Exxon Valdez and the birth of credit default swaps

[Jefferson23]

Commentary: Derivatives business owes much to an earlier spill

May 3, 2010


By MarketWatch
SAN FRANCISCO (MarketWatch) -- 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 (BP 50.00, -0.19, -0.38%) 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(XOM 67.85, +0.01, +0.02%) . 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 (JPM 43.56, +0.03, +0.07%) .

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.

-- Jim Jelter

http://www.marketwatch.com/story/exxon-valdez-and-the-birth-of-credit-default-swaps-2010-05-03

[BrklynLiberal]

1. Unintended consequences...That will be the theme for this century

[RandomThoughts]

2. If they make that claim, that they did not know what they were created

Then they should help put it to bed with good regulation and transparency, and moderation.

Otherwise it is just talk.

What is their intent, what is important?

[lib2DaBone]

3. If Mr. Obama does not outlaw Credit Default Swaps or tax them out of existance...

Goldman Sachs and the Hedge-Fund-Vampires will destroy this country.