Can This Possibly End well?

[don]

The troubled oil giant has already hired Goldman Sachs, Credit Suisse and Blackstone as advisers, but it is in negotiations to bring aboard Morgan Stanley, HSBC , UBS and Asian bank Standard Charter. People at the firm say the sticking point is that they are being asked to somehow guarantee that they would lend money to the company.

A BP spokesman declined to comment on the company's relationship with its banks, and officials at those firms also had no comment.

Underwriters are often asked to provide multiple financing arrangements, but U.S. securities laws prohibit underwriters “tying” of various assignments, meaning they cannot offer to make bank loans in exchange for being hired as an investment advisor. However, the companies themselves can demand access to bank lines of credit in exchange for hiring on other assignments, which appears to be the case here.

For BP, however, the access to cash is important for its survival. The massive spill in the Gulf of Mexico and its potential financial impact – Credit Suisse estimates it might cost the company nearly $40 billion—has raised the possibility that the firm might have to file for bankruptcy protection. It has already agreed to a demand from president Obama to set aside $20 billion to cover liabilities stemming from the oil spill.

It’s unclear how BP will raise money to pay for the claims. Sources say it may issue billions of dollars of bonds in the coming weeks as well as tap bank lines, or do a combination of both. People at the firms say they haven’t agreed to BP’s terms just yet.

http://www.foxbusiness.com/story/mar...hiring-banks/#

[vinoveri]

Re: Can This Possibly End well?

perhaps we will soon hear of the $20 billion liability insurance policy that BP holds with a subsidiary of AIG

if anyone thinks that a majority of the costs for this will not be borne by the taxpayer/consumer, dream on.

[Rajiv]

Re: Can This Possibly End well?

See also - Exxon Valdez and the birth of credit default swaps

Commentary: Derivatives business owes much to an earlier spill

In a world of unintended consequences, BP's Gulf of Mexico oil spill could set the stage for Wall Street's next derivatives bonanza.

It's all about bundling risk. And no one understands it better than big banks and big oil.

With about 200,000 gallons of crude flowing daily into the sea, BP's wild well could soon put it in the same league as the 1989 Exxon Valdez tanker spill, when 11 million gallons poured into Alaska's Prince William Sound.

President Barack Obama is on the record saying BP is going to pay for the mess. That might be a bit premature, given the epic litigation battles ahead.

But BP is already paying a steep price in the marketplace. Since the April 20 accident, its share price has tumbled 17%, wiping out over $20 billion in market value.

That's a big drop for one of the world's biggest oil companies, prompting some equities analysts to pitch BP's depressed shares as a buy opportunity.

It's not the first time an oil spill handed Wall Street a rare opportunity.

After the Exxon Valdez spill, an Alaska jury demanded $5 billion in punitive damages from Exxon. The thinking at the time was that the giant oil company should forfeit roughly a year's worth of profits.

Exxon moved to protect itself by raising a $4.8 billion credit line from J.P. Morgan.

J.P. Morgan, to protect itself in turn from an eventual default by Exxon, came up with a novel financial instrument called the credit default swap. Now a $30 trillion international marketplace, credit default swaps were also at the core of the global financial market's biggest blowout in decades.

Who knows what Wall Street's wizards might whip up to protect BP?

About the only safe guess at this point is that whatever they cook up, it's not yet regulated. And by the time someone realizes it should be, its inventors, like a bunch of mad Frankensteins, will claim they really had no idea what they were doing when they brought their monster to life.

And also - Exxon Valdez: How That Disaster Destroyed The Economy 20 Years Later

Hopefully, by now, you've already read the oil spill apocalypse pieces penned by our own Ryan Grim -- who documented "BP's Long History Of Destroying The World" -- and Sam Stein, who got the following diagnosis from a top lawyer in Exxon Valdez litigation: "[I]f you were affected in Louisiana, to use a legal term, you are just f--ked".

Well, here's something else depressing that you can add to your oil spill woes. The Exxon Valdez disaster, which occurred on March 24, 1989, played a major role in the collapse of the economy some 19 years later. See, as Stein documented, after lengthy litigation, Exxon managed to get the amount of punitive compensatory damages reduced from the hoped-for $5 billion to a paltry $500 million. But, back when Exxon had reason to imagine it might actually have to part with the $5 billion, the oil giant needed to find a way to cover its hindquarters. Exxon found a savior in the form of J.P. Morgan & Co., who extended the beleaguered company a line of credit in the amount of $4.8 billion.

Of course, that put J.P. Morgan on the hook for any potential judgment against Exxon. So the bank went looking for a way to mitigate that risk. Its solution made history, which you can read about in a June 2009 piece from the New Yorker's John Lancaster, entitled "Outsmarted." Here's the relevant portion:

In late 1994, Blythe Masters, a member of the J. P. Morgan swaps team, pitched the idea of selling the credit risk to the European Bank of Reconstruction and Development. So, if Exxon defaulted, the E.B.R.D. would be on the hook for it--and, in return for taking on the risk, would receive a fee from J. P. Morgan. Exxon would get its credit line, and J. P. Morgan would get to honor its client relationship but also to keep its credit lines intact for sexier activities. The deal was so new that it didn't even have a name: eventually, the one settled on was "credit-default swap."

So far, so good for J. P. Morgan. But the deal had been laborious and time-consuming, and the bank wouldn't be able to make real money out of credit-default swaps until the process became streamlined and industrialized. The invention that allowed all this to happen was securitization. Traditionally, banking involves a case-by-case assessment of the risk of every loan, and it's hard to industrialize that process. What securitization did was bundle together a package of these loans, and then rely on safety in numbers and the law of averages: even if some loans did default, the others wouldn't, and would keep the stream of revenue going, thereby diffusing and minimizing the risk of default. So there would be two sources of revenue: one from the sale of the loans, and another from the steady flow of repayments. Then someone had the idea of dividing up the securities into different levels of risk--a technique called tranching--and selling them off accordingly, so that riskier tranches of debt would pay a higher rate of interest than safer ones. Bill Demchak, a "structured finance" star at J. P. Morgan, took the lead in creating bundles of credit-default swaps--insurance against default--and selling them to investors. The investors would get the streams of revenue, according to the risk-and-reward level they chose; the bank would get insurance against its loans, and fees for setting up the deal.

There was one final component to the J. P. Morgan team's invention. The team set up a kind of offshore shell company, called a Special Purpose Vehicle, to fulfill the role supplied by the European Bank for Reconstruction and Development in the first credit-default swap. The shell company would assume $9.7 billion of J. P. Morgan's risk (in this case, outstanding loans that the bank had made to some three hundred companies) and sell off that risk to investors, in the form of securities paying differing rates of interest. According to J. P. Morgan's calculations, the underlying loans were so safe that it needed to collect only seven hundred million dollars in order to cover the $9.7-billion debt. In 1997, the credit agency Moodys agreed, and a whole new era in banking dawned. J. P. Morgan had found a way to shift risk off its books while simultaneously generating income from that risk, and freeing up capital to lend elsewhere. It was magic. The only thing wrong with it was the name, BISTRO, for Broad Index Secured Trust Offering, which made the new rocket-science financial instrument sound like a place you went to for steak frites. The market came to prefer a different term: "synthetic collateralized debt obligations."

As Lancaster notes: "Inevitably, J. P. Morgan's innovation was taken up by more aggressive and less cautious banks." Oh, you don't say!

Mortgage-based versions of collateralized debt obligations were especially profitable. These C.D.O.s involved the techniques that the J. P. Morgan team had developed, but their underlying assets were pools of mortgages--many of them based on the most lucrative mortgages, the now notorious subprime loans, which paid higher than usual rates of interest. (These new instruments could be pretty exotic: some consisted of C.D.O.s of C.D.O.s, pools of pools of debt.) J. P. Morgan was wary of them, as it happens, because it didn't see how the risks were being engineered down to a safe level. But institutions like Citigroup, U.B.S., and Merrill Lynch plunged in.

Flash forward to 2008, and there's widespread systemic failure that shreds the employment market and sends huge sums of wealth straight to Money Heaven.
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[don]

Re: Can This Possibly End well?

Correct me if I'm wrong, but isn't Obama's main effort going into creating the liability trust ASAP?

The banksters love chaos. It's an opportunity-rich environment.

[don]

Re: Can This Possibly End well?

Is this too Old School?


Obama's main efforts are going into the creation of a $20,000,000,000 BP liability fund..

BP's advisers, Goldman, JP Morgan, et. al.- in short, the TBTF bankster elite (and the President's #1 backers), will craft the bonds.

Moodys and Standard & Poor will rate the bonds.

Savers and pension funds, desperate for a return, will take the plunge, finding the 8% return irresistible.

Goldman and the boyz will quietly short the bonds.

BP goes under.

Did I miss anything?

Or yes, there's probably a public bailout figured in somewhere.


Blast from the Past: Remember when Bush was forced to actually go to New Orleans after doing his initial flyby? Remember what he said. We will not only repair the damage, we will make New Orleans better than ever.

Remember what Obama said about cleaning up the Gulf. Of course you do.

Now go fix yourself a drink.

You'll need it.

I do.

[GRG55]

Re: Can This Possibly End well?

The troubled oil giant has already hired Goldman Sachs, Credit Suisse and Blackstone as advisers, but it is in negotiations to bring aboard Morgan Stanley, HSBC , UBS and Asian bank Standard Charter. People at the firm say the sticking point is that they are being asked to somehow guarantee that they would lend money to the company.

A BP spokesman declined to comment on the company's relationship with its banks, and officials at those firms also had no comment.

Underwriters are often asked to provide multiple financing arrangements, but U.S. securities laws prohibit underwriters “tying” of various assignments, meaning they cannot offer to make bank loans in exchange for being hired as an investment advisor. However, the companies themselves can demand access to bank lines of credit in exchange for hiring on other assignments, which appears to be the case here.

For BP, however, the access to cash is important for its survival. The massive spill in the Gulf of Mexico and its potential financial impact – Credit Suisse estimates it might cost the company nearly $40 billion—has raised the possibility that the firm might have to file for bankruptcy protection. It has already agreed to a demand from president Obama to set aside $20 billion to cover liabilities stemming from the oil spill.

It’s unclear how BP will raise money to pay for the claims. Sources say it may issue billions of dollars of bonds in the coming weeks as well as tap bank lines, or do a combination of both. People at the firms say they haven’t agreed to BP’s terms just yet.

http://www.foxbusiness.com/story/mar...hiring-banks/#

What a joke. BP is a company with more than two hundred billion dollars of assets...and as I have pointed out before the assets in an oil company are REAL assets, not the shzt that passes for assets in our banking system. BP would have absolutely no difficulty meeting a $40 B liability. That BP is raising cash is reflective of the fact that its asset base is illiquid...if they have to sell anything it takes time.

The more sinister explanation is that if BP has to put its USA sub[s] into Chapter 11, better to enter bankruptcy protection with a levered up balance sheet than one that is "too clean".

[Minion]

Re: Can This Possibly End well?

What a joke. BP is a company with more than two hundred billion dollars of assets...and as I have pointed out before the assets in an oil company are REAL assets, not the shzt that passes for assets in our banking system. BP would have absolutely no difficulty meeting a $40 B liability. That BP is raising cash is reflective of the fact that its asset base is illiquid...if they have to sell anything it takes time.

The more sinister explanation is that if BP has to put its USA sub[s] into Chapter 11, better to enter bankruptcy protection with a levered up balance sheet than one that is "too clean".

What I haven't seen discussed is the assumption that BP will still be permitted to operate as before. Is it unreasonable to question this? It would seem to have an effect on future income........