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This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated "under the table" that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches. In other words, the Fed has advised banks to cover up major energy-related losses.
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Beyond just the immediate cash flow and stock price implications and fears that the situation with US energy is much more serious if it merits such an intimate involvement by the Fed, a far bigger question is why is the Fed once again in the a la carte bank bailout game, and how does it once again select which banks should mark their energy books to market (and suffer major losses), and which ones are allowed to squeeze by with fabricated marks and no impairment at all? Wasn't the purpose behind Yellen's rate hike to burst a bubble? Or is the Fed less than "macroprudential" when it realizes that pulling away the curtain on of the biggest bubbles it has created would result in another major financial crisis?
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In case we have forgotten, subprime mortgages were originated and packaged as investment grade debt and so made its way into a lot of portfolios where they could not keep junk credit and would have had to sell them if the credit ratings of those dropped. That by itself would not have caused the disaster.
The mortgages were securtized into tranches which were considered a good diversification method until the increasing defaults made it difficult to figure which securities were worth what. That itself would not have caused the disaster.
The missing origination documentation for many of these made it difficult for anyone to try to figure out the value of such securities. This by itself would not have caused the disaster.
Wall street created derivatives to insure against losses for such securities. This by itself would not have caused the disaster.
AIG started to underwrite almost everything that came its way to get the premium with no mechanism in place to assess the risk it was taking. This by itself would not have been a problem if it just meant AIG going down.
Lot of the banks were insured by AIG against other instruments they held which would have been at risk of default if AIG went down. This by itself would not have been a problem if the major banks just went down with it. We did let Bear Stearns fail with not much of a problem.
But we had our financial system and the regular banking activity tied to the health of the major banks that were ALL doing these investment trades which required inter bank lending which froze because no one knew which bank was creditworthy and so they could take down the whole economy with them even if they did not fail. So they were backstopped with guarantees to restore liquidity.
Lessons learned so now there are steps to ensure less drastic shutdowns if necessary.
The above is being compared to
Mostly regional banks holding debt always rated as Junk. A lot of the oil related ones are likely to default. There was no collaterization of these bonds with better ratings so no one is forced to sell. The banks can either foreclose on the debt driving the companies to bankruptcy which would affect the local economy or they could restructure debt. Very similar to regional banks that held failing mortgages. They were regularly shutdown and the healthier ones were asked to restructure mortgages than foreclose to avoid local distress.
Fed seems to be doing the same thing with regional banks here. The problem is that doing so would break the capital requirements that the Fed itself established. So, at most "if the rumors are correct", the Fed appears to be relaxing those requirements to enable the restructuring and an orderly shutdown of the oil companies in trouble with asset sales rather than forced bankruptcies where they would have to sell for pennies on the dollar to vultures. In the worst case, some regional banks would be shut down just like hundreds of regional banks were shutdown from the mortage crisis because of the non-performing debt they were holding.
But the conspiracy theories and populist notions against the Fed and at the ever popular taxpayer bailout accusations play better for the echo chamber that frequent these tabloid sites.
Especially when the markets have created a sense of doom from falling portfolios...
Oil has already blown-up. From $108 in 2014 to under $28 overnight. In less than 2 years it's given-up nearly 75% of its value.
That's far worse than the implosion of gold starting in the '80s. It took 19 years (1980-99) for gold to fall from near $850 to around $250. Percentage wise that's a smaller drop than oil has experienced in just 2 years.