As I had predicted something unusual with the massive buying from the Fed's USTs auctions.
The major banks already know something about to happen with the shortage of USTs.
1. They soaked all USTs to prepare for the T/o from SABMiller
2. They soaked all USTs to leave the shortage supplies in the Fed's RRP.
This will create a massive fails in the RRP chart that is the result of outstanding amounts the Fed is unable to pay to counterparties.
The monies will sit there with a 0.25% interest. After 14 days the counterparties will have to accept USTs as collaterals.
The 14 days have passed from 31/12/2015 until Monday 18/1/16. The Fed has just auctioned all the quality USTs that are scheduled for the national spending. The leftovers are mortgage backed securities.
Are the counterparties willing to accept those rubbish tier-3 capitals where they were removed out of Basel 2 policy since GFC
As the amounts involved in the RRP were too big due to equities rooted that causes a flood of demand for USTs. This will push usts prices higher and the usts yields lower to 2.036%. Gold is about to break free.
3. 45% of US banks loans to energy investments that included 25% from non-banks and 20% from major banks and 30% from foreign banks.
This is going to be a mess if poo keeps falling that is going to lead to defaults as banks increase costs and squeeze funding. The only way for energy companies that is to rise capital.
4. Not to mention a negative 21% in mortgage banking profit from J Morgan and other banks.
We have the shortage in USD and quality USTs that will sure trigger a Gold Run.
As oil prices wallow near multi-year lows, it’s becoming increasingly clear that the new cartel controlling oil prices is not OPEC but world credit markets. From Saudi Arabia’s record $100 billiondeficit to shale oil’s continuing reliance on cheap credit funding, it’s clear that no major oil producer or company in the world right now is economically self-sufficient based on oil revenues alone. This situation has left the flow of oil and the decision on when to stop pumping the increasingly tarnished black gold in the hands of banks rather than oil men.
The idea that bank loans to oil companies may be in trouble is not new but there are increasing signs of late that these distress energy loans could end up defaulting and leaving banks with a mess to deal with. At the national level, countries like Saudi Arabia won’t forfeit their assets to creditors of course, but their ability to keep running deficit funding is going to increasingly depend on bond market appetite for energy related debt. That could be problematic in 2016. With the Federal Reserve starting to raise interest rates, bond investors may find that they don’t need to invest in energy debt to garner yield as they have in 2015, and this in turn could start to crimp oil production.
Economists often like to cite cartels as having the power to control production, but at this point it looks like the only group with any ability to actually curtail (or expand) production are the major banks that direct capital market flows. Of course that production power is indirect, but it is real nonetheless.
Banks are not required to disclose the loans they hold to investors and Federal regulators don’t disclose this data either as it would potentially risk a run on certain banks, but regulators are definitely taking note of energy related loans in bank portfolios. That attention may start to change the lending game in 2016 as banks look to pull back from energy production. For some banks that are large enough, it is even possible that a broad pull back in lending could lead to markedly lower production levels across many U.S. firms in particular which in turn might help boost marginally prices. To the extent that banks act in concert to do this, the effects on prices might be more than marginal.
Some big banks have acted preemptively to dispel investor concerns over the size of their loans to banks. According to third quarter data, Citigroup holds $22 billion in energy loans compared to a total loan portfolio at the bank of $632 billion. JP Morgan Chase holds $44 billion in energy loans against a portfolio of $791 billion in total loans. Bank of America has $22 billion in oil & gas loans against a total portfolio of $886 billion in loans. Wells Fargo has $17 billion in oil & gas loans against a total portfolio of $888 billion.
The total amount of loans outstanding to the energy sector is a little under $4 trillion, so these banks make up only a small 3 percent of the total outstanding loan market. In fact, U.S. banks are currently only holding about 45 percent of the total U.S. loans to energy companies, with around 30 percent held by foreign banks operating in the U.S., and 25 percent held by non-bank entities like hedge funds.
But the banking market is very much an oligopoly and where the likes of Citi and Wells Fargo lead, smaller banks will follow. So far, banks have not been acting in a cartel like fashion and are more worried about their individual loans than they are coordinating credit decisions to try and help salvage loan recovery rates across the industry. But with the increasing chaos in the energy sector, 2016 could force banks to change their tunes as they did in the housing industry in 2009 which in turn would lead to a very interesting 2016 for energy prices.
Three of the biggest US banks revealed the damage wrought by a plunging oil price this week, disclosing big jumps in costs for bad energy loans and fears of contagion in other portfolios.
Citigroup, the fourth biggest by assets, said on Friday morning that it had recorded a 32 per cent rise in non-performing corporate loans in the fourth quarter from the previous year, mainly related to its North American energy book. Wells Fargo, the number three by assets, said net charges came to $831m in the period, up from $731m in the third, mainly due to oil and gas.
A day earlier JPMorgan Chase, the number one, said it was “watching closely” for spillover effects. If oil stayed around present levels of $30 a barrel, it said it would be forced to add up to $750m to reserves this year — which is roughly one-third of the benefit it expects from higher net interest income.
The disclosures are a symptom of the crash in crude, which has caused big producers to slash spending, tipped smaller companies into bankruptcy and prompted bank strategists to outdo each other with ever-gloomier predictions.
This week Morgan Stanley joined Goldman Sachs with a forecast of $20-a-barrel oil, while Standard Chartered went further still, saying the price could drop as low as $10 before money managers “conceded that matters had gone too far”.
Until now, the big banks had made generally reassuring noises about their energy portfolios, many of them stressing the investment-grade quality of their loan books and the seniority of their positions within borrowers’ capital structures.
But the tone of discussions this week, the beginning of the banks' earnings season, was markedly different.
Jamie Dimon, chairman and chief executive of JPMorgan, was on the back foot, responding to a barrage of energy-related questions from analysts by arguing that the “oil folks” had been “surprisingly resilient”.
“Remember,” he said, “these are asset-backed loans. A corporate bankruptcy doesn’t mean your loan is bad.”
John Stumpf, Wells’ chief executive, urged investors on Friday to look at the bank’s energy exposure “in perspective.” “We should step back and look at the entire portfolio,” he told analysts, taking pains to contrast it with the size of the bank’s exposure to residential property, where a “small improvement … is huge for this company.”
Wells Fargo executives said they were preparing for persistently low oil prices. “We’re sensitising our portfolio based on a continuation of very, very, very low oil prices,” said John Shrewsberry, finance director.
The banks are in an unenviable position. Lenders want companies to pay interest and return capital — and to do that they need to keep credit lines open to keep the wells pumping. But if credit limits are set according to the value of reserves in the ground, as they normally are, then banks have a problem when the price of energy collapses.
Oil folks … [have been] surprisingly resilient. Remember, these are asset-backed loans.
Jamie Dimon, JPMorgan Chase
“It’s a bit of a catch-22 situation,” said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas in London. “If you limit finance to a US [exploration and production] sector that is living beyond its cash flow, then you run the risk that production will fall and companies will fail to meet their financial obligations.”
Many banks pulled in their horns in October, during the last round of twice yearly revaluations. According to a survey carried out in the autumn by Haynes and Boone, a Houston-based law firm, companies’ credit lines were set to be cut by an average of 39 per cent. They seem likely to shrink further this April.
“Companies have a tendency to draw on bank lines once other options dry up,” said Devi Aurora, a senior director at Standard & Poor’s in New York. As they reached borrowing limits, “we think losses will begin to show up for the banks”.
Analysts note that the longer the oil price stays low, the fewer options the E&P companies have. For much of last year, they could negotiate extensions and amendments with lenders, on the assumption that prices would recover. Or they could sell non-core assets, seek capital from public or private markets, or rely on hedging contracts to secure sales above market prices.
But each of those escape routes now seems to be closing. Many cash-strapped producers have sold what assets they can, while bond and equity markets — both rattled by China — are offering much flimsier support. Hedges, too, are falling away, and becoming much more expensive to renew, said Kristen Campana, a partner at Houston-based law firm, Bracewell & Giuliani.
And despite a lot of talk about financial investors hunting for bargains, few have actually done deals. In October private equity firm Apollo Global Management and hedge fund Highbridge Capital Management backed Miller Energy Resources, a Texas-based driller — but only after Miller had filed for bankruptcy protection.
“Lots of [investors] are poking around,” said Ms Campana. “But the question is, are prices going even further down? Maybe if they wait a little longer, they’ll get an even better price.”
For the banks, the damage is not likely to be contained to energy books. In the past, energy downturns have hurt regional economies. Marianne Lake, chief financial officer of JPMorgan, said the bank was sensitive to “knock-on effects” in industrials and transportation, but was not seeing any broad portfolio effects for now.
But analysts expect the effects of job cuts to show up before long. On an earnings call last month, Royal Bank of Canada said it had detected some “early signs of stress” in its retail businesses in energy-dependent communities in Alberta, where the unemployment rate has risen by about half over the past year, to 7 per cent.
“It’s a similar phenomenon in the US,” said Brennan Hawken, a banks analyst at UBS. “Do you really want to be a credit card underwriter right now in the Dakotas?”
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Until now, the most pain has been felt with regional banks with outsized exposures to energy. Tulsa, Oklahoma-based BOK Financial, for example, where energy loans account for almost one-fifth of the total portfolio, said this week it expected loan-loss provisions for the fourth quarter to jump to $23m, about four times its earlier forecast.
Some analysts still scoff at the idea that the collapse of the energy sector could really hurt the big banks, noting that direct energy exposures are in the range of 2 to 4 per cent — versus about one-third for residential real estate. They note that lower oil has positive effects too, as consumers feel more flush from a fall in petrol costs.
“People hate banks and they want to see them suffer,” said Dick Bove, analyst at Rafferty Capital Markets. “But it [the energy sector pressure] is not going to have the impact that people are hoping for. This is not 2008.”
But Fred Cannon, global director of research at Keefe, Bruyette & Woods, said bigger banks had better brace themselves. “If it spills into the broader economy, and it starts looking like Texas in the 1980s, it could be a different story,” he said.
mixed set of results. Profits slipped in the first quarter for the first time in seven years, although the figures improved in the second and third quarters.
Shares in Wells, whose largest shareholder is Warren Buffett’s Berkshire Hathaway, underperformed a market sell-off, declining 4.7 per cent to give it a market capitalisation of $254bn.
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TRY Price at posting:
20.0¢ Sentiment: Buy Disclosure: Held
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