I guess that's one way to describe a $3.34 billion shortfall.
A Big Four auditor also signed off on their books 6 months ago, which just goes to show how easy it is to hide major frauds even at audited public companies. Crashes and liquidity crises often bring major insolvencies like this to a head. That's what happened here. At $60/barrel they were able
to keep the fraud going, but not at these prices.
Yeah, because the barrel was already full, you used the word "fraud" yourself.
So the fund was nothing more than a Ponzi scheme, Ponzi schemes also keep going if people pour money, they won't fail unless one thing happens, let's be real, the main reason was the fraud in the books.
Otherwise, the entire sector would be dead.
Again, you missed the point: the collapse of oil prices can act as a catalyst for shuttering already struggling oil companies. ~100 bankruptcies are expected, along with 30% of junk energy bonds expected to default.
https://www.cnn.com/2020/04/02/business/oil-crash-bankruptcies-whiting/index.htmlThat's how economic crashes work. Troubled firms can survive during boom years but go bankrupt when the tide goes back out. When they all crash at the same time (like 2008) we have a financial crisis. If there were more firms like Hin Leong engaging in Enron-style fraud, it would only
exacerbate the systemic risk already posed by the oil industry.
Your argument doesn't actually suggest the oil industry is in any way robust in the face of collapsing oil prices, or that banks would be unaffected. You're just saying, "hey look over there, fraud!"
And how is that the most important takeaway? Whether there is fraud underlying a bankruptcy doesn't make any difference.
Are you serious?
Are you?
The point of this thread is that banks are heavily exposed to oil companies, who are unprofitable or collapsing due to low oil prices, which poses systemic risk to the banking system.
The point of this thread is not whether Hin Leong had fraudulent books. That is tertiary to the above question. If anything, the fact that Deloitte signed off on Hin Leong's books raises questions about how prevalent Enron-style fraud is at public companies audited by the Big Four, i.e. virtually the entire US oil industry.
The issue is the systemic risk the oil industry poses to banks.
I went through the articles you've quoted:
North American oil exploration and production companies have $86 billion in debt that will mature between 2020 and 2024, and pipeline companies have an additional $123 billion in debt coming due over the same period, according to Moody’s.
So, that's 40 billion a year...some from companies that don't have any problems in repaying their debt.
What's 40 billion a year for the entire banking industry? EOS raised 4 billion, EOS!!!!!!!!
+$32 billion in the oil field services sector.
What's $241 billion, in a high leverage and potentially low liquidity environment where bonds are securitized and sold? Not nothing. It's something like 1.13% of the country's 2019 GDP, and much more significant than that in terms of banking liquidity.
Certainly not comparable to $4 billion. EOS? Shaking my head at that comparison.
I'm talking about crude oil because there are banks like Goldman Sachs who have more than 11% of outstanding loans tied to the oil sector. And none of these numbers include unfunded Q4 commitments either. It is too large to wave away if the banks are "too big to fail."
I'm not saying the oil industry is the only sector banks will see defaults in either, the opposite in fact. This is one systemic risk among several to consider.
Residential mortgage delinquencies pose another major risk. Then there is commercial real estate. The potential loss rate on consumer loans and credit cards is even worse. It seems worthy of speculation which of these factors, if any, might cause a tipping point for a banking crisis. Considering what happened in 2008, it would be silly to write off this possibility, especially when looking around at what's happening in the world.
Banks are bracing for the impact, because they are smart enough to see the collapse in Q2 will be epic.
They've set aside ~$35 billion among themselves to cover anticipated defaults. Will it be enough? We'll see. In times of crisis, the markets always look liquid until all of a sudden they aren't anymore.
I would change my tune on the oil industry when WTI is trading above $50 a barrel again, because that's the minimum before even the most profitable US producers can get cash flow positive. That's a huge impediment to recovery. Surviving for a couple months is one thing, surviving longer term at these prices will prove challenging. Unfortunately there are strong signs of economic deflation now, so a swift V-shaped recovery in prices looks less likely every day.
And again.. you've omitted a paragraph:
But the entire energy industry is adjusting. Parsley Energy, a leading West Texas oil and gas producer, has devised its 2020 capital budget assuming that oil prices will be in the range of $30 to $35 for the remainder of the year.
Parsley refinanced its debt in February and won’t face a crunch for at least five years.
That's one company, who managed to refinance its debt in February.
Literally no bonds are being issued to energy companies anymore. Oil companies can't refinance their debt.
And let me know when WTI is trading in the $30 to $35 range again. It's trading at $15 and touched $11 a few hours ago.
I really don't know what's going to happen but it seems silly to assume oil prices are just going to skyrocket in the near future to bail out the oil industry. Most of the commodity markets I watch are standing on the edge of a cliff too. Anything can happen, even a miraculous recovery from here, but I'm not going to stick my head in the sand given the market conditions. 2008 is still fresh in my mind.
The sentiment I see when I look around also seems way too optimistic. So many analysts are like, "Crude oil just dumped below $0 for the first time ever? Nothing to see here, move along! Everything goes back to normal next month!" We'll see about that.
