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By: Gordon_T_Long
SULTANS OF SWAP: BP Collapse Potentially More Devastating th
Tue Jul 6, 2010 04:40

As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming.

The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives.

The potential contagion may eventually show that Lehman Bros.

and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market.

What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions.

How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence.

BP has even more physical assets than Enron and GE.

Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps.

Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are.

They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios.

Once again, as we saw with Lehman Bros and Bear Stearns we have no visibility to the murky world of off balance sheet, off shore and unregulated OTC contracts, where BP’s financial risk is presently being determined.

At a time when understanding a corporation’s risk position is critically important, investors are in the dark. When markets are uncertain, bad things are certain to follow. The new financial regulations under the Dodd-Frank legislation does absolutely nothing to address this.

This was the central issue in truly understanding and corralling TBTF risk.

It has not been addressed and the markets will likely make the tax payer pay for this regulatory failure once again.

Massive BP Risk lay in the $615T OTC Market that only the major international banks have any visibility to…. and they are not talking!


I could not have stated it any clearer than Jim Sinclair at “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 to a bank with few tangible assets. 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….

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.”

From a historical context, some may not be aware that the infamous House of Rothschild at the height of their banking power moved into Energy & Oil.

Also, John D. Rockefeller quickly realized his globally expanding Standard Oil was more a bank, consolidating his financial empire under a banking structure which resulted in the Chase Manhattan Bank (the basis of Citigroup).

As long as an energy giant can manage its cash flows throughout the volatility of price fluctuations, it becomes a money and credit generating machine.

It can borrow with AAA yields anywhere on the curve and lend to less credit worthy entities at attractive spreads.

These lending differentials help fuel the $430T Interest Rate Swap OTC market.

BP has been able to spin off $20B of earnings for the last 5 years and $15B in cash last year.

All of this suddenly comes to an end if its credit rating is significantly impaired. But what could possibly cause this to happen? It would take a black swan event. An outlier. A fat tail.

Sound familiar? Heard this discussion before?

From Rense com.

Read the entire article here:

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