The Institutional Risk Analyst

Many banks, led by the likes of Charles Schwab (SCHW) and Bank of America (BAC), refused to restructure their bond portfolios when interest rates were lower, leaving billions of dollars in potential earnings sitting on the table. As we discuss below, SCHW had a yield on its securities book, which is almost half of the group’s assets, of less than 2% at year-end 2025. Why is this OK?  

“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?”

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.

President Donald Trump, Bill Pulte and Commerce Secretary Howard Lutnick have apparently met a couple of times in recent weeks to consider policy initiatives for spurring housing. Meanwhile, the GSEs have begun to buy and/or retain mortgage assets in an effort to push down mortgage rates, an effort that is unlikely to have much effect.

If SCHW could but find a competent team to manage the bank's assets they could vault to the top of this group in terms of financial and equity market performance. In the meantime, we hope that the folks at the Fed figure out how to publish the Y-9C and related documents for Raymond James.

Half of COF assets are allocated to consumer loans, with single digits in real estate and C&I exposures. The bank was in the 94th percentile of Peer Group 1 on nonaccrual real estate loans in Q3, the 97th percentile in 90+ day past due C&I loans and the 94th percentile in 90+ day past due for other loans and leases, which includes loans to nonbanks. We expect COF to have high levels of delinquency in its consumer book, but these other credit metrics are a little troubling.

We have published the latest edition of The IRA Bank Book for Q4 2025. Entitled "Defaults Fall, Market Risk Grows," the report details how indicators of consumer credit risk are falling even as risk to financial markets from institutional and commercial credit, crypto tokens and market exposures grow. Bank income has reached record levels in Q3 2025, but what happens in Q4 2025 and 2026?

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.

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.

The largest bank loan portfolio increases reported by the FDIC were in loans to non-depository financial institutions and broker-dealer loans to purchase or carry securities, including margin loans. This situation is inherently unstable.

The prospect of Zohran Mamdani becoming Mayor of NYC and the rise of other socialist elements in the Democratic Party means that owners of New York real estate are facing effective expropriation of their property.  And the real losers are New York consumers.

Some of the largest banks by assets have dropped from the top quartile into the bottom half of the distribution for the top 100 banks

GS had not appeared in the top 25 since we began the indices a year ago, while MS had made it three times.

As and when GS can exit the loss leading credit card relationship with AAPL, the performance of the business should improve significantly.

The Citi decision to exit mortgage servicing perhaps made sense in 2017, but today not so much.

SCHW needs to take advantage of their strong operating leverage and repair some needless damage done during COVID by inept bank management.

If you were really, REALLY going to do mortgage warehouse lending in today's market, KEY would be the better platform, not BNS.

Notice that the Fed stress test is silent on trillions of dollars in mark-to-market losses facing US banks from COVID-era securities

The larger banks led the way in January and February, but today the top 25 names in terms of total return include many smaller banks.

One of the effects of QE has been making many banks and real estate investors insolvent, a precursor to debt defaults.