The Wrap: Rate Cuts, FSOC Fantasy and CRE Deflation

December 12, 2025 | In this special edition of “The Wrap,” we give you our flow-of consciousness impression of the past week, ungated for all our readers.  Each week, we give our thoughts to Premium Service subscribers in advance of our new weekly collaboration with Julia La Roche.

“The Wrap with Chris Whalen" is released on YouTube, Spotify and Apple Podcasts over the weekend. And we get warmed up for Julia by speaking on The Business Briefing with Janet Alvarez on SiriusXM Radio Channel 132 at 9:00 AM on alternating Fridays. 

The Fed cut the target rate for federal funds another ¼ point as we noted in yesterday’s comment, but the lack of consensus on the FOMC and also among the analyst community has muted the positive lift for the markets. As Ester George told Kathleen Hays on Central Bank Central, the Fed is not concerned about inflation despite the fact that average inflation is running at 3% per year.

George, who’d make a great Fed Chair, noted that the resumption of QE via Treasury purchases only may further ease financial conditions. Esther George, however, does not agree when assessing the message from the latest meeting, that the statements made by the Fed chair at his press conference that followed it, or that the signals going forward, that Powell and company made a “hawkish cut.”

”I thought [Powell] tried to keep it relatively neutral, to say, you know, we’ve done 75 basis points, we did 100 before that, we think we’re basically in the range of neutral. Which suggests this might be a resting point, as we wait to see what the economy looks like, with these data releases and other things.”

We got a very good reaction to our piece on private credit yesterday (“JPMorgan, Growing Large Bank Risk & Private Credit”). We’d add the following thoughts. JPM apparently is now funding loans to NDFIs by selling participations. This is significant because the FASB was told years ago that practice risked a major problem for the rest of the banking system.

Why are participations a problem? Chase as the seller of participations could offset defaulted loans against the deposits of the borrowers. In a syndication structure each bank has the requisite “mutuality” to offset losses against deposits, but syndications are cumbersome. Participation is the model of choice today, but leaves participating lenders with no effective protection.

A former Chase auditor that became head of FASB convinced the accounting board to allow participations, unsecured borrowings by JPM, to be accounted as “sales of beneficial interests” in the underlying loans. This was done despite FDIC bluntly telling FASB that FDIC would never surrender the benefit of offset that sank other banks, but saved a lot for FDIC as receiver of Penn Square Bank. Five other banks failed or were acquired when the FDIC receivership repudiated participations sold by Penn Square, including Chase Manhattan Bank. The cost of resolving Silicon Valley Bank has only hardened this position among regulators.

Since JPM is the ultimate “too big to fail” bank, there may be no harm to it in the participation morass, but there are huge possible issues if borrowers do what’s smart and shift deposits to destroy offset rights at other banks. Fact is, JPM is funding loans to NDFIs via participations, since loan syndications are seen as being too much expense and trouble. Smart NDFI borrowers, needless to say, should limit any deposits at JPMorgan.

Thinking about ancient examples of stupidity like loan participations, today holds many reminders of the 1920s. Then we had no requirements for "conglomerate" lenders like JPM to consolidate reporting and "unsort" related-party transactions. Banks made short term "rollover" home mortgage loans with their holding company affiliates issuing mortgage insurance to secure the collection of the rollover.  

When the mortgage markets collapsed in the mid-1920s, of course, the mortgage insurers also collapsed, leaving nothing to support mortgage collection. This caused the banks to then collapse. The LDC debt bubble in the 1970s became the debt crisis of the 1980s in similar fashion.

Today we seem to have some semblance of financial security for regulated banks and holding company affiliations, but that has forced them to "branch out" and arrange for non-banks to intermediate with the "Parmlats" of today's markets. Is JPM's "fortress" balance sheet built in reliance on castles made of sand?

Meanwhile in the world of CRE, The Real Deal reports that Brookfield’s Wells Fargo Center — South Tower in DTLA is on the market. Newmark has the offering. Bids for the 45-story, 1.2-million-square-foot office tower are anticipated around $157 million, less than the $263 million debt balance that recently came due, per Green Street. The property was worth $450 million eight years ago. 

In NYC, David Werner reportedly is buying One Dag Hammarskjöld on 2nd Avenue for half off. Half. TRDNY reports that Rockpoint is trading the office tower for $270M, six years after paying $566 million for the property. The ground level retail space has been vacant for years, several tenants told The IRA.

But here’s the real question: Why would you want office space on Second Avenue in a residential neighborhood in the 50s just above the United Nations? Even at half off. This transaction illustrates how the economic heart of NYC is being hollowed out by the exodus of business out of Gotham. 

In happier news, crypto tokens continue to move sideways while gold and silver moved sharply higher, particularly silver. YTD silver is up over 100%, gold is up 61% and bitcoin is down single digits YTD and 11% in the past month. We have been adding to positions in gold and silver all year.

"Gold prices are making a repeating stair-step pattern of movements as gold trends higher," notes Tom McLellan. "Each part of this sequence sees a multi-month up move after breaking out to higher highs, then another multi-month consolidation of those gains. Right now gold is in a consolidation phase."

Source: Google (12/12/25)

Meanwhile, the Financial Stability Oversight Council (FSOC) unanimously approved its 2025 annual report. The report "presents the Council’s assessment of the most salient financial stability issues, provides the Council’s recommendations to address those issues, and summarizes the activities of the Council and member agencies to address potential emerging threats to U.S. financial stability."

The Trump FSOC document reads like a Marvel comic book and is entirely laudatory towards crypto fraud, as you might expect. Of note, the FSOC document uses the same idiotic language as former Treasury Secretary Janet Yellen in describing the grave systemic risks posed by residential mortgage servicers.

The FSOC 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..." If anything, many of the views expressed in the FSOC report are likely to undermine confidence in the dollar.

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