Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears

Tyler Durden's picture

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.

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 first 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.

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JustObserving's picture

Fraud is fine as long  as the Fed does it.

Looney's picture

So, the mark-to-fantasy wasn’t good enough – they’ve suspended it all together?



CheapBastard's picture

Along with the energy companies collapsing, they may face another big housing bust:


Houston home sales decline by double digits amid oil slump


Houston home sales fell 10.2 percent year over year in October, according to the latest monthly report from the Houston Association of Realtors.


Single-family home sales took a nosedive in all price categories. Houston’s townhome and condominium market saw the greatest hit in sales, tumbling 17.3 percent in October.




One of the largest apartment owners in Houston admitted their vacancy rate now is a  panicky 8% [normal less then 3% he said] and rising fast as the jobless energy-related people default on their rent and vacant.


Son of Loki's picture

"It's contained."


~ Soweto

strannick's picture

Can I mark my debts and assets to what I want, even though I'm not  a tbtf  bank?

Buckaroo Banzai's picture

No, because the banks are doing it "for the children"!!

Chupacabra-322's picture

"Gods Work." Wink, wink. Lucerferians Work.

remain calm's picture

Ho Le Fuk from PBOC said Sum Ting Wong ova ter to

remain calm's picture

So the Fed can just make up rules as it sees fit. How long till ponzi economy goes fucking KABOOM!? Do they really think they can control all the inputs and outputs and this not end utter fucking chaos. When it happens go for their heads.

Surviver22's picture
Surviver22 (not verified) remain calm Jan 16, 2016 3:28 PM

That's how you know you fuked up

The Juggernaut's picture

So the Fed DID PURPOSELY post data after 4:00PM, yesterday.

Do ya'll remember when the Mortgage companies ended MTM in 2007?   That ended badly.

Soul Glow's picture

"Bear Sterns is fine.  It's fiine!"  Said Jim Cramer on a Friday.


sunaJ's picture

Which banks will be required to mark-to-market, thus suffering massive losses?

Well, I imagine the ones that do not have to are going to be the member/owners of the fed. Does it not get more plainly criminal than that?

The only question you really have to ask is, which companies have loans with banks that have exposure to this shit-show? Well, as with any bubble, they ALL do. Which means it will be a sector-wide bailout, courtesy of you.

nope-1004's picture

No entity has been allowed to go bankrupt since 2008.  This doesn't suprise me and, in fact, I bet dozens of such meetings have taken place over the years with a variety of insolvent financial firms.

The Fed is king!  Long live financial engineering and mark-to-fantasy accounting!

Yes We Can. But Lets Not.'s picture

Rules are rules.  Until they aren't.

Thus, there is no rule.

Except for the less-than-powerful.  The USA is politically corrupt and DC/NY must be subjected to a deep cleansing.

philipat's picture

Does anyone else vaguely rermember there used to be this thing called GAAP and also an Accounting Standards Board that actually applied Accounting Standards via Public Accountants who actually applied them rather than increasing fees for not doing so. Just another example of how the entire US system is completely corrupt and broken.

jbvtme's picture

mulligans:  they're what's for dinner

GMadScientist's picture

I think that got shredded by Arthur Andersen by accident, check with Jeff.

Whoa Dammit's picture

The problem is the Fed keeps treating the terminal depression we are in as if it was merely a normal 2-3 year business downturn. If it was a normal 2-3 year downturn, their fixes would work. But they don't work now, and never will, because we no longer manufacture anything.

That being said I find it hysterically funny that the oil price collapse which was meant to take down Russia will probably take us down instead. Best laid plans of mice & men.

glenlloyd's picture

The real problem is we once again have the Fed in making decisions about winners and losers.

How many people maybe bet that these energy companies would go belly up? Did the due diligence and placed bets that it would happen only to have the Fed stick its fingers in there again.

Fed needs to fuckin step away and let the chips fall where they may. Accept the fact that we've reached the end of the line and that this is really only due to their incompetence.

Four chan's picture

how do you step away from a comple system of fraud based on fiat and hft?

All Risk No Reward's picture

No, the problem is that the people have no clue what the Fed is doing. It is a Sun Tzu Art of War operation to asset strip ordinary people out of most of their wealth.

The operation is as mind repelling simple as the creation of societal enslaving debt-money from nothing...

Step One: Blow massive debt-money bubble. This requires the lowering of interest rates to allow for leverage to increase.

Step Two: When Step One has basically run its course and topped out (2007/2008), loot society blind in "bailouts" such that your corporate fronts get designated "TBTF&Jail", you offload your trillions in bad debts onto the public (via the Fed), while getting bailouts and cashed out of the bad debts at 100 cents on the dollar).

Step Three: Once Step Two has run its course, bust the debtors in American, including the governments, and set up a more authoritarian governmental front structure that you control from behind the scenes.

This is the plan and it is what they are doing.

The propaganda is to keep the plebs in the dark to the skewering that they are all lined up to get.

When the pensions go... when the bank accounts go... when the jobs go... we are done for as ordinary people.

It is that simple, people, and the TBTF&Jail Banksters end up with everything in the end.

They aren't stupid, but they are BANKING on the fact you and yours are!

Jtrillian's picture

It's very important to understand that this is a drastic measure to prevent an imminent collapse of the energy market.  It is not based on any fears.  They would not act on fear alone.  It is based on reality.


All Risk No Reward's picture

It is war by a Sun Tzu Art of War method...

1. War is all about deception.
2. The best warriors never have to fight.
3. If you have to fight a war, end it quickly or it will bankrupt the nation, unless you are a supra-national Debt-Money Monopolist and bankrupting a country is a key component of your agenda so you dupe the people into a never ending war "on terror."

This is so obvious, but so few people "get it."

Saddam Miser's picture

What is Hitlery's nipples?

GMadScientist's picture

Worst History Channel re-enactment ever?

"The Ahnenerbe believed that the fuhrer's nipples could be tuned to sacred frequencies that would bring about Nazi victory."

ebear's picture

Tips of Icebergs!"

Nose of the camel!

GMadScientist's picture

Come now, you make it sound as if they have no analytical process whatsoever, when in truth they have very strict guidelines for how large a turd can be, how much of it must be covered by kitty litter, and how many witnesses may or may not be present to their crimes, all of which factor into each decision they make on behalf of the whole world economy.


spacecadet's picture

I'm curious as to who downvoted ya

eatthebanksters's picture

It's  great to be a banker!  

JRobby's picture

Marked to What? (Murmering, coughing, faint sound of vomiting)

Marked to Market! (Laugh Track Deafening)

PT's picture

Yeah, but tomorrow I'm gonna be rich!  And then I'm gonna buy me a big gas-guzzling V8 and I'm gonna drive it really really fast and increase demand and that will push the price of oil higher and then all them companies will be in the black again!  Yeah!  That's wot's gonna happen!  Temporary set-back, that's wot it is!  Yeah!

PT's picture

I love my yummy Moron-Pills.  You should try some.

FatTony7915726's picture

More like Blankfein's pubic hair! Just sayin'

espirit's picture

Blankfein's been shaved by his minions.

Just sayin'.

(mind bleach moment)

GMadScientist's picture

Nibbled, like goats.

(reaches for MIB red flashy thing)

GMadScientist's picture

You're a moron. And a pill. Put yer pants back on fer fuck's sake.

GMadScientist's picture

I don't suppose you could drive that V8 into the Straight of Hormuz and cause an 'incident'?

Soul Glow's picture

Demanding asset sales instead of forcing bankrupcies is delaying the inevitable, giving time for the Fed to kick the can.  

Problem with the can is it looks like shrapnel.

Tall Tom's picture

That can looks like one hell of a large bomb to me.


Yeah. kick it some more. Go ahead. Continue.


Maybe it looks more like this...




It is just one mint. One thin mint. (Here. Let me take cover.)

Squid-puppets a-go-go's picture

wouldnt it be funny if oil companies forced to sell are the straw that breaks the equity markets back and flushes us into full 75% drop mode

Squid-puppets a-go-go's picture

in fact, the oil companies should do a co-ordinated mass sell at the same time. Because fuck the bankers. Oil companies have hard assetts . bankers just have 0's and 1's and they dont deserve to scoop the pool

espirit's picture

Think about this...

'Got good boots?'

Tall Tom's picture

Mental note...Buy some good boots. Ooops.