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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WTFUD's picture

Hope Dies Last but Painfully Slowly

HalinCA's picture

Actually, this is the final slap in the face delivered by the banksters to Obiwon for his incredible faux pax on not delivering the KSA-Turkey pipeline.

gmak's picture

More lies on the Mark to Market. This is sure smelling like the crap the Banks did on CDS and swaps related to MBS, CDO, and CDO-squared in 2007.

matermaker's picture

That's exactly what it is, gmak.   The rest of the world had no clue until Lehman blew up and were told the World would end over the weekend.   They can try to hide it and lie like children, but eventually it will come out in the open.  Especially as oil has and is going to continue to tank much faster than sub-prime.

cbaba's picture

Mark to Mars who cares, gravity exists, you cannot escape from inevitable.

kotfare17's picture

Crude oil can be sold in the black market without affecting the "market" price, just as Iran has been doing for years already and just as Isis already does daily

cwsuisse's picture

This is a very dangerous game at the precipice.  Russia, Saudia Arabia, Iran and China or any combination of those could collude to blow the US up and it is difficult to fully deny that they might be tempted to make use of this opportunity. 

matermaker's picture

Of course they are.  What do you think is going to happen this week when Iran floods the markets with all those VLCC Tankers they have lined up in the Gulf?   Oil prices will collapse on Monday.  Even more so Tuesday.   Margin calls will be made.  Derivative daisy chains will go off.   Poof!   Sub-prime times 10.   Down goes the US and the petro dollar.

xrxs's picture

It makes one wonder if this move is tied to geopolitics and foreign policy. 

Boris Badenov's picture

You don't think they're already filled? Regardless, it's the transaction that will be posted to Iran's account on Monday, at the lowest price 10 years. I think the damage in price has already been done.

matermaker's picture

22 off the coast.  13 are filled and will set sail as soon as this announcement is made..  here's the live feed.   https://www.youtube.com/watch?v=OtXuoqQ0vDc

FreedomGuy's picture

This is serious shit, if accurate. It will spill over into everything. This is the movie, The Big Short only it is energy companies instead of housing.

The question is when and how this reverberates into the overall economy.

In my state the unemployed oil field workers are moving into the construction jobs. The housing market has gone insane here. Personally, suspect they have gone from frying pan to fire.

As a related note, the homes I have been looking at are all being built in the $500-750k range. Statistically that means you need at least $100k to $130k incomes (with little or no other debt and a $100k down payment) to tote the note. That means they are building home for about the top ten percent of incomes, only. My instincts tell me that if 90% of your homes are for ten maybe twenty percent of incomes, even excluding welfare families, you are in the wrong sector or your model is unsustainable.

Also, about 20% of all office space in my city is leased by energy companies. That has to reverberate rather quickly, as well.

Exalt's picture

It doesn't end with energy... there is an unfolding socialisation of the private sector.

Losses are going to be socialised wherever a "national interest" can be found in keeping companies afloat.

At best it is facism and if it is wholesale it's socialism. In the land of the free, home of the brave...

Son of Loki's picture

Up to 70 new apartment projects in Houston have been stalled or canceled amid the oil slump.




I read that banks are cutting way back on loans to these developers and as loans come due on their raw land holdings, it's going to be lots tougher. There's thousands and thousands of acres of raw land speculators surrounding Austin and Houston thinking RE prices only go up.


It's going to get anxiously interesting for them.


Ya know, if Soweto had not told everyone the USA economy is strong and awesome the other night, i'd think we're in a deep recession and heading for a whopper of a Depression.

Dr. Engali's picture

Like I've always said, it was only a matter of time before the fed starts monetizing oil debt. It doesn't matter what their mandate from CONgress is because they don't answer to CONgress.

matermaker's picture

They can't go very far monetizing the Petro Dollar.  The rest of the World won't stand for it.  China's new bank opened today.  Iran is getting the sanctions lifted and it's Oil License back.  Lybia is about to come back online with oil.  The petro dollar dies, this week.

Dr. Engali's picture

The rest of the world has shown that they have little choice but to take it. The fed will probably be monetizing shale debt, auto debt, and student loan debt before they're through.

matermaker's picture

Doc, that only applies to empires with the money and power to enforce their rules by the sword.  We not only no longer have that ability nor will, it will be decimated even further.  This is a case of just about every other kid in the sand box getting together and deciding to throw a cat turd at the bully at once.  He will have no choice but to cry and leave.  Hell, we don't even have enough potential soldiers, anymore.  38% obesity rate, defined as 50 pounds or more cited by the CDC.  What good would a draft do?

r3phl0x's picture

Well, you don't need many soldiers to control 10,000 ICBMs, and it's not a big deal if most of 'em are fat (the soldiers I mean. the ICBMs need to stay on a strict diet).

post turtle saver's picture

yeah yeah, the rest of the world won't stand for less than $30 USD buying a barrel of oil when every producer you've cited is going to pump like there's no tomorrow... it's the death of something but it sure as fuck isn't the petrodollar... it's the death of oil price manipulation...

"The petro dollar dies, this week." - you're delusional

Winston Churchill's picture

If I tried that on my balance sheet, I'd be locked up for trading while knowingly insolvent.

How can a regional Fed suspend rules on a national bank ?

They can't.This order came from NYC.

HalinCA's picture

Yup  ... bet the busybees are working 7x24 over this 3 day weekend to get ready for the Tuesday openings ... wonder how many forced mergers will happen ... last time BoA had a gun put to its head to acquire ML.    Who got CountryWide?  Memory fails ...

Bet we see all sorts of useless energy deals announced next week - all the majors will be expected to pick up the debris of the frackers ... they are going to allocate things to save the banks.  

If the majors don't to 'do their duty' watch the DoJ go after them ...  


Anybody who thinks the nation is not run by GS and the bankster gang after this is just delusional ...

EndlessSummer's picture
EndlessSummer (not verified) Jan 16, 2016 2:39 PM

Time to make India the new China.

jcdenton's picture

So in other words, derivatives are unwinding ..


FED: "Let's just try to keep this under our hat for now!"

"No cause for panic."

Winston Churchill's picture

I'd say its public now.

Panic first.

DirkDiggler11's picture

Hang the sons-a-bitches, every last one of them !!!

katchum's picture

This will not be good for the oil price. Please let them go bankrupt already...

cwsuisse's picture

By the way: the replication of the mechanics used to stabilize the banking system will likely fail in the energy industry. The energy industry is different from the banking industry, a cartell that is organized by the central banks. In the energy industry it will be impossible to find enough investors which are prepared to catch the falling knife and therefore asset sales will not work, absent a guarantee from the FED. The only solution is a full bail-out of the US shale industry by the FED, a measure that would most likely fail in the long-run because of the much lower production cost in countries such as Iran, Russia, Lybia and Saudi-Arabia. 

matermaker's picture

Not to mention that the value of their assets is in the crapper, as well.  Price of steel, equipment, etc.   At least with a sub-prime house, if you bulldoze the home and are left with nothing but dirt, at least the dirt is worth something.  These guys mostly don't even the real estate.

matermaker's picture

Say you're a run of the mill driller in Oklahoma and Northern Texas.  The bank tells you that you should sell every damn thing you have to pay them.  You KNOW the jig is up and you are toast.  Do you do what the bank tells you or do you just go ahead and file bankruptcy?    The banks are going to be writing this down one way or another.

Winston Churchill's picture

I'd sell all right, for cash out the back door.

All they are doing is giving them time to do exactly that.

Goes from the very top to the very bottom in that situation.I've seen it happen first hand.

There won't be very much to liquidate when the inevitable finally occurs.

Just human nature.

Kickaha's picture

I would be very surprised if the loans made to the shale frackers were not secured loans whereby all the equipment was pledged as collateral, with a UCC-1 properly filed.  The driller would get more money selling the stuff at the drill site than having the bank hire somebody to come out to the drill site, dismantle it, ship it to an auction site, and then auction it off.  I doubt anybody would buy it subject to the collateral lien on it.

If the driller files for bankruptcy, the Trustee sells everything and the lenders with collateral interests are priority creditors who will get paid to the extent that the auction prices for the collateral equal or exceed the auction price minus commissions.

The real problem for the banks is that they won't get much for any of this shit.  The equipment is a storage liability if the cost of drilling exceeds the price of the oil

Of course, if mark-to-market is suspended absent declaration of a default, then the banks will never default these fuckers and seize the collateral.  They will just roll the loans over because the unicorn accounting will allow them to keep the loans on their books at face value, thereby fooling the world into thinking they remain solvent.

I do wonder, as many have already suggested, if this is mainly a political response to the House of Saud's attempt to kill off the shale drilling industry competition.  Instead of a shrinking industry in the USA, we will have a large hoard of zombie drillers, which, from a distance, might even look like healthy companies. 


matermaker's picture

Alas, all of the drilling equipment and infratstructure is basically worthless on a low price commodity oil flooded market.  A large portion of ALL the decent jobs in the last ten years or so have been Oil & Gas related.  What's that going to do to the subprime auto market?   What about the liabilities of plugging all the open well heads when they fall out of production?

Tinky's picture

You'd have to be viewing from Pluto for the industry to look healthy.

HalinCA's picture

War. What was the question? Kiss goodbye to KSA's fields ...

SweetDoug's picture


Wow. Just plain ol' 'Wow!…"

And not a whimper of this anywhere else.

Not even… Business Insider!?

Who knew?

Kudos to ZH for outing this. Probably the story of the year so far, with the implications.

I don't know squat about finance, but I know 2 + 2 = 4 ? 5.

And this is trouble.



SkunkyBeer's picture

"reputable Swiss investment bank"

Ha ha ha, that's a good one. "Swiss" and "Reputable" can't be used in the same sentence without an "ain't".

HowardBeale's picture

So short squeeze on some of the sketchy oil companies that are heavily shorted?

nc551's picture

Pasting text directly from your source is the same as outing them.  One fine example from Google's free machine learning course involves using the Naive Bayes algorithm to sort through and identify email authors out of 10's of thousands of Enron emails, and it is dead on.  I'd be surprised if high level deep state companies aren't already poised to search for leaks this way.

Clowns on Acid's picture

Great. First step in debt jubilee / cancellation of US Fed Gov debt. The Fed Res owns 30% approx of Fed Gov't debt. Just cancel it. Now deficit is only $12B and not $19B. Progress !  Told ya we would handle it. What could go wrong?

maneco's picture

You are confusing deficit with debt. Deficit is the annual difference between government tax receipts and government spending. The annual shortfall or deficit is added to the national debt which is now around $19 trillion.

Clowns on Acid's picture

I wasn't confused. It is a net deficit as well as debt. But thanks for the Wiki definition Professor Micrometer. 

jal's picture

This is great news.

Nobody will know if they lost their shirt.

hound dog vigilante's picture



"Reality is not looking too good here... let's inject some fiction.  We'll sleep better, then retire."

-Dallas Fed

pakled's picture

I'm shocked shocked.

farmboy's picture

You have to be a "professor "at Harvard to come up with such a dumb solution.

I am amazed that GS is not selling them a Greece like swap to hide their mark to market problems, thanks to their buddy inside the FED.

Do not expect any answer. Silence and/or obfuscate is standard operating procedure for ex investment bankers in trouble.


falak pema's picture

The cracks begin to appear :

The FED is "fed up " of being the FED that bails out the tBTF cabal ; the true bad guys since 2008 crisis of American Hubris l.

About time; when TSHF the Oligarchs run for the "limited" number of lifeboats on the Titanic...

"Sorry buddy; its every man for himself. And I am protected."

"Oh my, my shale investment ! Oh my, my Unicorn of Nasdaq! "

"Oh my; my MIC company that lives off the tit of of "massive military supremacy"; now looking like Tiny TIm."

Tipping moments; will Pax Americana go the whole hog of taking on Putin and China, if the reset heads that way ?

The match of this Century; when petrodollar is no moar petrodollar!

No reset before we resolve this clash of Dinosaurs !