At its annual investor conference in San Francisco in May 2014, with oil trading at $102 a barrel, Wells Fargo boasted that in just two years it had almost doubled its energy exposure and seized the title of Wall Street’s top oil and gas banker.
Bloomberg News reports that the timing couldn’t have been worse. Crude prices peaked a month later and have since plummeted to $40. Wells Fargo has downgraded 38% of its energy loans and set aside $1.2bn to cover potential losses, according to company filings. The loans are coming under increasing scrutiny from regulators and investors, even though they make up only 2% of the bank’s portfolio.
Wells Fargo’s foray into oil shows how Wall Street misjudged the risks hidden in an esoteric type of energy financing long thought to be bulletproof. To fuel the growth of its energy desk, the bank targeted some of the least creditworthy borrowers in the shale patch, offsetting the risk by demanding oil and gas as collateral. This type of financing, known as reserves-based lending, was considered safe because banks historically got back every penny they loaned, even after default, according to a 2013 Standard & Poor’s report.
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