Re: "Shale will be much bigger than subprime."

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Re: "Shale will be much bigger than subprime."

Postby MacCruiskeen » Mon Nov 03, 2014 8:03 pm

Fracking Wells Abandoned in Boom/Bust Cycle. Who Will Pay to Cap Them?
January 4, 2014

Image

NYTimes:

The companies that once operated the wells have all but vanished into the prairie, many seeking bankruptcy protection and unable to pay the cost of reclaiming the land they leased. Recent estimates have put the number of abandoned drilling operations in Wyoming at more than 1,200, and state officials said several thousand more might soon be orphaned by their operators.

Wyoming officials are now trying to address the problem amid concerns from landowners that the wells could contaminate groundwater and are a blight on the land.

This month, Gov. Matt Mead proposed allocating $3 million to pay for plugging the wells and reclaiming the land around them. And the issue is expected to be debated during next year’s legislative session as lawmakers seek to hold drilling companies more accountable.

“The downturn in natural gas prices has forced small operators out of business, and the problem has really accelerated over the last couple of years,” said the governor’s policy director, Shawn Reese. “Landowners would like their land to be brought back to a productive status and have orphaned wells cleaned up.” [...]

http://climatecrocks.com/2014/01/04/fra ... -cap-them/
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Re: "Shale will be much bigger than subprime."

Postby seemslikeadream » Fri Nov 07, 2014 12:28 pm

WEEKEND EDITION NOVEMBER 7-9, 2014

They're Baaaaack...
Bush Family Play Central Role in Lawsuits Against Denton, Texas Fracking Ban
by STEVE HORN
On November 4, Denton, Texas, became the first city in the state to ban the process of hydraulic fracturing (“fracking”) when 59 percent of voters cast ballots in favor of the initiative. It did so in the heart of the Barnett Shalebasin, where George Mitchell — the “father of fracking” — drilled the first sample wells for his company Mitchell Energy.
As promised by the oil and gas industryand by Texas Railroad Commission commissioner David Porter, the vote was met with immediate legal backlash. Both theTexas General Land Office and the Texas Oil and Gas Association (TXOGA) filed lawsuits in Texas courts within roughly 12 hours of the vote taking place, the latest actions in the aggressive months-long campaign by the industry and theTexas state government to fend off the ban.

The Land Office and TXOGA lawsuits, besides making similar legal arguments about state law preempting local law under the Texas Constitution, share something else in common: ties to former President George W. Bush and the Bush family at large.

In the Land Office legal case, though current land commissioner Jerry Pattersonsigned off on the lawsuit, he will soon depart from office. And George Prescott Bush — son of former Florida Governor and prospective 2016 Republican Party presidential nominee Jeb Bush and nephew of former President George W. Bush — will take his place.

George P. Bush won his land commissioner race in a landslide, gaining 61 percent of the vote. Given the cumbersome and lengthy nature of litigation in the U.S., it appears the Land Office case will have only just begun by the time Bush assumes the office.

The TXOGA legal complaint was filed by a powerful team of attorneys working at the firm Baker Botts, the international law firm named after the familial descendants of James A. Baker III, a partner at the firm.

Baker III served as chief-of-staff under both President Ronald Reagan and President George H.W. Bush, Secretary of State under George H.W. Bush and as a close advisor to President George W. Bush on the U.S. occupation of Iraq. He gave George P. Bush a $10,000 donation for his campaign for his race for land commissioner.

The Energy Policy Act of 2005, which exempts the oil and gas industry from the Safe Drinking Water Act, the Clean Water Act and the National Environmental Policy Act for fracking, is seen by critics as the legacy of ashes left behind by the George W. Bush Administration.

Yet almost a decade later, the two lawsuits filed against Denton show the Bush oil and gas legacy clearly lives on and stretches from the state where the fracking industry was born all the way to Iraq and back again.

Jeb and George P. Bush: Fracking Investors

Besides sharing blood as father and son, Jeb Bush and George P. Bush also operate inside the world of fracking finance.

Jeb works at the firm Britton Hill Holdings LLC, while George Prescott works at St. Augustine Capital Partners and served a short-lived stint on the board of directors of the Midland, Texas-based fracking exploration and production company, Arbella Exploration from February through September.

“Its first investments have been tied to the exploitation of shale oil and gas in the U.S.,” explained an article in Bloomberg. “Britton Hill raised more than $40 million for its first fund in May 2013, according to a private placement notice filed with the SEC at the time.”

Britton Hill has investments in a company fracking in the Marcellus Shale basinand another that owns a fleet of gas carriers seeking to export U.S. propane to Asia. Mitch Jones, common resources director for Food and Water Watch, wrote a blog post critical of Jeb Bush and Britton Hill the day the Bloomberg article came out.

“These relationships, where politicians move between Washington and Wall Street, between government and finance and resource exploitation, is another reason why we need to get money out of politics,” wrote Jones. “It’s these sorts of relationships that corrupt our system and provide the permanent political-business elite with their hold on our government.”

The critique promulgated by Jones about Jeb Bush could just as easily apply to his son, who recently said his father is “more than likely” to run for president in 2016.

According to multiple press accounts and an independent DeSmogBlog review of Texas campaign finance data, George P. Bush took hundreds of thousands of dollars from the oil and gas industry in his land commissioner electoral race. He also received the endorsement of the Texas Oil and Gas Association’s political action committee, the plaintiff for the other lawsuit.

George P. Bush fully appreciates the role a strong domestic energy industry plays in ensuring our state and our nation’s prosperity and security,” Robert L. Looney, president of the Texas Oil and Gas PAC stated in endorsing him. “Mr. Bush is committed to advancing public policy that ensures Texas oil and gas producers can power our state forward and create good-paying jobs.”

Like Britton Hill Holdings, St. Augustine Capital Partners also invests in fracking,according to its website.

“St. Augustine has participated in partnerships with seasoned operators to develop drilling programs in the Marcellus and Permian Basins, in addition to offering financial advisory services for those opportunities,” St. Augustine explains.

“St. Augustine provides business development for dynamic middle-market service companies ranging from liquid storage construction to logistical operations,” the firm further details. “Additionally, St. Augustine has participated as a general partner for numerous oil and gas exploration and production related projects in a variety of geological formations.”

The firm also “has worked closely with” the Texas Railroad Commission, according to its website.

In the months leading up to the Denton vote, the Railroad Commission situated itself as the industry’s go-to spin machine in the attempt to discredit activists fighting for a fracking ban. Railroad commissioner David Porter, who formerly worked as an oil and gas industry accountant, was also one of the first entities out of the block to say an affirmative ban vote in Denton would receive ruthless contestation by the Texas government.

Serving as land commissioner in Texas is often a resume padder before running for governor, an article about George P. Bush published in GreenWire explained.

“[The] Texas land commissioner [is] a powerful post that controls the state’s oil and gas contracts,” the article explains. “Every land commissioner in the past three decades has gone on to run for lieutenant governor or governor.”

Baker Botts: From Texas to Iraq and Back

One of the co-counsel for Baker Botts in its lawsuit against the City of Denton isEvan Young, part of a powerful legal cadre that includes former Texas Supreme Court Justice Thomas Phillips. Phillips testified in front of the Denton City Council in July in opposition to the Denton fracking ban proposal on behalf of TXOGA (see video below, starting at 6:25).

Phillips also concurrently works on the legal defense team for former Texas Republican Governor Rick Perry — 2012 Republican Party presidential nominee and former chair of the powerful Interstate Oil and Gas Compact Commission — who faces state-level felony charges in Travis County for abuse of power.

According to his Baker Botts biography, Young formerly clerked for the conservative U.S. Supreme Court Justice Antonin Scalia and worked as legal counsel in the Office of the Attorney General under Attorneys General Alberto R. Gonzales and Michael B. Mukasey from 2006 through the end of the presidency of George W. Bush.

“While on the Attorney General’s staff, he accepted a detail to the U.S. Embassy in Baghdad, Iraq,” explains his Baker Botts biographical sketch, “where he was the Deputy Rule of Law Coordinator. In that position he worked to assist the Iraqi government in its efforts to strengthen its legal regime.”

Among the legal regimes Baker Botts helped create while Young was still working for the U.S. Department of Justice was one helping oil flow out of the ground in occupied Iraq and into the U.S. As of 2012, the U.S. is one of the world’s biggest importers of Iraqi crude, according to the U.S. Energy Information Agency (EIA).

An article published by American Lawyer in 2007 explains that Baker Botts helped cut a controversial legal deal between Hunt Oil and the Kurdish Regional Government (KRG).

That deal gave Hunt the right to explore oil in Kurdistan, the first U.S. company given the green light to do so. The Iraqi Constitution that the U.S. helped writesays making such a move is illegal.

“Not only was the deal made in a war zone, but Iraq is still working on oil resources legislation,” wrote American Lawyer. “Under the October 2005 Iraqi Constitution, local oil is owned by ‘the Iraqi people.’ “

Ray Hunt, CEO of Hunt Oil Company, gave George P. Bush $25,000 for his campaign according to Texas campaign finance data. And the Baker Botts Amicus Fund gave him $2,000 worth of donations, with Young and Phillips each donating $500 to get George P. Bush elected.

In late July, Iraq’s Oil Ministry launched a lawsuit against the Kurdish Regional Government in a U.S. District Court in Houston for what it says is a million barrels of illegally stolen oil exported out of Kurdistan — which is still sitting on a tanker called the United Kalyvryta 60 miles off the coast of Texas in Galveston Bay.

The Oil Ministry pointed to the Iraqi Constitution in its lawsuit as the legal precedent.

In March 2014, just months before the Iraqi government brought the lawsuit, Baker Botts published a legal memo on the legal and geopolitical ramifications of Kurdish oil exports.

Constitutional, “Big Government” Double Standards?

Though Baker Botts cited the Texas Constitution in its lawsuit against the City of Denton, the Iraqi Constitution was disposable for the firm and its client Hunt Oil when it came to procuring oil exploration and exportation rights in Kurdistan.

Baker Botts’ counsel also seems to have brushed aside concerns by both the U.S.and Iraqi government that the extra legal maneuvering for oil exploration and production rights in the area would create regional instability, the blowback of which is now visible in the form of the ascendant and lethal Islamic State.

Further, Sharon Wilson, an organizer for Earthworks — an environmental group that campaigned for the fracking ban in Denton — pointed to a quote from George P. Bush back in October. “Enough…big government solutions to our problems,” George P. Bush said at an October event his father Jeb Bush also spoke at.

“Denton residents, not politicians, directly spoke in overwhelming numbers that they don’t want fracking in their city,” Wilson told DeSmogBlog. “Overturning the will of the people by government fiat is the very definition of big government. George P. is going to have to put his money where his mouth is or decide if his mouth is where his money comes from.”
Mazars and Deutsche Bank could have ended this nightmare before it started.
They could still get him out of office.
But instead, they want mass death.
Don’t forget that.
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Re: "Shale will be much bigger than subprime."

Postby Lord Balto » Sat Nov 08, 2014 2:44 am

Good analysis of how fracking arithmetic doesn't add up from Max Keiser and Stacy Herbert.
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Re: "Shale will be much bigger than subprime."

Postby stillrobertpaulsen » Mon Nov 17, 2014 8:22 pm

From several months back, but belongs in this thread:

Shale's junk debt could get shaky if Fed raises rates

Independent oil, gas producers still dependent on the risks that come with speculative-grade bonds

By Collin Eaton
June 27, 2014

Image
Shale producers like Chesapeake Energy, which operates this rig in Ohio's Utica Shale, rely on debt that could be less available if the Federal Reserve raises interest rates.

Two years after natural gas prices collapsed, Chesapeake Energy's $12 billion in corporate debt last month nearly made it out of junk territory.

The natural gas producer has sold off thousands of acres, curbed billions in spending, cut a tenth of its workforce and banished its chief executive in the effort to trim a debt-laden balance sheet.

A credit upgrade in May signaled progress, but hardly an end to an episode that has highlighted the dangers of the U.S. shale industry's addiction to risky debt.

Corporate bond investors, eager to buy high-yield bonds from U.S. independent oil and gas producers, have tripled the sector's junk-rated debt (formally called speculative-grade) to $788 billion since the shale energy surge began seven years ago. But next year, the Federal Reserve may tap the brakes.

St. Louis Fed President James Bullard sent a jolt through equity markets Thursday when he speculated the nation's economy could be ready for higher interest rates by the first quarter of next year.

But the gatekeeper of the nation's money supply already has signaled it is planning to end its multibillion-dollar bond-buying program by the end of the year, and then begin to raise short-term interest rates toward historically typical levels from the near-zero rates that helped jump-start the recovery.

Higher interest rates might make risky new bond issues by shale producers less attractive, and a flight of investor capital could leave the producers short on a commodity even more precious than oil: Cash.

"This might work out for a single producer in the Eagle Ford or the Bakken, but for an industry as a whole, this is not very sustainable," said Vivendra Chauhan, a London-based analyst with Energy Aspects. A survey of 35 U.S. oil and gas producers by Energy Aspects showed their revenue and capital expenditures were essentially one to one.

"What that tells us is it's an operation heavily dependent on debt. Any cash you're bringing in is being consumed by capital expenditures," Chauhan said. "This becomes a 2015, 2016 story about what happens when interest rates do rise. If they stop lending, you'll get a pullback in production growth."

Speculative-grade bonds are considered extremely risky investments by major credit-rating agencies such as Moody's Investors Service and Standard & Poors.

By law, banks can't buy them, and in adverse conditions, the companies that issue them may never pay them back.

Some investors take on that risk in exchange for the higher yield junk bonds offer. But if the Fed pushes up interest rates on less risky debt, safer bonds become more attractive to investors.

U.S. independent oil and gas producers sold $2.3 billion in such bonds in the first three months of 2014, about half of all the corporate bond debt they took on in the period, according to data compiled by Bloomberg.

Tulsa, Okla.-based Laredo Petroleum garnered the most from its high-yield bond issuance at $450 million in the first quarter.

About 80 percent of the 115 exploration-and-production firms that Moody's Investors Service follows are junk rated, as are more than 70 of the 97 companies under Standard & Poor's purview.

Financially healthy

Most of the speculative-grade companies are financially healthy since the industry shifted its focus from natural gas shale to more lucrative oil plays, said Marc Bromberg, a credit analyst with Standard & Poor's.

But the companies typically are small, he said. They don't have the cash flow to be flexible under adverse conditions such as sinking oil prices.

And the oil industry has never encountered anything quite like North American shale plays.

Shale rock has far less porosity and permeability than conventional reservoirs, and extracting hydrocarbons from it requires a combination of horizontal drilling and the completion process called hydraulic fracturing - blasting water, chemicals and sand or other particles called proppant into a well under pressure to release oil or gas molecules.

It's about eight times more expensive than drilling a conventional well, and because the rock is so dense, production rates decline rapidly.

The U.S. Energy Information Administration projects that nearly four of every five new barrels of oil produced in North Dakota's Bakken Shale and South Texas' Eagle Ford Shale simply replace output lost to the high depletion rates.

And, on average, oil companies extract only 1 percent to 2 percent of the oil in tight reservoirs, with even the richer areas called "sweet spots" yielding only 5 percent to 6 percent of their crude, according to a recent study by the Oxford Institute for Energy Studies.

Production rates

Shale companies outspend their cash flow to keep their production rates up, and results get poorer but more expensive as operators drill farther away from a play's best areas.

Production from shale wells typically falls 65 percent to 90 percent in their first year, according to the Oxford Institute.

Even new technologies that make drilling cheaper and more efficient, such as multi-well pads, are running into geological constraints, said Michelle Foss, chief energy economist for the Bureau of Economic Geology at the University of Texas.

"I think what everyone is beginning to see related to all of this is a limit to drilling efficiencies," Foss said. "It looks like the same ground is getting tread and there are real limits in the geology. It's a reality in these plays. It's so hard to stabilize production."

The oil industry is set to spend a record $165 billion on exploration and production activities in the United States this year, up 9.6 percent over last year, according to Barclays. It's the second-most active spending region in the world after the Middle East.

Price collapse

Adding high levels of debt only speeds up the treadmill, said Deborah Lawrence Rogers, a former investment banker, corporate and federal policy adviser and founder of Energy Policy Forum.

When natural gas prices began to collapse two years ago, she said, high debt levels forced many U.S. shale-gas companies to keep producing, even though reining in production might have helped slow the price plunge.

Rogers said many shale producers haven't had a year of positive cash flow since 2009, and when a company has not had free cash flow for several years, it's generally "a big red flag."

Writing off assets

Much of the shale acreage hasn't proved as valuable as its purchasers expected. Since the beginning of the shale bonanza, companies have written off $35 billion in assets, said the Oxford Institute.

Since the shale land rush diminished a couple of years ago, however, credit ratings for many independent oil producers have improved.

They're putting their capital into production instead of land purchases, and many will likely see significant growth in free cash flow over the next year, said Stephen Trauber, head of global energy investment banking at Citigroup in Houston.

Even if some companies face financial pressure, "it's such a fragmented industry, there are so many companies available to acquire assets," he said. "I don't think it's a major concern."

International tension in Iran, Libya and Iraq has elevated oil prices well above the mark that many analysts projected last year, when U.S. supplies looked to be forming a glut. But that may not last.

'Breathing room'

"All we've done right now is bought some breathing room," Foss said. "It might make the drop all the more unpleasant."

She said the price of international benchmark Brent crude, which ended last week at $113.30 a barrel, is approaching a level that could be detrimental to the global economy.

In addition to international conflicts, activist shareholders' push for major oil companies, including Exxon Mobil, Royal Dutch Shell and Total, to exercise a new capital restraint probably will push oil prices up as production falls, Barclays analyst James West wrote in a report earlier this month. The industry saw a similar climb in crude prices in 2004 and 2005 after the majors pulled back spending.

If interest rates were to rise significantly, it would dramatically affect new bond issuances, but at the rate the Federal Reserve and the market are moving, borrowing costs may not be affected much for a long time, said Christopher Zook, chairman and chief investment officer of CAZ Investments in Houston.

"I'd be more concerned about economic weakness," Zook said.
"Huey Long once said, “Fascism will come to America in the name of anti-fascism.” I'm afraid, based on my own experience, that fascism will come to America in the name of national security."
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Re: "Shale will be much bigger than subprime."

Postby seemslikeadream » Sat Nov 29, 2014 9:09 pm

THU NOV 27, 2014 AT 12:16 PM PST
The Fracking Boom Just Went Bust
byDisappointedDemforDisappointedDem

Opec chose not to decrease oil production today. Oil (WTI) closed as 69.05 / bbl.

To quote a Russian oligarch reported via Bloomberg:

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

To give you some idea of what is likely to happen, here is a chart of oils, inflation adjusted, historical oil prices:
Image
If prices revert to the mean, oil is going down to a range between $20 and $40. Even if it does not, most shale plays (requiring fracking) just went belly up. Bloomberg has a nice chart on the subject:
Image
So what does this all mean?

Image
1. Natural gas prices are going to rise. Shale wells spew out a lot of natural gas (and oil). This has crashed the price of natural gas.


2. Rising natural gas prices mean that wind and solar just got a lot more competitive. Actually utility scale wind has been competitive for quite some time. From the New York Times:
According to a study by the investment banking firm Lazard, the cost of utility-scale solar energy is as low as 5.6 cents a kilowatt-hour, and wind is as low as 1.4 cents. In comparison, natural gas comes at 6.1 cents a kilowatt-hour on the low end and coal at 6.6 cents. Without subsidies, the firm’s analysis shows, solar costs about 7.2 cents a kilowatt-hour at the low end, with wind at 3.7 cents.

3. A transition to Electric Vehicles (EVs) is now a national security issue. This is the second time that OPEC has crashed oil prices when American production began to ramp up, the first being in 1986. Energy independence is a laudable goal, OPEC isn't going to let that happen. The only way to end geopolitical reliance on the middle east is to end our reliance on oil as a transportation fuel.
4. Somebody is holding a bunch of junk bonds issued by drillers. Most of these will probably default. If banks or retirement funds are holding these things, we could have a problem. If its mainly hedge funds, well hedge fund performance hasn't kept up with inflation this year, let alone the S&P 500 (or the yield on the 10-year treasury!). I'm not sure what will happen if hedge funds lose yet more money, but it isn't exactly going to be unexpected.

5. A number of red states are toast. It seems like a larger commodity bubble is bursting. I once had the mayor of a town in the East Texas oil patch explain it to me. When oil prices are going up you can do no wrong. When they go down you are an idiot no matter what you do. The current crop of Republicans are an adequate choice if your income is tied to commodities with prices that are, essentially, uncorrelated to your leaders ability to govern. They, probably cannot deal effectively with a boom cycle turning into a bust.

6. Unemployment will now do some whacky things. Employment growth has been strongest in energy producing states. Falling oil prices might stimulate the economy, but this may not be enough to offset job loses in the energy sector. A strong fiscal stimulus plan with provisions aimed at helping rural America would seem to be called for. Unfortunately, see point number 5 above.

7. Extreme political instability is possible in the United States. It's the economy, stupid. It's always the economy, stupid. That doesn't mean we are not going to see an ideological freak show as the Republicans try to distract from dismal red state economic performance.

Edit - Just to be clear higher natural gas prices - most likely - mean a shift to cleaner energy sources. New coal plants face major hurdles. Improved fuel economy in motor vehicles has more to do with government action than the willingness of automakers to produce cars the acceptable fuel economy and performance.

Sources of CO2 as per the EPA.


1:05 PM PT: Background on OPEC from Bloomberg:

The last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans.
In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow. As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers.

“1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.”

Yes the Saudi's are trying to drive American oil producers out of business. The fact that this move will also hurt ISIS and Iran is an added bonus.
Mazars and Deutsche Bank could have ended this nightmare before it started.
They could still get him out of office.
But instead, they want mass death.
Don’t forget that.
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Re: Re: "Shale will be much bigger than subprime."

Postby Wombaticus Rex » Fri Dec 19, 2014 4:51 pm

Very interesting letter in today's FT:

Sir, Gavyn Davies considers (FT.com, December 14) whether the collapse in oil prices could lead to a larger financial shock and concludes that it is unlikely. There is a very important transmission mechanism that could ensure that problems in the energy sector reverberate across the global financial system. Credit derivatives.

The exposure of US insured banks to derivatives stood at $236.8tn at the end of June 2014. More specifically, US banks had an exposure of $10.4tn to credit default swaps with around $2.6tn subinvestment grade. About 16 per cent of the US high yield market relates to energy companies. With oil prices below $60 per barrel, 30 per cent of US subinvestment grade energy companies could end up in restructuring or default. This means that banks could have to pay out on more than $135bn of credit default swaps.

However, that is a conservative estimate. If defaults from the energy sector spread out more widely across the high yield bond markets, payouts on credit default swaps could be much higher. There are also other derivative products such as structured notes that have been sold by banks to investors that are related to the oil price and could cause large losses for investors.

Increased volatility in commodity derivatives usually spreads across related asset classes and causes losses in interest rate derivatives (where US banks have $192tn of exposure) and foreign exchange ($31tn of exposure). Losses in one segment of the market can become contagious because of the interrelationships between the different asset classes and also the counterparties that trade them.

We do not know how these counterparties manage their exposure, hedging and risks, so as a result losses often appear in unexpected ways and places. We saw this in the last financial crisis when it was discovered that AIG was highly exposed to the US housing market (a surprise to many people) as a result of selling credit default swaps based on subprime mortgages.

There is unlikely to be a happy ending to falling oil prices for highly leveraged US energy companies, and it is wrong to assume that there is no interconnectedness between the companies, banks, hedge funds and other organisations that trade derivatives based on the oil price.

One should also not assume that losses in one sector and among one group of counterparties can be contained and contagion can be so easily prevented.

Peter Lewis

Peter Lewis Consulting (China) Limited,

Shouson Hill, Hong Kong
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Re: Re: "Shale will be much bigger than subprime."

Postby MacCruiskeen » Fri Dec 19, 2014 5:23 pm

Peter Lewis in the FT wrote:There is unlikely to be a happy ending to falling oil prices for highly leveraged US energy companies, and it is wrong to assume that there is no interconnectedness between the companies, banks, hedge funds and other organisations that trade derivatives based on the oil price.

One should also not assume that losses in one sector and among one group of counterparties can be contained and contagion can be so easily prevented.


WR, what's your view of all this? How serious could it get?

Don't want to sound as if I'm giving you a homework assignment, but your understanding of money is far greater than mine and I'm lost here. Certainly someone is playing a very high-risks game in forcing down oil prices right now, and the Saudis can hardly be operating without the Empire's explicit approval (i.e., under their orders). But would those global playas really risk the collapse of the entire global economy? Maybe they would.

Maybe they would.
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Re: Re: "Shale will be much bigger than subprime."

Postby Wombaticus Rex » Fri Dec 19, 2014 6:02 pm

Well, that is a tough question. The supercontext here is a global carbon crisis, so it is quite serious indeed and will continue to be -- yet at the same time, I don't mean to imply that we're all going to be living out "Mad Max" prior to the new version actually reaching theaters, you know? We're spectators with great seats.

I'd say the most important caveat here is that the "entire global economy" is backstopped by organizations with effectively infinite spending power. When a financial crisis hits, winners and losers are chosen.

No, wait: perhaps a more important caveat is that despite years of reading sunk into the project, my "understanding of money" is probably precisely like your own -- ie, I do not understand it. Yes, I happen to have a day job in the economics field, talk with economists every day, and I'm conversant enough with the concepts and nomenclature to be understood by experts and treated like a competent mammal, but....you know, I'm not just convinced that there's any communication about the real world happening there. Likewise, I have friends in the fields of philosophy and "string theory" who are quite into it, and while I enjoy catching up with them, I harbor suspicions that I'm just indulging their mental illness rather than learning anything.

That said. The CDS angle is something that a number of the sharpest folks I know lose sleep over. It's engineered to be a zero sum prisoners dilemma nightmare when things go wrong, and time is really the biggest problem: contracts need to be settled.

Two good short reads:

First, on the infinite spending power
https://medium.com/bitcoin-and-society/ ... be80d7e265

Second, on "Clearinghouses" and their role in this process
https://medium.com/bull-market/the-most ... e5186562d3

Of special import is this paragraph:

The deep issue here is that clearing houses are the choke-points of financial trading. This is going to be even more the case going forward, as regulators have insisted that more and more markets should be centrally cleared. Given this, you can see why it’s such a big priority for supervisors and market players alike that a clearing house should never be allowed to fail — they are the single points of vulnerability, so there have been an absolute raft of new regulatory measures for them over the last four years, increasing capital requirements, layering on cross-guarantees and bickering like hell about default funds, all aimed at making sure that something which has more or less never happened in the past — the failure of a major clearing house — should never ever happen in the future.


A CDS clusterfuck the size of what Peter Lewis describes would risk exactly that level of failure. And that, verily, would be terra incognita for all involved.

So to winnow it down to two contradictory but unavoidable points:
1) It is important to remember that the global macroeconomy is run by people who can break their own rules at will.
2) While impending economic catastrophe has a probability of 1, how and where it happens is beyond prediction.
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Re: "Shale will be much bigger than subprime."

Postby MacCruiskeen » Fri Dec 19, 2014 6:46 pm

Thanks, WR.

WR wrote:Likewise, I have friends in the fields of philosophy and "string theory" who are quite into it, and while I enjoy catching up with them, I harbor suspicions that I'm just indulging their mental illness rather than learning anything.


Heh. All I can offer you in return is a link to a free pdf of Terence McKenna's True Hallucinations:

https://pdf.yt/d/lcL1Fj40AGH7cqhY/download

Image

...which is currently blowing my mind for the second time.

Continuing on the topic of eschatology...

WR wrote:So to winnow it down to two contradictory but unavoidable points:
1) It is important to remember that the global macroeconomy is run by people who can break their own rules at will.


Point taken.

WR wrote:2) While impending economic catastrophe has a probability of 1, how and where it happens is beyond prediction.


I'm not sure it's beyond prediction for those people and institutions who are powerful enough to be able to break their own rules at will. I think they're predicting that it'll happen in Russia (and endeavoring to make it so), whatever the collateral damage to smaller players in "the global economy" elsewhere, including for example fracking companies in the USA.

But what the hell do I know. Got any mushrooms?
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Re: "Shale will be much bigger than subprime."

Postby Iamwhomiam » Sat Dec 20, 2014 11:39 pm

I seem to agree, Rex. The collapse of currencies; their consequential revaluation - yeah, shrooms seems like a worthy commodity to stock up on for hard times to come. I'm sure McKenna would agree.
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Re: Re: "Shale will be much bigger than subprime."

Postby Wombaticus Rex » Mon Jan 12, 2015 4:14 pm

Via: http://www.ft.com/intl/cms/s/0/a1b8c390 ... abdc0.html

A History Lesson

The investing public, including portfolio managers who think of themselves as highly sophisticated, are just starting their education in the documentation of oil and gas lending. Actually, they could have learnt about some of the problems that are now emerging if they had paid close attention during recent subprime mortgage securitisation cases. But they did not. So here we are again.

Much of the lending that supported the recent US unconventional resource (aka “shale”) boom long after the operating cash flow became inadequate was done by people who believed they were taking little risk. Institutional investors were not, for the most part, buying unlisted equity from inexperienced operators. Tens or even hundreds of billions of dollars of capital came from non-bank participations in leveraged loans to exploration and production companies.

As they would tell me or you, they knew that the underlying oil and gas assets were being developed by junk credits with negative cash flow from operations. There could be problems with the operator someday, yes. But because they had come in at the “bank” level, where there was a senior claim on the assets, they could get their capital returned even if there was a bankruptcy. And, of course, since these were floating rate loans, they, the investors, were not assuming the same interest rate risk as the buyers of fixed-rate junk bonds.

In addition to the comfort of having a more senior security interest in the underlying asset, the institutional investors believed the federal (and state) regulators of the banking system, and their armies of bank examiners, would be combing through loan books and aggressively using their authority to protect the banking system. Unlike the residential or commercial mortgage markets, there had not been a disaster in bank energy lending for many years.

Well . . . let us look into the sixth-grade class, and see what is up on the blackboard today. Oh, a history lesson! Penn Square Bank was a shopping centre bank in Oklahoma City that grew very quickly in the 1970s by lending to the local exploration and production developers. It was not a big bank; at its peak Penn Square could not put more than about $3m on its own books. But as a dynamic local institution, it could sell participations in its loans to other banks, such as Seafirst of Seattle and Continental Illinois of Chicago. This gave Penn Square, and its lending criteria, national importance.

After the last comparable collapse of the world oil price back in 1981, Penn Square Bank was found to have gotten ahead of its skis in lending to the E&P operators, and went under in 1982. It is to be expected that some bank will fail. But the loan participations that Penn Square’s bankers originated had infected much larger institutions. Seafirst failed in 1982, followed by Continental Illinois in 1984. They, along with Penn Square, were taken over by the Federal Deposit Insurance Corporation, which “resolved” them in liquidation and sale mode.

And this is where we find an interesting lesson for today’s non-bank buyers of bank energy credits. The FDIC, which now is awkwardly partnered with the Federal Reserve, is indeed very tough on marginal borrowers from failed banks. But that does not mean that when they take over a bank they protect the interests of those who “participated” in the resolved institution’s loans. The FDIC is there to protect the FDIC and the taxpayers who own it, not non-bank loan participants.

So the FDIC as liquidator of Penn Square et al asserted that the “sales” of loan participations by Penn Square and the others were not “true sales” that gave rights to the underlying collateral (whatever that was now worth). Instead, the FDIC argued, much of what the loan participants held were just unsecured claims on the failed institutions that certainly ranked below even the uninsured depositors.

Of course these assertions were challenged by the loan participants. They lost. The FDIC won. And guess what? In the past couple of years the FDIC has been reasserting its rights to take the underlying collateral on leveraged loans of failed institutions where the documentation does not clearly prevent it from doing so. According to 2013 “guidance”, the regulators said “A poorly underwritten loan that is pooled with other loans or is participated with other institutions may generate risks for the financial system.” Even so, the FDIC acting as receiver will seize the collateral when it can. Please write and tell me about your court victory over the government’s lawyers.

Christopher Whalen, a Senior Managing Director at the Kroll Bond Rating Agency, has spent a lot of time on the issues with the “true sale” doctrine. As he says, “The old-fashioned way is for the bank to give each participant its own note (with a claim on the collateral). Then it is a syndication, not a participation. Or the note can be taken across to a trust department, so the participant is protected by a trustee if there is a bankruptcy. When a participation is transferred, it is a good idea to file a lien under Article 9 of the Uniform Commercial Code to perfect the new owner’s security interest.”

So complicated. Still, much less trouble than finding out your “senior claim” has the security of a lottery ticket. It will be interesting to see how much of the E&P industry’s borrowing base has been provided by non-bankers without adequate collateral or legal recourse in the event of default.


Two good comments:

I'd argue Penn Square was a bit of a unique financial institution and, while instructive for today about the flaws of lending to just one industry, not representative of US banks today. From a FDIC summary:

"Penn Square, formed in 1960, operated as a small, one-office retail bank with a separate drive-up facility in an Oklahoma City shopping mall. In 1975, Bill Jennings, a former president of Penn Square, created a holding company to purchase the bank with $2.5 million borrowed from another Oklahoma City bank and little equity. The following year, Penn Square formed a loan department for oil and gas loans. From the beginning, the bank failed to document loans properly. In addition, it based repayment on collateral value rather than on the ability of the borrower to repay, and collateral documentation deficiencies were common."


I think this article gets the wrong end of the stick. Credit lenders prefer being at the "bank level" of a debt structure because many capital High Yield capital structures place the bank loan as the most senior, secured piece of the structure, then a HY bond ("Senior" in name often, but structurally subordinated to the bank piece in practice), then perhaps some mezzanine debt (or a "junior" bond), followed by the equity.

I doubt anyone bought O&G bank debt because they though banks are great at managing loan risk and only pick winners - investors simply wanted access to the highest recovery part of these risky capital structures; to the extent any recoveries happen, they flow to the banks.

The financial technology to document the economic transfer of a bank loan (through assignment, sub-participation, etc) is vastly different to 1985 - so I'm not sure harping on about a dubious bank failure 30 years ago has any relevance to today's debate.

None of this is to say investors won't lose a ton of money in US O&G credit exposure. They just own't lose it for any of the reasons mentioned in this article.
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Re: "Shale will be much bigger than subprime."

Postby cptmarginal » Mon Jan 12, 2015 8:17 pm

Still reading that last post, trying to understand this situation so that I can harangue people with diatribes about how batshit crazy it all is. Just wanted to share this off-topic thing I noticed:

"Christopher Whalen, a Senior Managing Director at the Kroll Bond Rating Agency, has spent a lot of time on the issues with the “true sale” doctrine."

http://en.wikipedia.org/wiki/Jules_B._K ... ing_Agency

Also really didn't know that Nick Kroll of "Kroll Show" (which I've not yet actually seen) was part of that particular Kroll family...
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Re: Re: "Shale will be much bigger than subprime."

Postby Wombaticus Rex » Thu Apr 09, 2015 2:00 pm

Caveat Lector as always: http://oilprice.com/Energy/Oil-Prices/T ... rices.html

But: much food for thought here.

Top 12 Media Myths On Oil Prices

By Dan Doyle

The upstream oil and gas industry is not a black hole. There’s no mystery wrapped in an enigma here.

There are a lot of meetings with engineers, chemists and geologists. There’s a constantly evolving learning curve. And then there’s all the regulations and compliance. But all-in-all it’s pretty straight forward, that is, until the media gets a hold of it. That’s when it becomes complicated. It’s as though we are getting reports from the mysteries of the deep ocean or life in the great galaxies beyond. There is so much hyperbole and unsupported guesswork that investors don’t have a chance. So, in a small effort to set the record straight, let’s see if we can’t dispel some of the misinformation.

Misperception #1: Goldman Sachs knows what is going on. This is incorrect. Goldman Sachs should not be quoted extensively. They are notoriously wrong when forecasting tops and bottoms. What they are good at is jumping on the band wagon and stoking fires. Their forecasting always seems to be done through a rear view mirror and their calls for peaks and troughs are always overdone. Back in July 2014 when WTI was peaking, they were calling for more, even as the dollar was showing signs of strength (and we know what happened there) and as oil inventories were beginning to wash up over our ankles. And then when we are forming a bottom in January and retesting it in March, they were calling for a deeper bottom. And then there was 2008. Remember the calls for $150 and $200 oil from Goldman and Morgan Stanley? That was right before we went to $40 and then some. (To be fair, Ed Morse from Citi called the top but he overshot the bottom. We’re not going into the 20s).

Misperception #2: The “non-productive rigs” are the first to go. This statement is a little baffling because all drilling rigs are productive, some are just more efficient. H&P’s Flex 4 and Flex 5 rigs are state of the art. But these rigs are stacking up just as fast as the less efficient rigs that require more man hours but are not as expensive to contract. Have a drive past H&P’s Odessa yard. It’s stocked full of these Flex 4s. Rigs are enormous which makes them costly to move around. You’re not going to bring in a dozen or so tractor trailers and a few cranes for a rig move back to Texas or Oklahoma, and hire the same sized fleet to bring in the newest generation rig. The closer truth is that the ones that are running in particular areas—that have not been let go—will continue running in those areas. And what the oil companies are going to do is put pricing pressure on their driller for not having supplied the cat’s ass in the first place.

Misperception #3: Supply keeps coming on because of innovations in fracking. Yes, fracking has gotten much better in shale formations but the real advances are already baked in. What has been occurring over the last 24 months or so is that more sand is being run per stage and stage intervals are more densely packed. Other than some new chemistry and a few software updates, that is the bulk of it. There really is no smoking gun between well completions in July 2014 when oil was at $100 and now--9 months later--when oil has been cut in half.

Misperception #4: Fracking has not gotten exponentially more efficient resulting in outsized cost reductions. Yes and no, but more “no” than “yes.” The 600 lb gorilla in the room is competition. Fracking has gotten competitive, damned competitive. Five years ago fleet sizes were smaller and there were nowhere near as many players. But then came the boom and service companies did what they do best. They overbuilt. They were also cheered on by cheap and plentiful money because everyone, especially bankers and private equity, wanted in on this one. To get an idea of just how competitive the shale landscape has become, a stage in a 2012 Marcellus well fetched almost twice the same stage today. There have been multiple improvements in both design and implementation, but the heavy lifting on cheaper frack pricing has been competition.

Misperception #5: The Baker Hughes rig count has become irrelevant. Incorrect. The Baker Hughes rig count is always relevant. Remember, this was the weekly number that allowed us to hold a bottom at $43 in March. But because supply didn’t immediately go lockstep with the falling count, analysts lost patience. They are now theorizing that rigs are so “productive” that the count no longer carries the weight that it once did. That’s a tough position to take. We were at 1,600 rigs drilling for oil in October and we’re now at 800. There is some truth that E&Ps are now favoring sweet spots but that won’t make up for the 50% collapse in the count. Shale extraction resembles an industrial process more than it does wildcatting. There aren’t many dry holes with shale. Microseismic advances have put an end to that as have data rooms stuffed full of old well logs that chart the potential of shales. Thus, most shale wells drilled today have a much better chance of being economic than step out and exploratory wells of the past. There is no legitimate model for 800 rigs growing US production past 8.9 mm BOPD in the Lower 48. And because its shale, and because shale is “tight”, drilling must continue at a breakneck pace to grow production. Analysts looking for a more ‘spot on’ number should start following the activity of fuel distributors who run nonstop between depots and frack jobs. Watch their sales for a more immediate indication of future production.

Misperception #6: We are running out of storage space for crude. We’re not. We’re going to be OK. Volumes have increased, especially at the oft mentioned Cushing, but Cushing accounts for only about 10% of US storage. Other storage areas are up but nowhere near as much. The reason is that physical traders like to park their inventory close to market and Cushing gives them that proximity. Also, Cushing is not a dead end. There are large pipelines that connect it to the Gulf Coast where storage is more plentiful and not nearly as full. Additionally, large inventory draws will be coming shortly with the advent of warmer weather.

Misperception #7: Shale wells have a productive life of only a few years. The truth on this one is slowly being sorted out and commentators are finally getting it right. Shale lacks permeability. Which means it’s very “tight”. It requires a frack job to free up the oil and gas trapped in its pore space. Fracking creates and sustains permeability and permeability is the pathway to the wellbore. Like any tight formation, oil and gas production is front loaded, meaning that most production will come right after stimulation. This results in excellent up front results but production tails off quickly, maybe even falling as much as 75% in year one and settling into something less for the next 10 or 20 years. This is called the tail and the tail is profitable, but only if the flush pays for most of the well.

Misperception #8: You can turn shale on and off. That’s wrong. Shale takes time like any other industrial activity. Slowing down its progress is a bit like stopping a supertanker. You can do it, but you need a lot of room. Most drillers require contracts and breaking them can be painful. Sand can pile up at rail sidings and result in demurrages. Layoffs can take time. Regulatory penalties may force an operator into activity whether he wants activity or not. All this takes time to work out. And then there’s always the stronger balance sheets that will drill regardless of price or that will drill and create a “fracklog” which is a newly minted MBA speak for a backlog of wells to frack. There is no switch you can flip.

Misperception #9: Oil is inversely related to the dollar. It is. This was a head fake. It’s not a misperception. Match the DXY to Brent and WTI over the last 12 months. It’s a perfect divergence. You want to bet on oil, then bet on the Euro.

Misperception #10: OPEC is done. Maybe, but the Gulf Cooperation Council is not. Collectively, the 4 GCC members pump more than half of all OPEC production. They also have very low lifting costs and enormous cash reserves. Additionally, they have stamina and are going to maintain OPECs position of no cuts. There’s a long history of Russia or Venezuela filling reduced quotas. This time around the GCC is not going to let that happen. If Russia concedes there may be a cut in June. But it is looking unlikely even if they do. Look for Saudi Arabia to pick up market share.

Misperception #11: American shale producers are the new swing producers. No, their banks are.

Misperception #12: A deal with Iran will lower prices. Sort of. It will take Iran a year or two to add anything meaningful to our 93 MMBOPD global market but the fear of a nuclear Iran will create enough tension to offset the supply addition. Worries over a nuclear Iran, whether real or perceived, will create enough fear in the markets to more than counter balance the additional million barrels a day of supply that may come on.

In short, oil prices will increase as weekly EIA production numbers begin posting declines as we saw last week. Demand will increase. Inventories will start getting eaten into by midyear. Europe will contribute as will Asia and the Middle East. A shrinking Chinese market is still growing at 7% a year, and that market is much bigger now than when it was posting 10% yearly growth five years ago. Rich Kinder was right in calling the bottom in the low 40s and John Hofmeiser (former President of Shell Oil) and T. Boone Pickens are probably pretty close to being right with their call of $80 as the top in the next year or so. A solid $65 to $70 by year end is the more reasonable number and is just enough to hold off development of some offshore projects, oil sands work and a good amount of the non-core shale plays. A stronger dollar will also do its work here as will a Saudi Arabia hell bent on market share. There will be less and less for shorts to hold onto and very few will want to be stuck on the same side of the trade as the big investment banks.
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Re: Re: "Shale will be much bigger than subprime."

Postby Wombaticus Rex » Fri Apr 10, 2015 9:41 am

Via: http://www.bloomberg.com/news/articles/ ... lunge-pain

The Oil Industry's $26 Billion Life Raft

For U.S. shale drillers, the crash in oil prices came with a $26 billion safety net. That’s how much they stand to get paid on insurance they bought to protect themselves against a bear market -- as long as prices stay low.

The flipside is that those who sold the price hedges now have to make good. At the top of the list are the same Wall Street banks that financed the biggest energy boom in U.S. history, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.

While it’s standard practice for them to sell some of that risk to third parties, it’s nearly impossible to identify who exactly is on the hook because there are no rules requiring disclosure of all transactions. The buyers come from groups like hedge funds, airlines, refiners and utilities.

“The folks who were willing to sell it were left holding the bag when prices moved,” said John Kilduff, partner at Again Capital LLC, an energy hedge fund in New York.

The swift decline in U.S. oil prices -- $107.26 on June 20, $46.39 seven months later -- caught market participants by surprise. Harold Hamm, the billionaire founder of Continental Resources Inc., cashed out his company’s protection in October, betting on a rebound. Instead, crude kept falling.

West Texas Intermediate oil futures rose $1.12 to $51.54 a barrel in New York at 9:41 a.m. London time. Prices are down 3.3 percent this year after plunging almost 50 percent in 2014.

Counterparty Names

Other companies purchased insurance. The fair value of hedges held by 57 U.S. companies in the Bloomberg Intelligence North America Independent Explorers and Producers index rose to $26 billion as of Dec. 31, a fivefold increase from the end of September, according to data compiled by Bloomberg.

Though it’s difficult to determine who will ultimately lose money on the trades and how much, a handful of drillers do reveal the names of their counterparties, offering a glimpse of how the risk of falling oil prices moved through the financial system. More than a dozen energy companies say they buy hedges from their lenders, including JPMorgan, Wells Fargo, Citigroup and Bank of America.

Danielle Romero-Apsilos, a Citigroup spokeswoman, said the bank actively hedges and manages its risk. Representatives of JPMorgan, Wells Fargo and Bank of America declined to comment.

At the end of 2014, JPMorgan had about $671.5 million worth of derivatives exposure to five energy companies, including Pioneer Natural Resources Co., Concho Resources Inc., PDC Energy Inc. and Antero Resources Corp., according to company records. That’s the amount JPMorgan would have owed if the contracts were settled Dec. 31, not including any offsetting trades the bank made.

It’s a similar story for Wells Fargo, which was on the hook for $460.9 million worth of oil and natural gas derivatives for companies including Carrizo Oil & Gas Inc., Pioneer, Antero, Concho and PDC, according to regulatory filings.

Energy Trading

These aren’t, of course, the kind of figures that would trigger any sort of systemic-risk concerns. Commodities are generally smaller parts of banks’ businesses compared with lending and underwriting, and banks hedge their oil-price risk.

New York-based JPMorgan had $2.57 trillion in assets at the end of last year compared with net liabilities for commodity derivatives of $2.3 billion, not including cash from settled trades and physical commodity assets, according to regulatory filings. San Francisco-based Wells Fargo had $1.69 trillion in total assets compared with net commodity liabilities of $241 million.

Still, $26 billion is $26 billion.

U.S. oil companies already netted at least $2.4 billion in the fourth quarter of 2014 on their hedges, according to data compiled on 57 U.S. companies in the Bloomberg Intelligence index.

Oil companies would rather be losing money on the trades and making money selling crude at higher prices, Kilduff said.

“It’s like homeowners’ insurance,” he said. “You don’t buy it hoping the house burns down.”

Offset Risk

The $26 billion of protection won’t last forever. Most hedging contracts expire this year, according to company reports. Buying new insurance today means locking in prices below $60 a barrel. The alternative is following Hamm’s example and having no cushion if crude keeps falling.

Financial institutions act as a go-between, selling oil derivatives to one company and buying from another while pocketing fees and profiting on the spread, said Charles Peabody, an analyst at Portales Partners LLC in New York. The question is whether the banks were able to adequately offset their risk when the market took a nosedive, he said.

“The banks always tell us that they try to lay off the risk,” Peabody said. “I know from history and practice that it’s great in concept, but it’s hard to do in reality.”


Re: "Still, $26 billion is $26 billion" -- not necessarily.
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Re: "Shale will be much bigger than subprime."

Postby Pele'sDaughter » Wed Jun 10, 2015 4:26 pm

My son and his wife have a friend who has been in the business for about 10 to 15 years here in N Texas. He had finally gotten out of the field and into the office. He and his girl got married and bought a nice home with a pool. After falling out of touch for the last 3 years my son decided to call him out of the blue. Scott went to work one morning and the placed was closed and padlocked. They're selling their home and all of their stuff and moving in with her dad. There will be many more stories like his. He's a nice guy and we hate to see this happen to him. My son is helping them move this weekend.
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