How BP Could Trigger Another Economic Meltdown

bpMatt Taibbi says the worst may yet be to come from BP’s unacceptable antics in the Gulf, in Rolling Stone:

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. If the company decides to declare bankruptcy — a very real possibility with these bastards — it could trigger chaos in our casino system of finance, underscoring the insane levels of leverage and systemic risk we have left in place, even after the global economic crash of 2008.

The first serious whiff of trouble came on June 15th, when Barack Obama manned up and went on national TV to tell the nation that he wasn’t going to let BP worm its way out of this one. “We will make BP pay for the damage their company has caused,” he declared, vowing to push BP to set aside $20 billion to clean up its mess and compensate victims.

That sound you heard the very next day was Wall Street’s collective asshole slamming shut in terror. If the government was seriously going to stick BP with the tab for the worst environmental disaster in America’s history, then there was suddenly a real chance that one of the most lucrative moneymaking machines the world has ever seen could go bankrupt. And if there’s one thing we’ve learned from the disastrous implosion of AIG, there is no such thing anymore as a giant company dying alone.

To Wall Street, a firm like BP isn’t just a profitable energy company with lots of assets like oil rigs and pipelines and gas stations — it’s also a corporation that routinely borrows hundreds of millions of dollars to keep its business up and running. And as a Grade-A corporate borrower of the first rank, BP and its debt are at the center of billions of dollars of gambling action on Wall Street, in the same way millions of home mortgages fueled the vortex of credit-default swaps and other derivatives that crashed the world’s economy in 2008.

In today’s casino economy, you don’t need the permission of a company like BP (or a homeowner in Florida, or a country like Greece) to place a bet on their debt. You don’t need to put any money down to back your losses. And there’s no limit to how many times you can wager on the same outcome: A company may have only taken out $1 million in loans, but scores of banks, hedge funds and other financial players might cumulatively wager $100 million on whether or not the company will pay off that single million on time. That’s why, if a behemoth as large as BP goes under, it can cause losses beyond its own liabilities: Derivatives now comprise a virtually unregulated shadow economy that is 100 times larger than the federal budget…

[continues in Rolling Stone]

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  • Vox Penii

    Sigh…

    “Why Speculate?” by Michael Crichton, a speech at the International Leadership Forum, La Jolla, California, April 26, 2002

    Abstract:

    In recent years, media has increasingly turned away from reporting what has happened to focus on speculation about what may happen in the future. Paying attention to modern media is thus a waste of time.

    My topic for today is the prevalence of speculation in media. What does it mean? Why has it become so ubiquitous? Should we do something about it? If so, what should we do? And why? Should we care at all? Isn’t speculation valuable? Isn’t it natural?

    I will join this speculative bandwagon and speculate about why there is so much speculation. In keeping with the trend, I will try express my views without any factual support, simply providing you with a series of bald assertions.

    This is not my natural style, and it’s going to be a challenge for me, but I will do my best. I have written out my talk which is already a contradiction of principle. To keep within the spirit of our time, it should really be off the top of my head.

    Before we begin, I’d like to clarify a definition. By media I mean movies television internet books newspapers and magazines. That’s a broad definition but in keeping with the general trend of speculation, let’s not make too many fine distinctions.

    First we might begin by asking, to what degree has the media turned to pure speculation? Someone could do a study of this and present facts, but nobody has. I certainly won’t. There’s no reason to bother.

    Today, everybody knows that “Hardball,” “The O’Relly Factor,” and similar shows are nothing but a steady stream of guesses about the future. The Sunday morning talk shows are pure speculation. They have to be. Everybody knows there’s no news on Sunday.

    But speculation is every bit as rampant in the so-called serious media, such as newspapers. For example, consider the New York Times for March 6, 2002, the day I was asked to give this talk. The column one story that day concerns George Bush’s tariffs on imported steel. We read:

    Mr. Bush’s action “is likely to send the price of steel up sharply, perhaps as much as ten percent..” American consumers “will ultimately bear” higher prices. America’s allies “would almost certainly challenge” the decision. Their legal case “could take years to litigate in Geneva, is likely to hinge” on thus and such.

    In addition, there is a further vague and overarching speculation. The Allies’ challenge would be “setting the stage for a major trade fight with many of the same countries Mr. Bush is trying to hold together in the fractious coalition against terrorism.” In other words, the story speculates that tariffs may rebound against the fight against terrorism.

    You may read this story and think, what’s the big deal? Isn’t it reasonable to talk about effects of current events in this way? I answer, absolutely not. Such speculation is a complete waste of time. It’s useless. It’s bullshit on the front page of the Times.

    The reason why it is useless, of course, is that nobody knows what the future holds.

    full text of speech: http://web.archive.org/web/20080312214444/www.michaelcrichton.com/speech-whyspeculate.html

  • iphlogiston

    That’s alright. They’ll just get bailed out then send their execs on all-expense-paid spa vacations to some place in the world where they haven’t yet fucked up the beaches. On our dollar, of course. Because, you know, all the stress of managing all those billions of dollars is just too much to handle!

    And this shit won’t stop until there’s a radical change in the way we do business in this world. As for me, I’m boning up on my conversational Chinese, just in case.

  • iphlogiston

    That’s alright. They’ll just get bailed out then send their execs on all-expense-paid spa vacations to some place in the world where they haven’t yet fucked up the beaches. On our dollar, of course. Because, you know, all the stress of managing all those billions of dollars is just too much to handle!

    And this shit won’t stop until there’s a radical change in the way we do business in this world. As for me, I’m boning up on my conversational Chinese, just in case.

  • Anonymous

    That’s alright. They’ll just get bailed out then send their execs on all-expense-paid spa vacations to some place in the world where they haven’t yet fucked up the beaches. On our dollar, of course. Because, you know, all the stress of managing all those billions of dollars is just too much to handle!

    And this shit won’t stop until there’s a radical change in the way we do business in this world. As for me, I’m boning up on my conversational Chinese, just in case.

  • Andrew

    The ‘Profit Über Alles’ attitude is especially pathetic when one realizes money is nothing more than a human abstraction with only arbitrary physical existence and no objective value.

  • Andrew

    The ‘Profit Über Alles’ attitude is especially pathetic when one realizes money is nothing more than a human abstraction with only arbitrary physical existence and no objective value.

  • Andrew

    The ‘Profit Über Alles’ attitude is especially pathetic when one realizes money is nothing more than a human abstraction with only arbitrary physical existence and no objective value.

  • Andrew

    Crichton is essentially rejecting the predictive ability and usefulness of science and even of human intelligence itself, and that’s what’s bullshit. He speculates on the future every time he sends a manuscript to a publisher.

  • Liam_McGonagle

    Y’know, from one point of view, this is the BEST CASE scenario.

    The true problem here, the one which is understood by very few is that nearly FORTY PERCENT (40%) of the money is bogus.

    What fact of the matter is that publically traded securities formed the fasted growing component of the money supply (M3) between 1960 and 2005–rising from less than 2% to nearly 40%. Of course only the Lord knows how much it is now. In a pique of mixed insight and cowardice, the Fed decided to stop publishing M3 statistics in November 2005.

    Clearly a 2,000% increase in M3 is not realistic. Or sustainable. But it IS the inevitable consequence of under-regulation of financial markets, bad accounting standards and a weird business ethos that disdains the rigours of fundamental economic philosophy in a naive quest for perpetual, uninterrupted increases in return on capital.

    I would think that the reason why this is a terrible problem is clear enough to anyone with the intellectual wherewithall to tie their own shoes in the morning: Money can only function effectively as a medium of transaction if market participants have reasonable confidence that they will receive full value in exchange. If, however, you apprehend that you will receive only 60 cents of value for each $1.00 you spend, logic demands that you void the transaction entirely, or at least go shopping elsewhere. Hence the shitstorm currently being raised in the U.S. about China’s allegend currency manipulations.

    Now the REASON why a total collapse of the capital markets would be useful: It would be a rare, if costly, opportunity, to clear the gunk out of the nation’s financial arteries in one go. Get rid of all the essentially forged dollars within the money supply, and get real productive capital flowing again.

    However the reasons why this is unlikely to happen are numerous. Many of them are obvious.

    1. What the hell would happen if the Dow would suddenly drop 9,500 points in one day? Some might cheer the sight of stock brokers and trading desk bosses swinging from Manhattan lamp posts, but given the unknowable depths to which speculative finance has been woven into the structures of the REAL economy (i.e., farmers, manufacturers, doctors, etc.), it’s anyone’s guess as to the final outcome. One real possibility is the total collapse of civil society and the rise of Fascism, if not the return to a sort of medieval warlordism.

    2. The volume and variety of the individual bogus contracts and securities is practically innumerable. Some are huge–like BP’s, but many more are individually small and would never hit anyone’s radar, even if their aggregate effect on the money supply is eggregious. The odds that they all, or even a significant portion of them, could hit maturity on the same date is practically nil.

    3. New Deal Era regulation. Ironically, some of the only Roosevelt era market safety devices not scrapped during the Reagan Revolution were the rules automatically stopping all trading activity if certain daily volume threshholds are exceeded. This makes great sense because it halts nasty “rushes on the bank”. Too bad they only set a floor, though, and not a ceiling as well.

    4. Vested interests of the mega-wealthy. It’s no secret that financial capital has been increasingly concentrated in the hands of the very powerful. No way would they willingly part with their ill-gotten gain.

  • Anonymous

    Y’know, from one point of view, this is the BEST CASE scenario.

    The true problem here, the one which is understood by very few is that nearly FORTY PERCENT (40%) of the money is bogus.

    What fact of the matter is that publically traded securities formed the fasted growing component of the money supply (M3) between 1960 and 2005–rising from less than 2% to nearly 40%. Of course only the Lord knows how much it is now. In a pique of mixed insight and cowardice, the Fed decided to stop publishing M3 statistics in November 2005.

    Clearly a 2,000% increase in M3 is not realistic. Or sustainable. But it IS the inevitable consequence of under-regulation of financial markets, bad accounting standards and a weird business ethos that disdains the rigours of fundamental economic philosophy in a naive quest for perpetual, uninterrupted increases in return on capital.

    I would think that the reason why this is a terrible problem is clear enough to anyone with the intellectual wherewithall to tie their own shoes in the morning: Money can only function effectively as a medium of transaction if market participants have reasonable confidence that they will receive full value in exchange. If, however, you apprehend that you will receive only 60 cents of value for each $1.00 you spend, logic demands that you void the transaction entirely, or at least go shopping elsewhere. Hence the shitstorm currently being raised in the U.S. about China’s allegend currency manipulations.

    Now the REASON why a total collapse of the capital markets would be useful: It would be a rare, if costly, opportunity, to clear the gunk out of the nation’s financial arteries in one go. Get rid of all the essentially forged dollars within the money supply, and get real productive capital flowing again.

    However the reasons why this is unlikely to happen are numerous. Many of them are obvious.

    1. What the hell would happen if the Dow would suddenly drop 9,500 points in one day? Some might cheer the sight of stock brokers and trading desk bosses swinging from Manhattan lamp posts, but given the unknowable depths to which speculative finance has been woven into the structures of the REAL economy (i.e., farmers, manufacturers, doctors, etc.), it’s anyone’s guess as to the final outcome. One real possibility is the total collapse of civil society and the rise of Fascism, if not the return to a sort of medieval warlordism.

    2. The volume and variety of the individual bogus contracts and securities is practically innumerable. Some are huge–like BP’s, but many more are individually small and would never hit anyone’s radar, even if their aggregate effect on the money supply is eggregious. The odds that they all, or even a significant portion of them, could hit maturity on the same date is practically nil.

    3. New Deal Era regulation. Ironically, some of the only Roosevelt era market safety devices not scrapped during the Reagan Revolution were the rules automatically stopping all trading activity if certain daily volume threshholds are exceeded. This makes great sense because it halts nasty “rushes on the bank”. Too bad they only set a floor, though, and not a ceiling as well.

    4. Vested interests of the mega-wealthy. It’s no secret that financial capital has been increasingly concentrated in the hands of the very powerful. No way would they willingly part with their ill-gotten gain.

  • Liam_McGonagle

    Your right! Prediction is useless! I say we scrap the daily weather reports, too!

  • Anonymous

    Your right! Prediction is useless! I say we scrap the daily weather reports, too!

  • gemmarama

    (to vox penii) didn’t you post this last week?

    (to disinfo/disqus) why do replies keep going to the top of the page?!

  • gemmarama

    (to vox penii) didn’t you post this last week?

    (to disinfo/disqus) why do replies keep going to the top of the page?!

  • http://profiles.yahoo.com/u/BXBBPV7PAQ4HTCMR6U75LFGZHI r

    Taibbi occasionally has interesting insights, but they are almost always within the framework of the corporate establishment narrative. Ever since his inane and frankly stupid attempts to defend the official 9/11 conspiracy, we should all question his ability to think critically. For example, his statement: “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.” Why does he assume that it’s capped? Because BP and the government says it is? Why is a financial disaster worse than turning the Gulf of Mexico into a toilet and imperiling entire species? What if the economy is not worth saving? http://dalependell.com/the-retort/an-economy-not-worth-saving/

  • http://profiles.yahoo.com/u/BXBBPV7PAQ4HTCMR6U75LFGZHI r

    Taibbi occasionally has interesting insights, but they are almost always within the framework of the corporate establishment narrative. Ever since his inane and frankly stupid attempts to defend the official 9/11 conspiracy, we should all question his ability to think critically. For example, his statement: “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.” Why does he assume that it’s capped? Because BP and the government says it is? Why is a financial disaster worse than turning the Gulf of Mexico into a toilet and imperiling entire species? What if the economy is not worth saving? http://dalependell.com/the-retort/an-economy-not-worth-saving/

  • Ironaddict06

    Yea, Great, Yes B.P. should file bankruptcy. Shaking down B.P. for $20 Billion is illegal. Yes BP should pay for all damages and the people now out of work, but not force to give the U.S. govt a $20 billion slush fund. For the many complain about gas&oil,now is the time to grant their wish- BP please file bankruptcy. Oil and gas should be cut off right—-now-cold turkey. Lets see how well Americans adjust. This would be fun to watch.

  • Ironaddict06

    Yea, Great, Yes B.P. should file bankruptcy. Shaking down B.P. for $20 Billion is illegal. Yes BP should pay for all damages and the people now out of work, but not force to give the U.S. govt a $20 billion slush fund. For the many complain about gas&oil,now is the time to grant their wish- BP please file bankruptcy. Oil and gas should be cut off right—-now-cold turkey. Lets see how well Americans adjust. This would be fun to watch.

  • GoodDoktorBad

    Not that I disagree with you completly but “This would be fun to watch” strikes me as the words of a man in an ivory tower, well stocked with beans and power bars.

    To bad this isn’t ancient Rome, I think you would immensely enjoy the gladiator games. The pain and suffering of others obviously gets you off. No?

  • Anonymous

    Not that I disagree with you completly but “This would be fun to watch” strikes me as the words of a man in an ivory tower, well stocked with beans and power bars.

    To bad this isn’t ancient Rome, I think you would immensely enjoy the gladiator games. The pain and suffering of others obviously gets you off. No?

  • Ironaddict06

    GoodDotorBad.
    My relatives live on a farm, so I would be able to handle to collapes of society better than most. I do need to stock up on protein bars.
    Yes the BP explosion was horrible, but BP provides thousands of jobs that people need. People complain so much about oil, they don’t realize how much oil, impacts their lives. To many people live in an imagineary world, were they think right now the world can live in a world that produces 100% clean energy and everybody can have it and very cheap.

  • Ironaddict06

    GoodDotorBad.
    My relatives live on a farm, so I would be able to handle to collapes of society better than most. I do need to stock up on protein bars.
    Yes the BP explosion was horrible, but BP provides thousands of jobs that people need. People complain so much about oil, they don’t realize how much oil, impacts their lives. To many people live in an imagineary world, were they think right now the world can live in a world that produces 100% clean energy and everybody can have it and very cheap.

  • Andrew

    Crichton is essentially rejecting the predictive ability and usefulness of science and even of human intelligence itself, and that’s what’s bullshit. He speculates on the future every time he sends a manuscript to a publisher.

  • Andrew

    Crichton is essentially rejecting the predictive ability and usefulness of science and even of human intelligence itself, and that’s what’s bullshit. He speculates on the future every time he sends a manuscript to a publisher.

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