Courtesy of Pam Martens.
The same phenomenon that’s been playing out for months took center stage yesterday with one notable twist: oil prices dove, the broader stock market swooned, but the mega Wall Street banks took a worse beating than the broader stock market averages. The Dow Jones Industrial Average lost 1.14 percent yesterday while Bank of America, Citigroup and Morgan Stanley were off by more than 3 percent. In an unusual twist, JPMorgan Chase, the bank that analyst Mike Mayo has preposterously called the Lebron James of banking, performed the worst among its peers yesterday, down 4.18 percent.
What knocked the wind out of JPMorgan’s sails yesterday is at the heart of why the banks keep tanking when oil prices swoon. In a nutshell, the market doesn’t think these banks are coming clean about their exposure to oil – whether it’s in loans to beleaguered oil companies or whether it’s derivatives it sold to its corporate clients and hedge funds to make wagers on the declining price of oil. In addition, the market thinks these banks have not taken adequate reserves to cover their potential losses and that they are waiting until the last possible moment in order for executives to boost their own pay and bonuses.
Where would the market get such cynical ideas? This is precisely how many of these banks behaved with the subprime debt crisis in the leadup to the 2008 financial crash.
JPMorgan Chase poured some gasoline on the fire of these suspicions yesterday when it held its annual investor day and announced that it will be beefing up its reserves to cover potential losses in the energy sector to $1.3 billion by the end of this quarter. The bank noted further that if oil stays in the $25 range for over a year, it would have to put aside an additional $1.5 billion.
JPMorgan Chase has owned up to $44 billion in exposure (loans and commitments) to the energy sector with $19 billion of that being rated below investment grade. A reserve of $1.3 billion represents just 3 percent of total exposure. That amount of reserves stands in contrast to data provided by the Federal Reserve on November 5, 2015 from the findings of the Shared National Credit Program (SNC), an annual review conducted by bank regulators to examine syndicated loans of $20 million or more that are shared between three or more banks.
According to the SNC, “Oil and gas commitments to the exploration and production sector and the services sector totaled $276.5 billion, or 7.1 percent, of the SNC portfolio. Classified commitments — a credit rated as substandard, doubtful, or loss — among oil and gas borrowers totaled $34.2 billion, or 15.0 percent, of total classified commitments, compared with $6.9 billion, or 3.6 percent, in 2014.”
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