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Page added on January 16, 2016
Dallas Fed Suspends Energy Mark-To-Market
Earlier this week, before first JPM and then Wells Fargo revealed that not all is well when it comes to bank energy loan exposure, a small Tulsa-based lender, BOK Financial, said that its fourth-quarter earnings would miss analysts’ expectations because its loan-loss provisions would be higher than expected as a result of a single unidentified energy-industry borrower. This is what the bank said:
“A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”
Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.
It didn’t stop there and and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.
Then, on Friday, U.S. Bancorp disclosed the specific level of reserves it holds against its $3.2 billion energy portfolio for the first time. “The reason we did that is that oil is under $30” said Andrew Cecere, the bank’s chief operating officer. What else will Bancorp disclose if oil drops below $20… or $10?
It wasn’t just the small or regional banks either: as we first reported, on Thursday JPMorgan did something it hasn’t done in 22 quarter: its net loan loss reserve increased as a result of a jump in energy loss reserves. On the earnings call, Jamie Dimon said that while he is not worried about big oil companies, his bank has started to increase provisions against smaller energy firms.
Then yesterday it was the turn of the one bank everyone had been waiting for, the one which according to many has the greatest exposure toward energy: Wells Fargo. To be sure, in order not to spook its investors, among whom most famously one Warren Buffett can be found, for Wells it was mostly “roses”, although even Wells had no choice but to set aside $831 million for bad loans in the period, almost double the amount a year ago and the largest since the first quarter of 2013.
What was laughable is that the losses included $118 million from the bank’s oil and gas portfolio, an increase of $90 million from the third quarter. Why laughable? Because that $90 million in higher oil-and-gas loan losses was on a total of $17 billion in oil and gas loans, suggesting the bank has seen a roughly 0.5% impairment across its loan book in the past quarter.
How could this be? Needless to say, this struck us as very suspicious because it clearly suggests that something is going on for Wells (and all of its other peer banks), to rep and warrant a pristine balance sheet, at least until a “digital” moment arrives when just like BOK Financial, banks can no longer hide the accruing losses and has to charge them off, leading to a stock price collapse.
Which brings us to the focus of this post: earlier this week, before the start of bank earnings season, before BOK’s startling announcement, we reported we had heard of a rumor that Dallas Fed members had met with banks in Houston and explicitly “told them not to force energy bankruptcies” and to demand asset sales instead.
Rumor Houston office of Dallas Fed met with banks, told them not to force energy bankruptcies; demand asset sales instead
— zerohedge (@zerohedge) January 11, 2016
We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston.
This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches.
In other words, the Fed has advised banks to cover up major energy-related losses.
Why the reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.
In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.”
Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up.
Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsst showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.
However, the big wildcard here is the Fed: what we do not know is whether as part of the Fed’s latest “intervention”, it has also promised to backstop bank loan losses. Keep in mind that according to Wolfe Research and many other prominent investors, as many as one-third of American oil-and-gas producers face bankruptcy and restructuring by mid-2017 unless oil rebounds dramatically from current levels.
However, the reflexivity paradox embedded in this problem was laid out yesterday by Goldman who explained that oil could well soar from here but only if massive excess supply is first taken out of the market, aka the “inflection phase.” In other words, for oil prices to surge, there would have to be a default wave across the US shale space, which would mean massive energy loan book losses, which may or may not mean another Fed-funded bailout of US and international banks with exposure to shale.
What does it all mean? Here is the conclusion courtesy of our source:
If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind. My question for bank eps is if you issued terms in 2013 (2012 reserves) at 110/bbl, and redetermined that revolver in 2014 at 86, how can you be still in compliance with that same rating and estimate in 2016 (knowing 2015 ffo and shutins have led to mechanically 40pc ffo decreases year over year and at least 20pc rebooting of pud and pdnp to 2p via suspended or cancelled programs). At what point in next 12 months does interest payments to that syndicate start to unmask the fact that tranch is never being recovered, which I think is what pva and mhr was all about.
Beyond just the immediate cash flow and stock price implications and fears that the situation with US energy is much more serious if it merits such an intimate involvement by the Fed, a far bigger question is why is the Fed once again in the a la carte bank bailout game, and how does it once again select which banks should mark their energy books to market (and suffer major losses), and which ones are allowed to squeeze by with fabricated marks and no impairment at all? Wasn’t the purpose behind Yellen’s rate hike to burst a bubble? Or is the Fed less than “macroprudential” when it realizes that pulling away the curtain on of the biggest bubbles it has created would result in another major financial crisis?
The Dallas Fed, whose new president Robert Steven Kaplan previously worked at Goldman Sachs for 22 years rising to the rank of vice chairman of investment banking, has not responded to our request for a comment as of this writing.
25 Comments on "Dallas Fed Suspends Energy Mark-To-Market"
makati1 on Sat, 16th Jan 2016 8:00 pm
Desperation…
penury on Sat, 16th Jan 2016 9:23 pm
It is becoming clear that the fear being felt government and banking circles is greater now than in 7 or 08
twocats on Sun, 17th Jan 2016 12:01 am
http://www.cnbc.com/2015/08/17/former-top-goldman-sachs-exec-robert-kaplan-named-president-of-dallas-fed.html
Head of Dallas Fed Robert Kaplan was appointed in August of this year, and just started in September. The old head is already at Barclays and recently outed the Fed as the engineer behind the stock market bubble.
http://www.zerohedge.com/news/2016-01-05/we-frontloaded-tremendous-market-rally-former-fed-president-admits-warns-no-ammo-lef
so this is either rats leaving a sinking ship, CYA, or Fisher was not a wartime consigliere.
And for the obama haters: “We front-loaded some folks”.
Davy on Sun, 17th Jan 2016 6:52 am
“How The Investment Grade Dominos Will Fall” – UBS Explains”
http://www.zerohedge.com/news/2016-01-16/how-investment-grade-dominos-will-fall-ubs-explains
“According to Citigroup’s Matt King, it is now officially too late to save junk debt, which has entered the final stage of the credit cycle, the one where defaults for high yield bonds rise with every passing month.”
“we estimate that nearly $1tn of speculative-grade credits are at risk of default over the next downturn, as the stock of low-quality credit has soared. Recent contagion in US HY from energy woes has severely impacted ex-energy spreads while shutting down bond-market financing for low-quality credits.”
Davy on Sun, 17th Jan 2016 7:01 am
“CNN Reassures Investors: “Don’t Panic… America’s Economy Is Still In Good Shape”
http://www.shtfplan.com/headline-news/cnn-reassures-investors-dont-panic-americas-economy-is-still-in-good-shape_01162016
Here is their response to the MSM cornucopian hopium:
“Pay no attention to the fact that last week not a single cargo ship was transporting raw materials in the South China Sea, the first time in history that it has happened”
“Worry not that Walmart, Macy’s and scores of other retailers had an abysmal holiday season and are now set to lay off tens of thousands of workers. Unemployment, when calculated using models that were used during the Great Depression and that were defined out of existence by the government in 1994 show that some 23% of Americans are out of work.”
“And though the economy is officially growing at 2.5% per year based on the government’s trustworthy data, we should absolutely not look at the inflation numbers, which according to Shadow Stats are running about 4% per year. If we did, however, go totally fringe and consider inflation within the context of the economy we might notice that this purported growth is actually negative 2% if not worse.”
“In fact, we’re doing so well that just 45 million of America’s population of 320 million people are on food stamps right now. “
“And with oil trading at under $30 per barrel, we can see nothing but blue skies going forward because, hey, we’re all paying a dollar less for gas now. We’re sure this will have no effect on the domestic real estate market in places like Texas and North Dakota. Nor will this collapse in oil prices cause debt burdened domestic oil companies to close up shop, potentially leading to a domino affect across the entirety of the U.S. economy. Nor will it have any impact on periphery businesses that service those companies, including all of those restaurants that saw below-minimum wage job growth explode last year.”
“You have absolutely nothing to worry about. The notion that an economic and financial catastrophe of historic proportions is playing out right before our eyes is the fantasy of internet conspiracy fanatics.”
shortonoil on Sun, 17th Jan 2016 7:16 am
Another title for this article could be:
How to Keep a Zombie Pumping Oil
or
How the FED Engineered $10 Oil
There is going to be a bunch of Sovereign Wealth Funds looking to cash in those $ denominated Treasuries they are holding. Now the FED will have to monetize the entire US economy; or in other words they get to buy all of it for the every day low price of a Ctrl\ P. You can turn the title to your house over to the FED on Tuesdays, and Thursdays after 9:00 AM.
makati1 on Sun, 17th Jan 2016 7:25 am
Short, that is what I see coming also, and I am not an economist.
Kenz300 on Sun, 17th Jan 2016 7:57 am
Oil prices are not the only reason to shut down frackers…….
70 More Earthquakes Hit Oklahoma, Averaging Nearly Three a Day in 2015
http://ecowatch.com/2016/01/11/fracking-earthquakes-oklahoma/?utm_source=EcoWatch+List&utm_campaign=1fd6621515-Top_News_1_11_2016&utm_medium=email&utm_term=0_49c7d43dc9-1fd6621515-86023917
Northwest Resident on Sun, 17th Jan 2016 11:17 am
Davy and Short — Excellent sarcasm for a Sunday morning. Thanks!
Hey Davy, I don’t visit this site often these days. What’s up with GregT, Apnea and Juan sliming you and going for your jugular? What did I miss?
During the State of the Union, Obama encapsulated the reality of our impending doom when he said that the American economy is strong (or doing just fine, or…) — forget the exact words. That was a Big Fat Lie. But that’s all the Federal Government and for that matter all the national governments have left — lies and deceit and propaganda and covering up the truth. Because, once the truth becomes commonly known, PANIC will set in and that’s when it all unravels, and very quickly, with utmost certainty.
We should be thankful for the lies and the propaganda and the dirty underhanded accounting tricks and the Ponzi schemes and the FED printing press and the Chinese claims of 7% growth — and the whole pack of lies and bullshit. Because, once all those tricks stop working, we will find ourselves in Dire Straights. Truly, we are all only one day away from total economic collapse because the whole economic system hangs on the ever weakening thread of a pack of lies. When that thread breaks, instant chaos will ensue.
So hey, cut the Fed some slack as they work with banks to hide their losses. It is for the common good!
onlooker on Sun, 17th Jan 2016 11:31 am
NR really good analysis. Yes that is now where we stand. Pretend and Extend, smoke and mirrors etc. Ultimately our currently is based on faith. As soon as the faith evaporates, the stampede to the exists will collapse any semblance of order in our markets and economies. Expect the nasty Stagflation to predominate. Asset deflation, currency inflation. So yes delusion is good now even while it should have been discarded years ago while we still could.
onlooker on Sun, 17th Jan 2016 11:32 am
sorry currency
Apneaman on Sun, 17th Jan 2016 11:43 am
Here is another piece of propagandist sheep priming I missed last week.
Time for an oil-industry bailout?Wednesday, 6 Jan 2016
http://www.cnbc.com/2016/01/06/kilduff-time-for-an-oil-and-gas-industry-bailout-commentary.html
A few days before this
Oil plunge sparks calls for Congress to act 01/10/16 06:01
http://thehill.com/homenews/senate/265304-oil-plunge-sparks-calls-for-congress-to-act
Now keep repeating the mantra – bail out bail out bail out, until it is accepted as the only alternative – just like last time.
Apneaman on Sun, 17th Jan 2016 11:48 am
More priming
STRATEGIST: There’s a decent chance the US government will bail out the oil industry
http://www.businessinsider.com/washington-could-bail-out-oil-industry-2016-1
Apneaman on Sun, 17th Jan 2016 11:50 am
Brazil Isn’t Ruling Out Petrobras Bailout
State-controlled oil company has been mired in financial troubles amid a decline in oil prices
http://www.wsj.com/articles/brazil-isnt-ruling-out-petrobras-bailout-1452886210
Dubya on Sun, 17th Jan 2016 11:53 am
If you cannot pay your $10,000 loan you are in trouble.
If you cannot pay your $10,000,000 loan the bank is in trouble.
We can now add:
If you cannot pay your $10,000,000,000 loan the country is in trouble.
I hope everyone is ready.
Apneaman on Sun, 17th Jan 2016 11:55 am
Uruguay gives state oil company Ancap $620 mln in financing
http://www.reuters.com/article/uruguay-oil-idUSL1N14N0DA20160103
Apneaman on Sun, 17th Jan 2016 11:58 am
Putin’s Bailout Bank Needs a Rescue; It’s an $18 Billion Whopper
http://www.bloomberg.com/news/articles/2015-12-28/putin-s-bailout-bank-needs-a-rescue-it-s-an-18-billion-whopper
Davy on Sun, 17th Jan 2016 12:42 pm
NR, same old he said she said. The problem is they think they can say what they want without impunity and I can’t. It is one of those double standard things and enforced by gang rule. I respect them if they respect me. You can’t get any more basic than that. They can’t live with that. One of the sluts gets their panties in a wade eventually then the whole gang of goons is in attack mode. Of course Mak is the reason for all this from way back. You know exactly what I am talking about. He has made sure there is hate and discontent abounding on the board. We can’t have moderation with an extremist.
ennui2 on Sun, 17th Jan 2016 12:58 pm
Does Mak even post in the forums or does he stop at spamming the comments under news? Kind of strange how this site has two different poster demographics, one who hangs here and another that goes into the forums. By and large the forum discussions are more substantive and here all you get is “bullshit!” style rants.
Davy on Sun, 17th Jan 2016 1:09 pm
Ennuu, this is a free board so go over and be with the civilized guys if you can’t take the heat. We are in the real world here with raw emotions that represent the reality of a world coming apart at the seams. If you think everything is fine and dandy then ignore us and be a good boy over on the member forum. You show every indication of being a cornucopian locked in your delusional exceptionalism of man’s manifest destiny of development and growth. I have a feeling you like it over here but you just want to be high and mighty sounding. I imagine deep down doom fascinates you. You are nothing but a doom slut like the rest of us.
GregT on Sun, 17th Jan 2016 1:30 pm
“The problem is they think they can say what they want without impunity and I can’t. It is one of those double standard things and enforced by gang rule.”
Wrong Davy. People are fed up with your childish accusations, and your America-centric attitude. You’re so far gone that I doubt you’ll ever be able to understand.
Davy on Sun, 17th Jan 2016 1:44 pm
widle greg did I hurt your pride. Quit being a boy and move on. You slaped me I slaped you. Grow up.
Boat on Sun, 17th Jan 2016 1:52 pm
Davy/Ennuu,
“We are in the real world here with raw emotions that represent the reality of a world coming apart at the seams”.
This Ennuu is what you will face. In my opinion the world is not falling apart at the seams. The doomer cult is wrong.
“If you think everything is fine and dandy then ignore us”
Another doomer misrepresentation of what is said. This non doomer says the world was never perfect and never will be. There has always been huge problems and mostly they have never been solved and if solved been replaced by bigger problems. Them doomers will twist your words. lol
” You show every indication of being a cornucopian locked in your delusional exceptionalism of man’s manifest destiny of development and growth”
See what I mean. A poster like myself who believes in peak oil and climate change will be labeled and vilified only because I think these things will happen decades from now.
Then there is the anti American thing. A whole nother subject. I think I will ridicule those who think that. A new chapter to embark on. Americans are just humans. Whenever any group of humans compete with others there is never any time in human history there hasn’t been conflict.
ghung on Sun, 17th Jan 2016 2:06 pm
Is it time to bail out the U.S. oil industry?
makati1 on Sun, 17th Jan 2016 7:52 pm
ghung, the US’ oily industry has been living on the government teat for decades. Since about 1971, I think. Nothing new here. They will just put the bill on YOUR tax tab. Are you OK with that? Maybe an extra hundred out of each paycheck so the elite can keep their mansions, jets and caviar?