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Lessons From OGX's Downfall

NEW YORK ( TheStreet) -- When it comes to economic development, Wall Street prefers going private to dealing with a government. But that can be a big mistake, as Brazil is now proving.

OGX, a huge energy balloon in Brazil blown up by a man named Eike Batista, has come crashing down and may take a lot of Wall Street money with it.

Big names such as BlackRock (BLK) and Pimco are on the hook for billions of dollars in bonds that now look worthless. Both those companies are on the OGX creditor committee.

What lured Wall Street to OGX was the promise of privately financed oil development. Since the monopoly of state-owned Petrobras (PBR) was broken in 1997, explorers armed with new technology have been finding vast pools of oil off the country's southeast coast. There's now a promise of even more on the northeast coast.

Brazil needs U.S. technology to tap the oil. Wall Street wants to protect its investment, but doesn't trust the government.

Enter Eike Batista.

Batista founded OGX in 2007 to tap the oil. It quickly found a big pool about 50 miles off Rio de Janiero, an area called the Campos Basin. Other companies found more, and there was soon talk of Brazil joining OPEC. OGX' Waimea field was producing at a rate of 12,500 barrels per day early last year, with the promise of more to come.

Batista wasn't just pumping oil, however. He was building a nation. A former speed-boat racer, and a key player in winning the 2016 Olympics for Rio, he created EBX Group which invested in steel production, property development, mining, and a huge "super port" aimed at bringing all of Brazil's oil wealth to market.

The speed-boat racing should have been a clue. Batista likes risk. Wall Street ignored the warning and backed him to the hilt.

But as with the gold in the Western musical Paint Your Wagon, it all played out. Instead of being the hunky young Clint Eastwood character, Batista turned out to be the drunken, slovenly Lee Marvin one. Wall Street bought itself a ghost town.

OGX said early this month that its latest find might be just one-third the size of earlier estimates. The oil is turning out to be harder to bring to the surface than first thought. But OGX had already spent the money it was going to make, and more, and now it can't pay back its loans.

Analysts are calling the crisis a test of Brazil's legal system, threatening to pull out of the country if they're not taken care of.

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