Skip to main content

Energy loans are now causing systemic risks to US banks

"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."
Zero Hedge, January 18,2015
That's more like it!  There is no doubt that the US bank's exposure to the drilling sector was large. Ideally, for the banks was to issue bonds (Junk, but they like to call them High Yield...) that was the feed for the US energy sector over the past 5 years.  Almost any project was fundable, because extraction costs were around $50/$60 and prices were around $80/$90.  As of 9:00 am today oil prices (WTI) are trading around $29.95, so that producers are maximising output so as to pay variable costs.  However, banks still "normally" would show loan impairment.  Covenants are breached and the prudent thing is to take loan loss provisions, that would reflect in a mark to market of the loans -- now it appears that there is, like in 2008, an agreement to "suspend" this mark to market rule, so as to not impact Tier one capital.

Now, that's a worrying development.  The implication is that banks have sufficiently large exposure to the E&P sector, which is clearly distressed, so as to have Tier one implication for the banks. Shows that the regulator took the line and the sinker, when it agreed to banks excessive exposure to that sector.  Compare this to Canada, where the Oil Sands business is far more affected, but where the banks are only discussing minor impairment in the Western portfolio.

The US is not in a recession, granted growth is not as robust as it could be, but it is still positive.  Yet the banks are forced to take action on their mark to market rules as to avoid impairment.  This indicate that the banks were, once again, imprudent in their lending activities... I saw the big short a few nights ago, nice story, but it shows that the banks have learned once lesson very well, privatize the profits and socialize the losses -- the American tax payer is a sucker, and should be exploited.


Popular posts from this blog

Trucker shortage? No a plan to allow driverless rigs

There are still articles on how America is running out of truckers -- and that its a huge problem, except its not a problem, if it was a problem salaries would rise to so that demand would clear. Trucking is one of those industry where the vast majority of participants are owner/operators and therefore free agents.

Salaries and cost are extremely well know, "industry" complains that there are not enough truckers, yet wages continue to fall... Therefore there are still too many truckers around, for if there was a shortage of supply prices would rise, and they don't.

What there is though is something different; there is a push to allow automatic rigs to "operate across the US", so to encourage the various authorities to allow self driving rigs you talk shortage and hope that politicians decided that "Well if people don't want to work, lets get robots to do the work" or words to that effect.

This has nothing to do with shortage of drivers, but every…

Every punter says oil prices are on the rise: Oil hits $48/bbl -- lowest since September 2016

What the hell?

How could this be, punters, advisors, investment bankers all agreed commodity prices  in general and oil prices in particular are on the rise...its a brave new era for producers and exporters -- finally the world is back and demand is going through the roof, except not so much!

What happened?  Well energy is complicated, the world operates in a balance -- 30 days of physical reserves is about all we've got (seriously) this is a just in time business.  So the long term trend always gets hit by short term variations.

Global production over the past 12 months has risen by somewhat less than 1.5% per annum.  As the world market changes production becomes less energy intensive (maybe), but the reality is that the world is growing more slowly -- America Q4 GDP growth was around 1.9% (annualized) Europe is going nowhere fast (the GDP growth in Germany is overshadowed by the lack of growth in France, Italy, Spain (lets say 27 Euro members generated a total GDP growth of 1.2…

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same rese…