With the failure of Lehman Bros., their energy trading group, Eagle Energy, is facing its own meltdown. Eagle, which was bought by Lehman in 2007, is being pounded by the fallout of having their credit tied to that of Lehman. Those that are selling gas to Eagle are canceling deals and those that are buying are left looking for other sources.

For a while, Tenaska Energy was facing a similar fate, as their trading arm, Tenaska Marketing Ventures (TMV) is backed by failing insurance giant American International Group (AIG), who picked up 50% of the gas trader/marketer last year. Fortunately for Tenaska, and those that do business with the company, the Feds stepped-in to save AIG, advancing about $85 billion in loans to keep the global company from going belly-up.

Also this week, Bank of America agreed to bail out Merrill Lynch, taking over their business in a $50 billion stock transaction. In the process, BofA gets Merrill’s energy trading group, formally known as Entergy-Koch. Interestingly enough, BofA has already taken a bath in energy trading, having lost a bunch of money on wrong sided hedges in crude and jet fuel, and most recently, with the collapse of Tulsa based SemGroup LP, a company that lost $3.2 billion due to poor decision making in the energy futures markets and was heavy into BofA for commercial credit.

Don’t think for a second this is the end of the turmoil in the energy markets brought about by the movement of financial services companies into energy commodity trading. It’s not that these companies don’t know what they are doing when it comes to energy trading (in fact, some of the most profitable divisions for a few of them have been their energy trading operations). The problem is that these companies have brought an entirely new counter party credit risk profile with them. These financial companies have staked huge positions in both the physical and financial energy commodity space, the “traditional” traders that do business with them now have to contend with events that have nothing to do with energy market fundamentals when calculating risk exposures. They now have to deal with issues related to junk mortgages, bond trading, and exposures of insurance companies to storm losses. Financial services and hedge funds carry with them an entirely new load of baggage that, prior to the last couple of years, most credit managers never really had to consider.

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