Why BP suspended the dividend
Late last night, our time, I asked Carl-Henric Svanberg whether events in the credit markets, and in particular the astonishing increase in the premium for insuring BP's debt, had contributed to the board's decision to suspend dividends until at least the end of the year.
Those of you who work in financial markets will presumably be unsurprised that he said that it was an important factor in the board's humiliating decision, because what happened to BP's debt insurance premium - or, more properly, to its credit default swap (CDS) premium - was quite remarkable.
Anyone wanting to insure loans to BP of six months or a year had to pay well over 1,000 basis points or 10 percentage points.
What does that mean? Well, a lender wishing to protect itself against any losses on a $10m loan to BP had to pay $1m for that protection.
Here's one way of looking at this.
If you believe that in the event of BP collapsing into administration, the losses on loans to BP would - for argument's sake - be 20 cents in the dollar, then a 10% CDS spread implies that the market's assessment of the probability of BP going bust is 50%.
Which is quite shocking.
Naturally, when BP's creditors take such a dim view of a company's financial prospects, it has to conserve as much cash as possible. Which means there's no way it can pay a dividend that consumes more than $10bn of cash every year.
That said, sometimes these CDS prices are utterly misleading, because the market in them is thin. But there is a substantial market in BP credit default swaps.
And the reason I'm boring on about all this is that a number of senior BP people - including members of the board - have volunteered to me that what worried them most was what was happening to the CDS price.
Here's some context: in March, before the Deepwater Horizon disaster, the CDS spreads on six-month and year loans to BP were 22 and 23.9 basis points respectively.
So insuring $10m of debt back then cost just over $20,000 - which is a bit less than the debt insurance premium on a rock-solid company like Tesco.
To put it another way, the Gulf of Mexico debacle has increased the cost of insuring BP's shorter-term debt by a factor of 50.
There are other ways of seeing the damage wreaked by the rise in the CDS price.
It means that if BP wanted to borrow for six months or a year, the rate of interest it would have to pay would rise to almost prohibitive levels.
Also those who do business with BP on credit could be deterred by the cost of insuring that credit.
To put it another way, the sharp jump in the CDS spread could have become a self-fulfilling event: if BP were unable to trade on credit, it would be bust.
So what's happened since the dividend has been culled?
Well, the one-year CDS spread has fallen several hundred basis points to somewhere over 500.
But even a debt-insurance premium of more than 500 points remains grotesquely high for a company that's supposed to be one of the world's safest.
BP remains many many miles from normal.