There’s been a few interesting financial stories in case you’ve forgotten that the world is teetering on the edge of some major changes / failures in the currency mechanisms we have come to take for granted as being both stable and real. While the mechanics of the BP spill and attempts to fix it prove riveting reading, it’s worth a look stepping back from the live ROV footage to check out what the rest of the world is doing in the meantime.

So without further fuss, here’s a few tidbits to chew on while you contemplate where to put your retirement or kid’s college fund money…

Money, Capital, Credit, and Bubbles… and what really does happen to Capitalism when growth fails?

I don’t want to get too far into this matter here, but this first article I think really demonstrates a point I’ve come to believe explains our use of money much better than anything else can. In other words, it shows the largely illusory nature of what we believe to be a fixed thing, money, cash, banking, flow of funds, etc.

Bloomberg, Currency Collapse May Stimulate Economic Expansion, BIS Says – June 14

Currency collapses tend to spur a resumption of economic growth rather than fueling a decline in gross domestic product, according to the Bank for International Settlements.
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The positive effects of a weaker currency on GDP, including making local products cheaper than imported goods, may outweigh the negative ones, such as rising inflation. Currency collapses occur when the annual exchange rate drops by about 22 percent, according to the BIS, which identified 79 such episodes, “more commonly in Africa than in Asia or Latin America,” since 1960, Tovar said.

I don’t know about you, but to me this is just weird. It’s like, we’ve created a house built on air, and when we don’t like how high or low our house is, we lower or raise it by huffing and puffing a bit (ie, deflation/inflation of money supply). Again, this is weird. I get the strong feeling I am looking at the Emperor’s New Clothes, ie, there’s actually nothing there at all in that entire global flow of funds, balance of payments, etc.

But I’ve had a sneaking suspicion for a while now that since all this finance stuff is actually just an abstraction, at some point, if the game looks like it’s about to blowup, they might just change the rules of the game. That can look a lot of ways, but it will probably have to happen more or less in relative harmony with the other major players in the first world. In other words, if everyone owes everyone so much money they can’t possibly pay it off, maybe it’s just time to start over. They won’t say this of course. And China will certainly continue on its global buying spree before those dollars lose their value.

My guess is the above story is a trial balloon for some re-evaluation of values. That certainly won’t help you any, but it might stretch this global financial collapse story out a bit longer than it should have run.

And while that story unfolds, hovering around the most elevated parts of the economic stratosphere, there’s a few guys who more or less thought they had a handle on the entire financial game, and thought they could surf any wave that came. Not a bad assumption, by the way, given past performance. I know most of these guys understand that money, capital, is primarily a tool to achieve one’s goals, but especially with Soros lately, it looks like he’s actually getting a bit worried, or confused.

Bloomberg, Soros Says ‘We Have Just Entered Act II’ of Crisis (Update2) – June 10

Billionaire investor George Soros said “we have just entered Act II” of the crisis as Europe’s fiscal woes worsen and governments are pressured to curb budget deficits that may push the global economy back into recession.

“The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.”

Soros, 79, said the current situation in the world economy is “eerily” reminiscent of the 1930s with governments under pressure to narrow their budget deficits at a time when the economic recovery is weak.
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“When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide,” Soros said.
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Credit default swaps, which aim to protect bondholders against the risk of a default, are dangerous and a “license to kill,” Soros said today. CDSs should only be allowed if there is an insurable interest, he said.

And Soros isn’t the only guy who sees big warning signs ahead.

marketwatch.com, Warning: Crash dead ahead. Sell. Get liquid. Now. – May 25

But will Main Street exit? Will we ever learn? No. The Wall Street casino makes mega-billions for insiders like Blankfein and the Goldman Conspiracy. Yet “The Casino” is still below the 2000 record of 11,722. So after accounting for inflation, Wall Street lost over 20% of Main Street’s 401(k) retirement money between 2000 and 2010. Yes, Wall Street’s a big loser the past decade. Their advice is self-serving. Period.

Given their miserable track record, only a fool would bet with Wall Street. Betting odds are Wall Street will lose another 20% in the next decade from 2010-2020. Yes, today’s market is a “buying opportunity,” but only for Wall Street casino insiders like Biggs, Blankfein and even low-level staffers inside “The Casino.” But not for our 95 million Main Street investors, there’s more pain ahead, this market’s dropping.

Correction? New crash imminent, worse than 2008
More proof: Earlier economist Gary Shilling said price-to-earnings ratios are at a “nosebleed 22.5 level.” The Dow was around 11,000. Money manager Jeremy Grantham recently said the market’s overvalued 40%. That could mean a collapse to 6,600. Last week in Reuters’ “Markets Could Be Derailed Again,” George Soros echoed a “game over” warning with a “stark warning … that the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis.”

Now Dow Theory’s Richard Russell is warning the public of an imminent crash: “Sell … get liquid … by the end of this year they won’t recognize the country.”

A bigger meltdown than the credit crisis? Yes, Bush’s team drove America into a ditch. But now Obama and his money men, Summers, Geithner, Bernanke, are digging the hole deeper. Soros says we have not learned “the lessons that markets are inherently unstable.” As a result, “the success in bailing out the system on the previous occasion led to a super-bubble.” Now “we are facing a yet larger bubble.” Worse than 2008?

This is just one guy writing, but people like Soros have a certain track record of being largely right. Definitely more than you or I. Not always, not invariably, but certainly more than the Ivy league types Obama has sadly decided to surround himself with. And noting that we have created nothing more than a ‘super bubble’ of government debt, fulfilling its role as debtor of last resort (that’s before the game ends, the play finishes, and the curtain drops, that is) is hardly new, Doug Noland’s Credit Bubble Bulletin has been pushing that point for years now, ever since the bailouts and government guarantees of risky/ bad / dangerous debt started around 2008.

Over the years, I’ve emphasized the prominent role “Wall Street alchemy” played in fueling Credit Bubble excess. The Street’s astounding capacity to transform risky loans into perceived safe and liquid securities was absolutely fundamental to the Credit Bubble. The OTC derivatives markets – including collateralized debt obligations, asset-backed securities, Credit default swaps, auction-rate securities, etc. – were critical for the intermediation of risky, high-yielding loans into “money”-like securities. This brand of risk intermediation and distortion was instrumental to the historic boom and bust – and this week it returned to the regulation spotlight.

As I’ve attempted to explain over the years, risk intermediation invariably becomes a central issue inherent to protracted Credit Bubbles and their resulting Bubble Economies. The amount of Credit necessary to sustain the Bubbles rises each year. And each passing year requires an increasing (exponentially-rising) amount of riskier Credit. Our government’s massive injection of Credit/purchasing power coupled with interest rate and market liquidity intervention sustained the existing economic structure. As they say, “that’s the good news.”

For the private-sector Credit mechanism to supplant government Credit will require an enormous expansion of risky loans. These risky Credits must then either be held directly by the financial sector or intermediated and sold into the marketplace. Admittedly, this may not be much of an issue today – with government Credit expansion and monetary stimulus abounding. But there is no escaping the harsh reality that acute Credit vulnerability is only held at bay by Trillion dollar deficits and ultra-loose financial conditions. I am skeptical of notions of shrinking deficits and a graceful Fed exit.
Doug Noland, Deficits and Private-Sector Credit, April 23 2010

Thomas Jefferson had something to say on these types of problems as well.

“And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”
Thomas Jefferson to John Taylor, Monticello, 28 May 1816. Ford 11:533.
Jefferson Encyclopedia, wiki.monticello.org – Private Banks

“A spirit… of gambling in our public paper has seized on too many of our citizens, and we fear it will check our commerce, arts, manufactures, and agriculture, unless stopped.” –Thomas Jefferson to William Carmichael, 1791. ME 8:230

“Our public credit is good, but the abundance of paper has produced a spirit of gambling in the funds, which has laid up our ships at the wharves as too slow instruments of profit, and has even disarmed the hand of the tailor of his needle and thimble. They say the evil will cure itself. I wish it may; but I have rarely seen a gamester cured, even by the disasters of his vocation.” –Thomas Jefferson to Gouverneur Morris, 1791. ME 8:241

“All the capital employed in paper speculation is barren and useless, producing, like that on a gaming table, no accession to itself, and is withdrawn from commerce and agriculture where it would have produced addition to the common mass… It nourishes in our citizens habits of vice and idleness instead of industry and morality… It has furnished effectual means of corrupting such a portion of the legislature as turns the balance between the honest voters whichever way it is directed.” –Thomas Jefferson to George Washington, 1792. ME 8:344

“We are now taught to believe that legerdemain tricks upon paper can produce as solid wealth as hard labor in the earth. It is vain for common sense to urge that nothing can produce but nothing; that it is an idle dream to believe in a philosopher’s stone which is to turn everything into gold, and to redeem man from the original sentence of his Maker, ‘in the sweat of his brow shall he eat his bread.'” –Thomas Jefferson to Charles Yancey, 1816. ME 14:381
etext.lib.virginia.edu/jefferson/quotations – Money & Banking

Soros, like Jefferson, is an interesting guy, and I’ve enjoyed reading his thoughts over the years. But as I get older and see how these economic games play out, I am increasingly reminded of that simple statement in the Bible, Timothy: the love of money is the root of all evil.

Note the ‘the love of’ part. Most people put this as just ‘money is the…’, thus missing the key active ingredient required to generate the evil, the pursuit and love of money, an actor, carrying out an action, that is. Note further that it’s extremely unlikely that you would end up being a mega-billionaire like Soros if you did not love money. Unless you were just doing it because you find it to be a fun game, which I will admit is quite possible as well. Or some combination of the two, which is probably the closet to the truth.

I like that quote, by the way, because it seems to be quite accurate, and it’s in the Bible, so our local religious types can’t really argue with it. It is also supported by thousands of years of human tradition, at least the parts of our tradition where we lived in smaller tribal units (that’s probably about 99% of our history in most cases), where excessive collection of private property was generally discouraged via taboo and other strong social restrictions.

In fact, I’d hazard the guess that the observation that the love of money is the root of all evil is a surviving fragment of a much earlier world view. One where an excess of wealth, or more importantly, putting one’s own needs as primary in front of the needs of the social body, was not seen as a positive, but rather as a mark of insanity, or at least sociopathic behavior, to be punished by severe penalties. This doesn’t mean there weren’t rich men, big men, in our societies, just that their primary obligation was to their tribe, not themselves.

Hard concept I know for us to get in our modern world, where we’ve made virtues of vices to greater and greater degrees. For example, few methods would be more successful than a rigorous application of the 7 cardinal sins, at least if one’s goal is to successfully climb the corporate ladder(s) of ones choice.

BP and the financial world – ripples and repercussions spread

Whatever your views of Biblical topics is, one thing’s for certain: we are certainly doing a terrible job taking care of our environment. You know, the place you live? The only place you have to live in fact, no matter how far you drive, fly, ride, bus, sail, submarine, or just plain walk.

This problem is being highlighted by the BP Gulf Oil Spill, which is starting to send some ripples down into the fundamental fabrics of the web that generates our daily lives, especially in that surreal zone known as the financial sector.

BP has come to illustrate a single very disturbing thing to me, namely that during the financial crisis, the Bush/Obama administrations maintained that there was nothing they could do, they had to bail out the financial industries (sic – calling these things industries when they produce nothing is an obscene abuse of language) in question, etc, because our system couldn’t survive without them. Also discussion of the nature of contract law was brought up repeatedly, ie, it was not possible to violate the terms of existing contracts, so creditors had to be paid off.

Apparently, when it comes to concrete, material problems, we can do whatever we want, however we want in terms of government taking control of, and even possibly dismantling, offending corporate entities such as BP. Entities, I might add, that produce the life blood of our system, oil. At least such talk is certainly not off the table at this point. Odd that such options magically wouldn’t apply to something far more ephemeral, in fact, I’d argue, illusory, not to mention parasitically worthless, like the massive groups engaging in high risk financial speculations of the most arcane, indeed, metaphysical sorts (Credit Default Swaps, Securitized mortages, etc…), eg. AIG, Goldman Sachs, BofA, Chase, Citibank… kind of makes you think, no?

If you’ll recall, above I questioned a bit how we view things like money. No matter how you decide to view this yourself, one thing is for certain: a certain amount of money in general gives you access to a certain amount of resources, or control over them.

So watching BP as it stumbles around like a boxer getting his face slammed by an invisible opponent is pretty interesting. As is watching the system that the oil they produced for in the first place try to handle a failure of this magnitude. I’d call this a game changer, in fact, even though the term ‘Black Swan‘ is massively overused, I’d have to say if anything qualifies for a Black Swan event, the BP blowout/oil spill has to be that.

Just watch the stuff unfold, in real time, piece by piece.

Bloomberg, BP Bankruptcy Would Offer No Protection From Costs – June 15

June 15 (Bloomberg) –BP Plc, whose potential liability for the Gulf of Mexico oil spill has lawmakers and analysts raising the specter of bankruptcy, would be unlikely to avoid paying claims by seeking court protection, restructuring experts said.
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The U.K. energy company faces more than 200 lawsuits, and the U.S. is assessing the cost of restoring natural resources destroyed or fouled by the spill. BP’s liabilities include $37 billion in cleanup and potential litigation expenses, according to a June 2 Credit Suisse report. While a U.S. bankruptcy may halt many claims, it wouldn’t allow BP to avoid paying for most of the cleanup and damages, said New York bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf LLP.
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BP said it won’t seek court protection. “We categorically deny those rumors,” said David Nicholas, a company spokesman.
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BP, the largest oil and gas producer in the Gulf of Mexico, may put all or part of the company into Chapter 11 bankruptcy, said Lynn Lopucki, a law professor at the University of California, Los Angeles. That would immediately halt spill litigation against it and place all claims under the control of the bankruptcy judge, he said.

Now, I don’t know about you, but everytime I see a company or politician categorically deny rumour x or y, that rumour is almost always true. Almost doesn’t mean always, but it’s very common, especially when such rumours hit the corporate type media. If you haven’t noticed this, my guess is you just haven’t been paying attention.

But wait a moment, what’s that we hear in the distance? It’s the cavalry, thundering up on their mighty steeds to restore peace and order.

In other words, BP has a lot to lose if they try to weasel out of their debts and obligations. If, that is, they determine that in fact they must strive to maximize shareholder value, the essential requirement of all corporations, especially the ones operating in the USA. In other words, if they try to cut and run. But watch how this game plays out, it’s interesting. Keep in mind the global big picture. The US consumes about 20-25% of global oil production, and has about 2% of global oil reserves. And has to import about 50% of their oil. Big market. Big profits. Wouldn’t want to lose such a market, now would we?

Bloomberg, BP May Lose U.S. Oil Leases, Contracts After Spill – June 14

BP Plc may lose control of its U.S. oil and natural gas wells and be barred from doing business with the federal government as punishment for the worst oil spill in U.S. history, industry and regulatory analysts said.

President Barack Obama and lawmakers are debating penalties that would cripple the company’s ability to do business in the U.S. as public outrage intensifies. In addition to BP’s culpability in the Gulf of Mexico spill, a 2005 explosion at BP’s Texas City refinery that killed 15 workers and a 2006 pipeline leak that dumped 200,000 gallons of crude at Prudhoe Bay, Alaska, will figure in the debate, said Michael Wara, associate professor of environmental law at Stanford University in Palo Alto, California.

“The government weighs whether there is a pattern and practice,” Wara said. “They’ll consider whether BP runs these incredibly complicated systems, where accidents can and sometimes do happen, or whether the company has a culture that disfavors safety and environmental compliance.”

And it’s not just about a few contracts, threats are being floated left and right as well, looks like the government really wants to get BP’s attention. That’s my take on it anyway.

news.com.au, BP executives could face 15 years’ jail – June 14

BP executives could face up to 15 years in jail for their role in the Deepwater Horizon oil disaster, legal experts say.

The advice from US legal experts came as executives from the world’s other major oil companies separately claimed the accident “was preventable,” reports said.

Jody Freeman, Professor of Environmental Law at Harvard Law School, told The (London) Times that if criminal negligence could be proved then “the law certainly provides for prison for environmental crimes”.
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The warning came as executives from Exxon-Mobil, Shell, Chevron and ConocoPhillips prepared to distance themselves from BP, according to planned statements seen by Financial Times sources.

The oil industry leaders were planning to testify in front of a subcommittee of the US House energy and commerce committee tomorrow that the oil spill in the Gulf of Mexico would have been “preventable” if BP had followed the industry’s “best practices,” the sources said.

The rest of the oil industry is more than happy to sacrifice BP at the altar to save their own skins. And to pick over the that delectable corpse of BP. All that lovely oil, all those resources, all those oil leases… Talk about jackals circling in for the kill.

Interesting, no? You can see the game unfolding, more and more rapidly. Remember, inside BP, there are guys who want to win the game. They don’t care about anything outside winning. Those guys have power in the company, you can rest assured of that, they wouldn’t be who they were if they didn’t. And they are watching that power get dismantled as BP stock value plummets almost daily. Every major company has these guys, some are so good at the game they become their own game, like Soros, Warren Buffet, Jim Rogers.

So these guys, sitting in BP, are going to try to do something to preserve their power and status. And wealth, of course. This is why they play the game, they don’t care about you or me, the game is everything to them.

And other big players are taking note as well, as you can see here:

Reuters, BofA to limit duration of trades with BP – June 15

Bank of America Merrill Lynch (BAC.N) has ordered its traders not to enter into oil trades with BP Plc (BP.L) that extend beyond June 2011, a market source familiar with the directive told Reuters.

The order to the bank’s traders came from a high-level executive and was made on Monday, according to a source familiar with it. It told traders not to engage in trade with BP for contracts beyond one year from this month.
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Limiting the duration of trades with a counterparty is one way in which banks can seek to protect themselves against risk that a company will be unable to meet its long-term obligations.

A BofA spokesman declined comment.

Groovy, no? Big games among the big boys. Translation: Bank of America sees a high probability of BP exiting the play stage right (or left, the precise scenario still remains to be worked out). So high, in fact, that they no longer want to play along.

So of course, BP gets the biggest boys on the block in their corner, Goldman Sachs highlighted as if they needed further highlighting. When the going gets tough, hire Goldman and anyone else you can find. I don’t know about you, but I think Goldman Sachs needs to be dismantled, now. It has its fingers in too many pies, and it does nothing to make this world a better place. In fact, when it comes to loving money, they have to be front and center.

NY Times, BP Hires Financial Advisers as Pressure Mounts – June 14

BP has hired several investment banks, including Goldman Sachs, the Blackstone Group and Credit Suisse, to advise on its options as it faces financial and political pressure over the Gulf of Mexico oil spill, people briefed on the matter told DealBook on Monday.

Among the matters the advisers have been asked to study are ways to handle BP’s mounting liabilities, one of these people said. The Obama administration has put pressure on the company to set aside money in escrow to finance potential liability claims and to withhold paying out its dividend.

BP has also been the subject of takeover speculation on Wall Street, another possibility that the advisers may be asked to consider.

Note especially the takeover rumours. Such takeover rumors aren’t rocket science. Just add cost to buy company stocks, then compare to value of company assets, oil in this case, then subtract debt, liabilities, etc. You know, the stuff BP will try to get rid of using some financial gimics and devices like splitting itself into new entities.

NY Times, Imagining the Worst in BP’s Future – June 8

The idea that BP might one day file for bankruptcy, particularly as part of a merger that would enable it to cordon off its liabilities from the spill, is starting to percolate on Wall Street. Bankers and lawyers are already sizing up potential deals (and counting their potential fees).

Given the plunge in BP’s share price — the company has lost more than a third of its value since Deepwater Horizon blew — some bankers and analysts say BP is starting to look like takeover bait. The question is, who would buy BP, given its enormous potential liabilities?

Shell and Exxon Mobil are both said to be licking their chops. And already, flinty legal minds are dreaming up scenarios in which BP would file a prepackaged bankruptcy and separate the costs of the cleanup — and potentially billions of dollars in legal claims — into a separate corporate entity.

Tony Hayward, BP’s chief executive, has insisted that his giant will weather this storm. BP is indeed a money machine: it turned a profit of nearly $17 billion last year.

Remember also why we even have corporations: to minimize risk to investors / creditors / and, most important, company officers, CEOs, boards, and so on. Maybe it’s time to let those people carry a bit more of the risk. When you look back at the history of corporations, they didn’t have this type of power or control over policy/politics in the past, and they don’t need to have it today.

And on and on it goes. Where it stops, nobody knows.

And if that wasn’t bad enough, Worst Locust Plague in Two Decades Threatens Australian Harvest! Sometimes you just can’t win, but you just have to keep going anyway, as if you had a choice in the matter.

This entry was posted on Tuesday, June 15th, 2010 at 22:00 and is filed under Our World, Reflections. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.