Jim Sinclair, "Could a Bankrupt BP Be Worse for the Financial World Than Lehman Brothers?"
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's likely to dwarf any banking entity in multiples....
As we're beginning to see, the Western pension structure, financial trading, and global credit are all intertwined. 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 isn't just an eco-event on its isolated own. It's 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's surely, at the very least, Enron times 10....
It looks like an exact replication of the 2008 credit-market seizure could ensue all over again -- and it could be a lot worse.
Many public pension funds have been singed by the shrinking market capitalization of British Petroleum in the wake of the ongoing oil spill in the Gulf of Mexico. Bloomberg reports that 42 state retirement systems have lost a collective $1.4 billion as BP's stock price finds its way to Davy Jones' Locker, right down there with the Deepwater rig. In fact, BP now stands for Busted Pension.
Inquiring minds would like to know if the Maine Public Employees Retirement System (MainePERS), with over 60% of its assets in stocks, is among those Blown-uP. Unfortunately, the MainePERS website lists only its top ten holdings, so it is not clear what exactly is the state's exposure to the Gulf catastrophe.
Largest Holdings as of March 31, 2010:
Bank of America
JP Morgan Chase
Procter & Gamble
Johnson & Johnson
Top 10 Equities
Personally, I would be concerned about the bank holdings in this group. In a deflating economy these will get hammered. Over the past ten years MainePERS has achieved an annualized return of roughly 3%, which is probably insufficient to cover growing liabilities.
partial recovery only [still down 17% from the 2007 peak]
Mike Burke (above) of Lewiston outlasted Brett Hine of Peru (via China) 7-5, 6-7, 6-1 Sunday in the championship match of the Huskies Open, a two-day event at Lewiston High School. The marathon match was punctuated by a two-hour rain delay between the second and third sets. Burke, the tournament's #2 seed, had advanced earlier in the day by defeating #3 seed Noah Capetta in straight sets, while #5 Hine had taken out top seed Tim Lacombe 2-6, 6-4, 6-1.
Matt is a mechanical engineer who owns a machine shop that caters to specific needs of the oil industry. His business utilizes expensive high-end computer-run machining tools that provide items requiring extremely high tolerances and specifications. Over 20 years he's built his company into one of the best in the world.
At the time that President Barack Obama took office, Matt had 84 employees and had just borrowed $5 million for expansion of his business operations. The expansion would allow him to bring on an additional 21 employees, bringing the total to 105.
During Obama's campaign, the oil industry was well aware that, if elected, he was going to pursue an agenda of cap and trade, a policy that would create a tremendous drag on the energy business. In response to Obama's election, the major oil companies immediately ceased all plans for future domestic operations and halted those currently in progress that could be stopped. The immediate effect on Matt was that his business fell off well over 50%. At the time of the BP spill, he was down to 34 employees and was barely hanging on. With the threat of drilling moratoriums, Matt expects his business to shut down and he'll have to file bankruptcy.
[update, 06-20-2010: According to David Kotok of Cumberland Advisors in a commentary released today, "we estimate that an extended moratorium, which we now expect to continue because of Obama political calculus, will cost up to 200,000 higher-paying jobs in the oil drilling and oil service business and that the employment multiplier of 4.7 will put the total job loss at nearly 1 million permanent employment shrinkage occurring over the next few years."]
[update, 06-22-2010: Martin L. C. Feldman of United States District Court in New Orleans today issued a preliminary injunction against the enforcement of the Obama Administration's six-month moratorium on all offshore exploratory drilling in more than 500 feet of water. Citing potential economic harm to businesses and workers, Judge Feldman wrote that the Obama administration had failed to justify the need for such “a blanket, generic, indeed punitive, moratorium” on deep-water oil and gas drilling.]
This morning's announcement from the Department of Labor: 456K new claims for the week ending June 5. (We need to lose 150K of these, sooner rather than later.)
Home mortgage applications:
"Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April."
--Michael Fratantoni, Vice President of Research and Economics Mortgage Bankers Association, June 9, 2010
This is an inverse measure of banks' willingness to lend to each other. (n.b.--higher is scarier)
Harrison Schmitt, Apollo 17 astronaut and geologist:
Nothing in the government’s response to the blowout and explosion on the Deepwater Horizon and its aftermath bears any resemblance to the response to the Apollo 13 situation by the National Aeronautic and Space Administration and its Mission Control team at the Manned Spacecraft Center in Houston....
With no single, competent, courageous and knowledgeable leader in charge of a comparably competent, courageous and knowledgeable team as we had with Apollo 13, the Administration has been doomed to failure from the start. The President, without any experience in real-world management of anything, much less a crisis, has no idea how to deal with a situation as technically complex as the Gulf oil spill....
Responsibility for the Deepwater Horizon accident ultimately lies with the chaotic regulatory environment for petroleum exploration created over recent decades by the Congress, courts, Department of the Interior and environmental pressure groups.
S&P 500 index: can you find the May 6 bungee ride?
Gordon T. Long, "Confirming the Omen of May's Flash Crash"
The highly discussed and quickly forgotten Flash Crash [of May 6] was an omen of what liesahead for the financial markets. It was a uniquely distinctive occurrence relative to anything we've ever experienced. Likewise, what we're about to witness will be startling and never before observed by this generation of investors. After only 30 days the Flash Crash signal has become unambiguous and historians will wonder why the public didn’t react sooner to its clarion call....
It's readily apparent that present-day markets have built across-market dynamic hedging machinery with a hair trigger. This trigger is designed to launch unimaginable trading volumes in less than 250 microseconds, across global exchanges, operating under different and still uncoordinated rules. The activation could be any number of events but my sense is it will stem from the dramatic contraction in money supply. Despite massive central bank actions, money supply as measured by MZM, M1, and M2 is still decelerating and, in the case of the difficult to obtain M3, is contracting....
When a highly leveraged system is built on the basis of liquidity and liquidity is shrinking, it's only a matter of time.