Sep 16, 2010 11:30 AM EDT
The following is an article from the September 30, 2010 issue of Rolling Stone. This issue is available now on newsstands, and via Rolling Stone's premium subscription plan . To read the rest of the new issue, you must be a subscriber to All Access. Already a subscriber? Continue on to The Archives . Not a member and want to learn more? Go to our All Access benefits page .
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.
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Too Big to Fail?
ReplyDeleteShould you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
Warren Buffett