THE PERFECT STORM 91of losses from unpaid debt — not counting derivatives. This
fiasco is bigger than the subprime crisis that took down the
economy in 2007.
I’m not saying we’re going to have another panic of that
magnitude tomorrow; I’m just trying to make the point that
the losses are already out there. Even at $60 per barrel the
losses are significantly larger than the subprime meltdown of
- We’re looking at a disaster.
On top of those bad loans, there are derivatives. Right now,
some of the producers are kind of shrugging, saying: “We went
out and borrowed all this money on the assumption of $80,
$90, $100 oil. But we also sold our oil production forward for
a couple of years at $90. So we’re fine.”
That’s not true in every case, but it is true in a lot of the cases.
The problem with derivatives, however, is that you don’t
know where the risk ends up. I don’t know where it is, the
Federal Reserve doesn’t know where it is and neither do the
bank regulators. The banks might know their piece of it, but
they don’t know the whole picture. That means we have to
keep digging and digging.
The losses out there are larger, potentially, than the sub-
prime crisis. The losses could actually be bigger than the sector’s
borrowings because you can create derivatives out of thin air.
And as I say, they could be in your portfolios.
There’s still time to call your investment advisors or broker to
see whether you have any of this risk buried in your portfolio. You
might not, but even if you don’t it may be time to take a little more
defensive posture. That could be a little more cash or other hedg-
es. That way when things start to collapse around you — even if
you’re not taking a direct hit — you’re not collateral damage.
Going back to my first point, the losses out there are larger,
potentially, than the subprime crisis. The losses could actually
be bigger than the borrowings because you can create deriva-
tives out of thin air. And as I say, they could be in your portfolios.