NY Fed Finds No Wide-Ranging Risk To Financial System From BP Exposure, Which Likely Means It Is Panic Time

A Reuters source has reported that the New York Fed has looked into BP counterparty exposure and "gave banks' exposure to BP a passing grade," Of course, since this is coming from the Fed, whose tremendous track-record of predicting catastrophes of all shapes and sizes, such as subprime, the credit bubble, the dot com bubble, the August 2007 quant crash, and the 5/6 flash crash, and many others, is immaculate, this almost certainly means it is now time to panic. We are confident that the FRBNY in fact has discovered just the opposite. Why else would they be looking at this issue if they did not have credible concerns of a domino effect on a possible BP bankruptcy.

From Reuters:

 The Federal Reserve Bank of New York has been probing major financial firms' exposure to BP Plc to ensure that if the oil giant buckles under the costs of the Gulf oil spill, it won't put Wall Street or the global financial system at risk, according to two sources familiar with the matter.

After pouring over documents and asking banks about their exposure to BP over the past two weeks, the Fed found no systemic risk, and hasn't asked firms to alter their credit relationships with BP, the sources told Reuters.

"The Fed gave banks' exposure to BP a passing grade," said one of the sources on condition of anonymity.

Beyond's BP survival prospects, the Fed examination underscores market uncertainty about how the spill's staggering clean-up bill might affect Wall Street, a fragile economic recovery, or the multitrillion dollar energy market.

Should the unexpected happen, and BP file for bankruptcy, the economic stakes are huge, potentially affecting the portfolios of some of the world's top banks and funds, not to mention up to 23,000 American jobs, the price of oil, and the easy credit that banks give to big oil companies.

After being subject to harsh criticism for regulatory lapses in the run-up to the financial crisis, the Fed has worked to expand its policing of system-wide financial risk.

The examination came as some banks that trade with BP ran their own models to gauge losses if BP eventually fails to meet credit obligations.

"We would be fine," said one London-based banker, whose bank buys credit default swap (CDS) protection before it enters any long-term swaps with BP.

The cost of those swaps have surged ten-fold since late April, lifting the price BP must pay to trade with the bank.

Other BP's trading partners have already restricted the duration of trades they do with the firm, whose portfolio gives it the largest footprint in energy markets among oil majors.

Bank of America Merrill Lynch ordered oil traders to limit the time frame of oil trades with BP to one year. Last week, a firm that trades multi-year electricity swaps with BP followed suit, telling traders to cut back swaps to one year, a source told Reuters.