BP bankruptcy could spark new derivatives crash, “bigger than Lehman”

July 11, 2010
By Tracy R Twyman

Gordon T. Long of Market Oracle is warning of a new credit crisis if BP files for bankruptcy which could be greater than that caused by the collapse of Lehman Brothers in 2008. This is because of BP’s activities as a provider of credit, and their involvement in the global over-the-counter derivatives market. Since BP has historically been a cash-generating giant, it has been able to borrow tremendous amounts of money at low interest and loan it out for higher interest. According to Moody’s, the bankruptcy of BP, or any of the other companies and subsidiaries involved in the oil spill, could affect a full 18% of the total global market of Collateralized Synthetic Obligations.

BP has already been dropped to BBB by the credit rating agency, while two other companies connected to the Deepwater Horizon disaster, Transocean and Anadarko, were recently downgraded from “stable” to “negative.” The article on Market Oracle noted that BP has recently been “aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt, and equity portfolios,” and that major banks, like Bank of America, have significantly shifted their BP holdings lately, all of which indicates a potentially seismic “credit event” is about to unfold. The article quotes an analyst named Jim Sinclair as saying “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.”

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