"These companies don't go bankrupt because of losses, they go bankrupt because of a lack of cash," Shimko said. "They could be making a billion dollars on trades, but if they can't post collateral it will all unravel." Constellation's worries started last month not so much because of instability in its business but because of questions about how much the company would have to set aside if its credit soured. When executives said they had underestimated collateral requirements in the event of a credit downgrade, S&P promptly reduced the company's rating, from BBB+, saying the revelation showed "a lapse in the company's risk management and control process." The downgrade required Constellation to post about $106 million in additional collateral with its trading partners.
Constellation's worries started last month not so much because of instability in its business but because of questions about how much the company would have to set aside if its credit soured. When executives said they had underestimated collateral requirements in the event of a credit downgrade, S&P promptly reduced the company's rating, from BBB+, saying the revelation showed "a lapse in the company's risk management and control process."
The downgrade required Constellation to post about $106 million in additional collateral with its trading partners.
If they want to do that stuff they should quit their jobs and start working for an investment bank (if there are any left). Peak oil is not an energy crisis. It is a liquid fuel crisis.
This is interesting because counterparty risk is relatively well understood, but the risk of yourself being downgraded seems not to be. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Also, as long as Constellation operates in "liberalised" energy markets (US, UK), they have to have an energy trading section. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Make sure you fully understand the trades that you are doing Make sure a hedger does not become a speculator Be cautious about making the treasury department a profit centre
Define risk limits Take the Risk Limits Seriously Do not assume you can outguess the market Do not underestimate the benefits of diversification Carry out scenario analysis and stress tests
Constellation says "we're not in a good position to face a downgrade by S&P" and S&P, on hearing this says "okay, I'll downgrade you".
Is S&P stupid? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Is S&P stupid?
Well judging on how relentlessly positive they've been about organisations who have heavily invested in securities that have been little better than toilet paper, if that then you'd have to say you've good evidence to say yes. Any idiot can face a crisis - it's day to day living that wears you out.
S&P got into a heap of trouble following the Enron crack-up by not looking past the companies financial (mis-) statements to the underlying reality. So to avoid that mistake they are going to quickly down rate companies on the edge and by down rating those companies they drop their debt rating below 'investment grade.' Once that happens insurance companies & etc. are forced to sell the paper, driving the interest rates of that paper up, increasing the cost of the debt, & so on through the downward spiral making the ratings downgrade a self-fulfilling prediction.
Which "proves" the ratings system "works." (For a low value of "proof" and "works.")
I, for one, sit back and marvel at the asininity of it all.
¹ My humble suggestion for updating the 'Invisible Hand' metaphor.
</tinfoil hat> Peak oil is not an energy crisis. It is a liquid fuel crisis.
