<DrumBeat: October 10, 2008 The Oil Drum What Career Should I Consider?>

121 comments on Resurgence of Risk - A Primer on the Develop(ed) Credit Crunch

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westexas on October 10, 2008 - 9:34am Permalink | Subthread | Comments top

http://online.wsj.com/article/SB122359301189021003.html?mod=todays_us_ma...
Credit Crunch and Sinking Prices Threaten Chesapeake Energy's Growth

Chesapeake Energy Corp. is scrambling to sell assets and cut costs as falling energy prices and tightening credit threaten to derail the company's dramatic growth. . . .

Mr. McClendon said the company will spend less in the future, but only because it's already got most of the land it needs. But that land is only valuable if companies have the money to drill it -- and a growing number of analysts are skeptical that Chesapeake and some of its peers will be able to find enough money to drill all the land before the leases expire. . .

In Louisiana, where Chesapeake helped create a leasing frenzy earlier this year, the company's leasing has all but stopped, according to attorneys representing landowners there. The company has scaled back even further in Pennsylvania, where Tom Murphy with the Penn State Cooperative Extension says Chesapeake has canceled some leases before they have been finalized. Mr. McClendon said Chesapeake has delayed lease agreements, but denies canceling any signed deals.

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tonyw on October 10, 2008 - 11:03am Permalink | Subthread | Parent | Comments top

WT, Chesapeake is but one of many. Basically ANY entity that needs to borrow money is having a hard time at present regardless of what collateral they have. I have advised those with credit lines to draw on them while they can. Stories are coming in of banks refusing to acccept Letters Of Credit from other banks, and these banks are amongst the most reputable (world top 20 not Icelandic:-)- banks just don't want to lend more than one day to anybody.

"Letters Of Credit" I hear people say aren't those just another funny derivative? Well no they are the basis for international trade, a Chinese exporter wants to know his goods will be paid for before he ships them to Americaville. So no LOC then no goods! Oh, OK then something to do with oil, say refiners find it more difficult to obtain LOCs then it could lead to refiners cutting output for financial reasons, despite demand for products. Which well known country do we know that imports lots of oil? Again it comes down to counterparty risk, everybody is less trusting and so wants the highest guarantee of payment.

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ROCKMAN on October 10, 2008 - 11:31am Permalink | Subthread | Parent | Comments top

CHK's annoucement perhaps sheds some light on a recent acqusition. In early Sept they paid International paper $264 million for 13,000 net mineral acres in the Haynesville Shale trend in N La. Difficult to tell for sure but that appeared to be a good deal for CHK. They may have the clock ticking against their leased acreage but the mineral right don't expire.

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Nate Hagens on October 10, 2008 - 12:05pm Permalink | Subthread | Parent | Comments top

CHK, our largest Nat gas producer, is being raided, just like LEH, AIG etc. by financial players.
people are shorting the stock and buying the credit default swaps
a large % of their hedges are at Morgan Stanley - if MS goes under, so does CHK. NO WAY does govt allow that to happen, but what to do?
I think XOM spends some of their war chest of 40 bil to buy some of these failing nat gas companies
CHK is now trading at $1.70 per mcf, a level last seen in the late 1990s.
heres another example of the disconnect between financial and natural capital. hedge funds trying to put CHK out of business to make money, yet when they get home they'll have no heat or diapers..

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tonyw on October 10, 2008 - 1:23pm Permalink | Subthread | Parent | Comments top

"but what to do?" Hey Nate, I thought you were in favour of being able to short? How about preventing all shorts?

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Nate Hagens on October 10, 2008 - 1:36pm Permalink | Subthread | Parent | Comments top

It all depends on the context.

We need regulation and a major paradigm shift in the direction of our institutions. But we need SMART regulation. Stupid regulation is worse than no regulation at all. And we cannot change the rules overnight lest there are unintended consequences. Changing the short-selling rules caused 10s of billions to leave our markets via closed/closing hedge funds. I know this for a fact. Its possibly much more. It adds to volatility and sends overvalued stocks higher and cheap stocks cheaper which then begets more panic and confusion.

We need less leverage. Short selling is a minor but integral part of the markets ebb and flow. If they are to remove it thats fine by me - but announce that shorts will no longer be allowed starting 1/1/2010 or something, so people have time to adjust.

I cringe to hear what will be announced tonight or over the weekend. I'm quite certain there is an abstract rabbit in the hat that I haven't conceived of that is being given the gift of rabbit life as we speak.

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tonyw on October 10, 2008 - 2:01pm Permalink | Subthread | Parent | Comments top

Nate, when I hear the words paradigm change then I usually try to listen hard and do the opposite:-) In this case I would completely agree with you, we need less leverage and financial institutions to be far more responsible.

The problem is being SMART and avoiding the unintended consequences especially when we can't sit back and wait months. A small example, how about preventing foreclosures and not throwing people out on the street? sounds good like apple pie but could it lead to more people giving up on their mortgages? if i had a mortgage and was struggling then i would be tempted as i understand that in the US you can walk away from a mortgage.

As to rabbits, yes no end to what can be dreamt up.

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Gail the Actuary on October 10, 2008 - 2:45pm Permalink | Subthread | Parent | Comments top

I don't know if people saw this yesterday. (Cook county is more or less equal to the city of Chicago.)

Chicago's Cook County won't evict in foreclosures

CHICAGO (AP) — The sheriff here said Wednesday that he's ordering his deputies to stop evicting people from foreclosed properties because many people his office has helped throw out on the street are renters who did nothing wrong.

"We will no longer be a party to something that's so unjust," a visibly angry Cook County Sheriff Tom Dart said at a news conference. . .

Dart said that from now on, banks will have to present his office with a court affidavit that proves the home's occupant is either the owner or has been properly notified of the foreclosure proceedings.

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Leanan on October 10, 2008 - 2:21pm Permalink | Subthread | Parent | Comments top

Lehman collapse puts hedge fund in dire straits: Short-seller Copper River should be in its glory in a market like this. Instead, it's fighting for its life.

NEW YORK (Fortune) -- September was arguably the worst month in hedge fund history, as unprecedented volatility in the capital markets forced once-mighty investment managers to book losses that had been thought unimaginable.

But for noted short-sellers Copper River Management, a $1 billion hedge fund based in Larkspur, Cal., the month turned into a perfect storm.

A devastating combination of counter-party failure, sudden regulatory edicts and margin calls conspired to turn the fund's performance on its ear, leading to a 55% loss in just two weeks.

According to people familiar with Copper River, the fund's management has sent out a letter to its investors in an attempt to explain the crisis and to retain enough capital to keep operating.

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ROCKMAN on October 10, 2008 - 1:51pm Permalink | Subthread | Parent | Comments top

I agree Nate. The folks I know with cash reserves are starting to morph into sharks. All the specualtion about CHK is just like bood in the water. A number of the smart players have been waiting for cracks in the leverage suit of armor. That day may quickly be upon us.

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ilargi on October 10, 2008 - 5:34pm Permalink | Subthread | Parent | Comments top

Nate,

You know I love you, something that doesn't go for all the drips you run with.

That said, I'd say it's quite clear how bang on Stoneleigh and me were from day one. And you, Wall Street affficionado, were not. Are we clear on that?

So today you re-run a year-old Stoneleigh piece, without even asking her for an opinion or update.

¿Que pasa, contigo?

She's all tickled and all, but I am not.

Is it so hard to pay dues where they are due? Yes, the Oil Drum has been wrong, consistently, and all along. Hey, just admit it and move on.

Nate, Stoneleigh just tells me to tell you I'm a retard.

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Nate Hagens on October 10, 2008 - 6:10pm Permalink | Subthread | Parent | Comments top

Wrong about what amigo? Look at my last 20 posts - I've been as right as rain. Look at my predictions in the oil volatility post in December, look at in 2005 and 2006 I said we were seeing the end of growth forever, and last summer that credit crisis would swamp peak oil in near term, etc etc...

And 'theoildrum' has also been way ahead of the curve. We just haven't focused on finance, because it's not a finance site.

In any case, you've had a great call, and I have no idea how you find time to put up a post everyday as well as links, (and in your second language).

We are all on the same team - trying to steer this societal ship thats going over Niagara Falls. I think TOD is taking the longer shot - trying to change the social and political paradigm for everyone at its most central tenet - energy. TAE is more ground-up - trying to save individuals money from avoiding financial morass. Hopefully, we've both made a difference. One will likely never really know, so its the path that matters.

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Stoneleigh on October 10, 2008 - 6:45pm Permalink | Subthread | Parent | Comments top

I was very pleased to see this post run today, and to have a chance to discuss its message again.

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jewishfarmer on October 11, 2008 - 2:36pm Permalink | Subthread | Parent | Comments top

I certainly can't speak for Ilargi, but I do think that many people coming at this from a technical perspective, including some folks at TOD, have dramatically underestimated the degree to which we will be able to invest in major projects in the longer term - that is, there has been an undercurrent narrative of assuming that we would have the wealth to make major, innovative changes when the time came. That narrative, for example, was an undercurrent of the discussion of relocalization I participated in sometime back - the assumption was that those who advocated primarily low energy, low cost, low input solutions were primarily doing so because of an agenda, not because such solutions were necessary.

I get the sense from many people on this site and at others that while on one level folks knew the end of growth was coming, at the same time they assumed that there would be just enough growth for their pet projects and solutions. This, of course, is not universal, but the sheer sense of shock that the odds are against it is quite vast - again, I'm not speaking of anyone in particular, but I do think that quite a few people have suddenly got the "doomer" religion ;-), over this way, when they suddenly grasped that oops, maybe we weren't going to be doing whatever mitigation project they'd most like to see.

Sharon

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BlueTwilight on October 12, 2008 - 4:47am Permalink | Subthread | Parent | Comments top

There was no guarantee the U.S. government (corporate oligarchy) would make all the wrong decisions. I certainly did not expect the Republicans to resort to corporate welfare for the Wall Street titans which likely crushed our financial ability to transition our economy away from crude oil. When arguing against the $700 billion bailout to my congressmen, I advocated spending the money on converting infrastructure to stimulate the economy. There is still a chance for a peak oil aware infrastructure project similar to the New Deal, but given the poor performance from the presidential candidates and congress, the odds seem decidedly against it.

Then again, the worst part of the subprime crisis is now, fourth quarter of 2008, which means the defaults and credit crunch will lessen next year. No one knows if the present financial crisis will be severe enough to plunge the world into a sustained depression. Some of the poorly managed companies that rely heavily on debt for day to day operations will be eliminated. I think it depends on how severely unemployment rises during the next 3 months. If it rises enough to cause widespread defaults on mortgages, including prime ones, then the world will be in a depression will little hope of anything other than low energy, low cost solutions.

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Stoneleigh on October 12, 2008 - 10:45am Permalink | Subthread | Parent | Comments top

The subprime crisis is small beer compared to what's in store for Alt-A, and prime, lending. The resets on pay option ARMs in those much larger areas have hardly begun and won't end until about 2012. The credit crunch is set to get worse, not better, as the default rate on underlying assets steadily increases, or perhaps climbs in leaps and bounds as unemployment shoots up.

The new year should see the Wall Street crisis spill over on to Main Street with a vengeance, and not just in the US either. Much of Europe is teetering on the brink, suffering from far worse housing bubbles than the US (Germany being a notable exception), and Asia has been crashing as well. The financial system is too integrated to avoid contagion.

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Ignatz on October 12, 2008 - 11:18am Permalink | Subthread | Parent | Comments top

I was very pleased to see this post run today, and to have a chance to discuss its message again.

Stoneleigh you are a calm eye of reason in a hurricane of self justification and recrimination. Good for you.

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westexas on October 10, 2008 - 7:27pm Permalink | Subthread | Parent | Comments top

The thing that I didn't foresee, but which you guys did, was how widespread the collateral damage from the mortgage and overall financial meltdown would be--to the point that it is affecting food & energy production.

I have thought for a long time that the auto, housing, finance, etc. industries were toast, but I didn't think that food & energy would be collateral damage. To be precise regarding energy, I thought that the global decline in net oil exports would outpace the global decline in demand, which I still think will happen longer term, especially with the difficulty in getting energy projects funded.

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121 comments on Resurgence of Risk - A Primer on the Develop(ed) Credit Crunch

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