The Institutional Risk Analyst

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? 

As we note in a recent article published by The Daily Reckoning, “The Bezzel: Is it 1925 All Over Again?,” that tales of woe regarding the Fed-fueled credit boom in commercial real estate and private credit will continue to grow in number in 2026.  When it comes to fraud, cockroaches are an inconvenience, but wharf rats carry the plague and are an existential threat.

Is the impending ZoMa administration in NY City Hall any worse than the devastation caused by the 2019 Housing Stability & Tenant Protection Act of 2019? We think that the panicked crowd of New York landlords and developers have greatly exaggerated the impact of ZoMa, who is a slick salesman but has even less substance that the disastrous Mayor Bill de Blasio. 

The upsurge in the price of gold during 2025 has surpassed the rate of increase for stocks and crypto tokens, begging the question as to whether the world is headed back to the future in term of money. Yet for most investors and nations, gold remains at the apex of value in terms of monetary assets, with fiat currencies next in line and crypto still occupying the periphery in terms of mediums of exchange.

The latest statements about a possible stock offering for the GSEs seem to be designed to boost the share price in the near-term and do not provide any more information than we had when such statements were made previously.  Given the management changes announced yesterday and the other requirements for a successful offering, we have a hard time believing that a GSE stock offering will occur this year.  Notice how the shares of Fannie Mae popped for a couple of days this week

We as people get used to permanence, so it's hard as people to deal with and assimilate sudden change. We like to have stability, so when you suddenly realize that you gotta go live somewhere else, that's a big deal. That's something Americans have a great deal of trouble with when we start talking to them about gold. It threatens all of their assumptions. So they get very uncomfortable.

The accumulation of delinquent loans in the mortgage complex since COVID has gotten to the point where residential loan defaults have no place to go but up. Higher delinquency levels will enable investors to pay less for mortgage loans in the secondary markets, adding to cash losses per loan that are already several points vs the loan balance.  It's not about "gain on sale" but rather cash received.

The first obvious point from the Q3 2025 earnings and commentary so far is that the larger banks in the US and Europe are starting to back away from private credit markets. When you hear Goldman Sachs (GS) CEO David Solomon and JPMorgan CEO Jamie Dimon making cautionary statements about private credit and recent disasters like First Brands and Tricolor, that tells you that they are trying to mitigate potential shareholder lawsuits down the road.

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.

So the $200 billion asset Fifth-Third Bank (FITB) is buying $80 billion asset Comerica Incorporated (CMA)? Is this the start of a wave of similar transactions among regional banks? Hopefully not. This deal neither creates great value nor promises significant synergies, but it does make for a bigger regional bank with so-so financial metrics. Essentially FITB is rescuing CMA shareholders.

Below we set up Goldman, Morgan Stanley and the other asset gatherers as we go into Q3 2025 earning this week.  As you might expect, GS is ahead of where it was a year ago in terms of non-interest income, earnings overall and equity market value.

“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?

So why would a firm like CrossCountry or UWMC be a buyer of higher coupon MSRs?  The short answer is that they believe their ability to retain the borrower by recapturing a prepayment will offset the obvious negative of high prepayments that comes with a lower interest rate environment.  These firms, it seems, would rather try to recapture prepayments on higher rate MSRs than own lower coupons and benefit from the stable cash flow from the servicing.

Mayor Eric Adams just dropped out of the New York City mayoral race and a silver spoon sucking Indian socialist from Uganda looks set to become the next Mayor of New York. You could never makes this up. But while a lot of political energy is focused on Zohran Kwame Mamdani's plans for rent stabilized properties, it is commercial real estate that pays the bills in New York City.

Is Michael Nierenberg, CEO of Rithm Capital (RITM), really paying a double digit cap rate for an "Irreplaceable Portfolio of Class A" properties in San Francisco and New York? What does this say about the true market value of all New York commercial properties?

With the FOMC cutting the target for fed funds one quarter point last week, we expect to see funding costs for banks continue to fall, part of the larger narrative that has seen bank loan demand and share repurchases leaving a great deal of dry powder.  Deposits are growing 2x loans, meaning that the balance must go into securities. One of the reasons that lenders of all sorts have been pushing down loan yields is to capture assets in a market that is short quality duration.

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?

In this edition of The Institutional Risk Analyst, we ponder the world of credit and investing as sovereign nations see their debt ratings sinking below that of global corporations. Meanwhile, the price of gold is reaching new highs. Then we set up the Q3 earnings of the top-seven US depositories for subscribers to our Premium Service as we surge into quarter end with equity markets at all-time highs and global central banks turning the money spigots wide open.

PNC went down less in April, but then lagged the leaders in our bank test group, not exactly a rousing vote of confidence in the $550 billion bank. The acquisition of FBHC may not help. The traditional rule of thumb in banking is that paying anything more than 1.25x book for a bank is usually not recovered.  We do not have a position in PNC.