You may have read the recent comparisons between Europe’s energy crisis and the collapse of Lehman Brothers.
Two experts told me this weekend that the analogy is only suitable in the sense that it is a systemic risk with a huge amount of money involved, but there is a fundamental difference.
In 2008, Lehman Brothers had actually increased the value of near-worthless securities to such an extent that when the bubble burst, a catastrophe ensued even though the U.S. government orchestrated a bailout for the banks (although not for Lehman. ).
So the current crisis of Europe is a Lehman moment, in the sense that the government is intervening to avoid a systemic collapse, although not in the sense that utilities were speculating, short-selling or supplying empty goods.
Does this make sense?
Let’s dive deeper.
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1. European utility companies hedging their sales with futures contracts they are facing a $ 1 trillion crisis since escalating energy prices pushed collateral requirements soaring.
The size of these margin calls is far greater than what otherwise healthy power companies can handle.
Kristian Ruby, Eurelectric’s secretary general of the energy industry, told me it’s not the fundamentals of these companies that are flawed.
“It’s the bad situation that was triggered by a purposeful attempt to disrupt the market,” explained Ruby.
Think back to Lehman Bros – the boom in subprime mortgages that led to 2008 burdened banks with toxic assets. The investment bank had to file for bankruptcy after bailout negotiations failed.
Some European governments are already moving to provide liquidity to the energy sector, and power companies will be able to pay off those debts because they still have millions of paying customers.
“We will not see a bubble of false value burst [like Lehman Brothers]but we could see bad consequences with healthy companies having to go bankrupt if this is not handled well, ”Ruby added.
Tim Gramatovich, investment director at Gateway Credit Partners, he told me something like this: utility companies weren’t doing anything wrong, but they were in the wrong place at the wrong time.
“These companies followed their rules, they weren’t speculating or shorting the gas,” he told me on the phone Friday.
“These are monstrous numbers. Nobody really knows how much money, or the length of the challenge. There is a war prize and a risk reward built into the energy markets, but no one knows that number.”
Get the full scoop here.
What do you expect them to do after the European governments? What does an intervention look like? E-mail firstname.lastname@example.org or tweet @philrosenn.
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Curated by Phil Rosen in New York. (Comments or suggestions? Email email@example.com or tweet @philrosenn).