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Due Diligence From Investor/financing Perspective

Brian E. Minyard, Jolisa M. Dobbs, Due Diligence in Oil & Gas Transactions

A. The Financial Crisis and its effects on investment diligence.

The financial crisis that began in 2007 is widely acknowledged to be the worst financial markets disruption since the Great Depression.1 The roots of the crisis have been attributed to everything from the development of exotic financial products like sub-prime mortgage backed securities and complex financial derivatives and credit insurance instruments, to the deregulation of financial markets around the world, to public policy initiatives distorting otherwise healthy market forces. The effects of the crisis, however, are far less subject to debate. When participants in the financial markets ceased to believe their counterparties were credit-worthy, the financial system began to freeze and the ability of all market actors to access the capital markets became extremely limited.

Market participants had good reason to be suspicious of their counterparties - the International Monetary Fund estimated that large western banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.2 These institutions kept their individual losses and exposures a closely guarded secret to prevent “runs” on their banks or trading against their positions by their competitors in the markets that would further increase their losses. Since no participant felt confident that they unde