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.

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