Tag Archives: energy bankruptcies

Did Something Blow A Hole In The Fed’s Balance Sheet?

[Note:  A reader alerted me to this – LINK – which explains the $19 billion drop in Capital Surplus.  Congress passed a law requiring all surplus capital at the Fed in excess of $10 billion to be transferred to the Treasury as part of the Highway Bill passed in early December.  But does not change the thesis for the banking system underlying the analysis below:  the banking system is starting to collapse again from billions in defaulting loans – loans that banks refuse to write down in value, just like they refused to mark down the value of the collapsing mortgage derivatives trusts in 2008 per “The Big Short.”  It also calls into question the credibility of a Federal Reserve that is allowed and enabled to operate with just .8%  book capital – $39 billion in book capital against $4.442 trillion in liabilities covered by just $4.482 trillion in “assets.”  Finally, it calls into question the legitimacy of a Federal Government that continues to pass legislation for spending programs for which it has an increasingly diminished ability to fund. The analysis below is a snapshot of the collapsing U.S. and financial, economic and political system.]

The basis for this analysis is a video published today by Mike Maloney titled,  Is A Financial Crisis Being Covered Up?  My hats off to Mike for finding this data from the Fed because I would not have  otherwise been looking for it.  To help think about the analysis below, keep in mind that the Fed’s balance sheet is an aggregation of all of the Regional Fed balance sheets, which themselves are an aggregation of the banks that are members of each Regional Fed.   (Click on image to enlarge)


On December 23, 2015 the Federal Reserve’s Capital Account plunged by 65% – $19 billion – when the Surplus Capital Account dropped by that amount.  The Capital Account (CA) represents the capital required to be paid in (“Paid-In Capital) to the Fed when a bank becomes a member of the Federal Reserve system. Think of the CA as the “book value” of the Fed – assets minus liabilities.   The Surplus Capital represents “retained earnings” and the Fed is required to maintain Surplus Capital equal to 100% of Paid-In Capital. This requirement is set by the Board of Governors.  Currently, Fed interest earnings in excess of the required Surplus Capital and net of expenses is then transferred to the Treasury in the form of a dividend.

The 65% plunge in the Fed’s Total Capital Account, accounted for by the $19.4 billion drop in Surplus Capital, took the Surplus Capital account down to only 25% of Paid-In Capital (Total Capital minus Surplus Capital = Paid-In Capital).  This points to a large scale financial crisis that had to be addressed by allowing some of the Fed member banks to withdraw an amount of Surplus Capital well in excess of the amount required by the Fed’s Board of Governors.  Perhaps that might explain the Fed’s unscheduled “expedited, closed meeting” that took place on November 23.

Per the Financial Accounting Manual for the Federal Reserve Banks,  the primary purpose of  Surplus Capital is to provide a buffer against Paid-In Capital in the event of losses.  And there’s the rub.  Without having the benefit of even a modicum of Fed transparency, I would suggest that the $19 billion removed from the Surplus Capital account at the Fed was used to address collapsing energy-related loans (assets) sitting on the balance sheet of some of the big regional banks.  On the assumption that these assets fall within the 10% reserve ratio requirement, it would suggest that some or several regional banks – and possibly one or two of the Too Big To Fail banks – have sustained at least $190 billion in losses in their energy-related loans.  Or they are getting ready to take write-downs of that magnitude.

Interestingly, as I was getting ready to write up this analysis, a colleague with an energy industry contact in Canada called to tell me that he had just heard that CIBC is getting ready announce a big round of job cuts related to its energy banking business.  The insider at CIBC also said that the big hits to the Canadian banking system are still coming.

I would suggest that this information can also be applied to domestic U.S. banks as well. We already know that the Dallas Fed has instructed its member banks to refrain from marking to market their energy loans and from pulling the plug on energy company borrowers who are in serious delinquency or technical default.   We also know that Wells Fargo is somewhat admitting to sitting on an energy loan problem and that Citibank has an even bigger problem to which it is not admitting:  Wells Fargo Bad, But Citi Is Worse.

It’s been estimated that funded (i.e. junk bonds + bank loans + funded revolver debt) is probably in the $500-750 billion area.  Total including unfunded is over $1 trillion. More ominously, we have no possible way of knowing the size of the  OTC derivative / credit default exposure connected to that $1 trillion.   But we can safely say that it’s likely to be multiples in size of the actual debt in “nominal” amount, although every bank out there will claim to be hedged and thus the “net” is a small fraction of nominal.  I would suggest that “net” becomes “nominal” when counter-parties begin to default.  Just ask AIG and Goldman Sachs.

Given that there has never been a drop in the Fed’s Surplus Capital even remotely close to the 65% plunge that occurred the week of December 23, that sudden plunge in Surplus Capital at the Fed is somewhat shocking.  But,  given the probability that it is being used as an attempt to douse the lit fuse of a massive energy-related financial nuclear bomb in the form of defaulted energy loans and related derivatives, that drop in Fed capital is horrifying.

The BKX bank stock index has dropped 18% since December 23 vs. 7.5% for the S&P 500 in the same time period.  While all eyes seem to be fixated on Deutsche Bank’s stock, it would seem to me that we should be focused on the financial meltdown occurring behind the Fed’s “curtain” that is clearly going on in the U.S. banking system based on the sudden plunge both in the credit quality of the Fed’s balance sheet and the recent cliff-dive in bank stocks.  

The U.S. financial system is collapsing.  This is evidenced by the extreme recent volatility in the S&P 500, as the Fed fights the inevitable stock market collapse, and in the recent run-up in the price of gold and silver.  As a final thought to this analysis, I would suggest the possibility that the fraudulent silver price fix on the LBMA last week was a last gasp attempt by the big bullion banks to grab as much physical silver as they can, as cheaply as possible, before the price of gold and silver are reset by the market.  How else can you explain the 40% move higher in the HUI gold mining stock index since January 19?

Energy Debt Is Imploding – Housing Market To Follow

“The banks are still clinging to their reserve reports and praying. The bonds are all toast. Most are in the single digits or teens.”

I asked a former colleague of mine from my Bankers Trust junk bond days who is now a distressed debt trader what was going on in the secondary market for energy sector bank debt and junk bonds. The quote above was his response.

Zerohedge posted a report last night with a Bloomberg article linked that describes what is going on – “Assets selling for far less than what companies owe lenders – Creditors are left holding prospects no one wants to buy.” the article further cites the ridiculously small reserves that four biggest banks in the energy sector have set aside: “Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low” – (Bloomberg).

Considering that those four banks combined probably have at least $100 billion of exposure to sector – not counting the unknowable amount of credit default swaps and other funky OTC derivative configurations the financalized Thomas Edisons at these banks dreamed up – the $2.5 billion in loss reserves is a complete joke. It’s an insult to our collective intelligence. Of course, Congress and the SEC took care of the problem of forcing banks to do a bona fide mark to market after the 2008 financial crash.

This is the 2008 “The Big Short” scenario Part 2. The banks underwrote over $500 billion in debt they knew was backed by largely fraudulent reserve estimates. I bet most of the “professional” investors at pension funds and mutual fund companies were not even aware that oil extracted from shale formations trades at a big discount to WTI. When creditors go to grab assets in liquidation, they’ll get a few handfuls of dirt to resell. And when the bondholders go to grab assets, they’ll get an armful of air.

The same dynamic is about to invade and infect the housing market. Notwithstanding the incredulous existing home sales report released on Friday – (how can the NAR expect us to believe that December experienced the largest one month percentage increase in existing home sales in history when the economy is sliding into recession and retail sales were a disaster?) – the housing market is on the cusp of imploding. I was expecting to see a unusually high number of new listings hit the Denver market right after Jan 1st and so far my expectations have been met. The acceleration of new listings is being accompanied by a flood of “new price” notices. I believe a rapid deterioration in home sales activity will take a lot of the housing bulls by surprise.

The stock market’s reflection of my assertions about the housing market is exemplified by the homebuilder stock I feature in this week’s issue of the Short Seller’s Journal. This stock is down 16% from when I first published a stock report on this Company in 2014. This is a remarkable fact considering that the S&P 500 is down only 4% in the same time period AND the Dow Jones Home Construction Index UP 8% in that time period. This company happens to originate a high percentage of the mortgages used to finance the sale of its homes.

The company relies on an ability to dump these mortgages into the CDO and Bespoke Tranche Opportunity configures conjured up by Wall Street in order to seduce dumb pension and mutual fund money into higher yielding “safe” assets. As the energy debt market implodes, it will cause the entire Wall Street supported asset-backed credit market to seize up. The next biggest losers after the energy sector will autos and housing. Businesses owners looking to improve their utility bills may want to check out commercial electricity quotes 2019 for more information on affordable energy.

This week’s Short Seller’s Journal features the above housing stock plus a copy of the report I originally published (the data is old but the ideas behind why the stock is a short are intact, if not more pronounced) plus I have presented two “Quick Hit” energy sector stock short ideas. All three ideas are accompanied with my suggestions for using puts and calls to replicate shorting the stock You can access this report here:Untitled