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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gatorengineer's picture

transferring assets to the tribe, one default at a time......

Withdrawn Sanction's picture

"Demanding asset sales instead of forcing bankrupcies is delaying the inevitable..."

Yep.  But there's an ironic twist to the Fed's "advice."  Imagine Tiny TX Bank forces a shale operator to sell assets to cover a non-performing energy development loan.  Those assets will fetch a lot less in today's market--say, generously, 40 cents on the dollar.  There is now a market-determined loss that has to be recognized. If losses are particularly substantial, Tiny Bank could be made insolvent while trying to follow the Fed's advice.  IOW, the suspension of mark to market only holds so long as the loan asset's losses remain unrealized.  The asset sale pushes them from an unrealized loss to a realized one and reveals the bank as at best impaired, if not insolvent.   Nice try Dallas Fed but that's bum advice.

ThroxxOfVron's picture

"There is now a market-determined loss that has to be recognized. If losses are particularly substantial, Tiny Bank could be made insolvent while trying to follow the Fed's advice.  IOW, the suspension of mark to market only holds so long as the loan asset's losses remain unrealized.  The asset sale pushes them from an unrealized loss to a realized one and reveals the bank as at best impaired, if not insolvent.  "

 

By the time the loss is realized it will be a liability of the FDIC/US Treasury.

 

ATM's picture

Demandng assets sales, but to whom?

My guess is our good friend Warren Buffett will start collecting oil assets in a large way........................financed by the Fed at negative rates.

Tall Tom's picture

So the Shale Oil Industry has been declared as Too Big To Fail.

 

The next one will be the Banks carrying the Student Loans...or the Auto Loan companies.

 

All of it is based upon deception...a foundational lie that eats away at the fabric of civilization as a cancerous tumor.

 

The collapse will be spectacular.

JRobby's picture

Both, Student loans are already non performing. Auto will result in a massive non perform / repo glut in 3, 2, 1.......

The years 2006 through 2016 - a bunch of shit financed that sold a short time later for half price! But hey! The banks make commissions based on the loan amounts!!!!!!!

new game's picture

corruption/fed cronies meet football playoff plebs glued to playoffs.

i ask who gives a fuck, remain calm drill on...

Hedger4Life's picture

Tall Tom

I believe we would agree that in this here capitalist system. The way this thing works in an optimal or functional fashion is when the the companies, businesses wtv you want to call them, are allowed to fail if they are proven by the real world and market to be unsuccessful. When companies are unable to survive on their own with all the mechanisms in place for funding etc then it is common sense that they fail and expire. That is quite natural. Creating a situation where the unsuccessful fail and the successful thrive. This propping up failed institutions is madness and foolishness squared.

Well if you don't let the weak fail eventually the business eco-system will become itself weak, unhealthy and distorted by moral hazard. And the whole economy or system will fail at some point in one go. It is not really that complicated. It is simply that stupidity has become indocrinated on a mass level.

Btw. Not pointing the finger at the commodity companies. If the fucking good for nothing parasite banks were bailed out with tens of trillions of dollars, For creating digits and running the presses and loaning the world's money supply that was made for free - at interest. Then that deal is not good enough for them. They engage in every manner of crime, corruption and market manipulations. Well atleast the commodity producers bring things like, oil, gas, coal, copper, steel etc to the market and the global economy. 

Tall Tom's picture

You know it. So do I. This entire system is based upon fraud. And it is doomed to destruction.

 

And we cannot prevent it.

 

Unlike you I am also pointing at the commodity companies.

 

There are at least two participants in any fraud.

 

There is the party that promises something for nothing.

 

The other party hopes to gain by out maneuvering the first party while hoping to steal...something for nothing.

 

Both are just as dishonest.

 

You may have heard that one cannot con an honest man. That is true. A dishonest man may be able to steal from him while he is blind, once. But the honest man chooses to not participate in fraudulent schemes and pie in the sky dreams. An honest man places his principles above that of garnering profits.

 

Anybody could have looked at the Shale Oil Model and have seen that it was not sustainable...at any price. It required exponential growth that was unfeasible.

 

Even Shell Oil pulled out after modeling the production. They knew it and exited.

 

But the Operators were looking at the short term gains because of the liquidity provided by the Banks.

The Bankers were interested in garnering those loan origination fees and bonuses.

 

This whole "boom" is just like the Housing boom before the Global Financial Meltdown of 2008.

 

Furthermore the Government of the USA defaulted on the agreements made in 1973 that continued to set up the US Dollar as the World Reserve Currency after the default of Bretton Woods. We promised the Saudis that we wuld not burn any domestically produced Oil. That is why the Prudhoe Bay production was shipped to Japan during the 80s and 90s.

 

It has all been based upon our failure to keep our word in agreements. It has all been based upon fraudulent shemes so that Bankers would make their bonuses on the pie in the sky dreams.

 

After all a Shale Oil Operator is just a liar with a well in the ground. He has a close relationship to his cousin, the Gold Miner.

 

 

Hedger4Life's picture

Again. I couldn't agree with you more. And I can't find fault with any of your statements here.

I am aware also that the mining, commodities, oil business etc are also corrupt and malevolent in their majority. Most of these interests are connected. The bankers control the war machine, and control the resource extraction, and the financial markets, and the corporations, and the government to boot.

Also off point. But on your recurring point that you have made over the years. Yes, starving the beast. Would be the single most effective way to bring it down. There would probably be no need for violence at all. A simple refusal on mass to adhere and submit to the exorbitant tax regime alone would dismantle the base of the system. Let alone withdrawing from other sources of supporting and funding them to facilitate our own subjugation and exploitation. After all it is a system whereby we are the colleteral for the debt/fiat creation and we are the annuity/perpetuity which pays monthly to the token holder. Sheep for the fleecing.

What prevents large numbers of people from defending and claiming their right to greater liberty would be a good starting point and good subject for another day.

Hedger4Life's picture

This line shows what sort of a man you are ' An honest man places his principles above that of garnering profits.'

Although you know your stuff, and have depth of knowledge and experience. To me this type of honor is worth more than all the success, money or intellectual intelligence in the world. If all men, or atleast most men had this type honorability as their main reference. This world would stand a chance to be a good place.

Sadly the system of frauds that you describe has pepetuated a state of affairs whereby conning, stealing, lying, cheating, exploiting and abusing are rewarded and rewarding whereas honesty, integrity, decency, respect are penalised. And this seems to have effected a moral evolution or devolution. Ie the environment has shaped and altered behaviours that increase the chances of survival and success

Grimaldus's picture

"Sadly the system of frauds that you describe has pepetuated a state of affairs whereby conning, stealing, lying, cheating, exploiting and abusing are rewarded and rewarding whereas honesty, integrity, decency, respect are penalised. And this seems to have effected a moral evolution or devolution. Ie the environment has shaped and altered behaviours that increase the chances of survival and success"

 

There it is---the difference between progressives and true constitutional conservatives. Well said sir.

 

To have a crime, you must first have progressives.

 

 

Grimaldus

PT's picture

So ... it sounds to me that the casino is now refusing to admit when people win and refusing to pay them out.  How long the casino lasts depends on how many "winners" leave empty-handed and how loudly they tell their story.

You could read the numbers, do the maths, and say to yourself, "Hey!  That company is a definite short."  So you buy some puts, sell some calls ... but now the Fed has stepped in and said, "This company is "fine".  We'll just feed in some 'cash-flow' through the back door" so the options expire worthless, the punter was wrong even though he was right.  The punter ain't coming back to THAT casino.  (As someone else said, like the end of The Big Short.

So the only game left is putting money on whatever the casino chooses to prop up.  But given that the casino's goal is to win, not to play fair, if everyone makes the same bet then the casino will ensure everyone will lose.

At least when the lotto-winners got the IOUs, the "casino" admitted that the punters had technically "won".

From the book of The Big Short (from dim memory, I haven't got a copy laying nearby): 
"We love it when you guys go short.  The more shorts you buy, the more longs we can sell."

Paraphrasing Homer from The Simpsons (where my memory is even fuzzier):
"Ow, it hurts, ow it hurts, ow it hurts ..." (as he continuously repeats the same action ...)

OregonGrown's picture

I think someone around here might be "peddling fiction"!

gatorengineer's picture

When was mark to market re-instated.  Answer it wasnt.

Tyler where are you getting these hack articles?

 

1stepcloser's picture

My house is still priced in 2006 dollars on some BOA spreadsheet

Tall Tom's picture

How certain are you that your mortgage has not been rehypothecated, bundled and sold?

 

Just how many note holders are there on your house?

 

Are you sure that you are paying the right lender?

 

Are you sure that your home does not belong to Cede and Company?

 

How much compensation do you expect to get from a bankrupted Title Insurance Company that failed in their due dilligence when searching out liens against your property?

 

Do you really own your house?

 

How many claims are there against it?

 

How many derivatives have been issued against that real property?

 

Are you not incensed?

 

How can you continue to support this system?

 

 

Badsamm's picture

They are the JV producers. Nothing to see here

Escrava Isaura's picture

 

 

As long as the money needed to be created is private debt instead of public asset all these flaws and frauds will only exacerbate. I has too. Can’t wait to see when it ‘leaks’ to retail banks—deposits.

 

"Once a nation parts with the control of its currency and credit, it matters not who makes the nation's laws. ... Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile." Mackenzie King, Canadian Prime Minister 1935-1948.

 

Doña K's picture

Can the smart kids in the room tell us whether to go long or short on oil Tuesday?

Tall Tom's picture

There are no smart kids.

 

I cannot tell you one way or another.

 

I have a 50% chance of being correct.

 

But the trend is your friend for the longer term.

 

And as for the Federal Reserve suspending rules and keeping the investor ignorant of the true financial health of any company is an exercise in FRAUD.

 

And it is truly sad that far too many people here on ZH support the fraudulent and corrupt Government of the United States for allowing this continuance of the fraud and corruption of the Federal Reserve Bank.

 

It is just another reason that gives me incentive to do something about it.

 

Soul Glow's picture

What I can tell you is that being in this market long is like playing Russian roulette.

Escrava Isaura's picture

 

 

Get this over your heads: Markets never existed but for the THIRD WORLD, PERIOD!

 

Here’s an example: Since 1947 when it really started operations, the World Bank has acted as a branch of the U.S. Defense Department, from its first major chairman John J. McCloy through Robert McNamara to Robert Zoellick and neocon Paul Wolfowitz. From the outset, it has promoted U.S. exports – especially farm exports – by steering Third World countries to produce PLANTATION CROPS RATHER THAN FEEDING THEIR OWN POPULATIONS. (They are to import U.S. grain.) But it has felt obliged to wrap its U.S. export promotion and support for the dollar area in an ostensibly internationalist rhetoric, as if what’s good for the United States is good for the world.

http://michael-hudson.com/2015/12/the-imf-forgives-ukraines-loan-to-russ...

 

KesselRunin12Parsecs's picture

"I said the smart kids"

 

I said 'YES'... Look bitch.. Just because your 'hubby' gets paid sheckels to be some kinda Israeli 'intelligence' soldier... That doesn't give you any credo to be the judge & jury on what's 'smart' & what's not...

 

Go cook him some Matzoh ball soup & get TF outta my face!

RafterManFMJ's picture

Guess who never loses? Those that can change the rules at any time. It'd be fun to play a game of Monopoly with these assholes ... oh, wait, we already are.

XitSam's picture

"Those that can change the rules at any time."

Isn't that called CalvinBall?

http://www.bartel.org/calvinball/

Tall Tom's picture

It will be fun to hang them.

Dave Thomas's picture

Or Jag that guy with the cigar and top hat with the pointy end of an iron!

SmedleyButlersGhost's picture

I'm guessing that your question is meant for me. In order to determine long or short, we need a starting point or a gauge for relativity. For instance long or short in Africa versus Japan is different.

Stroke's picture
  • Long Bankruptcy attorneys
PT's picture

Dona K:  If you bet big and plan to lose then the markets will remain "fair".

You can keep playing and win small, until such times as one of the "elite" sez, "Hey!  I like that little pot of loot.  MINE!"

I can think of no technicals or fundamentals that can save you from that "MINE!"

Except for "Plan to win when the majority of others are losing."   What's that chart of the-most-shorted look like again?  But I think it won't be long before the casino just takes money from both sides of the trade.  At that point they won't even bother pretending they are "right".

Usual disclaimer:  I know nothing.

conscious being's picture

Gotta call Janet. Or get on the Friend's and Family list.

What do you think Janet is doing this weekend? Maybe they keep her drugged in a box until it is time to come out and say something?

DipshitMiddleClassWhiteKid's picture

it will ramp for a day or two (thanks to Algo & HFT trading) than drop even harder

 

long term..it will go down to $20

newmacroman's picture

Oilive Black is the new Linda Green

stocktivity's picture

Oh sure...let's just carry the price of oil on the books at close to $100. BTFD because all is well and the Fed has your back.

Proofreder's picture

And a check will be in the mail

real soon now

hangemhigh77's picture

Execute these motherfuckers

Son of Captain Nemo's picture

Mark to unicorn.

+1000

Make that a t-shirt and sell them at the HQ's of JPM and Goldman!

 

Dragon HAwk's picture

( Translation banks Are Freeking Broke )

Assetman's picture

This is simply the Juncker Rule in full effect.

HardlyZero's picture

Asset sales...so that will begin the big unwind (again) in real estate prices.

Makes sense since real estate is also not mark-to-market anymore.

This real estate unwind/earthquake could cause other markets to collapse.

Fun with fiat.

MsCreant's picture

Assetman is here folks. Timmy better keep looking over his shoulder. Or maybe he is thinking about jumping?

The old timers come out when the shit gets weird. This is weird shit. An Assetman sighting is confirmation. You all look at graphs, I look for Assetman and Gordon_Gekko. Chumba always lurks...there are others.

Glad to see you. Hope your son and daughter are doing well. My son is almost done with college, got maybe 2-3 semesters left. Have no clue what he will really do, lots of talk. 

Cui Bono's picture

Quite Right MsC! If the big kids come out to play it's usually serious.

Remember the really early days when you could post anon. Hated it when that changed.

Every day I learned more than in years previous. Now I just
sit here reading and reading more baffled than ever that the whole fucking thing doesn't come down on itself...

Building 7 Doom Fatigue I think its called.... sigh...

Whoa Dammit's picture

"When the going gets weird, the weird turn pro." Words to profit by in the USSA. 

hangemhigh77's picture

Let's see that fucker lie his neck out of a noose. Hang all these lying crooks.