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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Paracelsus's picture

Except control of PHYSICAL which they will have to confiscate at GUNPOINT.

After confiscating the guns!  Second Amendment?

resaci's picture

1 war

2 oil up

3 recovery on track

yogibear's picture

"As MIses said:

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


The US dollar must eventually collapse and a resounding call for the prosecution of the Fed heads  for causing everyone to be impoverished except for the banksters.

itstippy's picture

It's not just the dollar that's experienced completely unsustainable credit expansion.  It's also the yen, yuan, euro, pound, looney, . . .

Corporate debt, government debt, private debt, equities, paper commodities (including gold), real estate trusts, every financial instrument in every denomination of currency worldwide is poised to collapse.  That's the "deflation" that the world's central banks are terrified of.

When the mainstream media economic talking heads start using the terms "contagion", "systemic", "moral hazard", and "too big to fail" again you'll know it's on and a lot of people are not going to get paid. 

Hubbs's picture

Any guess if this leads to Wells Fargo bail-ins? Isn't the FED getting a little winded after having bought up all the toxic MBSs?

Wondering if I should shift $ out of Wells Fargo savings account  into Vanguard moneymarket? Wells Fargo agent says don't worry, savings accounts are insured to 250K. (Yeah right. All cummulative trillion dollars of them?)

Then Thursday the Vanguard advisor recommended obliquely to income average into "stawks"  rather than their  money market, although she did ask what was my time horizon. I told her her "until the second coming" meaning that when the markets were no longer rigged, might I then  take her advice. 

The next day the DOW skids 392.

Does it matter?

Wahooo's picture

I see. I lose all of my energy equity investment, but the banks and oil companies get to skate through it unscathed.

Okay, I may be dumb for hanging on.


Clowns on Acid's picture

It has been that way since 2008. Where have you been?

assistedliving's picture

PVA=Paralyzed Veterans of Amerika right?  my google search just blew up...

hangemhigh77's picture

I marked to unicorn my mortgage and car loan. It's great. I don't owe anything. Donuts for everyone.

stateside's picture

The majority of jobs created over the last 10 years either directly or indirectly was a result of oil at $60-$100.  If not not for the fact that the jobs data is already falsified, we would be seeing actual job losses coming up within 3months. 


Ms No's picture

True and if we have to bail out any banks or shale companies we will have to recalculate the price of our "cheap" gasoline.

Gregory Poonsores's picture
Gregory Poonsores (not verified) Jan 16, 2016 6:34 PM

I love how people are shocked by this.

Sorry it's not a revelation. It was always going to happen.

Wow72's picture

The shocking part is how its just keeps moving forward with such little resistance and outrage. Im amazed to be honest.  Its like the people have no reflex to a slow motion train wreck coming right at them.

Gregory Poonsores's picture
Gregory Poonsores (not verified) Wow72 Jan 16, 2016 7:19 PM

After 2008 I work on that being the default position. They will blow bubbles. They will kick the can. They will print money. They will manipulate markets. They will bailout.

And it's not to benefit you.

I'd only be shocked if this wasn't happening.

Wow72's picture

The question is when will it end? It has to sometime and when it does? Holy Shit?

Wannabe_Oracle's picture

I believe the challenge is not reflexive, it appears more despondant in causation. If my assumptions are accurate, only a catalysmic event will raise eyebrows - followed by swords of mouth and metal./

SillySalesmanQuestion's picture

I'll need more popcorn and scotch for Tuesday...

3Wishes's picture


ItsDanger's picture

What a farce, defeats the whole purpose of MTM valuation of derivatives.  Sell bank investments if you havent done so already.

Yen Cross's picture

 Who ever wrote this article was kind enough to look impartial. Citi beats on "write downs" and misses on revenue, and Wells 'R' Us can't even scrape together enough in one time legal fees [writedowns] after all the ZIRP casino buybacks?

 I realize there's a lockout period during earnings season, but JFC, where's the " Top Line" revenue?

 I can't stop laughing!!!

 This shit is farcical--- Chasing UnicornsI mean yield much? The regional banks are also assholes and elbow's deep in this quagmire.  {PNC}

 I should have purchased more gold on the drop early last week.

V for ...'s picture
V for ... (not verified) Yen Cross Jan 16, 2016 7:39 PM


Ref: au and ag. Just do it. It is still on sale. Won't be in 2017.

Yen Cross's picture

 You're probably right. I'm pretty conservative, as I don't own a printing press.

  I'll probably do some hedging towards the middle of next week. I've already purchased quite a bit of the "real" stuff, over the last 6-8 weeks.

V for ...'s picture
V for ... (not verified) Yen Cross Jan 16, 2016 7:55 PM

It was just a friendly bit of well timed advice. G'luck. Timing is everything.

Yen Cross's picture

 I don't konw if this helps you. I'm not sure how deep your trading pool and options are.

 The xau/cad trade is way overbought. The xau/jpy getting oversold.

 I'm looking at the various currency baskets, and they all look a little rich vs $usd.

 Plus, global sovereign bond curves are pretty flat. Not implying much inflation.


V for ...'s picture
V for ... (not verified) Yen Cross Jan 16, 2016 8:49 PM

Cheers, Yen.

DipshitMiddleClassWhiteKid's picture

mexican peso and south african rand are no brainer shorts

Rockfish's picture

Suspenion of Rules for fear of contagion.

What will be next? 

bunnyswanson's picture

Protective Custody hopefully.

buzzsaw99's picture

the bonuses they keep

V for ...'s picture
V for ... (not verified) Jan 16, 2016 7:53 PM

After this ZH report, are you ready for next week? I am. Now time for some historical amusement...

'Now nodoby get nervous, you ain't got nothing to fear. You're being robbed by the John Dillinger Gang, and that's the best there is.' (John Dillinger) Just put your hands up, and hand over the money has become the modus operandi of the Feds. How ironic. Old joke: how to make a million? Give a bank a billion. Get ready. Ace reporting, ZH and your source. Brilliant. London calling ;-) https://www.youtube.com/watch?v=lotkzHsIuoA Rock the Casbah, the zionist vs islamist medievalists: https://www.youtube.com/watch?v=Bn1Ca8izXto
TulsaTime's picture

Sure, it always gets better when we pretend. Just ask all those Enron people

Kina's picture

war is going to break out in Saudi Arabia....see they are still useful for something

Onlygold1's picture

with oil breaking 30 on the way to 25, all the energy derivitives tied to oil can not be Marked to MARKIT...

in other words the implosion of all the banks locked up into those energy derivitives that would implode SOON-

so the fed is giving them a bye? who's on the hook for all that bad crap? I know their balance sheet(pronounced SHIT) cant handle it----Poof


yep this will not end nicely

El_Puerco's picture

It is Possible that, all this is just a big” DISTRACTION”… orchestrated by the Big Reptilian News Corporation to camouflage what’s really going on right now.

With the FINANCIAL Terrorist been hunted Right now...Psychopath (Reptilian Instruments) making us believes that all is coming down and will be PEACE...

Here is a hint for you:

{ http://bit.ly/1TPQQAr }


Humanity is in trouble!



 How Psychopaths operate and how to deal with them.

Victory_Garden's picture


Of more interest:




Extra Credit:


Finally nice to see the wall street babylonians take a huge loss. They coulda thrown all those billions of dollars out the window for a better return of sheer entertainment. Even better than the head puppets clown show!



Gadfly's picture

Anything to keep the boat afloat.

novelator's picture
novelator (not verified) Jan 16, 2016 9:17 PM

I was struck by the Fed instructing the banks not to force bankruptcies, but asset sales instead.


They have their buyers lined up already.


The Feds are, through their proxy buyers, going to own the entire shale oil industry.


Sort of a corporate nationalization of oil.


And we will suffer.

U4 eee aaa's picture

No doubt those buyers will be from Saudi Arabia. That probably explains why they are buying up all that US property

anonnn's picture

Asset-sales can be a euphemism for FedRes side-letters and other hidden agreements.

Sell me your assets today for the price you need  to survive.

You can buy them back later at a price you can afford.

Outsiders will be clueless, as always, because they do not understand the reality of "insider"and insider activity. It must be guessed, inductively, as the only explanation that acounts for all the observed facts.

Insider activity is riskless. Otherwise, the action are less than truly insider.


U4 eee aaa's picture

So how close are we to this popping.

In other words: How much has Goldman shorted and how much of it have they sold to their clients yet?

Answer that and we'll know the popping of the bubble is imminent

exartizo's picture


A Fly On The Wall Production

A conversation between a Dallas Fed VP and a room full of embattled Oil Company CFO's

Dallas Fed VP: We're here to help. It's time to stop the downward cycle that has been ravaging the US energy industry from the Saudi Oil War.

Oil Company CFO: We're almost out of capital. Our margins have spun down the toilet. We can't access the debt markets. We're locked out of the equity markets by declining prices and continued market commodity collapse. What can you possibly do to help us?

Dallas Fed VP: We're suspending mark to market for you. Just like we did for the banks when they were about to collapse. This should prevent most of you from being locked out of your credit lines. Some of you may be asked for asset sales but you won't be forced to file bankruptcy.

Another Oil Company CFO: So your'e going to let us Fudge Our Books to keep afloat?

Dallas Fed VP: Yes. And you can do it for as long as you need to to appear to be still solvent.

Yet Another Oil Company CFO: Isn't that illegal? Isn't there a transparency issue at hand?

Dallas Fed VP: Again Yes. And yes, there is a nail gun in the back room waiting for you if you have any trouble with that idea?

First Oil Company CFO: So the banks are effectively off our backs?

Dallas Fed VP: No doubt.

Second Oil Company CFO: So you're effectively transferring the risk to the investor and the taxpayer via compromised transparency, just like you did with the banks in '08

Dallas Fed VP: You must have graduated First In Your Class.

Yet Another Oil Company CFO: So you're basically happy to screw the Short Speculator to keep us afloat.

Dallas Fed VP: Sacrifices must be made. In the larger scheme of things Speculater Scum always finds a way to exploit risk. We're not troubled by their losses.

IridiumRebel's picture

It's like you were there.

exartizo's picture

You're a good man IR.


thisguyoverhere's picture

Nah, you've got the timeline wrong say . . . June 2009


Govt. guy

Major investment banks (say those that privately own "the fed")

Oil guys

Special guests


Govt third party: Thanks for coming and congrats on discovering all that oil we had on our books since late 60s

Oil guys: Yeah thanks for the tip

Major investment bank: So here's what they are offering:

Unlimited capital

Regulators agree to look the other way, except in regards to those not in the club, they will be fined and in court

You agree to produce at full steam till we say stop

One caveat, you do not tell anyone outside this group we ever had this meeting, and we'll have you covered in the press; anyone who suggests it we'll slap "conspiracy theory" on their rear end and they'll forever be discredited

Welcome to the club boys!


Oil guys high five and retreat to golf course . . . exit oil guys

. . .in steps

Special Guests . . . Prince Bernard's guy Jeroen van der Veer, Tony Hayward of BP and John Watson of Chevron and usual suspects.

van der Veer So the Prince asks whether we run the same play as 1979?

Govt Guy Yes thats the word, all their assets will be yours.

Investment bank guy. . . and all liabilities shifted to the public, right because we're not taking a loss, got it boys?

Govt guy Got it, and don't worry we'll have the press spin the whole thing

- - exit scene

exartizo's picture

nice alternate spin ThisGuy.

...except that most of the investing public, and of course the entire govt appartus is now so anesthetized that they don't even need to spin the media any more like they did in '08-09.

just conveniently "swept under the rug".

The Federal Reserve should have been renamed:

The Bureau of Risk Managment and Diversification for Oligarchical Interests (BRMDOI) in 2008.

However the Fed has always had a potential power conflict with the true interests of the American people. 

Arguably, as many of us know, the Fed really turned fully to The Dark Side back in 1976 when Mr. Nixon Sold The Country Down The River and was so handsomely compensated by The Banksters.

Too much power in the hands of too few men is never a good thing. No doubt someone has said that.

thinkmoretalkless's picture

Wake me up when Jamie orders the private jet to be fueled up and waiting..

fowlerja's picture

That's why the FED intervened..in oil patch country the FED is your friend...oh...FED stands for Fudge Energy Defaults...

anonnn's picture

More interesting when the acronyms are explained :



FFO--- Funds From Operations -a calculation of cash flow from operations


Shut In Well--- A well which is capable of producing but is not presently producing.


PUD --- Proved undeveloped reserves


PDNP --- Proved Developed Non-Producing (an oil/gas reserves classification)


2P reserves --- 1P (proven reserves) + probable reserves, so "Proved and Probable


1P reserves --- Proven reserves (both proved developed reserves + proved undeveloped reserves).


3P reserves --- 2P (proven reserves + probable reserves) + possible reserves, all 3Ps "Proven + Probable + Possible



 PVA ---Penn Virginia Corp. [....acquired Eagle Ford Assets from [MHR] Magnum Hunter Resources Corp.] There were later trade-press reports November 2015 that "auditors have expressed doubts that they can continue as going concerns".


gregga777's picture

Once again the Feral Reserve is engaged in blatantly unlawful and felonious conduct. But, that hardly matters because they are above the law and are never held accountable for their criminality by the Injustice Department, the Feral Bureau of Inforcement, the political parasite class—keep those bribes coming!—etc., etc., etc.