The Institutional Risk Analyst

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.

Hedge fund mogul Bill Ackman changed his tune and told investors this week that the government should not hurry to release Fannie Mae and Freddie Mac from government conservatorship. This announcement is essentially window dressing on the part of Ackman after FHFA Director Bill Pulte announced that the GSEs would not be released from conservatorship, dashing the hope of long-suffering shareholders.

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.