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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InsanityIsWinning's picture

I'm in the boat, but there are many cross currents . . .chance are we're screwed Tuesday morning as heavy shorts scramble to just get flat.  My out of the money calls expired Friday and I didn't put on protection over the long weekend . . . murphy's law 

Wannabe_Oracle's picture

Tuesday will bring green colors - nothing but green.

Wahooo's picture

You know it's coming, close those positions, don't be a banker.

Clowns on Acid's picture

Now that you mentioned it.... You HAVE to take some profits. Always bad luck annoumcing paper profits.

You ain't in Brooklyn no more.

SubjectivObject's picture

Ummm .... which banks?

debtor of last resort's picture

Reading peakoilbarrel for about a year now, thanks Ron, this doesn't surprise me. Reading ZH for about 4 years now, this decapitating of the FED and/or Wells Fargo, doesn't surprise me either. Thanks Tyler.

Downtoolong's picture

 

I’ll buy your debt above the market if you’ll buy mine. There’s your market.

 

Any way you look at it, this kind of shit is still a bailout.

 

Subtlety only makes Crony Capitalism worse.

   

TheAntiProgressive's picture

The "Law" only applies to the little people.

bentaxle's picture

Saudi knows how bad things are for 'murica. They'll keep pumping and so will Russia...

BendGuyhere's picture

Don't you love how the 'best and the brightest', aka 'the meritocracy' can just CHANGE THE RULES IN A HEARTBEAT FOR THEIR OWN ADVANTAGE?

PROOF THAT THE ACCOUNTING PROFESSION IS COMPLETELY FRAUDULENT.

PROOF THAT THIS COUNTRY IS RIPE FOR A HOT BLOODY STINKIN' REVOLOOOOOOTION.......

THINGS WOULD GET TERRIBLY AWKWARD OVER AT THE CLUB if some of Dallas's finest bankrupt oil companies actually went under.

MsCreant's picture

This is just so stunning I need to be allowed to go Full-Tin-Hat.

Okay, I know, never go Full-Tin-Hat.

I'm going to do it and if you want to kick my ass, hey, its fight club, it's on, fuck you...[insert minor jab to your jaw about here].

What if...

We are more into nationalism than most of you paranoid conspiracy tards on here ever suspected?

What if we are in a war so ferocious, global, and covert, that no, we really can't handle the truth?

What if the Fed is part of the MIC war apparatus, and the dollar istelf is weaponized?

What if every central bank is part of the war? 

What if there is a conspiracy to keep the value of oil low to defeat the Russians, financially, and if ISIS got too big for its britches, even though they are our creation, maybe them too? And the Fed goes to the banks and says something like this:

Folks, we're at war. The public cannot know the nature of this so keep your mouth shut about what we are going to ask next. Don't mark to market because this is not the real value of oil, it is an artificial one we have created in our war on Russia and others. All is legal in love and war baby; we are telling you that you and your clients are not going to lose shit if you don't liquidate. Just hang tough because when we do win this thing, you will be rich beyond you wildest dreams. If you just hold off and believe us, we will gather surplus oil and surplus value, and bleed our enemy's war chest dry. Just hold on. And don't tell or it all fails and so will you.

 

farmerbraun's picture

Nothing wrong with an exploratory jab :-)

 

It may be much simpler. The last thing that a bank, which is holding a  large number of  impaired mortgages  should do,   is have a mortgagee sale of the worst defaulter.

Because the inevitable  result is that , post the mortgagee -auction,  all the remaining mortgages become further impaired in respect of debt :valuation ratios , and off we go down the big slide.

 

The Texas situation seems to be a bit similar.

 

So you do not mark-to-market/ have a mortgagee sale.

 

What you do is sweep it under the carpet. Call it a "owner retiring" sale or some other crap. Just  don't tell the truth. You will only cause a further deterioration in your position.

 

Soul Glow's picture

The dollar has no intrinsic value yet banks are cluthching trillions - hundreds of trillions of them - like Tom Cruise clutching the door of a helicopter 1000 fett of the ground.

Oh, and Draghi is not in a movie, he does not have a stunt double, and he is going to fall.  So is Yellen, so is Karuda, and attached to them is Ben Bernanke.  And they are going to pull on each other until the last finger slips off and all they will know from that point on is the wind in their hair.

farmerbraun's picture

I like the script . You think we can get some backing to make this movie?

Maybe we just sit back and let reality unfold.

MsCreant's picture

Why is everyone producing so much oil when there is no demand for it, in this economic climate? Seems like a coordinated plan of some kind, to me. These actions are not responses to markets and fundamentals, these actions seem to be about manipulating some kind of political result. The Fed telling them to stop marking to market while all of this is going on, well, exactly when will you start marking to market? What will be the criteria for that? Do you see what I am saying?

And if I am right about that, I go to economic warfare, kind of like how they used to poison wells and destroy the enemy's supplies.

I am normally more like you, look for the simple explanation. The bigger oil picture is too provocative. We are literally playing with fire.

xxxxx's picture

I think you are overthinking it. The FED as usual through QE and ZIRP created a bubble that is unraveling, and now they just want to cover that up so there is not a banking panic. Plain and simple.

Lots of banks failed during the great depression. It appears to me the same thing is happening now.

debtor of last resort's picture

The infinite $ after '71 did a big shit in your diaper bro. You are just a whiner.

Fuku Ben's picture

You're going to be a tough opponent here in the literary fight club. Paul Craig Roberts please pick up your cat at the ZeroHedge courtesy checkout window and Fox Business prepare Judge Andrew Napolitano to step aside.

Cui Bono's picture

Whats the meaning of this shit?

did he just throw my cat out the window? @1:30

https://www.youtube.com/watch?v=G1jG8HUY4zI

Fuku Ben's picture

I wouldn't dream of it. Her comment is better than mine, many PCR posts and she asked better more direct rhetorical questions than the Judge whose style she emulated.

Thanks for the movie suggestion.

Wahooo's picture

First of all we are certainlty at war, a war of currencies and control over the new/jew world order. So you have all of that right. But there's no conspiracy to keep it silent, hell it's in plain view for everyone to see. What they can't afford is for the dollar to plunge bcause of another credit/faith crisis. But it doesn't look like that can be stopped, either, and so the illegal demands of the banks continues.

Kyddyl's picture

It's good to see you asking the bigger questions. But I keep wondering why Saudi Arabia keeps it up? They are doing themselves no good and their own citizens have been coddled a dangerously long time. Is Saudi Arabia being coerced? Before the initial Iraq invasion Saudi and the rest of the Middle East puddled along well enough. Once in awhile Saudi would throw a tantrum and embargo oil to the US knowing full well the consequences. I don't think it's Russia either, or not entirely. I think there have been other meetings in powerful places around the world and the, as yet, not fully identified powers have gotten sick of our wars for fun and profit and have decided to crash us. And yes, the big banks are complicit as through the sort of war you outline there are boundless opportunities for power and money grabs. Yes indeed we're at war!

Anyway thanks for looking at the broader possibilities!

Wannabe_Oracle's picture

"We are more into nationalism than most of you paranoid conspiracy tards on here ever suspected"?

 

Had you said "than most of us" instead of "you" I may have allocated some thought processes to your enchanting comment.

MsCreant's picture

I did start the thing by saying I was going "Full Tin Hat" and that you should never go Full Tin Hat (like full retard), as in, I am being more paranoid than anyone else here.

Cycle's picture

The image of Buffett's tongue eagerly looking for another hole to probe and lick to protect his investments [Wells Fargo] is what comes to mind. AIG/Goldman all over again. Neither Trump or Sanders appear to be receptive for the probe.

Tinky's picture

Henceforth, please keep your visual metaphors to yourself.

Wahooo's picture

Oh, for sure Buffet is diving into that tranny Quick.

Dr.Engineer's picture

What-if this is needed to prolong the low oil price to cause Putin more pain?  Yes, I'm stretching but I'm trying to give some sort so excuse that seems plausible.  Maybe another 6 months of shale oil production wil cause Russia to go bankrupt.  Oh, wait.  I forgot to take my pill today.  Sorry for that psychotic episode.

Implicit simplicit's picture

After the market to market bail out, and lower earnings for banks and oil companies, comes QE 4 buying all the shitty tranche oil bonds from the banks.

They are probably trying to figure a way to get a big war going in the mideast to support oil prices.  Psychopaths in charge of the loony bin?

bankonzhongguo's picture

Funny thing here is how this is all wrapped up with Saudi, ISIS and the Aramco IPO.

farmerbraun's picture

Is there anything that is NOT wrapped up in oil /$US hegemony?

Fuku Ben's picture

Its always nice to see the control freaks freak. That's an interesting alleged business proposal. Unfortunately their means of resolution to the problems they create will result in huge numbers of victims to a potential conspiracy to commit further fraud.

"told them not to force energy bankruptcies" and to demand asset sales instead"

It looks like they probably already have asset buyers lined up and ready to pay pennies on the dollar for cheap assets. And isn't it convenient that it will all be stolen without the pesky involvement of bankruptcy attorneys, courts, long delays or meaningless things like shareholder interest having to be taken into account after defaults. They may just find a few willing participants inside the banks to facilitate the up front criminal activity for a nice fee.

I would caution the honorable law abiding bankers (don't anyone laugh) or those trying to got straight against pursuing this course of action allegedly recommended by the Dallas Fed. Because if they are ever held accountable for their ongoing crimes they've just suckered you further into their realm with this scheme. Deeper than you may be already if you're hiding losses to prop up shareholder value. Which if past experience dictates is exactly what many are doing now. You may want to strongly consider drawing the line somewhere even if you're in way over your head. There aren't going to let you into the seats on the lifeboats on the U.S. Titanic.

lakecity55's picture

Or, moar bankers to face nailguns.
(If they don't play along...)

scatha's picture

Nothing but another bailout of collapsed fracking industry as well all the rest of high yield industry of gamblers anonymous. And be sure, they will pull every cent they lost in this gambling parlor called markets out of our sorry asses. Guarantied, it gonna be painful and stinky.

If you really want to know why price of oil is collapsing read this:

https://contrarianopinion.wordpress.com/economy-update/

V for ...'s picture
V for ... (not verified) Jan 16, 2016 5:37 PM

Ace reporting, ZH, thanks to your source and your team. Thanks.

MrSteve's picture

It was the suspension of mark to market and return to mark to model approved by FASB that ended the crash in March 2009 and turned the trend back up. That is the best, clear and present proximate precedent for this acton by the FED.

marcusfenix's picture

this stinks of desperation. more a delay tactic to buy some time but for what I don't know.

I don't think another bailout like 08 is even possible, it would have to be bigger, much bigger this time around to be effective. could they monopoly money their way out of this without burning the house down in the process?

I just don't see it.

one only need look at the national debt clock to know exactly how utterly lost the ship is at this point. it was just surreal watching Obama say that anybody who says the US economy is not growing is "just peddling fiction" while Rome is literally burning around him in real time.

the debt involved here globally defies description and it just destroys, consumes and crushes all else. it now has a life, a mind and a hunger of it's own and like a tsunami it is annihilating everything in it's path.

there is no policy, no manipulation, no scam, no QE, ZIRP or POMO, nothing that will change or stop that now.

it's sad though, my friends, my coworkers, the guy I pass on the street, they have no idea. they don't pay attention, they don't care to recognize the signs, they don't want to know. they just want to continue go on living as they always have, as their normalcy bias life dictates it always will be.

I sincerely hope they do because the alternative is ugly in a way we have never seen and many will not survive the culture shock alone.

but at this point I seriously doubt they, or any of us, will be so lucky.   

xxxxx's picture

I agree. It's hard to imagine what the world will look like after this debt based orgy unwinds.

It is unstoppable. My advice is save every US dollar you can they may look like gold nuggets before this is over,

Ckierst1's picture

I prefer the gold nuggets.

Wahooo's picture

I hope they all suffer this time. I hope they jump from rooftops, splatter themselves with nailguns, be impaled with pitchforks, be ass-raped, publicly condemned, shamed, and prosecuted, then all of them frog marched Into the sea like lemmings.

Lost in translation's picture

Yikes.

Didn't see that one coming.

nidaar's picture

"more a delay tactic to buy some time but for what I don't know"

Exactly what was in my mind and I believe it's for the elections. It remains to be seen whether it will help them or not, but the big calamity will be no later than the elections if not right before...

Early Retirement's picture
Early Retirement (not verified) Jan 16, 2016 6:09 PM

So it's all a lie, the new regulations, and the Jews stole all our money, again, replacing our cash deposits with worthless pieces of paper.

Wow72's picture

The FED was supposed to HELP? Did I get that right? Oh I forgot Private Bankers Bank Privately.

Yen Cross's picture

  I laugh when Bernanke and Mr. Yellen say the Fed. has various policy tools at their disposal. Those fuckers deserve to be fed feet first down a giant garbage disposal.

theprofromdover's picture

"  policy tool  "

I guess that's what it is.

theprofromdover's picture

These people have no shame.

Just wait 'til they really have to pull some seriously major stunts to keep this rusting hulk afloat.

Does nobody inside the Camp care anymore, is there not one of them with any morality?

 

Wannabe_Oracle's picture

In 2002, following coverage of concerns about deflation in the business news, Bernanke gave a speech about the topic.[60] In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money and to maintain market liquidity. Control of the money supply implies that the government can always avoid deflation by simply issuing more money. He said "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."[60]