The impact of the 2007-2009 subprime mortgage crisis in the integrated oil and gas industry

Table of Contents

List of abbreviations

List of tables and graphs

Acknowledgements

Abstract

Chapter one: Introduction

Chapter two: Literature Review
2.1.Introduction to the second chapter
2.2.The current financial crisis
2.2.1.The emerging literature on the causes of the current financial crisis
2.2.1.1.Politics and Policies
2.2.1.2.Credit Rating Agencies (CRA’s)
2.2.1.3.‘Originate and distribute’ banking model and recent developments
2.2.1.4.Financial innovation and technology
2.2.1.5.Information
2.2.1.6.Fair Value Accounting
2.2.1.7.Incentive Distortions (between brokers, agents and bankers)
2.3.Financial crises in the oil and gas context
2.3.1.Oil and Gas Industry background
2.3.2.Impact of economic and financial crises in the Oil and Gas industry in the past
2.4.Business strategies
2.4.1. Oil and Gas industry business strategies-scenario planning
2.4.2.Link between finance and strategy
2.5.Research questions
2.6.Chapter conclusion

Chapter three: Methodology
3.1.Introduction to the second chapter
3.2.Research approach – Epistemological view
3.3.A multi-method approach
3.4.Descriptive statistics and general information about the participants
3.5.Chapter conclusion

Chapter four: Findings and Analysis
4.1.Introduction to the third chapter
4.2.Analysis of survey data
4.2.1. Financing of the companies
4.2.2. The link between finance and strategy
4.2.3. Impact of the crisis in different departments of a company
4.2.4. Effectiveness of Risk Management methods applied in the companies
4.2.5. Impact of the crisis in the cost of capital of the companies
4.2.6. Impact of the crisis in different departments of a company
4.2.7. Scenario Planning
4.2.8. Analysts Recommendations
4.2.9. Impact of the current crisis in different aspects of business entities
4.2.10. Findings of the questionnaires, and other factors, which can affect the speed of economic recovery
4.3.Analysis of reports
4.3.1.Analysis of the publicly available financial statements
4.3.1.1. Sales and Net profits
4.3.1.2. Liquidity ratios
4.3.1.3. Long-term debt
4.3.1.4. Net cash from operating, financing and investing activities
4.4.Analysis of the analysts’ reports
4.4.1.Analysis of the M&A activity for 2007-2009
4.4.1.1. Financial data concerning the M&A activity for the year 2007-2009
4.5.Chapter conclusion

Chapter five: Discussion
5.1.Introduction to the fourth chapter
5.2.Discussion of main findings
5.3.Chapter conclusion

Chapter six: Conclusions
6.1.Conclusion
6.2.Limitations-Future research

Bibliography
7.1. Articles/Journals
7.2. Books
7.3. Press
7.4. Websites
7.5. Other

Appendix 1

Appendix 2

Appendix 3

Appendix 4

Appendix 5

Appendix 6

List of abbreviations

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List of tables and graphs

Table I: Biggest financial and economic crises in history

Table II: Relation between growth opportunities and financial conditions

Table III: Location of the headquarters of the companies which were asked to participate in the survey

Table IV: Continent that the headquarters of the companies which were asked to participate are based

Table V: Location of the headquarters of the companies which responded in the survey

Table VI: Continent that the headquarters of the companies which responded in the survey are based

Table VII:Positions in the companies of the persons who participated in the survey

Table VIII: Analysts recommendations for the companies under examination, for the years 2001, 2005 and 2009

Table IX: The implications of credit tightness and lower oil prices for different kind of companies of the O&G industry

Table X: Household debt payments, as a percentage of disposable personal income is presented, (1980-2008)

Table XI: Chronological order of the main events that happened in the 2007-2009 financial crisis

Table XII: Top Ten Deals in O&G industry for 2008

Table XIII: Deals in O&G industry by each continent for 2007 and 2008

Table XIV: Deals in O&G industry, 2008

Table XV: Deals in O&G industry by sector, 2008

Table XVI: North America deals by sector

Table XVII: South America deals by sector

Table XVIII: Europe deals by sector

Table XIX: Russian Federation deals by sector

Table XX: Asia Pacific deals by sector

Table XXI: Australia deals by sector

Table XXII: International deals by sector

Table XXIII: Africa deals by sector

Table XXIV: Middle East deals by sector

Table XXV: Main events that have affected the oil prices (1970-2008)

Graph I: Non-corporate and Household debt, as percentage of GDP

Graph II: Household debt as a percentage of disposable income in the US

Graph III: Household valuations, and distribution between households with and without mortgages

Graph IV: Actual and adjusted delinquency rates

Graph V: Year-to-year increase in US home equity loans

Graph VI: Increase in home ownership

Graph VII: S&P/Case Shiller home prices indices

Graph VIII: First quarter 2009 increase in earning in the US, for different industries

Graph IX: Oil price volatility (1982-2009)

Graph X: O&G deals by value, 2005-2008

Graph XI: O&G deals by number, 2005-2008

Graph XII: Decrease in deals of the O&G industry, 2005-2008

Graph XIII: Decrease in deals of the O&G industry, 2007-2008

Graph XIV: IEA hypotheses about world energy needs for

Graph XV: IEA estimates for world oil production, according to the hypotheses of the previous graph (1900-2100)

Graph XVI: Oil price volatility and events which affected its price

Acknowledgements

I would like to dedicate this paper to the memory of my father, Helias K. Tsanis, without whose unconditional self-sacrifice, support and guidance, I wouldn’t have been able to get this far.

Furthermore, I would like to thank my supervisor, Dr. Bradley Mackay, for his critical and valuable comments, as well as for his continuous support and encouragement, all the way through the completion of the current paper.

In addition, special thanks to my Mother, Helen Kiriakou, and to my sister, Despina Tsani, for their help and support in different stages of my life, as well as to Katherine Nicolson, for helping me to overcome difficult situations, and be productive but have beautiful moments as well. Many thanks to Mr. Vassilis Delivorias, as well, for his help and support to me and my family.

Last, but not least, I would like to thank all the persons who participated in my survey, helping me to complete my paper, as well as all my classmates from the MSc in Finance and Investment, class of 2009, who helped me to have a productive year, with many moments of studying, anxiety, and fun as well.

Abstract

The years 2007-2009 the global economy has been affected by the subprime mortgages crisis, which has its origins in the extremely risky positions that some banks and financial institutions held. When defaults in payments started, and banks started facing problems in their payments, lending between banks became more difficult, and through the contagion of the global financial system, the crisis spread around the world.

This crisis affected many industries. The current paper attempts to examine the impact of the 2007-2009 subprime mortgage crisis in the integrated oil and gas industry. Energy, and subsequently oil and gas, are vital for many other industries, as well as for individuals and households.

The impact of the crisis is examined through a multimethod approach: Questionnaires, which were sent to executives of oil and gas companies, are analysed in the beginning, followed by analysis of basic figures of the financial statements of the 200 biggest oil and gas companies. Findings are supplemented by the examination of the analysts’ recommendations, for a number of years. Finally, the mergers and acquisitions between oil and gas companies are examined.

This paper, has the characteristic that it investigates an event which is still unfolding. As a result, there is not established information about some topics, such as the specific causes of the crisis. Therefore, the emerging literature on some topics is analysed, and specialists’ reports are included, to compare and contrast findings.

Results show that, even though energy, and subsequently oil and gas, are necessary for almost every industry, the decrease in global demand, as well as the lower oil prices, will lead to a decrease in long term investing. Furthermore, sales of companies are expected to be lower, and this will oblige companies to find ways to reduce the costs, in all the levels of their value chain.

Keywords: Oil and Gas industry, 2007-2009 Financial Crisis, Scenario Planning, Risk Management

Word count: 16.500

Chapter one: Introduction

In the last two years, the world has been facing an economic downturn. According to academics and professionals, the worst has passed, and the recovery started^{[1][2][3][4][5][6][7][8][9][10]}. The 2007-2009 financial crisis, in brief, is a result of the increased risks banks were engaging, in order to achieve bigger returns, and be more competitive^[11]. Defaults in loan payments resulted major banks and companies to declare bankruptcy, intrabanking lending became much more difficult, and, through the contagion of the global financial system, the crisis spread around the world^[12]. This paper, through a multimethod approach, will try to investigate the possible effects of this financial crisis in companies of the integrated O&G industry.

It is known that among other natural resources, O&G are of great importance, because they both have a pivotal role in satisfying the growing of both companies and individuals^[13]. However, both resources are in scarcity, and therefore their position gives to the owner more benefits, than just energy autonomy^[14]. Since they are vital for the global economy, an investigation of the strategies of the companies of the O&G, and their preparedness for a financial turmoil, such as the current one, can provide useful insights, about the way that a corporate strategy is developed, and the link of the strategy with business financing, which is one of the main business functions affected from the current crisis.

Financial crises are not a recent phenomenon. One of the first bubbles in the history was the ‘tulip-mania’, in Netherlands, around 1637, during the ‘Dutch Golden Age’.^[15][16]. The crisis was a result of the very high prices of the futures contracts for tulip bulbs. At its peak, one tulip bulb was equal to 10 times the annual income of a skilled craftsman^[17]. When the bubble bursted, the tulip bulbs prices became normal again.

In the following years many different financial crises occurred. The South Sea Company (1720) and the Great Depression of 1930, are the most famous, inter alia. More recent examples could be the 1973 and 1979 crises because of the OPEC’s oil

embargo^[18], and the 1987 crisis, with the famous ‘black Monday’^[19]. According to IMF (2008), between 1990-2007 the number of financial and economic crises, in national and international level was equal to 42^[20]. Table is classifying the biggest financial crises in history.

Table I: Biggest financial and economic crises in history^[21]

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Mishkyn (2001), categorised the 4 most important factors which have caused financial crises in history. These are:

- Sudden increases in interest rates, from the central banks of different countries.
- Big declines in stock markets.
- Increases in uncertainty, because of unexpected events, such as wars, scarcity of resources, and other.
- Bank panics, where confidence in intrabanking relations is lost.^[22]

Mckinsey, a consulting company, states that financial crises occur often, almost every ten years^[23]. The role of financial markets is to ‘help the economies to allocate the resources, which are in scarcity, more efficiently’^[24]. However, when financial markets have failures, the impact in real economy is huge: economic development stops, unemployment increases and the general welfare is affected negatively^[25].

While there is a substantial literature on the causes of financial crises and how they can be predicted, two academics whose research is particularly pertinent for this dissertation are Minsky and Roubini^[26]. Minsky, attempted, many years ago to develop the ‘Financial Instability Hypothesis’ where he tried to explore the reasons for financial instability^[27]. He categorised income–debt relations for different economic units, into three categories: ‘hedge’, which was the least risky form of financing, ‘speculative’, and ‘Ponzi’ finance^[28][29], where the cash flows from the operations are not sufficient to fulfil the principle or interest payments. The recent Madoff scandal is an illustration of Ponzi financing^[30][31]. Minsky argues that, in good times, world’s economies tend to move from less risky forms of financing (hedging), to speculative and, even worse, to Ponzi finance. In other words, financial stability leads to instability. A point of Minsky, is that there should have been put effort to reform the system from ‘money-market capitalism’ to the ‘capital development of the economy’^[32]. According to Kindleberger (2005), his model is the tradition of classical economists^[33][34].

Roubini is another academic whose research is related to the current crisis.^[35]. In 2006, he announced to an IMF meeting that he was sceptical, about the bubble which was growing, and could lead to deep recession. This would happen because of the increase in bad quality MBS, which would lead to high levels of delinquencies and defaults in the payments of the mortgages.^[36]. As recognition to the high accuracy of his predictions, he was elected as ‘second most intellectual person alive at the world’, and received many prizes^[37].

The structure of this paper is the following: In chapter two, information is presented about financial crises in the past, and the emerging literature about the causes of the current financial crisis, followed by background information about business strategies, and the O&G industry. The chapter concludes with presentation of the research questions. In chapter three, the methodology followed is presented, with information about the participants in the project. In chapter four, findings of the multimethod approach followed are presented, while in chapter five, results are discussed, and compared and contrasted with the existing literature, as it is presented in the literature review chapter. In chapter six, final conclusions are drawn, followed by presentation of the limitations of this paper, which are the suggestions for future research as well. The questionnaire used in this paper, and other useful information, mentioned in the text, are given in the appendices.

2. Literature Review

2.1.Introduction to the second chapter

In the following paragraphs, the existing literature about financial crises of the past is presented. Furthermore, the timeline of the events of the current financial crisis is presented, followed by a presentation of the emerging literature on the causes of the current financial crisis.

2.2.The current financial crisis

Literature for the causes of the current financial crisis is still emerging. This crisis followed a typical ‘boom-bust scenario, in which unsustainable growth leads to the collapse of the market’^[38]. In recent years, high risk loans from banks had substantial growth. Subprime mortgages, described simply, are high-risk loans to individuals. ‘NINJA’ loans (No job, no assets, no income) were among the most popular subprime mortgages, where the borrower didn’t have a job, assets, and constant income^[39][40]. The debt from the mortgages , was then packaged and sold to other parties, who were not aware of the characteristics of the original mortgage borrowers^[41]. The process of collecting the debt and then selling it to third parties is called ‘securitization’. Graphs one and two depict the increase of US household debt as percentage of GDP, and as a percentage of disposable income, correspondingly. As it can be seen, there was a very big increase in each household’s debt the recent years, being higher that the US GDP for 2006, equal to almost 140 percent of the disposable income of each household. Graph three presents the distribution of households with and without mortgages, for different households’ valuations. As it can be observed, the bigger the value of house, the more the probabilities that this house will be purchased through a mortgage.^[42]

Graph I: Non-corporate and Household debt, as percentage of GDP (1916-2007)^[43]

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Graph II: Household debt as a percentage of disposable income in the US (1952-2004)^[44]

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Graph III: Household valuations, and distribution between households with and without mortgages^[45]

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Securitization, involved GSE’s, such as Fannie Mae and Freddie Mac, who bought pools of mortgages originated by financial institutions, in exchange for cash or other MBS. After buying them, GSE’s issued different tranches. Each tranche was carrying different yields, depending on the ratings they had received from CRA’s. CRA’s aim was to narrow the information gap between mortgage sellers and investors, or the ‘’information asymmetry’’ problem. After their purchase, commercial banks distribute them in the money markets as MBS using SPE’s/SPV’s^[46][47].

As a result, there was a big amount of ‘toxic’ debt in the financial markets. The increase of the number of loans, between 1999-2005, can be seen in graph five. When mortgages borrowers started defaulting in their payments, banks started losing confidence between each other. Graph four presents the increase in the delinquency rates for the recent years.

Graph IV: Actual and adjusted delinquency rates (2001-2007)^[48]

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In September 2007, British Bank Northern Rock made known to the public that it was running out of working capital, and asked help from UK government, triggering the confidence in the UK financial system. After some months, two of the biggest financial institutions in the US, Bear Sterns and Lehman Brothers faced severe liquidity problems, increasing uncertainty^[49][50][51]. Banks and companies collapsed, or declared bankruptcies^{[52][53][54][55]}, while other were at high risk. Big stimulus packages were provided from many countries, in order to prevent the global economy from worse events^[56][57].

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Graph V: Year-to-year increase in US home equity loans (1998-2008)^[58]

2.2.1.The emerging literature on the causes of the current financial crisis

The origins of the current crisis could fall into the following categories: Politics and policies, credit rating agencies (CRA’s), ‘originate and distribute’ banking model, and other recent developments in banking, financial innovation and technology, information asymmetry, fair value accounting, and incentive distortions between brokers, agents and bankers. In the following section, each possible factor is analysed in turn.^[59]

2.2.1.1.Politics and Policies

The policies that US governments’ followed the recent years impacted the housing markets, as well as the general financial system. The US government followed a low-interest rate policy because of previous bad economic situations^[60]. The aim of this action was to encourage growth when markets were in trouble^[61]. Mah-Hui Lim, (2008) believes that the limited impact of these crises on the markets fuelled investors and politicians beliefs about global financial stability^[62].

Since 1995, the US government followed a strategy of ‘affordable housing’, in order to encourage house ownership, for every citizen; this was to happen through ‘democratisation of credit’^[63]. This resulted in an increase in home ownership from 65% in 1995 to 69% in 2006^[64] (Graph six).

Graph VI: Increase in home ownership (1970-2006)

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As it can be seen by the S&P/Case-Schiller Home Price Indices (graph seven), there was a large appreciation in home prices in the period 1998-2006.

Graph VII: S&P/Case Shiller home prices indices

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The above factors led to the belief that the world was in the era of ‘Great Moderation’^[65]. This meant that macroeconomic volatility had decreased, and the financial system has stabilised. This spread confidence to all parties in the investing community^[66].

2.2.1.2. Credit Rating Agencies (CRA’s)

CRA’s were responsible for the rating of MBS, and their turnover was based on the fees received for the services they offered. The credit rating fee is not paid by the user (investor), but by the seller (banks and mortgage agents). This is a source of potential conflicts of interest.

CRA’s are blamed for lowering their credit standards. As it was proven, the due diligence conducted by the rating companies, for the collaterised pool was inadequate. As a result, investors were unknowingly receiving the same return for higher levels of real risk.

In 2000, S&P decided that ‘piggy loans’ (obtaining a second loan in order to pay the first one) carry the same risk, instead of regarding them as more risky, which was the usual practice until that moment; they therefore gave them identical ratings.^[67] In 2006, it was found that ‘piggy loans’ were 43% more likely to default.

According to Wray (2008), as the fees received from assessing structured finance were a significant proportion of CRA’s turnover, there was an incentive to rate as many financial products as possible. An illustrating example could be Moodies, one of the prominent CRA’s, whose 44% of turnover was generated from fees originated from assessing structured finance (student loans, credit cards debt and others), for 2006.^[68]

Models used for applying credit ratings were inefficient. Assessment was not made using traditional methods^[69], but with electronic models which promoted automatic underwriting. These models were not able to incorporate all the related factors, such as price appreciations of the houses or correlations between significant factors. Because of potential conflicts of interest, the design of the models used from companies, from ‘market to model’ they became ‘market to myth’, and finally ‘GIGO’ models.^[70][71]

The critique made for CRA’s, the fact that payments were made by the securities sellers and not the investors, the big proportion of turnover from assessing structured finance products, and the computer based models used, provide sufficient evidence to accuse them that they encouraged growth of the bubble.

2.2.1.3.’Originate and Distribute’ banking model and other recent developments in banking

Another contributing factor was the business model followed by banks, and recent financial developments. This model is different to the classical ‘originate and hold’ banking model.^[72]

According to Wray (2008), with this new banking model, banks were able to increase leverage, resulting in leverage ratios of 15:1, while with the ‘old model’ it was close to one.^[73] Banks, through the use of SPV’s enhanced the securitization process.^[74]

Another contributing factor in the crisis was banks’ reliance on wholesale rather than deposit funding. As it can be now seen from Northern Rock, who was nationalised after it failed to secure funding, wholesale funding was very risky.

A recent development in banking regulation was the signing of the 1999 Gramm-Leach-Bliley Act. This permitted commercial banks to become more involved in riskier practices seen in investment banks.^[75]

2.2.1.4. Financial Innovation and Technology

Securitisation and structured financial products are results of the so-called ‘financial engineering’. The result of financial innovations was complicated financial products, that ‘even their designer couldn’t understand their entire structure’^[76]. This made it difficult for investors to understand exactly where they are investing.^[77] Banks created products that just met CRAs requirements. The result was investor herding, due to investors’ overconfidence.^[78]

2.2.1.5. Information asymmetry

The classical problem of information asymmetry and agency problems also has its place in the current crisis. There was information asymmetry from two different parties: mortgage borrowers, who did not know the exact conditions applied for the loans they were receiving , and investors, who were not aware of the risk involved in financial innovations. Bernanke stated that ‘investors failed to impose sufficient discipline to the subprime originators which were the sellers’^[79], meaning that it was investors’ responsibility to be better informed about their investments.^[80]

The combination of low financial literacy of the borrowers and ‘borrowing greed’ resulted in risky loans, such as ‘low doc’, ‘no doc’, ‘liar loan’(borrowers were encouraged to lie) and ‘NINJA’ loans, which were mentioned earlier.^[81]

2.2.1.6. Fair Value Accounting

FVA was not a direct cause of the crisis; however since the bubble bursted, it helped to grow and spread the crisis. There has been a lot of debate surrounding FVA, its meaning, its importance, and how it should be applied, especially in periods characterised by high levels of volatility. According to IASB, an assets value is based on the price that this asset would have in a transaction between two willing parties (as opposed to during a liquidation process)^[82]. As the crisis spread, because of mark-to-market valuating methods and FVA, assets that were worth large amounts before, now they were worth nothing. This is because no one wanted to invest in such products, which are difficult to liquidate and are under severe legal structures of Sarbanes-Oxley act.^[83] An example of this was Bear Stearns, which held $2.5 trillion in CDS, however after they were marked to market they were worth $40.3 billion.^[84]

2.2.1.7. Incentive Distortions (between brokers, agents and bankers).

It is believed that incentive distortion was a contributing factor to the current crisis. The process through which loans were generated made mortgage brokers and agents to focus on the quantity of the mortgage loans and not the quality, as they receive commission on fees over the number of the loans they have generated. There was a time where brokers wanted to sell as much loans as possible, in order just to receive the corresponding fees, thus providing ‘raw material for no quality’.^[85]

Incentive distortion between mortgage brokers and agents was enhanced by the fact that mortgage agencies were not regulated by banks, as US regulatory authorities didn’t demand such requirements. Through the ‘window’ of mortgage brokers, banks could pool bad quality loans generated by non-regulated mortgage brokers. Following this process, they could easily increase their leverage.^[86]

In summary, the factors analysed above contributed to the creation and growth of the 2007-2009 subprime mortgage crisis. As stated in the introduction, the worst of the crisis has past, and many professionals, academics and politicians are now more optimistic about the future^[87]. Since financial crises are a necessary component to global economic development, no one can be really sure about the future of finance^[88]. Recently Bernanke stated that ‘World economy has started growing again, however, this ‘rally’ of global financial markets should be regarded carefully, as it is fragile’^[89], while Roubini, warned that the recent development can be severely affected by high interest rates and rising oil prices, and the world might enter into a second recession.^[90] In order to better understand the way that the current financial crisis affected the O&G industry, a summary of their past impact is presented in the next paragraphs.

2.3.Financial crises in the oil and gas context

In the next paragraphs, general information is provided about the O&G industry, and the impact that past crises had on it, in order to provide to the reader the information needed to understand the research questions and the findings, which are later presented in this paper.

2.3.1.Oil and Gas Industry background

Among the natural resources with the biggest global demand is O&G. Nowadays energy resources increased importance for the global economy. On the one hand, energy is used almost everywhere: From industrial production to everyday’s transportations. On the other hand, all types of energy that are used, are not in abundance, and their use has different effects to the environment : While solar energy and hydroelectric might exist free in the nature, their energy efficiency is much less than the energy produced by coal, natural gas and petroleum. However, the last three different kinds of energy severely harm the environment^[91].

Because of the scarcity of these O&G, and the extent of their use in both developed and developing countries, the possession of such resources, means that the owner of them can influence other countries, who need them. The geopolitical importance of energy has been growing the last 50 years, and it was felt by almost everyone during the 1973 and 1979 OPEC^[92] price rises, and the subsequent economic crises. Currently, many O&G industry specialists, and non-specialists as well, expect that ‘The third world war will happen for energy’^[93][94][95], and an ‘energy crisis’ is on its way^{[96][97][98][99]}. Because of its importance, oil is very often called ‘strategic commodity’^[100][101]. Howarth states that ‘no other single industry affected 20th-century civilization more rapidly or more profoundly that the oil industry. Oil was the great enabler, providing from one basic source a rainbow range of products’^[102]. One more unique characteristic, of this industry, is that its beginning can be dated specifically – 28th August 1859, when Edwin Drake discovered some oil in Pennsylvania^[103]. Countries like Kuwait, Venezuela, Russia, Nigeria and others, are rich in natural resources, have surplus of them, and can export them. All the rest are depended on the supplier countries, in order to develop. The result of this dependence is geopolitical disputes, such as the dispute which lasts the last 3 years between Ukraine and Russia^[104][105].

When talking about the companies from which the O&G industry consists, we can categorize them either based on who is the owner (Public-Private), or in the type of activities it operates (upstream/downstream/integrated).

When talking about IOC, we refer to the western-type companies, which are usually being traded in a stock exchange, while when we refer to NOC, we refer to companies which are state-owned^[106]. While the IOC is mainly concerned with profitability, share prices, and risk management, the NOC has to deal with government demands, local politics, and to seek ways to access capital and technology, which is sometimes more difficult than it is for IOC’s^[107]. NOC’s are more often observed in developing economies^[108]. In these cases, the O&G companies are of strategic importance for the national economy^[109].

When talking about the categories of the activities that the companies perform, we categorize them as upstream (O&G exploration and production), downstream (refining and marketing) and integrated (term used for companies which perform all different activities mentioned in this paragraph). API adds three more categories: Pipelines (transportation of the O&G from lands and sea to refineries and then to terminals), service and supply (all the companies which provide equipment, engineers and designers for O&G exploration and production) and marine (all means of transportation of O&G through sea)^[110].

[...]

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^[24] Cuthberson, K. And Nitzsche, D. (2008), ‘Investments’, Wiley Publications

^[25] Mankiw, G. (2008) : ‘Macroeconomics’

^[26] One more academic, Paul Krugman, the 2008 Nobel prize recipient, is regarded as having been correct in the critique he did for many years, working as columnist, in the New York Times, against US Bush’s economic policies, which, as stated in part 1.3.1, are regarded as having helped the bubble to grow. Even though his argumentations against ‘’the short-termism of Bush’s policies’’ were correct, his research focus isn’t concerned with financial crises (the Nobel Prize he received was about his work on New Trade Theory, by integrating economies of scale in general equilibrium models’ (http://nobelprize.org/nobel_prizes/economics/laureates/2008/ecoadv08.pdf)), therefore, his theories are not analysed.

^[27] Hyman Minsky, ‘financial instability hypothesis’, working paper No. 74, The Levy economics institute of Bard college, 1993

^[28] Also known as chain letters or pyramid schemes

^[29] Kindleberger, C. And Aliber, R. (2005) : ‘Manias, Panics and Crashes: A History of Financial Crises’, Palgrave Macmilan

^[30] http://www.foxnews.com/story/0,2933,466665,00.html

^[31] Recent research papers about the current crisis claim that a large number of mortgages received to finance the buying of the houses were actually a form of Ponzi finance.

^[32] L. Randal Wray, ‘comments on Minsky’s approach to securitization’ The Levy economics institute of Bard college, 2008, No.2

^[33] Such as John Stuart Mill, Alfred Marshal, Knut Wicksell and Irvin Fisher

^[34] Kindleberger, C. And Aliber, R. (2005) : ‘Manias, Panics and Crashes: A History of Financial Crises’, Palgrave Macmilan

^[35] Nouriel Roubini, a Turkish economist who has been researching and policy-making the last 30 years in the US, had predicted current events, with big accuracy. According to fortune magazine, "In 2005, Roubini said home prices were riding a speculative wave that would soon sink the economy. Back then the professor was called a Cassandra. Now he's a sage" (source: http://money.cnn.com/galleries/2008/fortune/0808/gallery.whosawitcoming.fortune/2.html)

^[36] Because of the accuracy of his predictions, he is often called ‘Dr. Doom’ (source : http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?_r=1)

^[37] http://www.thoughtsworththinking.net/2009/04/dr-doom-nouriel-roubini-himself-may-hold-key-to-market-recovery/

^[38] Demyanyk, Y. And Hemert, Otto Van (2008) : ‘Understanding the Subprime Mortgage Crisis’

^[39] Demyanyk, Y. And Hemert, Otto Van (2008) : ‘Understanding the Subprime Mortgage Crisis’

^[40] http://www.telegraph.co.uk/finance/economics/2785403/Ninja-loans-explode-on-sub-prime-frontline.html

^[41] Demyanyk, Y. And Hemert, Otto Van (2008) : ‘Understanding the Subprime Mortgage Crisis’

^[42] Appendix one presents the quarterly numbers of mortgages, as well as their value, from 1980, until 2008. The high levels of debt are clearly observable.

^[43] http://www.npr.org/blogs/money/2009/02/household_debt_vs_gdp.html

^[44] http://bp3.blogger.com/_odwu_bJENb8/SFLW_U3KzzI/AAAAAAAAAyg/abgjMw-ISuQ/s1600-h/Household+debt.jpg

^[45] http://www.calculatedriskblog.com/2009/06/households-with-mortgages-approximately.html

^[46] off balance entities used by banks, in order to avoid including these mortgage pools in their balance sheets, thus gaining the advantages of securitization

^[47] C.A. Stone and A. Zissu, The Securitization Markets Handbook, 2005, Bloomberg press

^[48] Demyanyk, Y. And Hemert, Otto Van (2008) : ‘Understanding the Subprime Mortgage Crisis’

^[49] http://news.bbc.co.uk/1/hi/business/7101523.stm

^[50] http://www.businessweek.com/bwdaily/dnflash/content/mar2008/db20080316_356646.htm

^[51] http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4761892.ece

^[52] AIG, JP Morgan, General Motors, and other conglomerates, inter allia, faced severe economic difficulties.

^[53] http://news.bbc.co.uk/1/hi/business/7618430.stm

^[54] http://www.washingtonpost.com/wp-dyn/content/article/2008/04/16/AR2008041603483.html

^[55] http://news.bbc.co.uk/1/hi/business/8077255.stm

^[56] ‘Summary of the Emergency Economic Stabilization Act of 2008’, United States Senate Committee on Banking, Housing and Urban Affairs

^[57] Appendix two presents the timeline of the events of the current financial crisis.

^[58] C.A. Stone and A. Zissu, The Securitization Markets Handbook, 2005, Bloomberg press

^[59] Murphy, G., Xie, A., Tsanis, K. (2008) : ‘A Critical Evaluation of the 2007-2008 Financial Crisis’, University of Edinburgh Business School

^[60] Examples are the dot.com bubble, the collapse of Long Term Capital Management, and the 9/11 terrorist attacks

^[61] Goodman A.,Thibodeau, T., ‘Where are the speculative bubbles in the US housing markets?’ Journal of Hosing economics, pg 117-137, 2008

^[62] Michael Mah-Hui Lim ‘Old wine in a new bottle: Subprime Mortgage Crisis—Causes and Consequences’ The Levy economics institute of Bard College , 04/2008

^[63] The economist special report : ‘When fortune frowned : special report in world economy’, October 11th 2008.

^[64] Ben S. Bernanke speech at the Federal Reserve bank of Chicago’s 43rd annual conference on Bank Structure and competition , Chicago, Illinois,May 2007

^[65] Ben. S Bernanke : ‘The Great Moderation’, Speech given at the meeting of the Eastern economics association, Washington DC 20 February 2004

^[66] Michael Mah-Hui Lim ‘Old Wine in a New Bottle: Subprime Mortgage Crisis—Causes and Consequences’ The Levy economics institute of Bard College, 04/2008

^[67] Pendley M. Diane, Glenn Costello and Mary Kelsch, 2007, ‘the impact of poor underwriting practises and fraud in subprime RMBS Performance’

^[68] L.Randall Wray (2008), Lessons from subprime meltdown, working paper N. 522- The Levy economics institute of Bard college

^[69] When talking about traditional methods of assessment, we refer to physical presence of the borrower

^[70] GIGO : Garbage-in, Garbage out, meaning that since the inputs in these models were of bad quality, then the outputs would be of bad quality as well.

^[71] Willem H. Buiter (2007) Lessons from the 2007 Financial Crisis, Centre for economic policy research

^[72] Willem H. Buiter (2007), Lessons from the 2007 Financial Crisis, Centre for economic policy research

^[73] L.Randall Wray (2008), Lessons from subprime meltdown, working paper N. 522- The Levy economics institute of Bard college

^[74] ENRON aside, SPV’s are Legal, Innovative and Widely used, 05/2006, knowledge Wharton

^[75] ‘R. Christopher Whalen (2008), The subprime crisis – cause effect and consequences, Networks financial institute at Indiana state university

^[76] Avinash Persaud, intelligence capital: ‘why bank risk models failed’, the first global financial crisis of the 21st century

^[77] Report of the financial stability forum on Enhancing market and institutional resilience, April 2008

^[78] Avgouleas Emilios , ‘Financial Regulation, Behavioural Finance, and the Global Credit Crisis : In Search of a New Regulatory Model ‘’

^[79] Report of the financial stability forum on Enhancing market and institutional resilience, April 2008

^[80] L.Randall Wray, Lessons from subprime meltdown, working paper N. 522- The Levy economics institute of Bard college

^[81] L.Randall Wray, Lessons from subprime meltdown, working paper N. 522- The Levy economics institute of Bard college

^[82] Michou, M.(2008) : ‘Analysis of Corporate Financial Information’, class notes from the University of Edinburgh Business School

^[83] R. Christopher Whalen : The subprime crisis : cause, effect and consequences, networks financial institute at Indiana state university), (IMF Global Financial Stability report Oct 2008 pg 111-113

^[84] Chapman University school of Law – Timothy A. Canova – Legacy of the Clinton bubble pg 3

^[85] L.Randall Wray, Lessons from subprime meltdown, working paper N. 522- The Levy economics institute of Bard college, page 9

^[86] Report of the financial stability forum on Enhancing market and institutional resilience, April 2008)

^[87] Look chapter 1 and the references which are there provided

^[88] http://www.imf.org/external/pubs/cat/longres.cfm?sk=22345.0

^[89] http://moneynews.newsmax.com/economy/bernanke/2009/05/05/210829.html

^[90] http://www.cnbc.com/id/31482098

^[91] Korpela, S. (2008) : ‘Prediction of the World Peak Oil Production’, as a chapter from the book ‘The final energy crisis’, edited by Sheila Newman, Pluto Press

^[92] OPEC(Organisation of Petroleum Exporting Countries) : A cartel made up from 13 oil-producing countries. The organisation’s raison d’être, according to its statement of mission is ‘to coordinate and unify the petroleum policies of Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital to those investing in the petroleum industry’. (source: http://www.opec.org/home)

^[93] Dickenson P. John, Clark Colin (1996) : ‘A geography of the third world war’ , Science publications

^[94] http://bptrends.com/publicationfiles/ONE%2010-08-COL-HumanProcesses-Harrison-Broninski-final.doc.pdf

^[95] http://www.indiadaily.com/editorial/01-10a-05.asp

^[96] McCluney, R. (2008) : ‘Renewable Energy Limits’, as a chapter from the book ‘The final energy crisis’, edited by Sheila Newman, Pluto Press

^[97] Karvounis, S. (2003) : ‘Environmental Management’, Stamoulis Publications

^[98] Karvounis, S. (2003) : ‘Environmental Management’, Stamoulis Publications

^[99] http://www.imerisia.gr/article.asp?catid=12338&subid=2&tag=9613&pubid=3167114

^[100] Mabro, R. (2007) : ‘The Significance of Oil’, as taken from the book ‘Oil in the 21st century: Issues, Challenges and Opportunities’, Oxford University Press

^[101] International Energy Agency, World Economic Outlook 2008

^[102] Howarth, S. (1997) : ‘A Century in Oil’, Weidenfeld & Nicolson London

^[103] Howarth, S. (1997) : ‘A Century in Oil’, Weidenfeld & Nicolson London

^[104] Where Ukraine defaults in its payments, and supplies of oil and gas in Europe are then interrupted, until Russia receives the required amounts.

^[105] http://www.foxnews.com/story/0,2933,476565,00.html

^[106] http://www.pfcenergy.com/pfc50.aspx

^[107] Fattouh, B. And Marbro, R. (2005) : ‘The Investment Challenge’, as taken from the book ‘Oil in the 21st century: Issues, Challenges and Opportunities’, Oxford University Press

^[108] Such as Russia, Venezuela, China, and other.

^[109] http://ftalphaville.ft.com/2009/01/06/50814/the-big-european-energy-freeze/

^[110] http://www.api.org/aboutoilgas/sectors/index.cfm