal to that of a Lehman, if not more. It is surely, at the very least, Enron x10.



All the counter-party risk associated with the current BP situation means the term curve of the global oil trade has likely shut down. Here we have yet another credit-based event causing a lock-up in markets that will now impede trade and commerce. It looks like an exact replication of the 2008 credit market seizure could ensue all over again – and it could probably be a lot worse. The world is in a far more delicate state now.



Although never really discussed, the world is highly reliant on BPs provision of long-term credit to many core industries. Who makes good on all the outstanding paper that so many smaller oil, gas and electricity companies, airlines, shipping companies, local bus, railway and transportation networks that rely on BPs creditworthiness and performance for? It doesn’t take a genius to figure out how this could all unwind. If BP has to be bailed-out, like a bank, the system will have to print even more unimaginable amounts of money.



The market, intellectually lazy and slow to realization, as it often is, probably has not woken up to it yet – but the BP crisis could unleash damage similar to the banking crisis. A BP failure through bankruptcy could make Lehman look small in comparison, and shake the financial house of cards we live in even more severely. If the implicit danger of the possibilities embedded in such an event doesn’t make an individual now turn towards safe investing, it is likely that nothing will.

KC native
06-22-2010, 06:00 PM
A link would be nice.

Anyways, this is complete and utter bullshit.

First, ICE won't be harmed if BP goes under. Futures (which are what trade on ICE) settle up daily. So, if BP were to go bankrupt and their futures would have settled from the day before. The exchange would simply settle up for the last day and then cancel the contracts. If the contract holders wanted to have their positions back they could trade them again (remember they are settled up everyday). Futures actually are an example of how derivatives should be traded (on an exchange and with a clearinghouse).

Also, how does BP back up ICE? ICE is a publicly traded company. They can raise their own capital. They don't need BP.

Second, all of BP's reserves and other assets would be sold off to cover creditors. Their reserves aren't worth zero (unlike some of the dreck that the banks were holding).

KC native
06-22-2010, 06:09 PM
Nevermind, found it.

http://jsmineset.com/2010/06/22/jims-mailbox-470/

Jim’s Mailbox
Posted: Jun 22 2010 By: Jim Sinclair Post Edited: June 22, 2010 at 12:55 pm

Filed under: Jim's Mailbox

Dear CIGAs,

A bankrupt BP is worse for the financial world than Lehman Brothers was for exactly the same reason.

Pedro’s credentials in energy exceed by orders of magnitude those talking heads giving daily BP opinions. In fact, Pedro’s credentials might just be better than all of them added together.

Please read this article closely, and share it with others. It is just that important.

Regards,
Jim

Dear Jim,

The BP crisis in the Gulf of Mexico has rightfully been analysed from the ecological perspective. People’s lives and livelihoods are in grave danger. But that focus has equally masked something very serious from a financial perspective, in my opinion, that could lead to an acceleration of the crisis brought about by the Lehman implosion.

People are seriously underestimating how much liquidity in the global financial world is dependent on a solvent BP. BP extends credit – through trading and finance. They extend the amounts, quality and duration of credit a bank could only dream of. The Gold community should think about the financial muscle behind a company with 100+ years of proven oil and gas reserves. Think about that in comparison with what a bank, with few tangible assets, (truly, not allegedly) possesses (no wonder they all started trading for a living!). Then think about what happens if BP goes under. This is no bank. With proven reserves and wells in the ground, equity in fields all over the planet, in terms of credit quality and credit provision – nothing can match an oil major. God only knows how many assets around the planet are dependent on credit and finance extended from BP. It is likely to dwarf any banking entity in multiples.

And at the heart of it all are those dreadful OTC derivatives again! Banks try and lean on major oil companies because they have exactly the kind of credit-worthiness that they themselves lack. In fact, major oil companies, conversely, spend large amounts of time both denying Banks credit and trying to get Bank risk off of their books in their trading operations. Oil companies have always mistrusted bank creditworthiness and have largely considered the banking industry a bad financial joke. Banks plead with oil companies to let them trade beyond one year in duration. Banks even used to do losing trades with oil companies simply to get them on their trading register… a foot in the door so that they could subsequently beg for an extension in credit size and duration. For the banks, all trading was based on what the early derivatives giant, Bankers Trust, named their trading system: RAROC – or, Risk Adjusted Return on Credit. Trading is a function of credit bequeathed, mixed with the risk of the (trading) position. As trading and credit are intertwined, we might do well to remember what might happen to global liquidity and markets if BP suffers what many believe to be its deserved fate of bankruptcy. The Intercontinental Exchange (ICE) has already been and will be further undermined by BP’s distress. They are one of the only “hard asset” entities backing up this so-called exchange.

If BP does go bust (regardless of whether it is deserved), and even if it is just badly wounded and the US entity is allowed to fail, the long-term OTC derivatives in the oil, refined products and natural gas markets that get nullified could be catastrophic. These will kick-back into the banking system. BP is the primary player on the long-end of the energy curve. How exposed are Goldman sub J. Aron, Morgan Stanley and JPM? Probably hugely. Now credit has been cut to BP. Counter-parties will not accept their name beyond one year in duration. This is unheard of. A giant is on the ropes. If he falls, the very earth may shake as he hits the ground.

As we are beginning to see, the Western pension structure, financial trading and global credit are all inter-twined. BP is central to this, as a massive supplier of what many believe(d) to be AAA credit. So while we see banks roll over and die, and sovereign entities begin to falter… we now have a major oil company on the verge of going under. Another leg of the global economic “chair” is being viciously kicked out from under us. Ecological damage is not just an eco-event on its isolated own. It has been added to the list of man-made disasters jeopardizing the world economy. The price tag and resultant knock-on effects of a BP failure could easily be equal to that of a Lehman, if not more. It is surely, at the very least, Enron x10.

All the counter-party risk associated with the current BP situation means the term curve of the global oil trade has likely shut down. Here we have yet another credit-based event causing a lock-up in markets that will now impede trade and commerce. It looks like an exact replication of the 2008 credit market seizure could ensue all over again – and it could probably be a lot worse. The world is in a far more delicate state now.

Although never really discussed, the world is highly reliant on BPs provision of long-term credit to many core industries. Who makes good on all the outstanding paper that so many smaller oil, gas and electricity companies, airlines, shipping companies, local bus, railway and transportation networks that rely on BPs creditworthiness and performance for? It doesn’t take a genius to figure out how this could all unwind. If BP has to be bailed-out, like a bank, the system will have to print even more unimaginable amounts of money.

The market, intellectually lazy and slow to realization, as it often is, probably has not woken up to it yet – but the BP crisis could unleash damage similar to the banking crisis. A BP failure through bankruptcy could make Lehman look small in comparison, and shake the financial house of cards we live in even more severely. If the implicit danger of the possibilities imbedded in such an event doesn’t make an individual now turn towards Gold at full speed, it is likely that nothing will.

Respectfully yours,
CIGA Pedro



Jim Sinclair’s Commentary

No surprise where the Cando is concerned for you.

Canada’s economy is suddenly the envy of the world
CIGA Eric

Canada Inc will be reflected in the exchange rate of the Canadian Dollar (Loonie). Par or better with the U.S. dollar is coming.

The 20 world leaders at an economic summit in Toronto next weekend will find themselves in a country that has avoided a banking crisis where others have floundered, and whose economy grew at a 6.1 percent annual rate in the first three months of this year. The housing market is hot and three-quarters of the 400,000 jobs lost during the recession have been recovered.

Source: news.yahoo.com

KC native
06-22-2010, 06:18 PM
So, more questions...

When did BP become a bank and start extending long term credit?

What is there OTC derivative exposure?

Why in the fuck would they have OTC derivatives for oil when there are such developed markets (depth, liquidity, etc) for oil and gas futures?

How does BP supply AAA credit other than the minimal amount of debt they have out there?

notorious
06-22-2010, 06:22 PM
Meh, the great thing about capitalism is that another company will take their place.


I am tired of businesses getting "helped" when they fuck up. If they fail, a new, up and coming business will take it's place! What a crazy idea!


BP made such a monumental mistake that if they go broke fixing everything, so be it.

KC native
06-22-2010, 06:23 PM
Meh, the great thing about capitalism is that another company will take their place.


I am tired of businesses getting "helped" when they fuck up. If they fail, a new, up and coming business will take it's place! What a crazy idea!


BP made such a monumental mistake that if they go broke fixing everything, so be it.

BP going broke wouldn't affect shit. Other oil companies would jump at their assets. This article was claiming that a bankrupt BP would be equal to Lehman Bros blowing up which is rubbish.

notorious
06-22-2010, 06:25 PM
BP going broke wouldn't affect shit. Other oil companies would jump at their assets. This article was claiming that a bankrupt BP would be equal to Lehman Bros blowing up which is rubbish.


Exactly correct.


Other companies will be all over the void created by BP.


I just wished that we would have let GM fail, too. They had a terrible business model, and if they had failed another company would have grown to replace them.

KC native
06-22-2010, 06:30 PM
Exactly correct.


Other companies will be all over the void created by BP.


I just wished that we would have let GM fail, too. They had a terrible business model, and if they had failed another company would have grown to replace them.

The problem with a GM failure would have been the spill over to their suppliers. Many of them would have failed in the interim. The job losses associated with a GM failure are much more severe than BP.

notorious
06-22-2010, 06:34 PM
The problem with a GM failure would have been the spill over to their suppliers. Many of them would have failed in the interim. The job losses associated with a GM failure are much more severe than BP.

There would have been fallout, but what makes this system great is that if a company makes terrible decisions, they should fail. Another business will rise up and take their place.



I will never believe that a business is too large to fail. There will always be investors willing to take a shot at grabbing the newly open market.

KC native
06-22-2010, 06:38 PM
There would have been fallout, but what makes this system great is that if a company makes terrible decisions, they should fail. Another business will rise up and take their place.



I will never believe that a business is too large to fail. There will always be investors willing to take a shot at grabbing the newly open market.

Yea, but in GM's case there were hundreds if not thousands of suppliers who would have failed simply due to GM failing. The spill over effects during one of our worst recessions would have been catastrophic.

Had this not happened during the recession then it wouldn't have been a big deal but the timing of their bankruptcy really put the US in a bind.

notorious
06-22-2010, 06:47 PM
Had this not happened during the recession then it wouldn't have been a big deal but the timing of their bankruptcy really put the US in a bind.

You are right. Good point.



They were fortunate to fail when they did. Good timing.

JohnnyV13
06-23-2010, 02:32 AM
BP going broke wouldn't affect shit. Other oil companies would jump at their assets. This article was claiming that a bankrupt BP would be equal to Lehman Bros blowing up which is rubbish.

That's what I thought, "its not like those reserves will disappear. Someone will buy them".

A BP collapse would cause disruption, but wouldn't constrict the money supply, like multiple bank failures (Because, with failing banks, people will start putting capital in cookie jars rather then expose it to the market).

BucEyedPea
06-23-2010, 09:47 AM
Exactly correct.


Other companies will be all over the void created by BP.


I just wished that we would have let GM fail, too. They had a terrible business model, and if they had failed another company would have grown to replace them.

Or bought them. Chrysler had a buyer even but they got bailed out instead. Stuuuuupid!

KC native
06-23-2010, 02:34 PM
Or bought them. Chrysler had a buyer even but they got bailed out instead. Stuuuuupid!

JFC, do you just make up shit all the time? The only way chrysler had a buyer was if the buyer got non-recourse loans from the government or Cerebus. When both said no, the deal fell through.