Dear Dallas Fed, Any Comment?

Several months ago, just as the market was tumbling on the back of crashing oil prices and not only energy companies but banks exposed to them via secured loans seemed in peril, we wrote a post titled "Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears" in which we made the following observations:

... 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 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."

Before we posted the article we naturally gave the Dallas Fed a chance to comment, which it did not take advantage of. To our surprise, however, the Dallas Fed's Twitter account did respond two days later as follows:

We in turn escalated by submitted a FOIA request demanding the Fed provide any and all documents and materials related to such meetings which according to the Fed did not happen. After all, there was "no truth" to the story.

The Dallas Fed's subsequent response to the FOIA was trivial: "the Board does not maintain or possess calendars of Federal Reserve Bank staff."

* * *

We bring all of this up several months later for the following reason: in an article published earlier today on Bloomberg titled "Wells Fargo Misjudged the Risks of Energy Financing" in which the author Asjylyn Loder writes the following:

... In September, regulators from the OCC, the Federal Reserve and the Federal Deposit Insurance Corp. met with dozens of energy bankers at Wells Fargo’s office in Houston.


The disagreement centered on how to rate the risk of reserves-based loans. Banks insisted that, in a worst-case scenario, they’d be made whole by liquidating the properties. Regulators pushed lenders to focus instead on a borrower’s ability to make enough money to repay the loan, according to the person familiar with the discussions. The agency reinforced its position with new guidelines published last month that instructed banks to consider a company’s total debt and its ability to pay it back when gauging a loan’s risk. Bill Grassano, an OCC spokesman, declined to comment.

Which, incidentally dovetails with the following article from the WSJ reporting of the same meeting:

The issue came to a head this month when a dozen regulators from the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. flew to Houston to meet with about 40 energy bankers from J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Citigroup Inc. and Royal Bank of Canada. In the spring and fall, regulators conduct a review of large corporate loans shared by multiple banks.


Several industry officials said the meeting, held at Wells Fargo’s offices in downtown Houston, was the first of its kind. The bankers and regulators sat around tables in a large room with a screen displaying the OCC’s agenda that largely focused on examining and rating the loans, people familiar with the meeting said.

Which is odd, because when we read the Bloomberg story, we focus on this particular line: regulators - among which the Fed - "pushed lenders to focus instead on a borrower’s ability to make enough money to repay the loan, according to the person familiar with the discussions."

Which sounds awfully close like "giving guidance to banks."

Which, incidentally, is what the Dallas Fed tweet said it does not do when it accused us of lying.

So, dear Dallas Fed, in light of today's Bloomberg article, would you like to take this chance to revise your statement which is still on the public record at the following link, and according to which you called this website liars?

Or perhaps there is "no truth" to the Bloomberg story either?