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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Clint Liquor's picture

"demand asset sales instead"? Since when do creditors dictate the terms of bankruptcy? Bankruptcy is design to fuck creditors. 

Boris Badenov's picture

No wonder ExxonMobil was up this week.

Urban Redneck's picture

If they can delay bankruptcy until after the crisis "officially" hits and Jack Lew does his best Hank "tanks in streets" impersonation, then Yellen can reopen the discount window to subprime energy slime for the debt of the merely insolvent, and launch TARP 2 for the BK destined paper.

Bend over and get ready for MOAR "trash for cash" to be backstopped by your wage slavery...

chunga's picture

What the hell happened to Linda Green?

Winston Churchill's picture

Rinda Gleen is on temporary assignment to a Chinese commodity warehouse.

chunga's picture

These fed pricks are getting cocky. If the millions of Jane and Joe Sixpacks out there that got froeclosed by the same fucking banks knew what this was there'd be pitchforks out already.

This is so lame.

Bay of Pigs's picture

No wonder Dick "The Hawk" Fisher bailed on the Dallas Fed. He knew what was coming down the pike.

Fuck you Fisher you lying cocksucker!

chunga's picture

Don't tell Freddie, but I'm about ready to watch football and drink a bunch of beer. I've had just about enough of this shit for one day.

Dave Thomas's picture

Someone spotted Freddie at a Panera Bread reading an Icke book, I think you're OK.

max2205's picture

Coincidence or not but have not seen that petroleum dot organization Comercial in a few months....we employ 50% of all US workers.


So much for that shit

orez65's picture

"... suspended mark-to-market on energy debts and as a result no impairments are being written down."

This is just fu.king unbelievable! 

When there is no consequence to making bad decisions then there is no correction to erroneous behaviour.

I've been hoping that somehow we could avoid the collapse of the US Dollar.

As MIses said:

'You either stop the credit expansion voluntarily and face the consequences or your currency collapses'

Yellen is a fu.king criminal.

Everyman's picture

It is worse that anything you an actually imagine.  These idiots forget what they are doing and have done, for the short game.  hey basically "protect" the big boys at the expense of everything and everybody else.  However it does indeed have a consequence.  Remember they already did this for all mortgages, commercial loans and almost all of real estate.  We cannot and neither can the big boys tell "what" the value of the largest asset classes, and NOW all bonds backed by CMBS, REBS, and now ALL energy bonds, CDS, Energy BS, of all those the realist outcome is, we do not know what is in them or what they are worth.

So, in effect the Fed. just made all energy and real estate class "assets" not virtually, but realistically "unknown".  Meaning, any of these asset classes are indistinguishable between being financially sound and having value, to being a complete bust, which the latter is the most likely.

We are no longer in the looking glass, it has bee busted.  These idiots cut their noses off in spite of their faces.  All oil and RE assets are suspect across all classes, period.  They just sped up the bust, GET OUT OF ALL OIL ENERGY ASSETS AND ALL RE ASSETS IN ALL CLASSES VALUES IS UNKNOWN AND UNKNOWABLE.

HardlyZero's picture

Now Fed using/hoping shale/oil/natty "land value"  as another "free" piggybank, might cause economic earthquakes and rush to exits.

Similar to German 1923 Rentenmark, but if a firesale occurs, and RE unravels (again in these 10 years)...watch out!

mkkby's picture

Cheer up.  Japan has gotten away with this little charade for 25+ years, and counting.

Mortgage loan books were allowed to be zombies until the housing market could be engineered higher.  I suspect the same will happen to energy.  Once russia has been punished enough, the saudis will cut back production and jack prices back up again.  If you are able to buy energy assets cheap (still to come) you'll get rich when this happens.

The dollar is in no imminent danger until spain, italy, japan and probably the uk "go greece".  When these countries go, it is your 18 month warning to get into hard assets FAST.

Black-Man's picture

Did you not read the article? The FED is gonna protect the owners of the debt from the oil/gas industry. However, if it is the coal industry - straight to bankruptcy court and screw the investors. Planned economies are great.

Everyman's picture

NOPE.  They are portecting the BANKS, not the bondholders.  The Bondholders are the "second tier".  When they "auction off assets" instead of marking the business to market, the BONDHOLDERS loose. 

It is a get out of jail free card for the banks, not the holders of the bonds and the debt, it is a HAIRCUT for them.

mkkby's picture

Yep.  Nice to see someone here learns.

The playbook since 2008 US and Europe since then -- protect sovereign debt and banks.  That is the red line.

No choice really.  It's either that, or bank runs and bail ins.

DonutBoy's picture

You are so right.  Prviate companies get officers in jail for moving liabilities off balance sheet.  Here we're just kind of pretending those debts are good...  I am soo tired of the lies.  The 'behavioral economics' of our government messaging us with a happy story.  Please, just dump the facts on the table and go help someone else.

Where but for Zerohedge would I see this?  I love this site.

Demdere's picture

Systematically remove the information needed for the market to function and then complain about market failures.

Set the banks up for failure, and then expect depositors to bail out stockholders.

BullyBearish's picture

The state of the union was an inept attempt at Jedi Mind Trick...

layman_please's picture

more than enough for the weak-minded.

these aren't the debts you're looking for

Wulfkind's picture

A couple of weeks ago CNBS was calling for Bail Outs for Shale Oil.  Here we go.....Stealth Bail Out.

Too Big To Fail all over again.

the_narrator's picture

I think this is more like the Dallas Fed engaging in Chinese style central planning.  You know, telling the banks who to lend to and at what terms and giving them money to lend.  Market/Shmarket America has central planning by unelected technocrats just like they do in China.

Eyeroller's picture

Redacted minutes from Fed meeting:

Yellen: "We must do whatever it takes to keep this pig from rolling over until Obama is safely out of office and I have retired due to health reasons."

JRobby's picture

The FED now promulgates GAAP! Weeeee!!!!!!

TheMerryPrankster's picture

Fraud is fine as long as the fed does it because then it is 'POLICY".

Also in the brave new world an illegal action isn't a crime if it isn't prosecuted, see Corzien,Dimond,Blankfein et al

House of cards, mostly "get out of jail free" cards.

Hyper Entropy's picture

Whatever happened to the Republicans complaining about shale oil in ANWR? LOL.

bamawatson's picture

whatever happened to the repuke-icans complaining about anything? their only focus know is to prevent trump from hijacking their gravy train. "campaign reform" forvever cemented the phoney two party system intrasquad game;

each team gets untold millions straight up from taxpayers to help finance their fake presidential beauty contests. the doughy rove graham mcslime mcconnell etal pukepublicans fear an outsider taking contol

o r c k's picture

The Repubs just want the US to lead (with 20,000 US troops) a Sunni army and invade Syria (and Iraq) for the purpose of "restoring democracy in Syria". Bottom line? "Assad must go because Saudi Arabia demands it". Plus, he gasses his own people. Yes, this is all based on quotes from the last Repub debate. If I think about this one more second, I'll go stark raving mad. Shit, too late.

Seasmoke's picture




orez65's picture

Dear Seasmoke:

That is NOT CAPITALISM, that is FRAUD.

Seasmoke's picture

That is what the /s is for. Some ZeroHedgers really make me work hard for those green arrows. 

TheMerryPrankster's picture

I like to think of them as 'green shoots' just like Bernie, said, green shoots all over the fuck.

Knee deep in recovery,wages  be raising,unemployment be dying, 6 chickens in every pot, massive stock market returns, free healthcare for everyone, my god surely this must be heaven.


Bluntly Put's picture

zombie capitalism is very similar to corporatism.

Wulfkind's picture

It is NOT capitalism.  It IS the INEVITABLE END RESULT though.  Capitalism is NO BETTER......NO BETTER than Communism or Socialism.  NONE what so ever.  The ONLY difference is the time scale it takes to turn into FASCISM and FEUDALISM.

And that time is now.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Jan 16, 2016 2:27 PM

Own oil infrastructure 'IN FEE SIMPLE'


ownership IN FEE SIMPLE has been the goal of THE CREATURE FROM JECKYLL ISLAND since 1913 whether it be the dustbowl, your house, oil rigs, or your balls & pussies.

Scooby Dooby Doo's picture

Does that black swan drink Texas Tea?

ebworthen's picture

When will the FED cover our mortgages and other debt?  NEVER.

When will the FED cover the corrupt banks shenanigans?  ALWAYS.

RafterManFMJ's picture

Hey, should we pay off all the plebes' mortgages? If we did so, they'd be debt-free, AND the banks would get all sorts of free money and improve their balance sheets?


FUCK NO! Let's just give the banks free money, and skip the first step...


If you've ever wanted to know the game, debt slavery forever, there's a pretty stark example.

Son of Loki's picture

You sound like an infidel; the Fed can schedule your beheading Tuesday morning , 9am sharp. Please don't be late since next Tuesday looks like a hectic schedule of beheadings and stonnings and the town square and stonning holes already look overbooked.

barroter's picture

Favors for the 1%, market DISCIPLINE for you!

Seasmoke's picture

Dear ZeroHedge. It is nothing nefarious ....

MrPalladium's picture

A bailout will mean low oil prices for years.


Hang the Dallas FED by their feet if they choose to look at fundamentals in an inverted manner.

Steroid's picture

That's called regulation of the regulator!

WTFUD's picture

= Bailout for BankCorp = Bail-In for Tax-Payers' = PonZi

expres12's picture

When the going gets tough, change accounting rules. A page from the bailouts.

thunderchief's picture

This will be 2016s overall theme.  Just like Obama's final hopium State Of the Union,  cramming hopium down everyones throat, regardless of the state of affairs. 

Count on this when it comes to any crisis, big or small.  Hope.. Thats what you were told in Chicago 7 years ago.  You now have one more year of swallowing.