Why the $1 trillion crunch isn’t another Lehman Bros

• The deepening of the energy crisis in Europe has left utilities with massive margin calls estimated to be in excess of $1 trillion.
• Two experts explained the dilemma to insiders and shared what the government could do to step in and help.
• “It’s not these companies’ fundamentals that are flawed. It is the foul situation created by a deliberate attempt to disrupt the market.”

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Russia’s cuts in natural gas supplies to Europe have raised fears of a “Lehman Brothers moment” for the energy sector, but analysts point to key differences from the bankruptcy that triggered the 2008 financial crash.

Escalating electricity prices have pushed up collateral requirements for energy companies hedging their sales on futures markets. Estimates for those margin calls are in excess of $1 trillion — more than what otherwise healthy utilities can afford.

“It’s not the fundamentals of these companies that are flawed,” Kristian Ruby, secretary general for energy at Eurelectric, told Insider. “It’s the rotten situation created by a deliberate attempt to disrupt the market.”

In contrast, the subprime mortgage crisis almost two decades ago left banks with toxic assets. For Lehman Brothers, this triggered a bankruptcy filing after talks to organize a bailout collapsed.

Some European governments are already trying to provide liquidity for the energy sector. And energy companies will be able to pay off that debt because they still have millions of paying customers and have made profits lately, Ruby said.

“We will not see a false value bubble burst [like Lehman Brothers]but we could see nasty consequences when healthy companies go bankrupt if not managed well,” he said.

The Lehman Brothers analogy doesn’t hold true because the nature of the crisis is different, Ruby added, although he acknowledges it’s a useful way to get lawmakers to act now.

Businesses are faltering as Vladimir Putin is deliberately cutting supplies, he said, and EU governments must extend credit lines to struggling utilities.

“No sensible company has an insane amount of money [for margin calls] that can explain Putin’s manipulation of the market,” Ruby said.

Tim Gramatovich, chief investment officer at Gateway Credit Partners, echoed Ruby’s view. He said it’s not that the utilities are speculating or running out of gas, but they are still the ones footing the bill if the government doesn’t subsidize their costs.

A Lehman Brothers moment would come if a government allowed an energy company to shut down, but that’s not happening, he added.

“Governments will step in and are already doing so,” Gramatovich told Insider.

Still, European politicians must decide whether to subsidize consumers or utilities, Gramatovich noted. And the final bill is not yet clear.

“Those are monster numbers,” he said. “Nobody really knows how much money is involved or how long the challenge is. There is a war premium and a risk premium embedded in energy markets, but no one knows that number.”