Wednesday, June 16, 2010

Bank of America (NYSE:BAC) Limits BP (NYSE:BP) Trades

According to a source close to the situation, Bank of America (NYSE:BAC) has told its traders they can't participate in oil trades with BP (NYSE:BP) (LON:BP) which go beyond June 2011.

Under conditions like these, it's almost certain the directive was made because of the liability the oil giant faces, and which are unpredictable beyond that time period.

Normally a company does this in order to protect itself from taking a big hit over the long haul, which in this situation with BP, a year would represent.

There are no guarantees BP will be able to meet its obligations beyond that time, and this is a move by Bank of America to protect itself from potential fallout.

These concerns are also displayed with the growing cost of credit default swaps, which have increased to 515 basis points, and seem to rise every couple of days as the spectacle continues.

What this means is it costs BP $515,000 to insure every $10 million in debt over a five-year period. Just a little over a month ago CDS were at 40 basis points at BP, costing them only $40,000 for each $10 million.

Fitch Ratings downgraded the credit of BP by six notches today, from AA to BBB, placing them not too far away from being considered junk status.

All of this confirms BP is not a good bet over the long term, the reason for the orders from Bank of America concerning BP trades.

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