Will BPs Impending Collapse Be Worse Than Lehman Brothers?

Long-time readers will recall that when Lehman went under, their counterparty derivative load broke the back of AIG less than 48 hours later.  Over at Zero Hedge, Gordon Long asks the same question about BP.  If BP does go under, who are the counterparties that would be on the hook?

As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming. The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives. The potential contagion may eventually show that Lehman Bros. and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market. What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions. How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence. BP has even more physical assets than Enron and GE. Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps. Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are. They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios. 

Translation:  BP, being an oil company with billions of barrels of oil in proven reserves, has a whole lot of counterparty clout in the global domino game.  They have even larger exposure to counterparty default swaps than Lehman did...because a whole crapload of companies basically took out insurance that BP was Too Big To Fail and counted that insurance as a a phantom asset.  So if BP actually goes under, so many companies would be owed so much that the economy would basically implode.  It wouldn't just be bailing out the banks.  It would be bailing out...pretty much every major company on Earth.

You get the picture.