Guest Post: A Bankrupt BP - Worse For The Financial World Than Lehman Brothers

Tyler Durden's picture

Submitted by Jim Sinclair from

A Bankrupt BP - Worse For The Financial World Than Lehman Brothers?
The BP crisis in the Gulf of Mexico has rightfully been analysed (mostly) 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.

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Turd Ferguson's picture


I discovered ZH thru daily visits to I heartily encourage all ZH'ers to add his site to your favorites.


bigdumbnugly's picture

Jim Sinclair's and Harvey Organ's sites are excellent, TF.  Both will refer to certain ZH posts as well.  These are the three sites I use for day to day updates.

Sinclair and Organ are especially great for day to day observations on the workings of the PM markets.   I think that is where I discovered ZH also.

Careless Whisper's picture

i call bullshit. bp has been pushing for cap and trade from the beginning. they are investors in the chicago climate exchange as well as many other places that will benefit from cap and trade.   more global tyranny. even a masseuse knows a dictator when she sees one. (extremely dictatorial commanding attitude) a cap and trade dictator that wants to tax everyone and control everyone. and she kept the dress.


Horatio Beanblower's picture

From the UK - "State pension Ponzi scheme unravels with retirement at 70"...


Rule Britannia!

Cognitive Dissonance's picture


Thank you for a nice counterpoint article to your earlier one on the media campaign to declare BP TBTF.

Cursive's picture

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. 

When I worked at Exxon a decade ago, this was true.  Exxon did not engage in speculative derivative products (maybe this has changed since, I don't know), but BP prided itself on the trading revenue it collected in these markets.  I personally believe this is why BP was a poor operator.  It ceased by primarily an oil company and began to think of itself as a trading/finance outfit.

Bokkenrijder's picture

How ironic, a commodity backed financial institution that would need to be bailed out with fiat-currency!

rsi1's picture

Jsmineset has predicted the world would end at least 10 times, the USD will collapse at least 20 times and that gold should be at 2000 who knows. With numbers such as "only God knows", it makes for great arguments.

The impact would be important, but it would be simply a capital structure change, reorganization, or sale to somebody like XOM, but the assets would not stop producing, that is for sure.

JS has some good points sometimes, but most times I feel I am wasting my time reading.

Pladizow's picture

Yet you continue to read?

BumpSkool's picture

Before you trash Sinclair, remember he is the one who called the top of the 1980 gold rally, and the bottom of this bull run, by getting back into the Gold market after a 20 year absence. Also, you, and everyone here on ZH could only dream of the amount of money Sinclair has made trading gold. Don't believe it? Ask around - you'll soon find out how successful a Gold trader Sinclair is... 

Pladizow's picture

Why BP will not survive


By James G. Rickards


There are two dynamics that BP bull analysts are missing, one political, one economic.



The economic point is that analysts assume there is some quantum of damage, hard to quantify or know in the short run, but still essentially fixed.  They then do their best estimates, compare the results to BP's balance sheet (including projected earnings over the next 5 years), make a judgment about BP's capacity to pay and their estimate of the franchise value and earnings potential net of the payments and then issue buy or sell recommendations at various market levels.


But that's not how the world works.


The damages are not fixed but moving in a critical state system with positive feedback loops.  In layman's terms, the worse things get, the worse they will get.  One year's compensation to a fisherman soon becomes two or three, etc.  Soon getting comped by BP starts to feel better than fishing and who can argue? Ecologies change, vacation habits change, vocations change, etc.  As long as BP has the money, there will be an irresistible dynamic to enlarge the claim until the money is gone.


The political point is related but starts in a different place.


Obama's approval ratings are getting close to those of Nixon, Carter and Bush 43.  History shows that once you drop below 40% approval there is no recovery because you no longer have sufficient critical mass with which to reward friends and punish enemies.


The economy is getting worse, not better.  By election day 2010, unemployment will be higher, real estate prices lower and the banking crisis will be back (or, it never really went away).


Obama hates the English.  They tortured his grandfather in Kenya. His first official act as President was to order the packing up and return of a Churchill bronze bust which Bush had displayed in the Oval Office.


Taking all of this into account, BP is an irresistible cookie jar into which politicians will reach their hands over and over.  Again, the dynamic is not "how much do you owe?" but rather "how much can you pay?".  The answer is that you keep paying until you're broke.  They will also need to demonize BP on a continual basis as a prod to pass cap-and-trade or cap-and-tax and as a club to beat Republicans who stand in their way.  Just look at what happened to Rep. Joe Barton (R-TX) today to get an idea of how this will pay out.


Don't think the law can stop this.  The law will accelerate it.  BP's negligence will turn out to be criminal, not civil and the criminal penalties are exponentially greater than the civil fines and normal tort claims.  Obama will use the threat of criminal prosecution to get more and then use an actual criminal prosecution to get the residual.


BP may not literally go to zero.  It may go to $2.00 per share or so at which point a pre-packaged bankruptcy will be used to transfer valuable assets to, say, ENI, Total or Exxon with some value preservation for BP debt holders.

sumo's picture

Obama hates the English.  They tortured his grandfather in Kenya. His first official act as President was to order the packing up and return of a Churchill bronze bust which Bush had displayed in the Oval Office.

A link for folks (like me) who didn't know this:

AnAnonymous's picture

Quite a jump to conclusions. Even the Telegraph did not make it.

But hey, this is the US and US citizens.

metastar's picture

Let them all fail! Who will bail out the middle class when the middle class is busy being forced unwillingly to bail out the rich, the irresponsible, the TBTF?

LePetomane's picture

BP or its bankruptcy induced equivalent  isn't going anywhere for the simple fact that the environmental devastation unfolding in the Gulf will be treated from a consumer perspective as a sunk cost (pun intended, goddamnit.)    ie There's no reason to investigate alternative energy when the region still has oil in the ground.   Besides, what's a little more fubar.


What's that dear?  Dancing With The Stars Is On!?

Gotta run!

VogonPoet's picture

"Then think about what happens if BP goes under."

anyone with an overly large credit line, bets bigger than they can cover, etc goes bust, their assets are liquidated, and those with cash and gold get them on the cheap, the system clears, and new businesses rush in and hire up to fill in the gaps where the old businesses dropped out.

i'm bored by such essays about the earth shaking and other proclemations of eternal doom. 

4shzl's picture

It sounds like Sinclair's been drinking the ponzi kool-aid. TBTF, systemic risk, global financial implosion, yada, yada, yada.  At the end of the day, it's the oil that counts -- not the bullshit.  In BK, BP's assets will be sold off and continue to be produced, hopefully by a more competent operator. Derivative contracts will get handled with a big, red "FORCE MAJEURE" stamp and be suitable for framing in the men's washroom.  Tough titty for the bankstas -- cry me a river . . .

Muir's picture



Pure dribble.

Make up your mind guys.

I for one, would like BP to fail followed by a massive derivatives meltdown and financial Armageddon.



Have a nice day.



fuu's picture

BP needs to DIAF. Seriously. How many millions are going to die from exposure to toxins released in this debacle?


At some point the laws of nature kick in and we have to get rid of these parasites.


Also the whole financial system is on the verge of collapse anyway because IT DOES NOT WORK. Who farking cares if BP is the straw that breaks the ponzi's back?

resipsaloquacious's picture

Oh the fucking irony!  To paraphrase: "bail out BP, or else the economy will be ruined!" (Hhmmm, where have I heard this before?)  "Oh, but remember!  Once you bail us out, let us do whatever the fuck we want to do, including drilling in areas that where we cannot do it very safely. Otherwise you are facists!")

News flash: the economy is already fucked. 

Here's the kicker: the fact is, for the last three decades (actually much longer), Banks and Big Oil have pretty much received from the Govt. everything they ever wanted (regardless of the party in power in the WH or Congress), and look where we are: stocked in the public square with our pants around our ankles, with John Holmes behind us and with buggering intentions -- no lube. of course.  Isn't it time someone calls these crooks' bluff and see what happens when we do not provide them with carte' blanche?

BumpSkool's picture

nowhere does the article state that BP should be bailed out. It says only that if it fails ... its gonna be a big event like Lehman or worse... it does not endorse rescue. Read it... 

resipsaloquacious's picture

I read it. 

Apparently, you live in a world without implication.  A world where unless a proposition is expressly stated in a manner that slaps you in the face with its own obviousness, you cannot grasp it. 

I suggest you read between the lines, I know, it's tough. 

BumpSkool's picture

I suggest you follow the guidence of Vladimir Nabokov and read what is there ... and not imply what isn't

resipsaloquacious's picture

Deal.  I will read the collected works of Nabokov when you learn how to spell guidance.

hound dog vigilante's picture

Fuck BP.  Fuck the financial world.  Fuck TBTF.

Let these failing criminal enterprises collapse... they deserve it.

The sun will rise. The chickens will lay eggs. The local credit union will be open for business.

Main St. has absolutely nothing to fear by BP/Wall St./markets imploding into insolvency.

Tartarus's picture

There is now a 40% chance of Tropical Storm Alex bursting onto the scene.

CEOoftheSOFA's picture

This is the same type of non-quantitative BS that got us mixed up in TARP.  You could have said that if United Airlines went bankrupt it would freeze the transportation in the US. 

rmsnickers's picture

Sinclair's article is well written and I appreciate the contribution but I, personally, am tired of hearing how EVERY company is tbtf and the consequences will wreak havoc on the world.  Seriously, who gives a shit at this point?  Banks aren't lending, everyone is underwater on their homes, cars, etc., and the stock market is like a game of pong with computers kicking shares back and forth all day.  Meanwhile, I haven't had a raise in over two years (still thankful to have a job despite headcount going from 385 to 25), no companies are hiring, states are going to be going bankrupt, etc.  Why does it even matter if 1 major disappears considering another will pick up the assets and slack?  God forbid, a company that rolls the dice on safety actually has to pay when they fuck up this bad.


Sorry for the all over the place rant but seriously, can't we just let 1 company fail sometime?  Just this once?  Pretty please?

jmc8888's picture

And yet derivatives aren't seen as the disaster waiting to happen.  But then again, we all know the risk right? That any stock can go to 0, and investment can.  Well anything involving derivatives has a huge chance to be worth 0, either by its own crappiness, or by glass/steagall legislation.  Anybody using derivatives better be careful.  Because in the end, besides the fact that we're all dead, the derivatives game is going to blow up.

Unless you have helicopter ben on speed dial.


Vampyroteuthis infernalis's picture

If we would have let capitalism take its course on the financial markets in 2008, we would have witnessed an enormous collapse. Two years later, a new economy that is growing would have appeared out of the ashes.

Oh wait.......... I'm sorry. Those crooks at the top would have lost their ill-gotten billions and power. That will never happen.


Liquidation of a company BP's size would be a lucrative endeavor. Lehman cost about $1 trillion to clean up. That just might be the trigger.

londonhedge's picture

How naive are people here?  Do you really believe any government is going to 'liquidate' a company that employs this many people in this election environment?  Besides, BP may become insolvent, but it won't be illiquid.  There are too many choice assets completely ring-fenced from the grips of even Obamarama.  BP plc.  The plc part kind of gives it away.  Any insolvency would be a going-concern and while the headline numbers would be big, most of the operations would keep on going just fine.  And to compare a BP insolvency to Lehman in scale is silly.