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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Troublehoff's picture

Disgusting criminals


So we have rules and regs but any time those rules and regs dont work well for the banks, they change the rules....


Only under a fractional rerserve system is this theft/criminality possible... everybody else has to pay for this - heads I win, tails you lose!


fuck the banks





gcjohns1971's picture

The surprise is not that the Fed will bail out selected Fed shareholder and crony banks.

The surprise is that after 3 iterations of the same over the last 16 years - in MASSIVE and publicly visible fashion, no less, that people still expect the Fed to act as an agent of the Public Trust, e.g.  "stable prices...bla...bla...bla...full employment...bla...bla...bla."

The Fed is an agent of two to four banking families...PERIOD.

It serves no genuine Public function at all.  And it never did.


me or you's picture

They can run, they can hide but they cannot escape from the economic meltdown. HAHAHHA! US is dead. HAHAHAHA!

ZIRPY's picture

Crack-up Booms lead to Crack-down Busts!

Chris P's picture

So what's the difference between us and China? Haaaaaa Haaaaaa 

bentaxle's picture

Both of them are not supposed to be corrupt. From the top of government and the judiciary, downwards. However, in one of these country's the people have no real choice about it, in the other....they do.

if's picture

>>for oil prices to surge, there would have to be a default wave across the US shale space


BK would wipe out debt, thereby, reducing the breakeven point for many producers.

amanfromMars's picture

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?


Does the Fed leave the curtain alone and realise a mother of a financial crisis for Media and Big IT Bods and Buddies to Deal with, and Sort Out. …….. with Immaculately Virtual Tools for Bigger Beta SUHD Big Picture Presentations ……. in Future Sees with Celestial Tele Vision.


Now that would be Real Monster of a Dark AI Horse Program Slid into the Running for Whoever is Targeted for Control and Command of Running Internetworking Things. 


And what value to market for capitalisation, and derivatived future loading and loding with Pure Product, Profit? 


The rule of thumb is here is that input is squared to output and both cubed to deliver Futures in Futures and Future AIDerivative Virtual Added Venture Plays ….. for Presentation of the Future in Existences which are PostModernTerraBotICQ, Virtually TelePathic and Pathologically Psychotic ……. Near Perfectly Single Minded.


You have a real hairy, and beautifully scary scoop, there, ZH.


Someone looking out for Remote Command and Virtual Control. Is that not supposed to be the remit and raison d’etre of military and security and government ordered bodies? Are they naked of those assets and catastrophically vulnerable to their armies of charms? Wow, Kapow, ......... that's a Wholly New AI World Series just floated there.


As you know, Zero Hedgers would love more to know in order to exploit and export prime clear counsel ….. present truths of future notes.

Paracelsus's picture

That sound from the movie "Jaws" (Duh,dum...Duh,dum...Duh,dum) is 

what you will thinking of next week when all those derivatives parked at JP

Morgan explode.There is a downside from shifting risk off the balance sheet.

This country cannot afford:

A) Death of the petrodollar.

B) Explosion of JP Morgans derivative book.

C) A" rush to the exits" worldwide US Treasury dump.

D)Bailout of oil industry to keep Texas RE values from cratering.

E) Propping up of share market so people won't pull their 401K's.

The issues above cannot occur simultaneously or we are screwed.

They need to start teaching about risk in Business school.

Look for a very large false flag happening soon to cover up this stinking pile.

It is drawing a long bow,but Texas having sided with South,has a long record

of independence of mind and suspicion of the Northerners' business practices.

This may sound hypocritical coming from a Boom-Bust State,but the record 

clearly shows that it was the North changing the rules of the game,and their 

business practices,which decided the issue of secession.

Also,the Alamo confrontation was largely started by Mexico changing the rules

which the Texans had agreed on.A contract is a contract,until the Fed gets involved.

Jus7tme's picture

>>banks were to work with the energy companies on delivering without a markdown

Can someone pleae explain exactly what the phrase "delivering without a markdown" means? What does "delivering" mean what does "without a markdown" mean in this context? Please do not be glib. This is a serious question.

Do they mean deliver the bonds/loans, at the Dallas Fed discount window, for a little sector-specific QE purchase by the Fed, at face value?

Stox's picture

As a retired community banker, not from the oil patch ...


Marking to market loan assets is a two-edged sword.  Think of it in one limited sense as a stop-loss on a traded security.  It forces you to liquidate a declining asset.  On the one hand, that can save you from a worse loss, later.  On the other hand, it can take you out of a position that within some reasonable period of time returns to a profitable level, or less of a loss.  Like securities, liquidation begets liquidation, forcing assets yet lower until the cycle breaks.  Credit events like 2008 do not come along with each and every downturn, and in many of them hindsight shows that a bit of patience rather than panic is the wise course.  Of course in events like 2008 the wise move is to dump hard, dump fast, and be the first to do so, because time is not your friend and prompt action can be the course that saves the bank.  The trick of course is to make the call correctly as to whether patience or fast action is the wise move in THIS case.  The Fed / FDIC have come to rule via spreadsheets and artificial math games like stress tests that remove judgment and wisdom from consideration.  


The second aspect any banker will tell you is that the regulators can give you some verbal guidance today, and get amnesia tomorrow.  Bankers and Directors of banks have personal legal liability in a bank failure.  If I were still a banker, I would most certainly want to see any verbal guidance that veers away from written regs in writing, I'd have a copy at home, and have a copy in a vault.  I may insist that the regulators in fact issue public guidance.  I would NOT just take the personal liability on my shoulders, or ask my Directors to do so, based on some whispered instructions.  If they want something done, they can shoulder it.  Remember, numerous banks were jawboned to the point of being forced to buying failing firms in 2008, but the moment they owned them the regulators pounded the bejesus out of them to apply ever larger amounts of capital to them and forced them to constantly dump the assets at prices way below the "distressed" valuation price levels they were forced to buy them at.  


As I said, I am not in the oil patch, and I have no expertise in that sector.  All I know is what I read, and we all know much of what we read is junk of questionable sources and reliability.  It sure looks like this mess isn't going to go away soon, but I surely am in no position to make that call.  


So what this may well signal is the Fed / FDIC have privately concluded is that in fact their own mark to market mantra in 2008 was one cause of making the real estate crash worse in terms of both price and time than necessary.  If that is so, then they should say so and amend the regs.  Having said that, also recognize that it isn't just the banking regulators in total control of that. Much lunacy is the result of the accountants writing GAAP that the regulators then have to contend with and make some effort to reconcile bank regs to accounting regs.  Pretty much any banker would tell you the crew writing GAAP so very often seem to live on some other planet and make the crew writing bank regs look wise by comparison.  


Bottom line, it stinks to high heaven that any banker is being asked to ignore a written reg.  


Which in the end begs the question:  IS IT TRUE?

highwaytoserfdom's picture

save Troika PNAC MSM DNC/RNC MIC ZIRP NIRP gov goodness

Sing "Sweet Caroline" 




pparalegal's picture

Time and distance at play here. When the oil company short hedges run out (soon if not already) and the hidden billions in derivatives go nuclear...the boom-suck will be heard around the world.
Better invest in the latest survivalist books and freeze dried stuff comrades, this may not be containable to much longer.

Kefeer's picture

Digital printing is much faster and efficient and there is the Exchange Stabilization Fund also reported on ZH and other places.  The reason for hiding is multi facade; one major is the keeping of that motto "full faith & credit" in the US to the majority of the Americans; the world has already awakened.



Kefeer's picture

QUOTE: "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" -


I'll guess the friends and family plan; just a guess.