Late to the Oil Party Wells Fargo is Now America’s Largest Petrol Bank

The sages at WFC, the one with a chuck wagon as their company logo, proudly boasted about their growth initiatives in energy back in 2014, when oil was north of $100. It was the very worst time to load up on petrol-loans. But hindsight is 20/20 and bubbles are hard to predict. I do not fault them for miscalling the sector or even having too much exposure to it. A great man once said ‘no balls, no babies.’

My beef lies with the banking industries insistence to value these loans based on collateral, instead of what regulators want–the fucking cash flow.

Moody’s is projecting the banksters will need an additional $9 billion to cover losses. But that number is woefully fucked if the rules change. It’s also worth noting, the so called collateral is virtually worthless if the banks can’t sell it because there isn’t a profit to be had from it, with oil down at depressed levels.

Just yesterday, CHK pledged its entire company to keep their $4 billion credit line intact. Again, this is a Morton’s Fork moment for the banks. If they do not extend these lines of credit in their reevaluations, losses, big fucking losses, will need to be taken. If they kick the can down the road, like they did with CHK, God willing something good can come from it. If that $4 billion is drawn and the company goes belly up anyway, it could take years for WFC and others to recover the money through collateral.

“We’re all being as appropriately tough to make sure that we protect the interests of the bank,” John Shrewsberry, Wells Fargo’s chief financial officer, said on a January call with analysts. “We were working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue, or to end up as the holder of a number of oil leases as a bank.”

Bullshit.

Wells Fargo has been the top dealer of high-yield oil and gas debt, according to data compiled by Bloomberg, selling slices of junk-rated loans to regional banks throughout the U.S. as well as to financial institutions in Canada, Europe, Asia and the U.K.

One example: Breitburn Energy Partners LP. Wells Fargo devoted a page of its 2014 presentation to the Los Angeles-based oil and gas producer, which had a market value of almost $2.7 billion at the time. Now it’s worth less than $120 million. The company has drawn down $1.2 billion of a $1.4 billion credit line, filings show. Wells Fargo, the lead bank, sold participation to lenders including Credit Agricole SA, ING Groep NV and Mizuho Bank Ltd.

At the height of the boom in April 2014, after a rapid expansion of reserves-based lending, the U.S. Office of the Comptroller of the Currency, which oversees 1,600 banks and thrifts, published new underwriting guidelines. They were based largely on how such loans performed in previous downturns, and the regulator almost immediately began updating the guidelines, according to a person familiar with the matter.

Last year, after bank examiners marked many energy loans with tougher ratings than lenders thought necessary, the OCC was flooded with appeals, the person said. 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.

How can you both be ‘tough’ on protecting the bank and at the same time argue with regulators to soften their stance on rating the loans? You simply cannot have it both ways.

By the way, I’d love to see who is assessing the worth of said collateral. This is very reminiscent of the games that were played during the housing bust.

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.

“The regulators are taking a stronger stance on cash-flow protection rather than collateral coverage,” said Julie Solar, a senior director of financial institution ratings at Fitch Ratings Ltd. “There were a lot of disagreements and a lot of appeals. There’s a difference between the banks’ view of the ultimate risk of loss and the regulators’ view.”

Who in their right mind would want collateral to be the determining factor in rating loans, when the underlying commodity by which the collateral is valued has plummeted by 60%? It makes no sense, unless of course you have something to hide.

The new guidelines mean banks will have to downgrade loans and set aside more cash to cover losses. Oil and gas producers owed Wells Fargo $9.6 billion at the end of 2015, about 55 percent of the bank’s outstanding energy loans, company filings show. Most of that debt is backed by reserves, the bank has said. “The tougher standard makes it more expensive for the banks to make loans to the energy business,” said Buddy Clark, a partner with law firm Haynes & Boone in Houston. “But if the banks foreclosed now and tried to sell the properties, they’d have to take a loss. If it happens all at once, it’ll be a disaster where all of these properties come on the market at the same time.”

Bingo and presto!

Wells Fargo will need to wipe the egg from their collective faces and simply take the hits. All of those offices, designated for new energy loans, will be closed and eventually they will be forced to write down the loans to reflect the current market environment.

The greater threat here is the long term effects the economy will face, after these banks get burned from yet another central bank overplanned induced bubble. After the financial crisis had ended, banks opted to go with energy, seeing it was hot and backed by real cash flow. Little did they know, they were being duped into being bagholders, once again. The next time America has a great idea, Well Fargo and friends will be less eager to finance it.

Argue the message, not the messenger.

MOAR

There are so many ways to rip Gartman to shreds with this clip. I almost feel like a werewolf biting away at his shirt sleeves. He’s talking bull markets and silver-gold ratios–something that hasn’t been relevant since the Victorian Ages.

‘Gentlemen don’t trade oats or silver,’ says D. Gartman. You’ve got to be fucking kidding me, mate.

Moreover, Gartman declares he’s too old to trade silver and can only play this on the long side of gold. After all, we’re in a long term bull market in the metals and he’s long of them, in bullshit terms, until something deleterious falls upon his foot and shatters it in twelve places.

Note how Gartman holds his hands up in that funny manner. He may very well be a demon. By the way, I absolutely love the fake books in the background. Nothing says ‘I’m smart as shit’ as a background filled with fake books. Riveting stuff.

Reverse Cramer, Rich Ross from some meaningless firm, is out with a significant note of caution this evening, particularly those playing in the tar pits of oil. He points to a trend in the market that has failed before, namely running up stocks in brainless fashion up until earnings–only to fail miserably after said earnings disappointed. There is a notable risk inherent in the chasing up of oil stocks.

He did cite the XLE as a prime example of doom portending.

I happen to agree with this Rich ‘Boss’ Ross fellow.

In this clip, Cramer dismisses the ‘protest’ candidacy of B. Sanders, likening it to a joke compared to the business friendly Hillary campaign. Moreover, he doesn’t think Sanders stands a chance, especially since the superdelegates will hand Hillary the win, in what Cramer calls a ‘coronation’, as opposed to the advertised ‘nomination.’

Taking a contrarian viewpoint to what has been hitherto a castigation of earnings expectations for the first quarter of 2016, James Cramer cites a marked improvement in the Chinese indices, as well as the dry fucking bulk index, as evidence that doom might not be the prescribed analysis needed heading into earnings.

He sees upside, when everyone else is expecting black flags and carcasses strewn out across the investment landscape.

I’ve gotten over these elections. I’ve come to grips with the indelible facts, for the millionth time during my life, that my opinion means nothing, as well as my vote. All that I can do to allay the brutishness of it all is to express scorn and deride the mockery that we call democracy. These trolls keep citing so called laws that were put in place, which negate common sense and decency. Last I checked, the democratic process should count the votes of all men, as a right, not just a select few ham and eggers who are bought and sold by the establishment elite.

These elections are a great success for one reason only: it is laying bare the corruptness and illegitimacy of a system that praises itself as being fair and equitable. I believe the Sanders-Trump candidacies, if anything, have awoken the masses to these grave injustices.

This is the very worst case scenario for feverish bulls, but the best for me. At the open of trade, I led a faction of top hatted gentlemen into another tranche of short XLE, close to $63.

For the second time in as many days, the market was robbed and beaten for an otherwise genteel 150 point advance.

Oil stocks reversed under the weight of their own hubris.

The ark, gentlemen. It floats.

Any questions?

Median returns for both sectors are higher by 7%–based on a mere 1.1% return in the physical metal. Wholly and without question, these moves are of the nonsensical varietal.

Markets are flagging here, giving up a 150 point gain, reminiscent to what occurred on Friday. This is, without question, a very ominous development for the morale of this market. The buyers of this late stage rally are of the cheapest cloth. Their loyalties lie only with their account balances.

Offer them a hard tape, and subsequent losses, and watch them flee the field of battle, en masse, paving the way for a Kool-Aid guy breaking through to the downside.

The rally in gold is more likely due to these mercenarial traders, floundering to find new opportunities, rather than a solid fundamental reason backed by strong asset reallocation.

A storm is coming.

Everything is skewed to the downside, according to David Kostin–War Chief of U.S. Equity Strategy, Goldman Sachs.

These are the three principle reasons for you to fear the coming ice’d-berg.

1. Energy and banks
“Our analysts have highlighted a laundry list of headwinds including energy counter-party risk, a slowdown in capital markets activity, and a bruising quarter for asset managers,” Kostin & Co. said. “We believe financials earnings per share [EPS}could fall by as much as 25 percent.”

2. Negative guidance
“Since 2006, roughly 20 percent of firms have provided ‘next-quarter’ guidance during earnings season and 73 percent of firms typically guided below consensus,” Goldman found. “Following the depths of the global financial crisis, guidance has grown increasingly negative, and has been worse-than-average since 2012.”

3.Corporate buybacks
Kostin believes the gravy train of equity buybacks is ending: “a meaningful reduction in what is currently the only source of net demand for U.S. shares.”

In summary, the outlook for over 30% of the market is bleak and very dark, and also very dire. With regard to the financials, they’re diving–headlong–into cement pools, with earnings expected to be reduced by 25%. Moreover, this isn’t going to be a one-off event and companies are expected to guide lower, in droves, for next quarter. Lastly, corporate buybacks have run its course. They’ve been maintained at a pace that is unsustainable. The succor the markets have enjoyed with this seemingly endless support of prices has all but come to an end.

BEHOLD the earnings season to come. David Kostin believes you will enjoy it, immensely, similar to a horror movie or something much, much worse–a lifetime of Presidential campaign speeches.

A new aristocracy is forming in the marketplace, as the new born investors in distressed commodities express themselves through higher prices.

These new men of industry are above all stations in society. Their milieux is one of extreme wealth and substance. Stocks like CHK and BBG are in their portfolios from the lows. They feel oil will double from here and their new Greenwich mansions will be completed by next fall, should everything go according to plan.

“Isn’t it wonderful?”, asked the wife of one of these illustrious investors.

I cannot begin to describe how wrong this rally in commodity related stocks is. I do not pretend to hold all of the answers to life and I’ve had my fair share of failures throughout the years. But this will not be one of them.

This perversion of reality, this melt up in commodity related stocks, will end. When it does, it will end very badly indeed.

In the meantime, the market is running higher again, save biotechs. I don’t expect the rug to be pulled just yet. I do expect said rug to be completely gone, however, come May.

Enjoy the rally while it lasts.