A Gonzo take on BP

Rolling Stone’s Sept. 30 issue features a new angle on BP-as-corporate-villain by Matt Taibbi, the magazine’s Hunter S. Thompsonesque writer, who, starting with his now famous “vampire squid” take-down of Goldman Sachs, has pushed business journalism in a fearlessly irreverent direction.

 The opening paragraph sets out the premise clearly:

It was sickening enough when British oil giant BP set new standards for corporate scumbaggery in the Deepwater Horizon oil spill, turning the Gulf of Mexico into its own personal toilet and imperiling entire species of wildlife in an attempt to save a few nickels. But with the Gulf geyser finally capped, there’s still a way for BP to cause an even more unthinkable disaster: an AIG-style, derivative-fueled financial shitstorm.

The risk, then, is primarily a Wall Street one: that the insurance market for debt – credit default swaps (CDS), which can also be characterised as a market to bet on (or hedge) the risk of a debtor defaulting – would amplify many-fold the impact of BP going into bankruptcy. Taibbi explains it in colourful fashion:

If a CDS is two bankers sitting on a bench placing bets on whether or not the oil company across the street defaults on its loan, a CSO [collateralised synthetic obligation] is a giant basket of those CDS bets whose contents can be chopped up and sold as securities-like products to whatever moron is interested in buying them.

With all the amoeba-like variations on bets against BP’s debt, Taibbi finds out from Moody’s, one of the main debt rating agencies, that almost one-in-five CSO’s in circulation have a link to BP.  The bottom line: a BP bankruptcy, or near bankruptcy, could have an effect on the corporate debt market similar in size to that of AIG’s near-death experience, though with perhaps less of a ripple effect through the world financial system.

The question, then, is what risk of BP going bankrupt? Clearly, the perception of that happening has receded as the company has come to grips with the Macondo gusher, finally sealing it last weekend. BP’s shares have recovered considerable ground since their nadir in the summer, rising from below £3 at their London Stock Exchange low to above £4, though still well off their highest this year above £6.50. In the debt market, as Taibbi acknowledges, the CDS rates (the cost of insuring the debt) have eased back to 240, two-thirds lower than the peak but still some 50-times higher than where they were before the blow-out.

In sum, Taibbi’s point is that there is a lingering risk that BP might try to choose bankruptcy as a way to avoid — “weasel out of” — paying liabilities for the Gulf spill if they reach far beyond the US$20bn the company agreed with President Obama to set aside in the summer.

For a company of BP’s size and resources, the bankruptcy scenario is far-fetched, a fact Taibbi acknowledges:  “It may very well be that BP won’t go bust — or that, even if it does, it won’t cause a financial catastrophe.”

But his point, ultimately, is about the unquantifiable nature of the risk because of the murky ways that banruptcy law, but more particularly the derivatives markets, work. BP’s Gulf spill saga will run and run, much as Exxon’s Valdez disaster has done, and while the bankruptcy scenario fades it is still a plausible one.

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