Wall Street Whispers - BP, Bank Valuations - TheStreet



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Editor's Note: This is a new column at TheStreet, called "Wall Street Whispers." It will take a look at what various media -- news sites, blogs, notes from analysts and investment firms -- are buzzing about, and run down the latest chatter we're hearing about Wall Street.


On Tuesday afternoon,


reported that

Bank of America

(BAC) - Get Report

, one of the country's largest swaps dealers, had effectively ordered traders to

stop doing business



(BP) - Get Report



The move is still unconfirmed, attributed to one anonymous source. But if it proves to be true, it would be the first definitive indication that the market doesn't just think BP has

short-term trouble, but that it may not be around past June 2011.

The situation is ironic for two reasons.

First, BP is a great example of how the derivatives reform legislation stands to impact not just Wall Street firms, but the various companies they do business with. BP had $19.6 billion worth of fuel-hedging derivatives on its balance sheet at the end of the first quarter. Those contracts help it hedge against risks that the price of oil, natural gas or other refined products will go haywire.

Meanwhile, everything for BP seems to be going haywire, and Bank of America -- which may not be its only derivatives broker-dealer, but is probably a major one -- is saying that it will no longer offer the firm protection beyond next June. The news comes on the same evening that President Obama gave his first Oval Office address pledging that BP will be made to pay for the damage it has done to the Gulf coast, and as estimates of the carnage continue to rise.

Essentially, BP's risks are rising from an operational standpoint just as the cost and certainty of protecting against that risk are being thrown into question.

On top of that is another, even more ironic point: The most vilified type of derivative -- credit default swaps -- was created in the midst of the last catastrophic oil-leak disaster.

JPMorgan Chase

(JPM) - Get Report

came up with the instrument after extending a loan to

Exxon Mobil

(XOM) - Get Report

in the aftermath of its Exxon-Valdez spill in Alaska.

It would be unfair to pile on BP based merely on an anonymously-sourced report which neither company would confirm. But that's not the only reason the market has slashed BP's share price nearly in half since the oil started spewing in the Gulf of Mexico. Bond investors, too, are worried: CDS for BP's debt are

pricing in a 39% chance of default

. The cost of protection has gone through the roof, reaching a record 630.6 basis points.

From an investor's point of view, the gamble certainly became higher risk on Tuesday. Higher reward is

less certain.

Flavor of The Day

Analysts have been buzzing recently about the fact that bank valuations don't make a lot of sense, and it's easy to see why. Aside from the euro crisis and general tumultuousness, financial reform makes it hard to tell what precisely banks will still be able to make money doing in the future.

Wall Street has priced in known impacts: Big banks have said how much regulatory changes to overdraft fees, credit-card reform and other already-implemented rules will sap from earnings.

I've seen a couple analysts note weak book-to-value ratios, which is

always a useful tool.

But let's take a look at two investment scenarios:

Company A has $2.3 trillion worth of assets, with 1.5% of them showing signs of weakness. About $145 billion, or 6.3%, represents dry-powder ready for investment. However, Company A has lost $2.3 billion over the past four quarters, due to special items and problems it says it has largely worked through.

Company A's stock is trading at less than three-quarters of its most recently stated book value. It's trading at more than eight times earnings expectations for next year, though, according to Thomson Reuters.

Company B has $240.6 billion worth of assets, with $6.8 billion in dry powder. It has earned $25.4 billion over the past four quarters. However, it's trading at 92% book value, and 4.3 times earnings expectations for next year.

Company A is Bank of America. Company B is BP. Draw your own conclusions.

The Consumer Equation

I've already said it (more than once) but I still find it hard to believe. Could it be ... could it


be that consumers have begun to realize that maxing out their lives on credit cards isn't the smartest way to go?

Credit-card balances have been declining for some time, though that's been a combination of paying down balances (for those who can afford to) and banks simply writing off the bad debt (particularly once they were required to put those assets on balance sheet, and when they acquired enough capital to do so).

But now, it finally seems like both sides have gotten rational about credit-card debt -- by force or by will.

On Tuesday, the five top credit-card lenders -- Bank of America, JPMorgan,


(C) - Get Report


Capital One

(COF) - Get Report


American Express

(AXP) - Get Report



(DFS) - Get Report

-- said that delinquency rates fell to the lowest levels this year.

(Read: People are making good on their debt.)

The results came just as the

Federal Reserve

implemented new rules for credit card customers, to prevent sudden interest-rate hikes and penalty fees that most people outside of the banks consider to be extreme.

(Read: Banks are being forced to not be jerks.)

It's unlikely that people would complain about crazy interest rates they were presented with initially, or the minor transactions they ended up paying five times as much for when overdrafting. Banks thought they'd never be faced with a situation where the borrowers' frustration got loud enough for politicians and regulators to notice.

Yet, whoever is at fault, all of this will make for better relationships between lender and borrower, and that's a good thing.

Odds & Ends

A few questions regarding BP and banks and the economy of the Gulf:

Who else in the financial sector has important exposure to BP, and what are they doing about it (if anything)?

How much money has been lost on fuel that has been spilled, rather than utilized? (An ugly question at this time, but I've been wondering for awhile, and haven't yet seen estimates.)

How is this affecting the Gulf economy? I've heard stories about resorts and hotels without customers -- and it is undoubtedly sad and undeserved. But is the recovery project creating enough jobs to offset those losses? Is that a ridiculous question? (I'm asking, not stating.)

-- Written by Lauren Tara LaCapra in New York