Posted on 10/15/2015 10:36:55 AM PDT by thackney
Cheap oil is creating headaches for the Wall Street firms that bankrolled America's oil boom.
That's because the crash in oil prices is putting energy companies under financial stress. Oil revenue has dried up, yet these companies are still saddled with tons of debt.
America's largest banks are now raising red flags about the health of those loans. For the second-straight quarter, the banks have warned investors about an uptick in troubled energy loans.
Banks "are going to lose money on the loans they've made. That's pretty evident -- whether oil prices go to $30 or $80 a barrel," said Dick Bove, an analysts who covers banks at Rafferty Capital.
The American energy boom of the past decade was fueled by a wave of cheap credit from big banks. But now cracks have begun to emerge in that boom because oil prices have plunged from around $100 last year to below $50 today.
Wells Fargo (WFC) on Wednesday said it was forced to set aside more cash to cushion against potential commercial defaults due to the "deterioration in the energy sector." Bank of America (BAC) reported it may need to set aside an additional 15% to deal with troubled commercial loans, specifically in its oil and gas portfolio.
JPMorgan Chase (JPM) too boosted its oil and gas loan-loss reserves by about $160 million last quarter. The increase was driven by the sentiment that "oil prices will remain low for longer," Marianne Lake, JPMorgan's chief financial officer, told reporters during a conference call.
It's important to note that energy loans do not appear to pose an existential threat to big banks like mortgage loans did just seven years ago.
Bove estimates the oil portfolio represents just 2% to 3% of big banks' total loans, compared with 33% for residential real estate...
(Excerpt) Read more at money.cnn.com ...
You place your bets, you pay your debts.
Who saw that coming?
But I also read the increase in oil prices last week were many of those investors locking in a higher price for the next year. So the doom and gloom is put off for a while more.
Greed CAUSED their problem.
All foretold by people who were laughed at then.
Um lots of people saw that coming. I’ve been reading about it for years.
The ‘To Big To Fail’ banks don’t need to worry. it is some of the regionals and locals that are going to take the big hit.
The loans aren’t the problem.
It’s the hedges.
Those banks that are acting as counterparts to oil hedges are buying enormous amounts of oil at ~ $100 a barrel. This is costing them insane amounts of money. Like a trillion a month.
They would already have gone bankrupt - except the Fed is keeping them afloat.
Apartment complexes were built at boom town construction cost to rent out for more than a Malibu beach house. (studio apartments were between 1800 and 2000 a month, 2 bedroom for 2400 to 3600, and anything larger went for more. Houses were at a premium, renting 5000 a month or more.)
Expecting either to make a killing or that the boom would last forever, the investors overbuilt.
Those of us who had been through an oil boom before knew it wasn't going to last and just shook our heads.
The rent still hasn't come down much, but the occupancy is down considerably as those who lose a primary job in the oil patch are moving back where they came from and taking family and savings with them.
In the end, without a resurgence in oil prices, a reduction in rent (refinancing or change of ownership), those properties will likely lose money. Most do not have handicapped accessibility (think 4th floor walk-up, no elevator), so they won't be converted to 'senior citizen housing' in the future.
That may well be part of what is coming back to the banks now.
For the rest, look at the likes of Silverado Savings and Loan when the last oil boom died (1986). Equipment bought at premium prices will eventually be auctioned off for pennies on the dollar.
I was being sarcastic. Should have tagged it. Sorry...my humor is not always evident.
Yes, for those curious, this has been out there for a while.
Funny how all of the Communists in Versailles on the Potomac are silent about “obscene oil profits”. I wonder how many of them have stock portfolios that are hurting.
You just wrote the story of every boom, oil and otherwise, since the dawn of time. Today, we get to visit lots of those places and call them "ghost towns" while discussing the stories of painted ladies, raucous living, and getting rich quick only to get poor quicker. We have plenty of these places here in Oklahoma that date back to the 1920s. Some even lasted into today but most are showing the strain from the multiple cycles of the boom-to-bust oil field.
I bought after the last boom died, paid off my house, and just watched the show. Much of the available real estate had been bought up by a few people who made a killing during the boom, and I'm holding out for a nice shop cheap. With production still going on and all that implies and entails, that will be a while.
This is the risk side of the equation that the greed and envy folks don’t seem to understand. Seems like they’ve been on a W-2 too long.
what are you talking about a trillion a month?
There was a similar oil boom and bust in the 80’s, but not on the scale of this one. It’s nice to see the speculators who add nothing to the economy get burned.
What an ignorant statement.
Bfl
These are the banks that loaned to the independents to allow the US oil production to grow by several million barrels per day. It would not have happened without those loans. They risked their capital.
Lose some money, did you?
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