Trump to Fire Jay Powell? No. Bank Earnings? Nada. Bayview for Sale?

April 22, 2025 | Premium Service | Updated | Last week we put down the obvious long gold, short dollar trade. The markets continue to reject the America-first agenda of the Trump Administration, but we suspect that a lot of this fuss comes from shock after years of excessive monetary ease by the Federal Reserve Board. Time to wake up from the long QE slumber kiddies.

In fact, President Donald Trump’s trade offensive is entirely successful in terms of marginalizing China, at least judging by Beijing’s increasingly shrill threats of retaliation against nations that cut deals with Washington. Isolating communist China was always the point of Trump's trade offensive.

Below for the benefit of annual subscribers to our Premium Service, we report on some of the more interesting developments in Q1 2025 earnings and also the market conditions as mortgage companies start to report this week. But first let’s talk about the sophomoric media commentary swirling around the public spat between President Donald Trump and Fed Chairman Jerome Powell. 

As we note in our upcoming book Inflated: Money, Debt and the American Dream, Presidents always think that they can control Fed governors, but the control ends as soon as the individual is appointed and is then confirmed by the Senate. The next Fed Chairman is likely to be far less disposed to provide excessive liquidity to markets, perhaps the more cogent observation to make about the Fed post-Jerome Powell.  

President Trump will not try to fire Chairman Powell, as he confirmed after this edition of The IRA was published. Why not? First, Presidents appoint Fed chairmen, but they are confirmed by the Senate and thus can only be removed via impeachment. Second and more important, firing Powell will seriously piss off Senate Republicans, killing President Trump's hopes for tax legislation this year. And to add to the stakes, Treasury Secretary Scott Bessent would likely resign if Trump disregards his advice on dealing with the Fed.

Rather than speculate about whether the Fed under a new chairman would cut the target for short-term interest rates, maybe we should ask whether the next more conservative Fed Chairman will support expansion of the Fed’s balance sheet in the face of massive fiscal deficits. Keep in mind that President Trump could have tried to fire Powell in January, but advisers from Treasury Secretary Bessent on down are urging caution. Trump knows that if he tries to fire Powell, he loses any control over the Senate and that means no tax cuts.  

Leaving aside the latest Trumpian tantrum about interest rates, the bigger point to make is about the nature of the central bank. Just as William McChesney Martin ultimately betrayed President Harry Truman after his appointment in 1951, Donald Trump will lose control of his choice to replace Jerome Powell on day one.  And if Trump is not careful with his public comments, Powell may just remain on the Fed Board for the rest of his term as governor through January 2028. This will force Trump to select the new chairman from among the existing governors. We kind of like the idea of Chairman Michele "Miki" Bowman.

So far, Q1 2025 earnings are about what we expected with flat to down interest income and funding costs, but oversized volumes and some gains from market volatility. Bank of America (BAC), for example, reported flat net interest income but a $2 billion jump in sequential non-interest income.  The table below is from BAC's Q1 2025 supplement.

Perhaps more significant, BAC saw both interest earnings and funding costs fall dramatically in Q1 2025, but the net interest income was unchanged. Credit provisions were up small, similar to many other large banks. But the bank's balance sheet remains significantly under water.

The yield on BAC’s $923 billion in securities (roughly half of the balance sheet) was below 3% as of Q1 2025. Fannie Mae 3% MBS are trading at 84-31 this AM. As we have noted previously, BAC is in a precarious position in the event that credit costs and/or LT interest rates rise. 

Of note, BAC has just lost a litigation with the FDIC over underpayment of insurance assessments between 2012 and 2014, thus a $450 million expense may be hitting the bank's income later this year.  FDIC had originally sought more than $2 billion in insurance assessments and interest from BAC, Bloomberg reports, but the court ultimately disallowed claims by the FDIC prior to 2013. 

U.S. Bancorp (USB) also saw net interest income down in Q1 2025, but the bank’s operations continue to improve overall as USB digests the 2021 acquisition of Union Bank of California. Like BAC, credit provisions were down vs Q4 2024.

Perhaps more significant, USB has shaved six points off of its operating expenses over the past year. At Q1 2025, USB had an efficiency ratio of just 60%, well-below most of its peers but still nine points above industry leader JPMorgan Chase (JPM). The table below is from the Q1 2025 earnings supplement from USB.

Another important bellwether for the banking sector is M&T Bank (MTB), a $200 billion asset bank holding company based in Buffalo, NY, which is actively involved in the residential mortgage space. Like its peers, MTB saw interest income down vs Q4 2024 but basically flat YOY.  And credit loss provisions were down small vs Q4 2024 and almost 30% YOY. The table below is from the Q1 2025 earnings of MTB.

Of interest to our readers who follow the mortgage sector, in the MTB earnings announcement there was the following remarkable disclosure regarding Bayview, one of the leading managers of residential mortgage assets:

"The recent quarter decline in noninterest income reflects a distribution from M&T's investment in Bayview Lending Group, LLC ("BLG") and net gains on bank investment securities each in the final quarter of 2024."

We asked the folks at MTB for a translation. Here is their response:

"M&T holds a 20% minority interest in Bayview Lending Group “BLG,” a privately held commercial mortgage company. Bayview Financial, a privately held specialty finance company, is BLG’s majority investor. Periodically BLG makes cash distributions to M&T and Bayview Financial, typically in the first quarter of the year. BLG made cash distribution in 1Q24 and an additional distribution in 4Q24, but did not make a distribution in 1Q25. Cash distributions received from BLG are recognized as income by M&T and included in other revenues from operations in the Consolidated Statement of Income."

What does this mean? There have been reports in the press that Bayview is looking to raise money. Monetizing the equity of a manager, any manager, is really hard. Since Bayview manages Lakeview, the second largest residential mortgage servicer in the US after JPM, the fact that the manager is looking to raise money and apparently omitted a payment to MTB in Q1 2025 seems significant. Bloomberg's Gillian Tan reported last week:

"Bayview Asset Management, a credit firm that oversees $20 billion, is exploring liquidity options including the sale of a minority stake, according to people with knowledge of the matter. The firm, led by chairman and Chief Executive Officer David Ertel, may consider other options including raising capital through a net-asset-value, or NAV, loan, said one of the people, all of whom asked not to be identified discussing private information. No final decisions have been made, the people cautioned."

The fact that Bayview is in need of new capital seems to coincide with very difficult bond market conditions in Q1 2025. Is Bayview for sale? Media reports indicate that Bayview Asset Management is exploring a sale of a minority stake. The firm, which oversees $20 billion in assets for institutional investors, is also reported to be considering other liquidity options, including a net-asset-value (NAV) loan and/or the sale of Bayview's insurance arm, Oceanview Holdings.

Industry observers tell The IRA that Q1 was particularly ugly in terms of hedge results for mortgage servicing rights (MSRs).  MTB is actively involved with financing the operations of nonbank mortgage firms, which are starting to release results this week. Nonbank mortgage sector leaders PennyMac Financial Services (PFSI) and Mr. Cooper (COOP) report earnings tomorrow.  Stay tuned.

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