The Institutional Risk Analyst

The aggressive behavior of some issuers is distorting pricing for loans in the secondary market and may be creating the circumstances for the next systemic “surprise” in the nonbank sector. To us, Exhibit A in the category of a potential nonbank default event is United Wholesale Mortgage (UWMC), aka “Countrywide II.”

Of course, in the muddled markets at present, there are a number of low-scoring banks which have done relatively well in recent weeks. The parent company of tiny Merchants Bank of Indiana, Merchants Bancorp (MBIN), for example, saw its stock price rise significantly in early 2026, 2x the S&P 500 over the past year, driven primarily by its inclusion in a major index and strong financial performance.

This change in posture by President Trump opens the way for Kevin Warsh to be confirmed by the Senate perhaps by May 15th. More important, it provides a way for Powell to retire, which opens a second governor seat on the Board. Big question: Even with the investigation by the DOJ ended, does the Trump White House have the votes to get Warsh confirmed?

On Capitol Hill, Kevin Warsh appeared before the Senate Banking Committee this week to consider his nomination as Fed Chairman. Warsh reiterated that Fed “monetary policy independence is essential.” But he got some rough questions from Democrats, especially ranking member Elizabeth Warren (D-MA) She asked whether he will be a “sock puppet” manipulated by President Trump. Warren called Warsh “uniquely ill-suited for the job as Fed chair,” but frankly Warren is uniquely unquali

“Private debt” gating retail investors is the whipping boy du jour, but not the canary in the coal mine, nor the real problem, nor the real risk. Over-investment and malinvestment in things like data centers or unprofitable business models that require cheap money and are based on hype and suspension of common sense, excessive government spending, inflation and currency debasement, populism and socialist rhetoric manifesting itself in real policy and tax decisions, these are

Bank earnings this week have been mostly what we expected, with income up, credit loss rates continuing to trend lower and most banks refusing to provide additional disclosure on private credit exposures. As the private credit mess proceeds in the weeks and months ahead, a lot of the “debt” in these deals will turn to equity – which is what it should’ve been all along.

As we noted in our discussion with Julie Hyman on Yahoo Finance this week, the big question facing banks in Q1 2026 is disclosure about private credit. The big losers in private credit are not banks, but rather institutional and retail investors who were lured into these wholly unsuitable, structurally illiquid investments by the false public statements made by the sponsors.

We infer the size of the NDFI portfolio of individual banks by subtracting the aggregate NDFI series of the FDIC from Other Loans & Leases. In 2010 when the FDIC first started gathering the data, NDFI loans were less than a quarter of the “other loans and leases” (OLL) category, but today they are 60% of OLL and growing fast.

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.

Institutional investors can and do abide by limits on redemptions for private equity and credit, at least for a while. Retail investors cannot and do not, and will run when there are clear signs of distress and illiquidity. Remember the deposit run at Silicon Valley Bank.

The equity of many banks traded off in January following Q4 2025 earnings. The earnings were not bad by any means, but some investors seemingly decided to take profits after a remarkable run in banks stocks going back to last October.

Large-cap tech stocks experienced the worst week since November, causing a split market where value-oriented stocks are gaining attention, while tech stocks and crypto tokens are being liquidated. Equity managers are rotating out of tech and into everything else, creating a cosmic imbalance that is difficult for the non-tech equity market to absorb.

The addition of Kevin Warsh as Fed Chairman does not change the ST calculus on the FOMC in terms of support for further rate cuts. Even as a former Governor, Warsh begins his term as leader of a minority on the Committee, especially if former Chairman Powell remains on the Board. This is why the inability of Trump to blame Powell for the astronomical increase in home prices, as we discuss below, is so remarkable.

GS had a remarkable year in 2025, as shown in the table below. It is good to see the firm back on track after the disastrous experiment in retail banking and credit cards. This is really one of the few pages in the GS public disclosure that has any useful information, which is a major reason that the Fed's Y-9C is must reading for analysts of Goldman Sachs.

But more to the point, the comingled worlds of private equity and credit may be the biggest scandal to hit Wall Street in a century. Most bank loans to PE sponsors "secured" by private company assets are actually non-recourse, so there is no recovery for the bank in the event of default. We think these factors are just some of the reasons that exposures to private equity and credit may be the most risky part of bank loan portfolios.

Only the Fed under Janet Yellen was dumb enough to buy $3 trillion in MBS, costing the taxpayer hundreds of billions in losses without really affecting mortgage rates. A mere $200 billion from Donald Trump is a rounding error, pure populist political pulp -- another progressive political display that will have zero impact on LT interest rates. In fact, the childish suggestions coming from the White House on housing may continue to push LT interest rates up.

Of note, JPM's CFO Barnum said in response to a question that “I haven't heard anything to suggest that the private [credit] deals are performing differently from the public deals. It probably is true at the margin that some of the new direct lending initiatives involve underwriting at slightly higher expected losses, and that's significant because, as we've been discussing here, the wholesale charge-off rate has been very, very low for a long time."

“The delinquency rate for commercial mortgages increased in the second quarter of 2025 across most major capital sources,” said Reggie Booker, MBA’s Associate Vice President of Commercial Real Estate Research. “The largest increase was among CMBS loans, driven by rising delinquencies in both multifamily and office properties. Delinquency trends continue to reflect differences in property type, loan structure, geography, and borrower profile.”

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..."

The surprise pre-release of Q4 results led to a significant drop in JPMorgan's stock price and took down the entire sector along with it. But is this the only negative surprise likely to come from JPM? We think not. CNBC’s Jim Cramer said on X yesterday that investors should buy JPM on the dip, but we disagree. In fact, the markets seem to know something about JPM. Maybe this explains why Citigroup (C) has outperformed the House of Morgan all year.