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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Kayman's picture

Our new fucked-up world. The ship is sinking from too much conjured up debt against shrinking real private incomes. Answer:

  "Women and children remain seated. Too Big Too Jail to the lifeboats, please. "

besnook's picture

wait until they have to suspend mark to market in the equity market.

Consuelo's picture

"What does it all mean?"






bthunder's picture

Exhibit 1:  Bullard says that oil prices have to stop falling.

Exhibit 2:  Fed tells the banks to cover up bad loans to energy comapies.

Exhibit 3:  In 2008 the Fed took too long before suspending mark-to-market rules and before it started "asset reflation" by way of buying MBS with QE.

Conclusion 1:  This time the Fed is trying to be "ahead of the curve" and is about to start "reflating" oil industry by buying something (oil futures or  junk bonds of shale companies or smth else.)  The Fed knows that they're about to drive prices up, so they can tell the banks to just 'hang in there" for the time being.

Conclusion #2:  SUV and truck market will be dead in 6-12 months, short automakers. Discretionary spending will take a hit - trade accordingly.

Question:  Will the Fed sell short more paper gold while purchasing junk debt issued by bankrupt oil firms to claim that "oil prices are up, but there's no inflation. Just look at the level of USD and gold" ??



Hitlery_4_Dictator's picture

What you outlined is my worst nightmare...

Boris Badenov's picture

I vote for Exhibit 1 and Conclusion 1. Bullard gave the banks 48 hrs notice to get their front-running shoes on to buy crude futures before the fed does. It's a brilliantly simple plan, rising crude prices cures all ills, including stock prices. Plus it might even weaken the USD.

Hitlery_4_Dictator's picture

This will explode the prices of S&G. Also, this will do nothing for economic numbers, the stocks are goign down no matter what they do. You can not stop economics mother nature forever. 

HardlyZero's picture

or plan to Nationalize the shale oil lands.

The coal land lease rates are being evaluated upwards now, as it is.

That will be 'green' anti-warming policy winning ?

john_connor's picture

This will just cause more stress build up in the financial system without the normal signals, and then boom, it collapses.  Same it has been for a while.

In the meantime oil price will continue to sink which will hasten geopolitical tensions further.

Way to go Fed.  Save the banks balance sheet, suffocate everyone else, and start WWIII.  

matermaker's picture

If oil suddenly stops being priced in US dollars, do you think oil exporters would fare better?  Would just about any commodity producer be better off?    .....just something to think about.

matermaker's picture

Don't really need a war, for that.   Just some underhanded thing like flood the oil market and make the US economy go boom.

Panic Mode's picture

That means we not only bail-in the banks but also the oil, drilling and exploration companies. How generous of us.

MsCreant's picture

We won't do shit, unless you count printing/watering down our dollars eventually. The Fed is picking the winners and the losers. 

If I am a little girl playing a game of cards with you, and in the middle of the game I change the rules so that before, you were winning, and now me and my friends are winning, you would not want to play with us very long, would you? 

Soul Glow's picture

Us?  Are there two girls, and are we playing strip poker?  Because that sounds fun.  


MsCreant's picture

Let's play a game of Fed strip poker then! This will be fun.

By the end of it, you will be naked and required to do degrading things that we enjoy, and we will have all our clothes on, because everytime the rules say we are supposed to reveal what we have, I change the rules, and we reveal nothing. You up for that MLH?

Soul Glow's picture

Lol I'm going to hit Bernanke as hard as I can with my silver knuckles and knock all his teeth out of his shit eating face.  Then I'm going to burn down the house he built of paper.  And I'm fine with being naked while I do it.


In.Sip.ient's picture

Keep in mind, the 2% daily oil glut...

Yeah That One...

Which has caused the price of oil to fall

out of bed, and make the US$ look good...


Well, it amounts to a 14 days of consumption buffer.


You can check my figures yourself quite easily and

correct me if I'm too far off.  Oh, and of course when

the implications of my comment sink in... you'll see

why its perfectly reasonable for the FED to "bail" the

affected parties.


...'tis the centrally planned way...


Winston Churchill's picture

Your figures are wrong,that 2% is a compounding surplus.

Just about to become 3%.

skipjack's picture

...and there's no more storage.

shovelhead's picture


I wonder if Oilpatch Joe, who just got laid off, can keep his bank from foreclosing on his house or pickup truck if he stops making payments?

Any guesses?

Yup. That's what I thought too.

ZeroPoint's picture

How about marking my mortgage to say - 5 bucks?

Soul Glow's picture

Or forgetting about it all together.

elegance's picture

THIS is Zerohedge at its best.

JamaicaJim's picture


"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."



wait....no I'm not

HalinCA's picture

Lets see, GS running the Dalls FED, GS making loans to Ted Cruz ... sure must be great to be God on earth.

novictim's picture

Thank you, Tyler/ZH!


This is an oasis of truth telling here.  Who else does this?  No one.

Trucker Glock's picture

Charge-offs would be taken more seriously if it was real money being charged off.  The ledger giveth and the ledger taketh away.

HalinCA's picture

Finally, a good reason to let Iran destroy KSA oil fields.

Dark Daze's picture
Dark Daze (not verified) Jan 16, 2016 3:34 PM

At what point, exactly, does the money printing, the subterfuge, the lies and deceit end? Using an industry, any industry as an extension of your foreign policy is nuts. The only reason anybody holds greenies anymore is they are trying to get as much money back as possible before the end.

Spiritof42's picture
Spiritof42 (not verified) Jan 16, 2016 3:38 PM

In simple language, the Dallas Fed's solution is to play "let's pretend." Because it's worked so well in the past.

Soul Glow's picture

Yep, like the dot com bubble, and the Enron energy crisis, and the mortgage backed security crisis.  Works great!


InsanityIsWinning's picture

If the fed is buying the bad paper but forcing collateral asset sales then the fed is putting the driller out of business. . . .

Ms No's picture

It is probably far worse than we know.  The banks and the "independent" organizations that help them assess their reserves have been helping these guys out.  It's all lies.  They may even have been using the excuse of national security (Russia) to pull this scam off.  These are frontloaded investments due to the decline rates and where is all of the miracle money after ten years?

They need to make their money back within 4-5 years.  The wells are back to around 9 million a piece.  The first wells will be the best and the first acreage purchased will be the best so the problem will continue to worsen.  These wells will not be around for 40-50 years as many claim, they will be lucky to make it 15 years.  The claim of 40-50 year reserve life is BS also, it's all bullshit.  Their accounting tricks allow them to book reserves that have no present value.

You don't want to even start talking about NG decline rates.  Yes, there are wells that produced gas for 100 years in the devonian shale back in the day, not these wells.  They are hiding everything and this will make Enron look like Disneyland when it is over.

I can't wait until the day that these reserves are reassessed, it will be just like Alaska.  Oops... we thought there was tons of oil in this spot but.... we were off by over 90%  and what we did develop was completely uneconomic and we are going to need you to bail it out.  Hey look a squirrel! 

Arthur Schopenhauer's picture

Mark-to-market on energy debts, eh?

I seem to recall something about a company by the name of ENRON who used that accounting method...


xxxxx's picture

This could be big. Reminds me of the Savings and Loan crisis way back.

Soul Glow's picture

In other news the Dallas Fed has hired Aurther Anderson to do its accounting gimmicks....I mean do its accounting [cough].

paint it red call it hell's picture

Why am I not surprised??????

bid the soldiers shoot's picture

75% of American investors don't have the faintest idea about the nature of this discussion.  Of the remaining 25% who are aware, 15% have given the Fed carte blanche to do what ever is necessary to protect their assets.

The 10% who have complaints about how the Fed is handling this mess, have been thretened by Yellen that she will sit on their faces if they don't STFU.

newworldorder's picture

The treat of Yellen sitting where you described is enough to make me believe in the FED for all eternaty.

MsCreant's picture

The sound...

My hair...

The chopper blades...


What's that falling from the sky?

Soul Glow's picture

Bernanke's decapitated head?

stingboo's picture

Not for nothing...but why the surprise? How the fuck did you think USGovt intended to fund this oil war?? 

Ms No's picture

It went under the radar on Friday due to the market rout that these bastards are insuring that we will pay out the nose or sit in the dark in the future.  I get that we have to protect habitat for animals and do things right but we all know that they don't give a shit about that.

"US President Barack Obama announced Friday his administration has placed a moratorium on new leases for coal mined from federal lands as part of a sweeping review on the government’s management of vast amounts of taxpayer-owned coal throughout the West."   “President Obama has taken a major step to move us away from coal and accelerate the transition to clean, renewable energy, and we applaud his leadership,” Greenpeace Executive Director Annie Leonard said.



MsCreant's picture

We are engaged in Financial Warfare with the world. You could create a video game out of central banking..

We have Church and State separated, we need Business and State separated somehow...

The Fed has decided to suspend reality until further notice...in the name of war...

Soul Glow's picture

The church runs the state, and business runs the church.

Clowns on Acid's picture

" Business and State separated somehow" ....yeh...they used to call that Glass Steagal. But then came along one Robert Rubin with an idea and a President named Clinton that would do anything for a buck and a blow job.

Wannabe_Oracle's picture

I agree that we are at "Currency War".

Farmer Joe in Brooklyn's picture

Just sent article to bunch of friends.

Thanks, Tyler(s)..!!

After the last two years of people mocking me and calling me a negative debby-downer, they are finally (and very reluctantly) beginning to give me credit.  I can tell that they are very, very worried.

Also, I'm up 150% on my puts over the past few weeks (nearly 50% on my original investment after bleeding premium for the past year).  Patience and discipline finally paying off..!! 

Now it's time for some QE4 and negative rates to fuck me up the ass....