The Institutional Risk Analyst

“Since the start of the Iran war, base rates are up 48 bps and spreads (the six rates I use) are up 80 bps, for a total impact of 128 bps.  The impact on EBITDA to support equity is roughly $5 billion per bp.  At an EBITDA multiple of 8-1, each bp reduces equity valuations by $40 billion.  SIMPLY STATED, the “cost” of the war now stands at $5.12 trillion in reduced “fair value” of US investments. ARE WE HAVING FUN YET?”

Within a couple of months, the supplies of crucial petrochemical inputs currently on the water will be delivered and there will be nothing in the delivery pipeline after that point in time. Refined products are a far greater concern than oil. Kuwait, for example, produces a lot of aviation fuel for the EU. The Saudis are now shipping phosphates by truck to Yanbu, but this is not even a modest replacement for the disrupted supply chain in the Gulf.

In this week’s edition of “The Wrap,” we feature our view of the top-ten key events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap with Chris Whalen” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  March 20, 2026 | Gold and silver prices continued to pare gains from the past 90 days, even as deliverable supplies of both metals are shrinking

Fed Vice Chair for Supervision Michelle Bowman outlined bank-friendly Basel endgame and GSIB surcharge proposals, reports Ian Katz at CapAlpha in Washington, which she said will be released in a week. Overall, the changes will result in a small decrease in capital requirements for the largest banks and more significant changes for smaller institutions. We’ll be responding to the request for comment on Basel III. 

We hear that the PennyMac fiasco was largely caused by Bill Pulte and the Trump Administration. Most people in the markets don't realize that the GSEs had already bought a ton of mortgage-backed securities (MBS) in Q4 of last year. This market manipulation tightened mortgage spreads 15-20bps and increased mortgage prepayment speeds without a corresponding offset from hedges in the Treasury market. This set up PennyMac and other mortgage lenders for a disaster.

As we told Bloomberg TV last week, not only has the President's attacks not forced Powell out, but he has made this decidedly mediocre Fed chief a progressive martyr. As a result of Trump’s ill-considered attacks, Powell will likely remain as a Governor through 2028, depriving the President of an opportunity to appoint another governor for a 14-year term.  How does this mess serve the agenda of President Trump?

This week in “The Wrap,” we report in summary fashion about the latest events in Washington and Wall Street this week. The Trump Administration departed from Davos with a variety of “wins,” but there was nothing substantive about housing affordability or really anything else.

When the Fed took net loan loss rates for banks down to ~ 50% of par in 2021 vs 95% after 2008, they enabled some very stupid and foolish behavior by investors and lenders. These behaviors are only partly described by the nominal level of interest rates because, of course, we must account for leverage in calculating the full scope of the prospectives losses. Lend More Upon Default (LMUD) has concealed the scope of the disaster and even pushed down reported loan default rates.

Kevin Hassett's comments on Federal Reserve independence may have undercut his chances for the top Fed job. President Donald Trump has observed in recent days that there are “two Kevins,” Hassett and former Fed governor Kevin Warsh, who we personally support.

The Trump FSOC document reads like a Marvel comic book and is entirely laudatory towards crypto fraud, but uses the same idiotic language as former Treasury Secretary Janet Yellen in describing the grave systemic risks posed by residential mortgage servicers. The report states incredibly: "The continued use of U.S. dollar-denominated stablecoins is expected to support the role of the U.S. dollar in the international financial system..."

As Chairman Powell said in the latest FOMC presser, the SOMA reinvestment plan is intended to get their duration down to that of the Treasury debt outstanding by allowing long duration MBS to be replaced by short-duration T-bills. Could the Fed have continued to shrink the SOMA further as Bowman and others have urged? 

Why does the US central bank need to pay interest on bank deposits at the Fed? Because we have $35 trillion in public debt. The interest rate on T-bills, bank reserves deposited at the Fed and reverse repurchase agreements (RRPs) issued by the Fed must be roughly the same.

My view of Fed “independence," if you talk about absolute independence, it's nonsense. You can't have one piece of the government that becomes an autonomous power running around doing whatever it wants. That's ridiculous. But the Fed should be independent of the President and the Treasury. The reason why this is completely clear was explained by none other than William McChesney Martin: The Treasury is the borrower.

“A higher money price of gold is best read as a symptom of a weaker currency. It isn't really the gold going up, it's the dollar or fiat currency in general going down.” That seems to me to be right. And then he says, “The value of gold lies in being independent from political discretion. Fiat money is a claim on the future discretion of politicians.” Isn't that good?

Q: Do you suppose the folks inside the Trump White House, who spend much of the day watching Newsmax, understand that loan forbearance is about to end for tens of thousands of American households on October 1st?

Paying interest on reserves has nothing to do with whether banks lend and everything to do with enabling the Fed to manage the Treasury market. If you don’t want the Treasury market to remain open, then take away the Fed’s power to pay interest on reserves.  

The leading candidate to be the next Fed Chairman believes the balance sheet could safely shrink to around $5.8 trillion, with bank reserves potentially decreasing to $2.7 trillion. Waller argues that a shift towards more short-term Treasury bills would make the balance sheet safer and more flexible, and he is absolutely right.

Imagine if the Fed had to tell the public that federal deficits were bad for bank safety and soundness? We haven't had a Fed chairman since Arthur Burns who would speak publicly about the inflationary aspect of federal deficits.

The connection between expanding the balance sheet via open market purchases of Treasury debt and bank reserves is one of the starkest illustrations of how federal budget deficits translate directly into inflation.

When Ray Dalio says to be afraid of the bond market, he is asking a question that belongs in the mid-1970s, when the dollar still competed with other currencies and US interest rates were actually affected by interest rates in other nations. But today, with many of the other industrial nations led by Japan, China and the EU literally drowning in public debt, the US is still the leader of the parade.