Elizabeth Warren, The Next Brooksley Born?

Brooksley Born was chairperson of the CFTC from 1996-’99 under President Clinton.

Born had all the experience one could ask for in such a post. She was the first female president of the Stanford Law Review.

She worked as a lawyer specializing in derivatives at her former-firm. Yet, ultimately her campaign to regulate these contracts was denied by Robert Rubin, Larry Summers, and Alan Greenspan.

We know that unregulated derivatives played a key role in the crisis. They’re at the heart of the TBTF problem.Watch PBS’s excellent documentary The Warning for more.

Geithner plays the role of Rubin

Now Tim Geithner, Rubin’s protege, is trying to block the appointment of Elizabeth Warren as head of the new Consumer Financial Protection Bureau.

Coincidence warning: Warren’s competitors for the job include another Bob Rubin protege, Michael S. Barr. He served as special assistant to the Mr. Rubin, and as Deputy Assistant Secretary of Treasury.

Huffington Post broke the story on Geithner’s opposition to Warren. Their source is reportedly “familiar with Geithner’s views”. Excerpt:

Warren’s persistent oversight is part of the reason for Geithner’s opposition, according to the source

We shouldn’t be surprised to learn that Geithner fears a regulator who “persistently oversees”. The horror.

The Agency Warren Should Lead

Elizabeth Warren should be the clear front runner to head the CFPB. In 2007 she wrote a paper titled Unsafe at Any Rate, which strongly influenced to new agency’s creation. She’s the most knowledgeable, honest, and motivated candidate we have.

Yet Geithner, sworn to serve the American people as Treasury Sec. doesn’t want her in the post? Some guesses as to why:

  1. She’s a lawyer who understands the complex issues at hand.
  2. She seems determined to enact real change in America’s broken TBTF banking system.
  3. She’s smarter than him.
  4. She asks questions that make Tim squirm, as seen below:

Denying Mrs. Warren this chance  would be a historic mistake.

She knows what needs fixing in our broken financial system, especially as it relates to TBTF banks. Banks that are massively subsidized by ultra-low interest rates, lax capital requirement, and guarantees both implied and explicit.

The new agency will exist under the Fed. Obviously, that’s not ideal. But it’s all we have at this point. Having Warren in there to keep an eye on the boys would be a huge step.

I got the chance to see Elizabeth Warren speak at last year’s Buttonwood conference. She is sharp as a tack and asks all the right questions. Unlike most other speakers, she didn’t shy away from criticizing banks. Here are a few quotes:

The reason banks lost confidence in each other is because they looked at their own books. (in reply to a question about cross-exposure among banks).

What we have confidence in is the fact that big institutions will be bailed out. (in reply to a question about the importance of economic confidence).

At the time (Oct ’09), I wrote:

Unfortunately, Mrs. Warren’s position is toothless; her role has no enforcement authority, after all.

This would prove to be a recurring theme throughout the conference. The speakers with the best ideas were usually in no position to act on them. Power-players like Summers and Geithner said little of substance, dodging the best questions.

Let’s not allow Elizabeth Warren to become the next Brooksley Born. If you want to get involved, contact your local representative and let them know you support the nomination of Elizabeth Warren as head of the CFPB .


hat tip Shahien Nasiripour @ HuffPo

Geologist on BP Well: ‘We know the formation is destroyed’

Controversial geologist Chris Landau weighs in with his latest thoughts on the Macondo well disaster. Snippets:

  • He has little confidence in new cap and relief wells
  • ‘We know the formation is destroyed, they destroyed it while drilling’
  • ‘You cannot seal a blownout formation from the top or bottom’
  • ‘Can’t seal a tire with 50 holes in it through the valve stem’
  • Recommends drilling 8 total relief wells to relieve pressure

I don’t pretend to possess the expertise necessary to judge Mr. Landau’s claims. For me, his commentary is food for thought, and provides some balance against the rose-tinted views presented by BP and Wall Street analysts.

We should welcome outside perspectives on the Macondo well blowout. After all, official oil flow-rate estimate were still 5,000 bpd when NPR investigations suggested 50-100k bpd. We know now that the BP/govt numbers were likely underestimating flow by 10x. Whether this lowballing was intentional is secondary to the fact that it may have hampered response efforts.

We need input from independent experts. When they’re wrong, it will be refuted. If they’re right, it may assist response and containment efforts.

Here’s the interview with Mr. Landau. It’s worth a watch, plus it has some of the better leak footage I’ve seen so far. My advice: Consume with salt, but consider.

I did some quick research on Mr. Landau to make sure he is at least quasi-legit, and am happy to report he passed a quick PH test. He’s an oil & gas geologist with drilling experience, and has some rather unorthodox theories outside of the Macondo well.

I checked out a few of his peer-reviewed papers. And they’re quite intriguing. Chris is a proponent of Inorganic Oil Theory (inorganic, as opposed to fossil). Some of his peer-reviewed work on that can be found in PDF form here on page 94 and here on page 17. It’s a little chemistry-heavy, but there’s some good meat there.

Inorganic oil is an intriguing prospect. It’s not as if fossil fuels would be the first ubiquitous knowledge to be debunked.

Disclosure: I own BP puts

Gambling on a BP Bankruptcy with LEAP Puts

2012 BP puts offer some interesting possibilities. I’m using them as a speculative bet on a worst-case Gulf scenario, but they could also make a nice hedge for longs.

Jan ’12 BP LEAP puts expire 566 days from today (7/14/2010). That’s a lot of time for something to go wrong.

For example, there will be two hurricane seasons between then and now. Just one poorly-placed hurricane could push millions of gallons of crude further into sensitive areas along the Gulf Coast, multiplying the eventual bill for BP. Warm water conditions mean NOAA is forecasting an abnormally high 13-23 named storms in the Gulf of Mexico in 2010.

Potential Profit from BP Puts

Let’s use Jan ’12 $2.50 BP puts as an example. They closed with an ask price of $0.16 today. One hundred contracts at that price would cost $1600 + commission. Each put gives its holder the right to sell 100 shares of BP stock at $2.50 on date of expiration (Jan 21 2012 in this case).

If BP shares are wiped out, the maximum potential profit on 100 $2.50 puts would be $23,138 (assuming a $.02 share price at option expiration). Max loss is the initial cost of the puts, $1600 + commission.

So the max ROI would be 1446%, or around 14x the initial investment. BP filing for bankruptcy is still a highly hypothetical scenario, but I think the risk/reward ratio is good here.

The fact that you can make 14x your money on these options means investors are essentially betting on a 1 in 14 chance of BP going bust by the expiration date, Jan 21 2012. I think there’s more like 1 in 4 chance of bankruptcy, hence the bet.

Buying the $2.50 puts is an aggressive strategy. It’s betting on total disaster. A more conservative strategy use puts closer to the money ($15, $25, etc). The potential upside would be less, but it’s a little bit safer. I own a few different 2012 strikes, including some $2.50s.

BP is an international giant with deep pockets and political clout to match. But its risks are high too. The litigation costs alone will be staggering. Other potential potholes include legislation, reputation, well casing degradation, environmental devastation, and other “ations” we have yet to fully grasp.

On the legislation front,  today the U.S. House Natural Resources Committee passed an amendment which could effectively ban BP from future offshore drilling leases. More on that over at Bloomberg BusinessWeek.

For BP, it all adds up to unknown liabilities, slower growth, and higher drilling costs going forward (no more shortcuts, hopefully). That’s why I think that even a behemoth like BP could buckle under the weight of this mess.

Bankruptcy Scenario

One big question that would emerge from a BP bankruptcy is how claim seniority is handled. Would bondholders and other creditors retain seniority over economic and environmental claims?

I’m guessing common shareholders would be wiped. But a Bear Stearns-esque buyout, with Exxon or Shell reprising the role of J.P. Morgan and U.K. gov’t subbing in for the Yanks is certainly possible. We won’t know until the situation plays out and the full extent of the damage is known.

Further harm to BP investors would be unfortunate. It’s a staple of retirement funds and the demise would have widespread financial impact. However, if it comes down to a lack of funds at some point, it would be an even greater tragedy to punish innocent parties adversely affected by the spill, and shortchange cleanup efforts in favor of investors. An investment comes with risks, always. If someone has to suffer, it’s gotta be stakeholders of the at-fault party.

But that probably won’t happen based on what I’ve read. In the fallout from asbestos/mesothelioma bankruptcies, creditors were placed above victims in most cases (as I understand it). More on that here.

Disclosure: Long BP puts including Jan 2012 $2.50s.
Note: This is NOT financial advice. It is provided for informational purposes only.

Random market thoughts

  • Bought more GOOG this week, it is really really cheap here.
  • Re-shorted BP today @ $32.50 with a stop @ $36. Still holding some pure gamble 2011/12 LEAP puts at multiple strikes ($2.50 to $29).
  • Bought XOM this week, partially as a pair to the BP short, but mostly cause it looks cheap and I needed more energy.
  • Trimmed AAPL to near the bone, used proceeds to buy GOOG. Recent developments in China may look bad for Google, but I think they’ll be worse for Apple in the long run (labor costs set to skyrocket).
  • Trimmed PGJ (domestic-driven Chinese ETF) a bit. Nothing against this China really, just finding other options more attractive and taking some profits.
  • Bought Acergy (ACGY), a Norwegian offshore drilling services firm. Among other things, ACGY are some of the guys who run those ROVs hovering around BP’s Macondo well. Co. just merged with Subsea 7, which should work out well for both parties.

Anyone else got ideas? This market is obnoxious.

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