Bailout Round Two is on the horizon in the US
The prospect of another MASSIVE Bailout is the direct result of Obama’s admitted policy of manipulating oil prices as an Economic Weapon against Russia and Iran.
The oil price collapse began in late October as the collusion by U.S. officials with Saudi Arabia’s monarchy to hit Russia with an “oil sanction”; but it has gone out of their control. Notably, on Dec. 20, it was not Russia whose credit was downgraded, but the European oil majors BP, Total, and Shell, all placed on negative credit watch by Standard and Poor’s.
The oil majors have been loading up with debt for a decade, with an emphasis on paying dividends and buying back their own stock. That debt was piled up despite the fact that demand for oil and gas, throughout the trans-Atlantic economies, has become more and more depressed since the 2007-08 financial collapse. The sector now has roughly $1.6 trillion in debt with—if oil prices remain in the $50 per barrel range—not much more than $300 billion in revenues, a highly leveraged situation. Keep in mind that during December, the natural gas price has also plunged by a third, down to the range of $3/cubic foot.
In 2012 the Federal Reserve began publicly “debating” the possibility of forcing the banks out of commodities and infrastructure holdings, but did nothing about it. Despite The Fed “advising” Wall Street banks to get out of commodity holdings; the banks have so far ignored this.
With the collapse of the oil price by 50% in the second half of 2014, the banks have found that a widespread type of commodity derivative known as a “three-way collar” has become very dangerous to them. As the price has declined, from $110/barrel for West Texas Intermediate Crude all the way down to below $55/barrel now, these derivatives have compelled the banks not only to buy more leveraged debt paper, but to buy more oil and gas futures as well.
London Telegraph financial analyst Andrew Critchlow warned already on Nov. 14 that oil shale drillers had come to be nearly one-third of all “highyield, sub-investment grade” (subprime) borrowers in the United States.
He estimated that if the oil price stayed in the $60s (it has been in the $50s for more than a month), 30% of high-yield B- and CCC-grade (energy) borrowers would default. “A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle,”
Wall Street banks are being hit by this, was shown by the end-of-November report—ironically, put out by Citibank’s research team—that the U.S. banking sector’s revenue had dropped by 17% in the third quarter, and its loan revenue, the area which has been dominated by high-interest lending to the energy sector, had dropped by 60%. At the same time, the banking sector’s exposure to foreign exchange derivatives rose by 90%, and to commodity derivatives by 40%.
Bailout Round Two
This highly dangerous situation for the banks goes back to the Federal Reserve’s allowing the big Wall Street banks to own commodities and commodities infrastructure (warehouses, tankers, electric utility plants, etc.), by giving them waivers of the Bank Holding Company Act in the 2002-05 period.
The biggest U.S. banks now reportedly have some $240 trillion in derivatives exposure. They have managed to pile up almost all of it on their FDIC-insured commercial banking units since Glass-Steagall was eliminated in the 1990s. But due to their extreme risk, these commodity derivatives are among the few types that could not be in those depository units — until the banks ran roughshod over Congress in mid-December. Now, with potentially huge losses looming, those trillions in derivatives are subject to a crisis Federal bailout.
According to financial experts, the immediate prospect of losses from defaulting debt in the leverage loan and junk bond markets, together with the only slightly longer-term prospect of huge losses in the derivatives markets, have put the Wall Street banks in trouble. The latter’s losses could be in the hundreds of billions in total, given that this derivatives exposure of Wall Street is in the trillions.