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Has BP Sprung A Counterparty Risk Leak?
A casual glance at the BP annual report reveals the following suddenly relevant tidbit:"OTC contracts: These contracts are typically in the form of forwards, swaps and options. Some of these contracts are traded bilaterally between counterparties; others may be cleared by a central clearing counterparty. These contracts can be used for both trading and risk management activities. Realized and unrealized gains and losses on OTC contracts are included in sales and other operating revenues for accounting purposes. Highly developed markets exist in North America and the UK where gas and power can be bought and sold for delivery in future periods." While we are positive that BP's risk management department has done a terrific job at evaluating the viability and credit risk of its own counterparties (thank you Federal Reserve), the question now becomes, is the inverse also true (ahem, collateral calls on increasing rating agency, ahem)? As the firm likely has tens of billions in open OTC positions in various commodity and currency markets, is it time that speculators shifted their attention from BP to the Morgan Stanleys (wink wink), Deutsche Banks, and Goldmans of the world?
As for the question if there is enough OTC risk for counterparties to be impaired by, the answer, as can be seen on the chart below, a resounding yes:
Zero Hedge will shortly conduct an in depth investigation into just which banks are on the hook from a potential BP failure and by how much. Based on some preliminary rumors, we would be rather concerned about investment banks whose traders enjoy abusing their expense accounts at Hawaiian Tropic on Times Square.
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We are gonna find out AIG is the one that insured BP aren't we?
Go figure!
But its ok, cause as long as Goldman is the counterparty on AIGs swaps, all will be well:)
Cheeky and Tyler, I love you guys and I am a ZH zealot but BP is not going away in our lifetime.
BP is not going anywhere. Too many fear mongers.
BP as a bankruptcy candidate – Business media and press and investors all grinding hard on the possibility that this oil spill could wind up bankrupting BP. The stock has lost ~$80B in market cap since spill started on 4/20 (about $55B on relative basis vs. peers XOM, CVX, RDS). It is acting terribly, down ~6% yesterday and softer again today in Europe trading. The stock is in a vicious circle where the ongoing flow of negative news and political pressure begets selling, which begets more speculation about “how bad can it be”, which begets more selling, etc. And why step into that breach as a buyer? Uncertainty = paralysis where only the boldest of value and deep value players dare to tread.
· BP as a bankruptcy candidate – part 2 – It feels like there is a frenzy for sources/experts/analysts to one-up each other on the assessment of fines and liability and talk about BP as a donut hole stock (zero). We have a really hard time getting there from a practical perspective as BP worth more alive than dead to US government and all those that want milk from this future cash cow. Politically, the world agrees that the US government is going to punish BP big time. But that Capitol Hill punishment will have to work within a framework of legally established fines, fines assessed for criminal activity after a criminal investigation is conducted and settlements between BP and the government. Then will come the civil lawsuits for economic impairments from individuals, states, companies. These will be huge dollars – but most of them involve a lengthy time element. Years and years of litigation. The Valdez accident happened in 1989, the civil and criminal charges were settled in 1991 and the class action awards hit in 1994..but were fought until 2008 (and initial punitive award was reduced dramatically).
· BP as a bankruptcy candidate – part 3 – Let’s look at some quick math and history to figure out what the near term (next few years) fines and penalties can be for BP. Clean Water act violation could be ~$4,300/bbl (see discussion at this link, under 33 U.S.C. 1321(b)(7)(A) and 33 U.S.C. 1321(b)(7)(D) – we just wanted to feel cool and quote all those docket numbers). Assuming 2mmbbls spilled, that is $8.6B in potential fines. For historical reference, the largest Clean Water act fine was Koch Industries at $30MM in January 2000. The largest environmental fine ever was Exxon Valdez at $1.65B inflation-adjusted ($1.1B in 1991). The largest criminal fine ever levied by the government for any reason was against Pfizer in 2009 at $1.3B. Clearly, BP will be the biggest numbers ever...but it is hard to get BP bankrupt just from government fines.
· BP as a bankruptcy candidate – part 4 – If extracting big dollars from BP is the goal (and it almost certainly is), then there is going to have to be a lot of horse trading going on. Will the British government really allow the US to bankrupt one of its largest companies (remember BP used to be British Petroleum) and big employers?..we think no. Does Obama really want a bunch of economic fallout and job losses in the US if BP were to shut down?..we think no. Will Obama administration push so hard that BP walks from its North American assets and just hands them the keys as payment for all the fines, etc?..we think no. Can lawsuits and class action litigation suck enough cash out of BP to force bankruptcy?...we think no (decades of litigation is costly, but not dangerously high). Will BP enter into a near-term settlement that bankrupts the entire company?...we think no. Can plaintiffs lawyers suck BP dry?..perhaps, but it will take many, many years to litigate. So where can we truly find the rationale for BP to go to zero in the short term? You can’t…or if there is one, it is at BP’s discretion as a negotiating tool.
I'm not insane enough to call a BK of a major oil company [not even if said companies actions kill all the ocean life within 2000 miles radius]. I said the stock will fall further, credit will deteriorate, bond prices will deteriorate as well, and the spread on CDS will widen [maybe even go into triple digits]. Will BP end up BKd; probably not since there is too much national interest invested into keeping BP a viable and competitive corporation. that said; market prices default probability at 22% [or something like that [+/- 200 bips]] and that is the only metric i use to assess whether or not is BP going BK. Based on that; no.
Cheeky, agreed. I love your posts and insight. They broke the mold with you my friend. Keep up the excellent analysis, posts and most importantly like your acerbic wit.
All good arguments but the best one is:
"Will the British government really allow the US to bankrupt one of its largest companies (remember BP used to be British Petroleum) and big employers?..we think no. Does Obama really want a bunch of economic fallout and job losses in the US if BP were to shut down?..we think no"
Precisely why they will take the Johns Manville path and file for bankruptcy while continuing to operate profitably. US Bankruptcy Court will allow it because they will be told to allow it. Awards and damages will be "metered out" by the bankruptcy court.
This is the US!
The average individual gets financially pounded, morally ass fucked and taxed to death while big companies are allowed to shelter their wealth and that of its largest benefactors up to the limit of what the public will tolerate. And then some more.
And for fun, those that already know what is going to happen will profit from it by gaming the BIG CASINO
Fuck us all!
11 is not a shutdown - but its a fantastic venue for horse trading and the reallocation of wealth - the filing itself will prove BP has been punished to the fullest extent, the equity of the 'commons' can be divided up, mgmt will get 10% at the end of the day just for playing ball. No job cuts required.
Keep telling yourself that... Keep buying and see where you end up. I am taking the other side of the trade. Remember it is an election year and Obama has to save his legacy and his party's seats (house and senate). I am betting he seizes assets sooner or later and/or BP files Ch 11 to avoid the seizure of assets.
Tough talk from Thad - 72 hours to come up with a comprehensive plan. Eventually the 'so what' will be answered .
Totally agree with you and Cheeky how theres NO WAY bp would ever file for bankruptcy, despite these conditions which are unfavourable at best.
MSM is a piece of shit.
The way the media is being positioned against them with such aggresive headlines and BK headlines I am inclined to think GS may be pulling a few strings aka AIG style CDS holdings.
What's the odds that Cheney's hidden minions are working deep and hard into GS's squid FED team to seize BP's assets befrore they come for the serial drill hole cement FAIL HAL. Like asbestos killed Lloyd's of London by their personal asset hook, Chapter 11 would be letting them off.
First one that will suffer are the pension funds! England will get whiped if BP goes down!
Also, all BP assets if chapter 7 gets there will flood the markets and drive oil down to 30$
$30 oil will again come to the rescue for a crack-headed foreign oil starved culture of instant gratification. Alternative energy: be prepared to roll over and give the real players another cyclical chance to buy'em up for pennies.
CDR Counterparty Risk Index
Judge for yourself.
Thank you cheeky! (and for the other day's reply)
Looked at The CDR Government Risk Index.
That one has gone up 100% in a couple of months!
If it was reported somewhere, I didn't see it.
Jesus man; you dont need to thank me for responding to you; it is always good to discuss things which are worthy of a discussion [meaning that we do not recycle same old phrases thoughts and observations]. The pleasure was all mine; what with all the writing of the posts; engaging in the conversation and all that.
Now, regarding CDS GRI; here you go:
How long until BP is transferred from the World's Most Hated Company list to Too Big To Fail?
"Bail out BP!"
The UK Banks must be up BP oil's creek with out a paddle......
HOLY SHIT! BP gonna take down GS to the abyss?
They knew about the spill before BP did they sold 50% of their shares in the company the day b4 . I doubt they are on the hook, if anything they probably will profit from a BK- But if cheeky says it aint gonna happen right now it aint gonna happen .
Just buy OXY as surely Phibro was short wink wink -- in other news Gore's daughter getting divorced
All we need is some action in the middle east, particularly in the strait of Hormuz and BP will have more then enough cashflow to deal with the spill.
I wonder how many shares Benjamin Netanyahu owns.
Benyamin is the Judas goat that will lead his nation to equal the Q score of Iran in the US.
If BP insured itself through AIG and AIG is owned by BHO and his bankster thugs, then guess who is really going to pay for all this? Middle class still has too much money.
I thought BP was a british company. Are the fines/penalties/judgements going against the British Company or the US division??? I hear people saying that Obama should freeze BP's assets, but I don't believe we have standing to seize any assets besides those that belong to the US subsidiary. Anyone know about this?
Correct. Only assets in the US can be seized.
If the contents of that undersea blowout poured into the roof of the halls of Congress; you'd see assets frozen just for starters.
Anyone else think this BP - gulf of Mexico situation is starting to look like a repeat of the 1930's dust bowl experience?
EURO chart indicates a move soon :
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Barrons: BP: A Month From Chapter 11? 14 minutes ago
Shares of BP (BP) are off $4.20, or 12%, at $30.50, extending rather dramatically their slide from the late morning, apparently prompted by some pretty harsh views expressed by energy investor Matt Simmons of boutique investment house Simmons & Co.
Simmons, who wrote a book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, tells Fortune’s Nin-Hai Tseng today that the Gulf of Mexico spill could get much worse. “There’s a lake at the bottom of the Gulf of Mexico that’s over 100 miles wide and at least 400 to 500 feet deep of black oil,” says Simmons, and a hurricane could cause that lake of to “paint the Gulf Coast black.”
Simmons thinks BP’s a step away from insolvency:
They have about a month before they declare Chapter 11. They’re going to run out of cash from lawsuits, cleanup and other expenses. One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup. But there isn’t enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this my guess is that they’ll panic and go into Chapter 11.
Holy Cow, Batman! Can't Turbo Timmy and Uncle Ben the Converter of all-rice create a Trillion or two to make it all fit under the rug?
Yeah, huge that BP could be bankrupt (assets sold off to pay liabilities). Bigger for the British pension system which is significantly overweight BP. Bigger for other large share holders...can you say major CDS event.
But Biggest of all is the impact that the oil industry is truly liable for spills. No more (real or perceived) caps on liability. The oil industry hasn't been truly built with this risk model but now it will need to refine and re-evaluate it's safety systems and its risk / reward for a lot of activities (deep water drilling, other high risk projects).
The outcome of this is going to be higher energy costs. Not saying BP should or shouldn't be liable but let's be clear what the outcome will be...we'll (consumers) pay for something we probably should have paid been paying for all along (the cost of these oil companies to have redundant systems to ensure these kinds of accidents wouldn't happen as the occassion would be an automatic Bankruptcy). Implications ripple from this one and don't seem priced in.
Talk it down media. Talk it down dems. Talk it down tobacco lawyers.
Lets load up like they do when its 18 ish.
Has anything stranger than a BP Bankruptcy happened in the past 2 years? Naaaah!
Umm, yes. It's called a Black Swan event...You won't see it 'til it hits.
One good possibility involves failed insurance models...specifically, Self-Insurance.
Before Taleb gave it its name, there were studies that tried to spot such events by predicting systemic failures via spotting weaknesses in a system .
Systems of insurance nearly always include a right-to-inspect and transparency of the insured item. E.g, industrial goods [as opposed to services] are subject to periodic outside inspection and review of terms, along with right to cancel if fraud is uncovered. There is real transparency.
As long as the insurance provider has "some skin in the game", it monitors all operations affecting risk and has motivation to spot and mitigate future damage and risk.
Insurance providers have a long history of regulating client behavior. E.g., fire insurance, electrical codes, piping standards, etc.
Insurance without its own "skin in the game", lacks that motivation ... e.g. scandals where insurance employees profited with fees, "favors", etc while bankrupting the insurance company.
Self-insurance avoids 3rd-party right-to-inspect and need for transparency.
BP claims to Self-Insure its operations. Thus no outsider had right-to-inspect and right-to-transparency and right-to-monitor operations. MMS does not count...none of their own "skin in the game"...its all taxpayers' money.
Did that contribute to BP failures? Ya think?.
Might Self-Insurance be a BlackSwan-maker?
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