Daily Archives: December 12, 2011
I think there is sufficient evidence today to conclude that Re-Hypothecation is at the root of the customer losses at MFG. This Reuters story started the discussion on re-hypothecation. There have been several additional articles on this at Zero Hedge, (link, link) and FTAlphaville (link, link). Let me add one additional bit of info.
The Canadian customers of MFG got their money back within 10 days of the MFG bankruptcy. The accounts that have lost money are either USA or UK based. In Canada, re-hypothecation is not permitted. I got these comments from a Canadian MFG account holder:
The trustee where segregated MF Global Canada customers’ funds were held was RBC Dominion Securities. I don’t think any of these funds ever left the trustee in Canada. Likelihood is if they left, the Canadian government would have made the parent Royal Bank of Canada eat up the losses and make full restitution.
We shall see in the coming weeks if, in fact, re-hypothecation is the cause of the problems. I’m convinced it is.
The rules on broker’s ability to A) Hypothecate and B) Re-hypothecate in the USA are spelled out in Reg T. This set of rules has been established by our good friends at the Federal Reserve Bank. Let me provide some telling words on this re Reg. T rule 15c3-3:
- Except as otherwise agreed in writing by the OTC derivatives dealer and the counterparty, the dealer may repledge or otherwise use the collateral in its business;
- In the event of the OTC derivatives dealer’s failure, the counterparty will likely be considered an unsecured creditor of the dealer as to that collateral;
- The Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa et seq.) does not protect the counterparty.
Well there you have it. Reg. T does permit the broker to “repledge” (AKA re-hypothecate). In the event of default by the broker, the counterparty will be considered an unsecured creditor. (AKA customers lose money). And SIPC provides zero protection to account holders in the event of a broker default.
For me, there is sufficient information to conclude that Reg. T is flawed and must be changed. I have to believe there is any army of lawyers over at the Federal Reserve looking into this as I write and they are struggling with what they can do to “fix” the problem.
For sure a fix is required. MFG has not, as yet, morphed into a systemic problem. But we are getting closer by the day. The Fed is aware of this. The risk is that customers start to withdraw funds and assets from other brokers. The deleveraging this would cause would be catastrophic. A significant chunk of the shadow banking system (about $10 trillion) is dependent on the liquidity that is created by hypothecation. (The situation is bigger and more problematic in the UK)
A month ago Fed governor James Bullard stated on CNBC that the issues with MFG did not constitute a systemic problem. I wrote about this at the time Bullard made those comments. I made a public bet with Bullard (a six pack of beer) that he would be forced to eat his words. I never did hear from him.
I’m re-doubling the bet this AM. If Reg. T is confirmed to be the source of customer losses at MFG then Reg. T will have to be gutted. The changes will have to take place fairly quickly. The consequences across all markets of these changes could prove to be a devastating blow.
The nice folks at the FRB are having a big meeting this week. Reg. T and MFG will almost certainly be on the agenda. I have to believe all those smart folks at the Fed have figured out that we have a problem. We may well get some announcement on this topic by Friday.
Any changes to Reg. T will have profound effects on global markets. Not only the exchanges/asset prices will be affected, this has the potential to derail the global economy. We are already in a very dangerous liquidity situation. If the Fed is forced to change margin rules, liquidity will dry up for an extended period of time. Forced changes in Reg. T will prove to be a Black Swan event.
Should we get a confirmation of the foregoing discussion and the Fed is forced to react and make regulatory changes, there will be significant long term implications for the Fed. The Fed will have to shoulder the blame for the flaws in Reg. T. They will also have to take responsibility for the broader economic consequences that will surely follow those changes.
The possibility exits for the Fed to lose any credibility they may still have in the US and abroad. The completely unregulated Federal Reserve may lose its independence as a result. There are big downsides to significant revisions to margin rules. The upside is that the Fed’s supreme power over the global economy would be finally checked.
Source – Business Insider
- MF Global’s US And UK Customers Got Screwed By A Little Thing Called Regulation T (businessinsider.com)
- Why The UK Trail Of The MF Global Collapse May Have “Apocalyptic” Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else (zerohedge.com)
- MF Global and the great Wall St re-hypothecation scandal (paul.kedrosky.com)
- MF Global Looted Customer Accounts (mb50.wordpress.com)
- MF Global looting can continue! Missing funds and fees likely to go higher: Guest Post by MFGFacts.com (zerohedge.com)
- The Gold “Rehypothecation” Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold (zerohedge.com)
- MF Global aftershocks (ftalphaville.ft.com)
Figure 1: Map of the U.S. Bakken-Lodgepole Total Petroleum System (blue), five continuous assessment units (AU) (green), and one conventional assessment unit (yellow) (Source: USGS)
In 2009, U.S. oil production began to climb after declining for 22 of the previous 23 years.
The shale oil production of the Bakken formation, which straddles the Montana-North Dakota border and stretches into Canada, has been a significant contributor to this temporary uptick in oil production.
The Bakken boom has inspired a number of prominent commentators to resurrect the energy independence meme. Daniel Yergin was first at bat, asserting in an essay published by The Wall Street Journal that rising prices and emerging technologies (especially hydraulic fracturing) will significantly drive up world liquid fuels production over the coming decade(s). Ultimately, Mr. Yergin argues that tight supplies lead to high fuel prices, and high fuel prices will bring previously inaccessible oil to the market. The trouble with this line of thinking is that high prices aren’t merely a symptom of the supply problem; high prices are the problem.
After Mr. Yergin stole first base through this apparently convincing display of contortionist logic, the next up to bat was Ed Crooks who recently penned an analysis piece for the Financial Times. In this piece, Mr. Crooks declares that “the growth in U.S. and Canadian production from new sources, coupled with curbs on demand as a result of more efficient use of fuel, is creating a realistic possibility that North America will be able to declare oil independence.”
Mr. Crooks thus ‘balances’ rising production from shale oil and Canadian tar sands against declining consumption, which he mistakenly chalks up to efficiency gains rather than the deleterious effects of the greatest recession since the Great Depression. Beyond this obvious blunder, Mr. Crooks manages an even greater and far more common gaffe by neglecting to integrate decline rates of mature fields into his analysis.
But in a game where the media is the referee and the public doesn’t know the rules, Mr. Crooks manages to get on base by knocking a foul ball into the bleachers. With Yergin on second and Crooks on first, Edward Luce steps up to plate and takes a swat at the energy independence meme, directing the ‘greens’ to look away as “America is entering a new age of plenty”. And while the greens looked away, Mr. Luce took a cheap shot at clean energy through an attack on the federal government’s support for the now bankrupt solar panel manufacturer, Solyndra. Luce thus willingly employs the logical fallacy of hasty generalization to sway his audience. Of course the Solyndra bankruptcy is no more generalizable to the solar energy industry than BP’s Macondo oil spill is to all offshore oil production, but in a game of marketing one-upmanship one should not expect a balanced and rigorous evaluation of the possibilities.
With the bases loaded and oil prices remaining stubbornly high as tensions in the Middle East and North Africa persist, the crowd is getting anxious. And the crowd should be anxious. After all, tight supplies and rising oil prices strain personal finances and threaten to send our fragile economy back into recession. It is, therefore, unsurprising that the public is as eager to consume the myth of everlasting abundance, as they are eager to consume these scarce resources.
While the Bakken boom offers a hopeful story in which American ingenuity and nature’s endless bounty emancipate us from energy oppression and dependence on evil and oppressive foreign dictators, musings of energy independence are premature, misguided, and misleading. The problem with the Bakken story as told by Crooks and others is that it lacks historical context. Referring to recent developments as an energy revolution implies that there are no lessons to be learned from history. But as Mark Twain put it, “history doesn’t repeat itself, but it does rhyme.”
Read More: Source
- DANIEL YERGIN: America’s New Energy Security: Thanks to new technology, the U.S. has become less d… (pjmedia.com)
- Why Bakken? (dailyfinance.com)
- The U.S.’s Oil Future – More Crude from Americas: Yergin (ibtimes.com)
- Time Lapse Video From International Space Station Captures Mystery City in North Dakota (indiancountrytodaymedianetwork.com)
- Bakken Shale Bursting with Oil, Opportunities (OXY, HES, MRO, EOG, BEXP, CLR, CXO, KOG, FST, SGY, WLL, AXAS, AREX, TPLM, RPC, TLLP) (247wallst.com)
- Don’t let Big Green stymie boom in energy jobs (energyindependenceforstates.com)
- The Irrational, Non-Economic Exuberance Underlying Hydraulic Fracturing (forbes.com)
SCOD Presents the World’s First Zero Carbon Superyacht Tender with a Top Speed of 80 knots ‘The Emax Super Marine 45’. The Emax Solar Hybrid Jet Propelled Tender is powered by twin CMD TDI V6’s coupled to GM Allison Hybrid Transmissions.
Each 450hp Diesel Electric Power Plant is revolutionary in the fact that it weighs no more than its gasoline equivalents while consuming 40% less fuel!
When employed as a Zero Carbon ship-to-shore Shuttle the Emax Super Marine 45 relies on a 32KWh Lithium UPS to propel the Solar Hybrid boat at up to 25 knots in virtually silent electric mode. Push the throttles full ahead and the infinitely variable transmission kicks into low gear engaging the V6’s and loading the Hi-Torque RR Waterjets to deliver unsurpassed acceleration. Once on a plane the transmission selects the most economical rpm for the load at all speeds up to 80 knots.
Available from Ned Ship Group the 900hp (1160 ft.lbs of torque) Carbon Epoxy Super Marine 45 is the fastest most powerful tender in the world. Even so she is 50 to 100% Greener than other tenders in her class, due to her Solar Hybrid Propulsion and the ability to store and use energy harnessed from her 4KW Photo Voltaic SunPower Solbian array.
The Emax Super Marine 45 utilizes Allison’s Hybrid technology, a dual mode (Series & parallel EVT) Electrically Variable Transmission that delivers the highest level of economy with the best performance. This system with years of proven reliability from Arctic to sub tropical environments is employed in thousands of Hybrid buses the world over as well as the GM fleet of Hybrid pickup trucks, the Hybrid Cadillac Escalade and surprisingly the Hybrid Bluetec S Class Mercedes Benz .
Whether shuttling passengers and supplies back and forth or embarking on an exhilarating adventure, the luxurious teak decked Super Marine 45 can seat up to 10 people, plus 4 sunbathers on the sun bed. Inside the cabin beneath the Solar Center Cockpit she provides a shower room with stand up head and a sumptuous double bed. For excursions there’s a kitchenette with fridge/freezer, stove, microwave and a foredeck table for setting out a buffet or having a sit down luncheon for six guests.
Richard Sauter Head of Design commented “With a top speed of 80 knots, no other Superyacht tender compares to this upper echelon of performance combined with luxury, style and versatility.”
As a jet propelled Zero Carbon recreational watercraft she is the safest and by far the most Eco Friendly boat of her kind. The EPA estimates that registered recreational boats in the USA produce a staggering 330 million metric tons of CO2 per year. Switching from gasoline to Emax Solar Hybrid propulsion can reduce that figure by over 50% thereby reducing “global warming pollution” by more than a 160 million metric tons per year.
LOA 45’ / Beam 10.5’ / Draft 2’
Standard Power: (2) Cummins MerCruiser Diesel (CMD) TDI 4.2 V8 – 700hp
Optional Hybrid Power. (2) CMD 3 liter TDI V6/GM Allison Hybrid – 900hp
UPS 32KWh; Valence Technology
Drives; (2) Rolls Royce FF Series WaterJets
Construction; Ned Ship Epoxy Carbon Fibre
Zero Carbon Cruise; 25 knots
Standard Cruise; 55 knots
Max Speed; 80 knots
- Emax E-Volution: Fastest, greenest luxury yacht (digitaltrends.com)
- A $40 Million Luxury Solar Sailboat, For Low Emissions Indulgence (wired.com)
- New Solar Hybrid Supertanker Impresses (robbiz1978.blogspot.com)
Davy Jones Production Platform
Joan Lappin, Contributor
A lot is happening in the Shallow Water Ultra Deep drilling program that McMoran and its astute partners, Energy XXI and Tex Moncrief, have been pursuing for the last few years. Now that the U.S. space shuttle program has come to an end, the scientific frontier in this country has moved to drilling miles into the earth’s crust instead of launching men to the moon. Those over 50 are old enough to remember the tension everyone in America felt as the first U.S. spacemen disappeared around the back of the moon and were temporarily out of communication with the Mission Control Center in Houston. Nobody knew if they would continue past the moon and out into space or circle back around into view as planned.
These days the exploration frontier is 30-35,000 feet below the mudline in the Gulf of Mexico. Petroleum engineers are designing tools and rigs to control the 400 degree temperatures and 20,000 and more lbs. of pressure being encountered by drill bits and logging tools working 6 miles into the earth.
On September 2, 2009, BP announced a massive oil discovery at its Tiber well in what was then one of the deepest wells yet drilled to a total vertical depth of 35,055’ in 4132 feet of water in the Wilcox and Tuscaloosa formations 250 miles Southeast of Houston. The discovery was described as having multiple pay zones in the “lower tertiary.” Kaskida, another BP well was announced as having 800’ of hydrocarbon bearing sands about 45 miles SE of Tiber. Neither of these wells is in production and it is likely to be many years and many billions of dollars spent to build pipelines and solve lifting problems before they are.
In contrast, the Davy Jones 1 well was announced as a discovery by McMoRan and its partners in January 2010, just a few months after the Tiber discovery. It is about to come online and into production almost any day now. What’s the difference? DJ1 is in 20 feet of water just off the coast of Louisiana. Drilling for oil and gas in the Louisiana almost swamp land has been going on for decades. There are existing pipelines all over the place. The production platform pictured above is in water that a tall NBA player could almost stand in and wave his arms above the surface.
So everyone is waiting with great anticipation just as for those astronauts circling the moon for the first time decades ago. McMoRan, the operator, had long ago announced expected completion of the well in mid-December 2011 with perforation of the well casing and a flow test to follow shortly thereafter before the end of the year.
Davy Jones and the Ultra Deep wells don’t give up their booty without a fight. This is no exception. It is not certain how fast the reaming of the well will proceed. Might be before year end and it might not. For sure, the goal is to move at the “proper” speed to successfully complete and test the well. No other course would make sense when the well has cost about $170 million so far. Other than satisfying Wall Street, whether the well is completed on December 20th or January 10th is irrelevant. In this case, slow and secure is the way to go.
The real issue since this play began is that for years many of the other oil and gas exploration companies have disparaged the whole idea that anything worth pursuing would ever be found. Once it was, the next group of naysayers were convinced that like BP’s Tiber and Kaskida, it would be impossible to produce them. Earlier this year, in an astounding tip of the hat to a small E&P company like MMR, Chevron complimented MMR’s Jim Bob Moffett and elevated the Gulf of Mexico to its top three exploration zones. Oil folks in the know are no longer putting down this concept that under the exhausted shallow fields in the Gulf and under the salt weld, more hydrocarbons would or could be found. Now it is accepted that massive amounts might still be found altering our nation’s energy future.
The expectation for Davy Jones 1 is that once the inside of the hole is smoothed (reamed) new production liner will be placed into the hole. Next the well casing will be perforated to allow production to begin. Gas and hopefully some liquids too, will come surging up the well. There is a range of estimates but some folks believe that as the well is perforated from the bottom up, the initially activated zones will begin producing 20 MMcf per day building to the 50-70 MMcf per day level MMR expects to produce. Because this well is in a hole originally designed years ago to go to only a 20,000’ depth, its small size limits production to a maximum of 75 MMcf per day. Those constraints will not apply to Davy Jones 2, drilled 2.5 miles away which was designed from the outset with much larger pipe and to go to a 30,000’ depth. The second well is due on stream in the second half of 2012, even less time than the two years it has taken to design the equipment needed to bring Davy 1 onstream.
In the world of exploration and production nothing is ever certain. However, MMR expects to have some additional good news to report before year end at either its Lafitte well or at Black Beard East. In all cases, Moffett is looking at both of these wells for the same Wilcox and Tuscaloosa sands such as the Frio which has previously been seen at Blackbeard East and which is a massive producer onshore Louisiana . This zones have also been seen offshore at BP’s Tiber and Kaskida wells. Good things are just around the bend but until then, nervous anticipation is the mood of the week.
Joan E. Lappin CFA Gramercy Capital Mgt. Corp.
In these turbulent times, put our decades of experience to work for your portfolio. Contact us at firstname.lastname@example.org
Gramercy Capital, its clients and Mrs. Lappin own shares in McMoRan and Energy XXI. They do not own shares in BP or Chevron, also mentioned in this article.
- USA: Saratoga, McMoRan in Vermilion 16 Field JV Talks (mb50.wordpress.com)
- USA: McMoRan Encounters Hydrocarbon Bearing at Lafitte Well (mb50.wordpress.com)
- TGS, Starts Patriot WAZ 3D Survey in U.S. Gulf of Mexico (mb50.wordpress.com)
- Shell Awards Subsea 7 with Two Gulf of Mexico Contracts (mb50.wordpress.com)
Subsea 7, a major player in seabed-to-surface engineering construction, and services, today announces the award of two engineering and installation contracts from Shell for the Cardamom and West Boreas Projects in the Gulf of Mexico.
Subsea 7’s scope of work on West Boreas is the installation of a 6,096m (20,000ft) long umbilical as well as subsea distribution hardware for the field. Installation will occur in water depths up to 959m (3,146ft) in the Mississippi Canyon block area.
On the Cardamom Project, Subsea 7 will install a 9,266m (30,400ft) long umbilical plus subsea distribution hardware for the field in depths up to 914m (2,999 ft) in the Garden Banks block area.
Ian Cobban, Subsea 7’s Vice President for the Gulf of Mexico, said: “We are very pleased to have been awarded these contracts by Shell, which build upon our strong track record in the deepwater subsea construction market in the Gulf of Mexico.”
- Norway: Subsea 7 Charters Island Intervention Vessel (mb50.wordpress.com)
- USA: FMC Technologies Wins Subsea Systems Contract from LLOG – Who Dat project (mb50.wordpress.com)
- USA: EMAS Wins Gulf of Mexico Subsea Contract from BP (mb50.wordpress.com)
- Shell Perdido: The first full field subsea separation and pumping system in the Gulf of Mexico. (video) (mb50.wordpress.com)
- Gulf of Mexico: Vector Lands Cascade Chinook Field Job (mb50.wordpress.com)