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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Government needs you to pay taxes's picture

Yup, better to lie than to die.  Keep fucking the taxpayers and the savers.  You will hang, banksters.  You will hang.

gregga777's picture

If this was a nation in which the law was equally applied to all it would be an easy matter to follow the flow of bribery funds from the banks to politicians and Feral regulatory officials. But, alas the United States of America is the most corrupt nation on Earth. The Feral government of the United States is in a terminal state of corruption and incompetence.

Muppet's picture

"Banks are to work with energy companies on delivering without markdowns..."

Delevering.   Not delivering.

Tanz der Lemminge's picture

And that clown over at at Ticker Forum is talking about SSL issues with the IOT. He's the new clown car show.

Not to mention pump & dumping blackberry.

tbagonya's picture

The Fed fo sho don't take the gold miners to lunch do they??

TeraByte's picture

Fed can give banks a x amount of digi dollars for free and the problem fixed, but I am still haunted by the very question, why they found this short cut to heaven on earth only after gfc, when the solution was that simple.

24millionsharecertificate's picture

The big naked short!!!!

reinhardt's picture

terrific, entertaining and incitful comments

but, you are ALL not getting it

it is deeper than imaginable

r

thisguyoverhere's picture

Out with it then, come on . . . spell it out.

bunnyswanson's picture

The old rich families want to remain rich.  They are in every nation and hide in the shadows, handing out huge donations as political base locally and on up, alumni of major universities and medical centers, research laboratories.  Funding makes the wheels go around and the source of that funding determines what happens.

This is a manufactured People Bubble to bring down unions which set the standard across the world for the middle class.  Churches encouraging multiple child births is just one example.  Being rewarded via govt/state check every month for 18 years upon giving birth is another green flag to reproduce.  Consumerism made certain that every dime the fat cats paid us was returned to them.  Half of the crap on the shelf is unnecessary.  Quality has gone the way of the dinosaurs.  China has built cities just to keep their workers busy and investors jumped right in.  The empty sky scraper just knocked down is just one example.  Recycling is another answer but in 2 decades, price of recyclables is the same. 

The answer is NOT to destroy industrial nations but rather to eliminate the old rich who have lost their purpose in this world and know it.  Monopolizing industry is a knife in the back of capitalism and invention.  It's another recipe for disaster.  Mediocrity has risen to the top through cronyism and nepotism.  Who would even consider building a nuclear power plant on an EQ fault?  Who would suggest a leader of the free world should drive down the center of a crowded southern city in a fucking convertible? 

Media, Hollywood, music industry all chipped in to milk every cent out of 1st world nations and indebted both the citizens and their govt with so much debt, failure is inevitable and it was intentionally done.  Have you ever played the Game of Monopoly?  I'd say 10 entities control everything, that they are playing a cruel and highly unusual game with 6 billion people at their mercy.

Satan's picture

If only there was a way to slow down or better yet completely halt Saudi AND Iranian oil production... I wonder how one would go about achieving this?

Satan's picture

If only there was a way to slow down or better yet completely halt Saudi AND Iranian oil production... I wonder how one would go about achieving this?

Runs-With_Toast's picture

Its worse than this. Its the intentional destruction of the USA under Barry. They are putting off the crash to pile it on the GOP / Trump

Runs-With_Toast's picture

USA economy shafted on purpose. Manufacturing gutted. Borders opened. Flooded with drugs. Rich took QE $, no trickle down. Obamacare the planned disaster. Taking Guns. Its going to get uber ugly

Sechel's picture

what good is mark to market if banks only do it when asset prices increase?

Wow72's picture

Its total corruption and dont doubt it or it will get you too.

tbagonya's picture

They make the gold miners mark to market. Totally rigged markets my friend get use to it will only get worse

Wow72's picture

They know what is going on???? Its just crazy the FED goes about covering things up and not giving anyone warning. EVERYTHING IS FINE PEOPLE?  To say the FED does not understand what they are doing or are just simply stupid, is to fall for their BULL SHIT.  They know exactly what they are doing and they are part of the Criminal Organization we now call the UNITED STATES GOVERNMENT!

They are intentionally lying and trying to deceive the people? WHAT GOOD ARE THEY?  We need integrity not LIARS!  We have only CROOKS!  More lies, more deceit, whats new in the land of the brave?

 

Wow72's picture

How can a Government entity of private bankers be allowed to deceive us legally? ITS INSANITY AT ITS MAX!

The FED legally Deceives us, think about that over your morning Coffee? Its all good really! Excuse me while I prepare some bridges for resale.

The Deception must be for our own good? because apparently we know nothing and neither do they.  How much integrity could this market possible have with these idiots in charge? Its UNREAL! Where are the people, where is the outrage? We pay these people to legally deceive us? Life is what you make it!  Its getting "progressively" worse!

Do people not want TRUTH?  FED = Masters of Deception.  End the FED! The FED is a recipe for disaster, get ready we are almost COOKED!

How about the TRUTH JANET? Whats the matter not capable?  Or is the truth not convenient for your agenda?

Joe Sixpack's picture

The Fed is not a government entity.

Wow72's picture

I think that is debatable, its just not democratic.  I was waiting for that... Whose economy are they controlling? Who pays them and who "oversees" them (Hint: No One)?  They are a part of our "governing body" regardless of what they label themselves? Except for the fact they are private bankers with little if any oversight who have private interests?  Democratic No? Governing Body? Yes? In my opinion? I certainly feel like Im in OZ? Explain to me what a "detached" set of private bankers are? they are performing governmental tasks? No maybe it is me, but its hard to differentiate the appearance and the actions? If you close your eyes you would think it was our government making the decisions they make? Its not, Its private bankers.  I think Ive seen enough, its getting close.. Enough people are clueless? Its unreal?

Break_the_Bank's picture

Indeed they lie to decieve the people, and the media plays right along. Problem is, most still believe (and rely on) the BS. Land of the brave is now "officially" land of the sheeple. 

antonina2's picture

OK then it is solidified that this rout in oil prices was completely engineered by the powers that be for the trivial purposes of attempting to take out Russia and Iran.  Whelp, that worked well guys!  We are taking ourselves out and now you are looking at charging the tax payers with  the bill for your idiotic mistakes, once again.  When will people wake the F up!

I need more asshats's picture

Yea yea look at me I print up the joo confetti. Believe in it as it is your master without it you suffer.

What's you credit score bitchez? Print it out on a yellow star of david and wear it on your left lapel over your heart or little hitler janet will send you to live in her ghettos.

22winmag's picture

The FED instructs banks when and how to put lipstick on pigs?

 

I suppose they specify which color as well.

Last of the Middle Class's picture

This is my shocked face the fed is still giving banks a leg up even on the way down. Different rules for different folks. Middle class can't do that, you see. Won't find Hillary or the GOP money men talking about that shit

goldinpenguin's picture

Money center banks own the Fed and the Fed makes and interprets rules for their benefit,smaller banks won't get the same treatment and will be pushed into failure and bargain takeovers by the big banks

explosivo's picture

How can a firm pay its bills if it doesn't have any assets to use to generate income?

goldinpenguin's picture

We have devolved back to candy store acct, the cash flow statemnt is the only fin stmt that matters. Everything is fine until you have no cash

truthalwayswinsout's picture

Yes. Very astute. Mark to fantasy always ends when the money runs out. Look at Enron, look at Bernie Madoff.

FredFlintstone's picture

I suppose this is bad for anyone trying to short this shit?

blown income's picture

Broken record here ... Lafayette La "oil Hub"

 

Resteraunts- lines out the door

 

Cars- I see more new F250 , Infinity, Benz ,Bmw , etc paper plates than I do 10 year old wheels

 

Homes- haha look at these prices-http://www.vaneatonromero.com/L15300792  Yeah , a side yard

 

But , but , but --- the jobs---http://www.theadvertiser.com/story/news/2016/01/14/ambassador-town-cente...

Brown said Thursday’s turnout may be an indicator that many in the local workforce may be turning to retail as the region’s economy struggles with the downturn in the oil and gas industry.

“I think a couple of things drive it,” Brown said. “If you look at Lafayette, it is really driven by two main sectors. It’s driven by the oil industry and the service industry. If the oil industry is suffering a little bit, the service industry is picking up. It’s also suffering a little bit from a sales standpoint. It may be a little soft. The retail industry is always hiring.”

 

Nigga pleaze..............

 

Service driven economy...See homes , see Cars... I must be REALLY FUCKING STUPID CAUSE I AM DOING SOMETHING WRONG, NO AFFORADBLE HOME AND 2 NEW VEHICLES AND OUTBACK STEAKHOUSE EVERY NIGHT AND FOR LUNCH!

 

OH , your competition in the job market-

 

Philip Deitenbeck, 20, and Triston Thibeaux, 18, said they arrived at 9:15 a.m. and were unable to enter the fair until 11 a.m. because it was so crowded.

“I knew there was going to be a lot of people here,” Thibeaux said.

He picked applications for Chuy’s and Blaze Pizza, a California-based pizza chain set to open its second Louisiana location inside the shopping center.

 

Thata a fucking career right there !!!! FUCK YOU FED RESERVE!!!!!AND OBAMA!!!!!!!!!!!

 

CROWDS TO GET A JOB AT CHUY'S...

Service industry....... modern day slaves................................................................

 

AND THIS FAT FUCK- REALLY !!! ????- http://www.theadvertiser.com/videos/news/2790002335001/4708569613001/

 

GO SMOKE SOME MORE DICKS!!!!!!!!!

 

 

Fuck it dude , let's go bowling....................

homiegot's picture

Work hard and you can work up to assistant manager.

doggis's picture

THANK YOU TYLERS FOR BREAKING THIS EXCLUSIVE STORY.

THE ONE THING "WE" ALL COLLECTIVELY KNOW IS THAT THE "FED" IS A BLACK HOLE OF INFORMATION. NO "INFORMATION" LEAVES THE BLACK HOLE.

SO, MY QUESTION IS - "DID THE FED PURPOSEFULLY HAVE THIS STORY "LEAKED"?

 

WHY WOULD THE FED "LEAK" ITS OWN STORY. WHAT IF THE "ASSUMPTION" THAT THE FED IS THERE TO PROTECT THE "CRONY CAPITALIST OLIGARCHS" OF AMERICA, AND BY EXTENSION - "EXTEND AND PRETEND" PEAK DEBT -  IS AN "INCORRECT" ASSUMPTION.

WHAT IF THE FED'S PURPOSE IS TO "IMPLODE" THE USA IN ORDER TO CHANGE THE ECONOMIC/SOCIAL/POLITICAL STATUS QUO TO A BIS/NWO AGENDA OF A ONE WORLD CURRENCY/ONE WORLD GOVERNMENT?

WHAT IF THIS LEAKED EXCLUSIVE LEADS TO THE "PIN PRICK"? WHAT IF THAT IS "EXACTLY" WHAT THE FED DESIRES?

EITHER WAY, ZEROHEDGE IS OBVIOUSLY NO LONGER "FRINGE" AS IT WAS THE "VEHICLE" FOR RELEASING THIS "LEAK".

 

Arthur Schopenhauer's picture

AIG Executive Talks

 

Jackie and Dunlap express America's outrage in their interview with one of the most hated men in America...

Zinu's picture
Comparison of Hitler’s Germany with Putin’s Russia: How Russians Became Fascists.

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

Contrariologist's picture

While we quibble endlesly over who the next (puppet) president will be, an unelected, unaccountable Fed is TRULY destroying the worldwide economy.
"The best trick the devil ever pulled was making people think he doesn't really exist."

Zinu's picture
Comparison of Hitler’s Germany with Putin’s Russia: How Russians Became Fascists

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

NubianSundance's picture

Saudi oil reserves remaining are vastly overstated.

'Saudi Aramco has kept remaining recoverable crude oil reserves constant simply by artificially increasing the OIIP (Oil In Place) each year since 1982, accompanied by an unrealistically high average recovery factor of 52% since 1988.' (Business Insider)

I think the fields in the Al Saud family control are nearly done. 

OutaTime43's picture

Absolutely correct.. hence, their agressiveness in regional geopolitics and their desire to have Aramco "go public" (ie: leave a bunch of suckers with the bag.. a depleting onshore oil reserve in a politically unstable region). Anyone buying the Aramco IPO (if it happens) will be absolute suckers.

overmedicatedundersexed's picture

coincidence?? mr kaplan of dallas fed , former GS under blankfein and mr cohn, new boss is mr yellen..does anyone see a pattern? No I see nothingggg. crime is best when kept in the family no??

https://www.youtube.com/watch?v=34ag4nkSh7Q

 

truthalwayswinsout's picture

This is Progressive National Socialism at work. This is the kind of stuff that when it collapses the entire system will be taken down. This is the kind of stuff that creates a Russian or French type revolution.

OutaTime43's picture

Tell OPEC to cut production or we invade.. problem solved.

InsanityIsWinning's picture

If true, this is a big story. I can't find anything else to back this up . . . curious if anyone has confirmation. 

Government needs you to pay taxes's picture

Proof that the deeply corrupt Fed has learned NOTHING from financial events of the past 8 years.  There havent been any concerted efforts to reduce the net and notional derivative exposures.  If a company gets into trouble, those execs know all their political donations and lobbying dollars might just be great insurance.  Also, execs know they need to be bigger, so they can be considered 'important' to one of the fragile/broke TBTF banks.  IT's such a fucking scam, funded by savers and taxpayers.  Make your list, ladies and gents.  Have a 'top 10' for your gibbet. 

Threnody's picture

In American football, a team will sometimes run a successful play over and over until the other team finally figures out how to stop it.    Well, the American people haven't caught on yet.   The FED has learned that the same play still works.