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Large Banks: QT Winners & Losers

October 3, 2022 | Premium Service | A number of readers have asked us to talk about the winners and losers among large banks in the current interest rate environment of quantitative tightening (QT). Below we do just that and more. But first we want to give a big shout out to Dr. Judy Shelton, who asked during a CNBC interview why the FOMC thinks cratering the economy with policies she compares to medieval practice of bleeding is a good way to deal with inflation. The ways and means of the FOMC are ever more statist and authoritarian in nature, a direct threat to free markets and America's civil liberties in general.


If you look around the financial markets, the many fingers of the hand of Uncle Sam including the FOMC seem to be doing their best to foster asset price deflation and general market contagion. The Fed is determined to raise the rate for the mythical market known as Fed funds through the rest of the year. This implies a Fed funds rate above 5% by Christmas. Will the FOMC then stop, look and listen to the results of its actions? Chairman Jerome Powell's stairway to heaven is shown below.


The Fed has ended purchases of Treasury bonds and mortgage backed securities, creating an updraft in terms of yields that has taken the markets back to 2008 levels. Meanwhile, bank regulators at the Fed and OCC are forcing the top 50 banks to raise capital, sell risk assets and/or reduce lending on real estate generally. The top 10 banks could be sellers of a couple hundred billion in 1-4 family exposures in 2022. How is this helpful?


Across the Mall in SW Washington, the folks in the normally quiet agency known as Ginnie Mae are preparing to finalize a draconian capital rule. The new issuer eligibility standards could force a sudden, 20% reduction in the fair value of MSRs held by independent mortgage banks, call it $15 billion in round numbers. Several large issuers are said to be planning big bulk sales of Ginnie Mae MSRs that could crater the $2 trillion government loan and MBS market. The fact that the Biden White House is largely unaware of the impending change by Ginnie Mae should concern members of the FOMC.


As we noted in our recent deep dive into the world of government mortgages (“The Bear Case for Ginnie Mae Issuers”), the new GNMA capital rule could accelerate the collapse of correspondent and wholesale channels across the residential mortgage industry. And this inexplicable action by the Biden Administration will only make worse the deteriorating liquidity situation in 1-4 family loans. Both Fannie Mae and Freddie Mac, for example, are said to be greatly increasing loan repurchase requests to conventional lenders. One insider reveals that these put-backs are a means of getting rid of low-coupon loans that were caught on GSE balance sheets by the Fed's rate hikes.

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