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Wall Street's Biggest Banks May Have To Make Good On $26 Billion In Oil Hedges

Tyler Durden's picture




 

Selling billions of dollars worth of insurance on things that turn out to, on occasion, exhibit extraordinary volatility can be a dangerous thing — just ask AIG which was sucked dry by collateral calls from a certain vampire squid when the M2M value of the MBS the company so foolishly insured cratered in 2008 and Goldman came banging on the door for its money. And while the value of the price hedges (i.e. insurance contracts) the US banking sector has sold to the country’s now beleaguered shale drillers may not be large enough to present an imminent systemic risk, as Bloomberg notes, “$26 billion is still $26 billion”

For U.S. shale drillers, the crash in oil prices came with a $26 billion safety net. That’s how much they stand to get paid on insurance they bought to protect themselves against a bear market -- as long as prices stay low…

 

The fair value of hedges held by 57 U.S. companies in the Bloomberg Intelligence North America Independent Explorers and Producers index rose to $26 billion as of Dec. 31, a fivefold increase from the end of September, according to data compiled by Bloomberg.

 

Though it’s difficult to determine who will ultimately lose money on the trades and how much, a handful of drillers do reveal the names of their counterparties, offering a glimpse of how the risk of falling oil prices moved through the financial system.

 

More than a dozen energy companies say they buy hedges from their lenders, including JPMorgan, Wells Fargo, Citigroup and Bank of America…

 

At the end of 2014, JPMorgan had about $671.5 million worth of derivatives exposure to five energy companies, including Pioneer Natural Resources Co., Concho

 

Resources Inc., PDC Energy Inc. and Antero Resources Corp., according to company records. That’s the amount JPMorgan would have owed if the contracts were settled Dec. 31, not including any offsetting trades the bank made.

 

It’s a similar story for Wells Fargo, which was on the hook for $460.9 million worth of oil and natural gas derivatives for companies including Carrizo Oil & Gas Inc., Pioneer, Antero, Concho and PDC, according to regulatory filings.

Of course, as Bloomberg goes on to point out, these are the same banks which helped to finance the shale bonanza in the first place and as we recently saw with Standard Chartered, collapsing crude prices can spell trouble if you’re in the commodities loans business. 

Those who sold the price hedges now have to make good. At the top of the list are the same Wall Street banks that financed the biggest energy boom in U.S. history, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.

That list is particularly interesting because as the following graphic shows, these banks are the first, second, third, and sixth largest bookrunners for leveraged oil & gas loans over the past three years:

Here’s The Telegraph with more...

A lengthy period of cheap crude is likely to trigger widespread defaults and many oil and gas loans are now changing hands for well below their face value as investors fear they will not get their money back.

 

Banks will offload many of the loans and hedge their losses, and some will have stricter lending standards for high-yield loans than others.

 

Losses will also depend on how long the oil price stays low, so it is unclear precisely how exposed the banks are to the energy industry’s woes...

 

Chirantan Barua, an analyst at Bernstein Research, has estimated that the combined losses of Barclays, RBS, HSBC and Standard Chartered from falling oil prices could amount to $3.4bn.

 

“Someone is feeling the pain,” said Mr Barua. “When you see [this much] high-yield issuance in a sector that has been levering up across the supply chain, any shocks in the underlying business will have risk ripples across the financial system...”

 

According to Dealogic’s data, RBS has arranged $14.3bn of leveraged oil and gas loans in the past four years, making it the biggest UK player in the high-yield space.

 

This compares to $10.5bn for Barclays and $4.7bn for HSBC, but is far less than the biggest Wall Street players. Wells Fargo and JP Morgan have both been bookrunners on almost $100bn since the start of 2011.

...and a bit more color from NY Times:

Two of the banks that may be the hardest hit by lower investment-banking fees are among the biggest. Wells Fargo derived about 15 percent of its investment banking fee revenue last year from the oil and gas industry, while at Citigroup, the business accounted for roughly 12 percent, according to the data provider Dealogic…

 

And Wall Street firms that financed energy deals may now have trouble offloading some of the debt, as they had originally planned.

 

Morgan Stanley, for instance, led a group of banks that made $850 million of loans to Vine Oil and Gas, an affiliate of Blackstone, aprivate equity firm. Morgan Stanley is still trying to sell the debt, according to a person briefed on the transaction.

 

Similarly,Goldman Sachs and UBS led a $220 million loan last year to the private equity firm Apollo Global Management to buy Express Energy Services. Not all the debt has been sold to other investors, according to people briefed on the transaction.

 

A precipitous drop in oil prices can quickly turn loans that once seemed safe and conservatively underwritten into risky assets.

 

The collateral underpinning many energy loans, for example, is oil that was valued at $80 a barrel at the time the loans were made. As oil has dropped well below that price in recent months, the value of the banks’ collateral has sunk.

*  *  *

So it certainly looks like a lot is riding on the degree to which large US banks have been successful at offloading their exposure to the sector (which, thanks to falling crude prices and mounting bankruptcies is likely getting more difficult by the week) and on how well they have been able to hedge the hedges they sold to shale drillers. Any way you slice it, it's difficult to see how this turns out particularly well, for if Barclays, RBS, HSBC, and Standard Chartered may be facing a combined $3.4 billion in losses and they represent a small portion of the market compared to Wall Street's largest firms, and if these same US banks are facing $26 billion in exposure on hedges they sold, well, "someone is feeling the pain," as the Bernstein analyst told The Telegraph. As for the likelihood that most of the risk has been transferred to outside investors or otherwise hedged, we'll leave you with the following quote from an analyst who spoke to Bloomberg on the matter:

"The banks always tell us that they try to lay off the risk [but] I know from history and practice that it’s great in concept, but it’s hard to do in reality.”

 

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Thu, 04/09/2015 - 19:30 | 5976892 Hulk
Hulk's picture

Like AIG did on bad derivative bets...

Thu, 04/09/2015 - 19:36 | 5976918 knukles
knukles's picture

US Taxpayer will have to make good on bad oil hedges.  (fixed it for ya')

Thu, 04/09/2015 - 19:49 | 5976960 mayhem_korner
mayhem_korner's picture

 

 

I thought it was the USD printing press.

Thu, 04/09/2015 - 20:42 | 5977101 Handful of Dust
Handful of Dust's picture

<< just ask AIG which was sucked dry >>

 

AIG was NOT sucked dry; the taxpayer was.

 

I'm sure AIG is still throwing their lavish exec partees at the Ritz.

Fri, 04/10/2015 - 06:25 | 5977812 Richard Chesler
Richard Chesler's picture

We don't always lay off the risk but when we do, it's on taxpayers.

Booyah!

 

Thu, 04/09/2015 - 20:46 | 5977107 Bumpo
Bumpo's picture

Bets gone bad? isn't that what hedging is for? I have no sympathy since this is their doing and their inverntion to protect themselves from such catastrophes.

Fri, 04/10/2015 - 01:35 | 5977663 Fox Moulder
Fox Moulder's picture

So the banks loaned the money then sold insurance on the loans? Now they get to pay twice?

Good business plan.

Thu, 04/09/2015 - 19:48 | 5976955 mayhem_korner
mayhem_korner's picture

 

 

The hedges were taken by the oil producers, which means they are good hedges.  Just not for the bankster counterparties.

I just wanna know who's going to force the banks to pay out.

Thu, 04/09/2015 - 20:25 | 5977055 new game
new game's picture

the courts, contracts. lawyers gonna make some serious dough if counter parties don't pay. my guess is they pay.

Fri, 04/10/2015 - 00:49 | 5977610 sun tzu
sun tzu's picture

The banks don't hold on to those contracts. They sell them just like they sold the mortgages, mostly to hedge funds. What if the hedge fund is bankrupt?

Thu, 04/09/2015 - 22:21 | 5977360 Hail Spode
Hail Spode's picture

In this case it is the oil and gas companies that bought the hedges who will make the banks pay. If nothing else because those same companies owe those same banks booku bucks. IOW, if the banks don't pay on the hegdes the companies just don't pay on the loans.

Thu, 04/09/2015 - 22:33 | 5977380 Serfs Up
Serfs Up's picture

"I just wanna know who's going to...be forced to pay out"

Okay I changed the part after the elipse.

My bet is "Orange County."

I don't know why, or how, but those guys seem to be the ultimate suckers at the table.  They never see it coming.

Fri, 04/10/2015 - 09:42 | 5978289 astoriajoe
astoriajoe's picture

them and CALPERS.

Thu, 04/09/2015 - 20:16 | 5977030 Luckhasit
Luckhasit's picture

you mean the trillions in deriatives the tax payer is on the hook for paying, good thing congress just passed that bill to help banks, for situations just like this!

Thu, 04/09/2015 - 20:55 | 5977135 logicalman
logicalman's picture

Government/banking problem..........

The taxpayer can always be coerced into covering bad bets.

It's shat the hired thugs are for.

 

Fri, 04/10/2015 - 08:17 | 5977944 Cheduba
Cheduba's picture

"It's difficult to determine who will ultimately lose money on the trades and how much."

Yup, that's an easy one - taxpayers at 100% of the losses.  Plus a few million more percent for golden parachutes, settlement costs, and the cost of mansions on a bug out island.

Thu, 04/09/2015 - 19:46 | 5976952 kaiserhoff
kaiserhoff's picture

I'll take "who would write that shit?", for $500 Alex.

Thu, 04/09/2015 - 19:51 | 5976968 mayhem_korner
mayhem_korner's picture

 

 

ROTFL.  They must have mistakenly thought they had stores of oil in the Comex vault to manipulate the price.  Nothing a crafty letter from Jamie to My Fellow Shareholders won't fix.

Thu, 04/09/2015 - 22:55 | 5977421 blowing winter
blowing winter's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Thu, 04/09/2015 - 19:32 | 5976900 TeamDepends
TeamDepends's picture

Gold is money, all else is credit. So who has the gold (guffaws all around)?
-JP Morgan Jr. Jr.

Thu, 04/09/2015 - 20:01 | 5976996 mayhem_korner
mayhem_korner's picture

 

 

It's almost as if we should buy gold on credit, then somehow "misplace" it.  Oh wait...

Thu, 04/09/2015 - 19:37 | 5976917 Save_America1st
Save_America1st's picture

Fuck the banks and the scumbag, sociopath banksters, AAAAAAAAND their lapdog, treasonous, political puppets. 

Fuck 'em....and I hope they all burn in hell. 

Cuz, ya know what?  Those fuckers think exactly the same way about the 99.99% of the rest of us on this planet.  Don't doubt that for a fucking second.

Thu, 04/09/2015 - 19:36 | 5976922 unirealist
unirealist's picture

Banks need 26 billion? That's what taxpayers are for.

Thu, 04/09/2015 - 19:41 | 5976933 Save_America1st
Save_America1st's picture

26 Billion?  HAHAHAHAHA  Really?

CTRL-P, bitchez

That much gets spent by the gov-scum in just a couple days.  26 Billion????? 

Fuck...that's just a rounding error

 

Thu, 04/09/2015 - 20:57 | 5977139 logicalman
logicalman's picture

Down the back of the couch!

 

Thu, 04/09/2015 - 19:37 | 5976924 kaiserhoff
kaiserhoff's picture

Jamie's wife will be soooo pissed.

Does Oprah know about this?   MEN!

Thu, 04/09/2015 - 19:48 | 5976959 knukles
knukles's picture

OK, so some women's liberation freedom of whatever bowel movement now says it's sexist to refer to Mrs Hillary Clinton as "Hillary".
OK, so how about Cankles?

Cankles/2016

Thu, 04/09/2015 - 19:57 | 5976983 kaiserhoff
kaiserhoff's picture

Truffiness is your forte, young man;)

Thu, 04/09/2015 - 20:21 | 5977044 knukles
knukles's picture

                           Aw shucks
      Scuffing ground with toe, hands behind back, shy smile

Thu, 04/09/2015 - 20:20 | 5977043 shovelhead
shovelhead's picture

Will Ms. Muffmuncher be acceptable?

Thu, 04/09/2015 - 20:22 | 5977047 knukles
knukles's picture

If Debbie Wattery Shits says it's OK, then it's OK

Thu, 04/09/2015 - 21:02 | 5977149 logicalman
logicalman's picture

Words cannot express the feelings I have for the likes of Hitlery and those who wish to install such an abomination in a position of power.

Any self respecting woman would put as much distance between herself and this apology for a human being.

Thu, 04/09/2015 - 21:58 | 5977301 2handband
2handband's picture

No worries... nobody is going to put her in a position of power. POTUS has no fucking power. 

Thu, 04/09/2015 - 19:50 | 5976934 ted41776
ted41776's picture

Don't worry scro'! There are plenty of 'tards out there living really kick ass lives. My first wife was 'tarded. She's a pilot now (idiocracy reference)

Thu, 04/09/2015 - 19:42 | 5976936 mayhem_korner
mayhem_korner's picture

 

 

So oil loans are selling at a steep discount due to default risk, while the 10-Year T is commanding less than 2%.  Got it.

What's my Delta Tau name? 

Thu, 04/09/2015 - 19:50 | 5976964 knukles
knukles's picture

Probably Negative Convexity with a Subzero Yield and Substandard Alpha.
Make a great starting spot for the equity layer of an already bankrupt CLO issued at a premium.

Thu, 04/09/2015 - 19:53 | 5976974 mayhem_korner
mayhem_korner's picture

 

 

LOL.  I'm making that into a tee shirt. 

Thu, 04/09/2015 - 20:57 | 5977138 ThroxxOfVron
ThroxxOfVron's picture

The world has gotten so fucked up that outrageously absurd gibberish of this nature has become SOP for the financial industry...

 

Thu, 04/09/2015 - 19:42 | 5976940 Youri Carma
Youri Carma's picture

The Godzilla under the Black Swans I would say.

Thu, 04/09/2015 - 19:47 | 5976954 kchrisc
kchrisc's picture

FedRes: "Increase the speed to of the presses."

The banksters need to repay us.

Thu, 04/09/2015 - 19:56 | 5976966 Monetas
Monetas's picture

When Hedges .... become Sludges !    When the people .... who manipulate the PMs .... also print the fiat .... they can literally "mine" free gold .... and they are doing it .... don't sell your PMs cheap .... to these "free money whores" .... this mining scam will end soon !

Thu, 04/09/2015 - 19:59 | 5976988 NDXTrader
NDXTrader's picture

That will NEVER happen. They will run the price of oil up with Grandma Janet dollars until those hedges finish out of the money by 1 cent...

Thu, 04/09/2015 - 20:08 | 5977008 mayhem_korner
mayhem_korner's picture

 

 

Don't think so.  Oil is the de facto reserve currency.  The dollar is the tail, not the dog. 

Thu, 04/09/2015 - 20:18 | 5977034 flyonmywall
flyonmywall's picture

$26 Billion is a drop in the bucket. Now, if it was $260 billion, then that might actually be worth something. Oh wait, isnt' $260 billion about what Greece is on the hook for? Now you're talking about real money.

Thu, 04/09/2015 - 20:22 | 5977050 Falconsixone
Falconsixone's picture

Just print money and tack it on the middle class... no middle class?...well print it anyway and tack it on the have nothings.

Thu, 04/09/2015 - 20:26 | 5977058 Scooby Doo
Scooby Doo's picture

The American Taxpayer May Have to Make Good on $26 Billion in Oil Hedges.

Fixed it for ya!

Fri, 04/10/2015 - 01:17 | 5977652 Jack4952
Jack4952's picture

"may have to"?????

Congress passed an act just a month or two ago by which the government (i.e., taxpayers) will assume ALL losses by he BIG BANKS regarding derivatives and similar "products".

It is NOT that the American taxpayer MAY have to pay; by that new federal statute the American taxpayer WILL have to pay!!!

"Heads they win; tails we lose."

Jamie Dimon and his cohorts may be criminals, but they most certainly are NOT stupid criminals!

 

Thu, 04/09/2015 - 20:42 | 5977102 kedi
kedi's picture

Wonderful.

Tax money bailouts to banks and oil business. Of course certain folks will know when, to whom and how much, just a little before most folks. Win win for a few, lose lose for everyone else. And not a job saved or created, no doubt.

Thu, 04/09/2015 - 20:44 | 5977108 Jack Burton
Jack Burton's picture

BOOM!  And yes, we could see this coming!

This will be put onto the public's balance sheet, we citizens will make good the bad investments, those whose bad business models and bad investment decisions should have ruined them, will get bribed politicans and the Federal Reserve to slip this all over to Public Balance Sheets.

And they still call this capitalism. They still tell the working class and poor folks to work harder for less and everything gonna be allright!

Thu, 04/09/2015 - 23:21 | 5977486 Monetas
Monetas's picture

Socialism destroyed all the socialist economies .... and socialism is destroying all the capitalist economies .... this has been going on quite a while .... so, the only people still calling this capitalism .... are socialists trying to shift the blame for their failure .... that wasn't so hard .... was it ?

Thu, 04/09/2015 - 20:47 | 5977114 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

our boy jamie made sure the US tax payer is on the hook for these bets

nothing to see here!

Thu, 04/09/2015 - 20:52 | 5977126 buzzsaw99
buzzsaw99's picture

good luck collecting a dime from those shysters

Thu, 04/09/2015 - 20:56 | 5977134 henry chucho
henry chucho's picture

Of course the banksters and hedge fund managers laugh all the way to the bank about the ravings of little piss-ants like me..that being said,when this whole pile of shit we call an economy comes crashing down,those mother fuckers better not run for the hills,because piss-ants like me will be waiting for them here..

Thu, 04/09/2015 - 21:01 | 5977148 Downtoolong
Downtoolong's picture

No wonder Jamie Dimon is actively searching for Rogue Traders in his firm. He's probably praying every night that the $26 billion doesn't turn out to be $126 billion in his own camp.

Fri, 04/10/2015 - 00:18 | 5977566 holdbuysell
holdbuysell's picture

That's the primary exposure. How many times has this 26B been hypothecated and levered in the shadow banking system?

But it's all hedged in their matched books, of course. LOL

Fri, 04/10/2015 - 01:09 | 5977633 Jack4952
Jack4952's picture

Hey, those banks vouluntarily assuned those risks with the goal of making large profts when the sold these hedges (insurance policies).

Isn't that what REAL capitalism is all about? Taking risks with our assets for greater future profits?

The banks should PAY UP on these debts, just as they expect people to pay their debts!

NO MORE BAIL-OUTS by the government (which really means that the PEOPLE pay, instead of the banks)!!!

 

That is my "THREE CENTS" on the subject - one cent added for inflation ...   ;-)    ;-)   ;-)

 

Fri, 04/10/2015 - 01:44 | 5977670 Pitiful
Pitiful's picture

MOAR LEVERAGE!!!!

 

... FFS, when are people going to realize that debt (also known as credit) is NOT wealth? You can't assume you will ever be paid back for anything you lend out, that's completely assinine. If you don't want to lose money, don't frickin lend it out.

Fri, 04/10/2015 - 05:37 | 5977781 chistletoe
chistletoe's picture

unless I am badly mistaken, the big banks have worked out a strategy spawned from the gold and silver and LIBOR manipulations .... they are buying physical crude oil in quantity, one or two MILLION BARRELS A DAY, and storing it in tanks all across the USA as well as in floating tankers ... then they are selling long term futures contracts to offset the price ... the contango fully covers the purchase price AND the storage price ... so they can then use thei oil as collateral for chain loans of all kinds ...

 

However, any hike in interest rates, or even any inflation index rise or any weakness in the US dollar against foreign currencies, or even any worldwide depression and resulting reduction in oil demand, any of these events could trigger a sell-off of epic proportions ...

Fri, 04/10/2015 - 06:23 | 5977810 Ted Baker
Ted Baker's picture

You summarised all in your comments.

Well done!

I though I was dreaming

Fri, 04/10/2015 - 05:45 | 5977789 hedgiex
hedgiex's picture

Markets already know that they are trying to offload. When you have a group of sellers, you bet the sharks smell blood and prices at which collaterals were based is no longer there. So the margins/collaterals at these banks are evisecrating.

Focus on the weak ones to break. My choice Citi and Deustsche.

Why are muppets still hanging on these Banks' share. They have kegs of fire powders under them. Only reason to be long is to bet that they will once again be bailed out.

 

Fri, 04/10/2015 - 05:50 | 5977792 jber
jber's picture

And to make the situation even more "funny" they announced yesterday that a British oil company did find a oilfield equivalent to 100 billion barrels of oil in the UK. 

http://www.nydailynews.com/news/world/100-billion-barrels-oil-found-lond...

Fri, 04/10/2015 - 06:20 | 5977808 Ted Baker
Ted Baker's picture

Now I understand why some large investors been shorting these 4 top banks...

Fri, 04/10/2015 - 06:21 | 5977809 Ted Baker
Ted Baker's picture

now i understand why large investors been shorting these top us banks

Fri, 04/10/2015 - 06:35 | 5977816 falak pema
falak pema's picture

Crime and Punishment in the realm of "Big Oil"...

When the GWB crusader legacy goes sour, we remember what happened in yesteryear to his historical role model : Saint Louis and the 7th and 8th Crusades ! 

Give a man sufficient rope and he will always finish by hanging himself. So showed us Alfred Hitchock.

Some movies like some great novels are timeless! 

Fri, 04/10/2015 - 07:02 | 5977840 Last of the Mid...
Last of the Middle Class's picture

surely an insurance company can't be expected to pay out ona policy such as that! TBTF here we come . . . again.

Fri, 04/10/2015 - 07:18 | 5977863 prudent_investor
prudent_investor's picture

Especially overvalued banks will get to suffer. Read here about valuation of Canadian banks those revenue exposed to oil loans the most:

http://prudentvalueinvestor.blogspot.com/2015/01/v-behaviorurldefaultvml...

Fri, 04/10/2015 - 15:17 | 5979908 Angry Plant
Angry Plant's picture

Oil will be $100 are above forever was what people believed just a few months ago. Just like they thought housing prices would never drop in 2008 and tech bubble would go on forever in 2000.

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