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This week in “The Wrap,” we ponder the events of the past week and give our readers some thoughts about the future. The Trump Administration celebrated January 6, 2021 by invading Venezuela in 2026, an adept move from a media perspective, but is all of this just for show? We also ask whether 2026 is the year when the tech trade fueled by AI hype fizzles out. And don’t miss our weekly podcast with Julia La Roche , which is released on most every Saturday. Iranian Weapons in Venezuela With the US military intervention in Venezuela, President Donald Trump now claims to control that nation’s oil sector, but much of the narco government of Nicolás Maduro remains in place. More, the growing crowd of bad actors from Iran, Cuba, China and Russia is still on the ground in Venezuela, actively planning the demise of the United States.   The Heritage Foundation reported in 2023 about Iran's extensive activities in Latin America . Strangely, the Trump Administration has said almost nothing about the presence of offensive military weapons in Venezuela, weapons controlled by Iran that can target the US. The US has a blockade of Venezuela, but why has President Trump made so little policial hay out of the presence of Iranian Revolutionary Guards in Caracas? What would Jack Kennedy or Ronald Reagan have said?  Revolutionary Guards The Credit Strategist  wrote earlier this week: “Iran has been manufacturing weapons in VZ for years. Iran’s Revolutionary Guards maintain an operational infrastructure in the country with Hezbollah operating alongside. Since 2020, Iran has transferred weapons capable of reaching any target in the state of Florida (weapons that were publicly displayed in VZ military parades in 2021 through 2023 - talk about painting a target on your back!). An Israeli defense research organization, the Alma Research and Education Center, catalogued the specific systems and notes they can target both American soil and ships in the Caribbean.” Meanwhile, a number of observers have noted that Venezuela holds as much as 600,000 bitcoin tokens, an offshore pile potentially worth tens of billions of glorious fiat dollars, though experts question the feasibility of such a large stash given local corruption and infrastructure issues.  The whole point of "socialism," after all, is theft, right? Why does Venezuela need such a large pile of crypto? To evade US sanctions and support global allies like Iran, of course. Never forget that the primary use case for bitcoin outside the US is to support criminal and terrorist organizations and evade US sanctions. But if the crypto stash ever existed, you can be pretty sure that Maduro and his Cuban protectors have already stolen much of it over the past several decades since Hugo Chavez seized power in 1999. Just check the blockchain... In the Washington Post years ago , we noted that the phrase "the perfect dictatorship" was coined by Peruvian novelist and Nobel laureate Mario Vargas Llosa to describe Mexico's long-ruling party, the Institutional Revolutionary Party (PRI). His comment, made in 1990 during a televised roundtable discussion with intellectuals, stunned the Mexican political class and their American sponsors. All of the major "leftist" political parties in Latin America used the PRI as a model and made looting their respective patrimonies into an artform, but none more than Venezuela. Oracle Gone a Bridge Too Far?   Most analysts are optimistic about the US equity markets, as one might expect, with some talking heads even predicting stock price multiple expansion due to short-term interest rate cuts by the FOMC. But some are starting to question still inflated valuations in technology and financials. Top of the list of negative outlooks is Oracle Corporation (ORCL) , which depending on who you ask is either profoundly insolvent due to its massive bet on the marketing con known as AI or the greatest trade since Nvidia (NVDA) in 2020. We wuz there (h/t Jim Cramer ). Likewise, analysts are starting to fashion constructive rationales for higher bank valuations based upon lower interest rates. “As of November 30, 2025,” notes MTS Observer , “Oracle announced almost $250 billion in planned new lease commitments, substantially all of which are related to data centers and ‘cloud capacity’ arrangements. In simple terms, what this means is that Oracle has contractually committed to incurring and paying $250 billion in rent expense over the next 20 years in support of its push into the artificial intelligence space.” What this means is that ORCL is on the hook for many more hundreds of billions of dollars in lease expenses and related costs for its imprudent dive into “artificial intelligence” or “AI.” Like earlier AI cons going back to IBM Watson, AI is the acronym for one of the greatest value destroyers in history. Could ORCL possibly generate enough revenue and earnings to justify such an investment? Or is CEO Larry Ellison  chasing the same shiny object as everyone else in techland? Call it reflexivity or smallmouth bass in June, same difference. Recent massive capital expenditures for AI infrastructure have indeed impacted near-term free cash flow at ORCL, yet supporters of the stock say that its cloud growth is strong, with a huge backlog of contracted future revenue, signaling long-term profitability, even as it invests heavily in data centers. But are large language models (LLMs) really going to produce LT profitability for ORCL and other tech giants betting the farm on AI?  We are a large seller of that notion. In a fascinating interview with the FT over the weekend , former Facebook (FB) AI guru and admitted wine connoisseur Jan LeCun  argues that LLMs are useful but fundamentally limited and constrained by language. An electronic parrot, like we said. To achieve human-level intelligence, you have to understand how our physical world works too, LeCun argues, and thus LLMs are ultimately a dead end. “Intelligence is really the thing that we should have more of,” he argues. “We suffer from stupidity.” Regardless of how you feel about the investment prospects of AI, what we can say is that the AI-induced hype surrounding stocks like ORCL and Nvidia  is starting to wear thin with many investors. But perhaps more concerning is the fact that there are growing numbers of examples of where AI is enabling fraud and costing investors money – a lot of money. AI & Mortgage Fraud President Donald Trump said on social media Thursday that he is directing the federal government to buy $200 billion in mortgage bonds, a move he said would help reduce mortgage rates at a time when Americans are worried about home prices. In fact, the housing GSEs or even the Treasury must hedge their portfolios, thus the net impact on mortgage rates of MBS purchases will be zero while increasing taxpayer risk. We discussed this last year in National Mortgage News (" Reviving GSE MBS purchases would repeat the Fed's mistake .") Also, neither of the GSEs has the cash liquidity to fund the purchases (h/t Dennis H.). We remember when former FHFA Director Sandra Thompson retired the term debt of the GSEs. We asked her: Don't you think they'll need the funding? She said "Nope, don't need it." Somewhere Thompson is laughing. Only the Fed under Janet Yellen was dumb enough to buy $3 trillion in MBS, costing the taxpayer hundreds of billions in losses and without really affecting mortgage rates at all. Yellen's "operation twist" was another fiasco, where the Fed bought longer-term Treasury bonds and simultaneously sold shorter-term ones to lower long-term interest rates and stimulate borrowing. LT interest rates did not fall and the Fed lost tens of billions because of the duration mismatch. A mere $200 billion from Donald Trump is a rounding error, pure populist political pulp that will not impact home affordability at all. In fact, if the folks in the White House asked Treasury Secretary Scott Bessent , he'd tell them that mortgage spreads are  already pretty tight. But all that the White House cares about is the November midterms, thus look for the level of silliness to increase. Getting Fannie Mae and Freddie Mac to repurchase their own debt is a truly idiotic idea that has been circulating around Washington for some time, but President Trump is getting more progressive by the day. In fact, the childish suggestions coming from the Trump White House on housing may continue to push LT interest rates higher . Yet the carnage caused by AI in the world of mortgage lending may be worse than any yowling in Washington. Consider the rising incidence of fraud in US mortgage lending. AI is being used by dishonest borrowers, and sometimes even crooked loan officers and whole lenders as well, to alter documents and create completely fictitious borrower identities. These techniques help criminals to bypass traditional security measures and automated bank verification systems for income and employment. In essence, the entire traditional process for income verification has been rendered obsolete, putting lenders, the GSEs and investors at risk. Even documents like the IRS Form 4506-C are being falsified by unscrupulous lenders using AI. When Plaid was founded a decade ago, we initially thought the idea of giving vendors access to your bank data was outrageous. But today, in the world of AI and loan fraud, it may be essential. WGA just invested in a private firm that supports non-QM lending with income and asset analysis using direct source data (Plaid, Finicity, MX), not PDFs. In fact, the poor old PDF is muerto as a source document in lending. Consider a short list of some of the threats facing US banks and lenders. Synthetic Identities : Criminals use AI to generate convincing, yet fake, personal identities by combining real and fabricated information (e.g., mixing a real Social Security number with a fake name and address). These "synthetic identities" are then used to open fraudulent accounts or apply for loans with no intention of repayment, making them difficult to track as there is no real victim to report the fraud. Forgery of Documents : Advanced AI tools can produce authentic-looking fake documents such as pay stubs, bank statements, tax returns, and identification documents (passports, driver's licenses). These forged documents are used to inflate income information, hide existing financial obligations, or verify the fake identities during the loan application process, bypassing verification systems. Deepfakes : Fraudsters use AI to create highly realistic audio and video impersonations ("deepfakes") of legitimate individuals, such as loan officers, real estate agents, or even the borrowers themselves. This technology can trick bank employees or automated systems relying on voice or video verification into making unauthorized changes to loan terms or misdirecting funds. Social Engineering : Generative AI allows scammers to create large volumes of highly personalized and grammatically perfect phishing emails, texts, or social media messages that mimic the tone of legitimate companies or individuals. These messages are designed to trick victims into revealing sensitive personal and financial information needed for loan applications or account takeovers. Robot Attacks : AI bots can automate large-scale credential stuffing attacks, rapidly testing stolen login information across multiple websites to gain unauthorized access to accounts that can then be used for fraudulent loan applications. During 2026, we think that the cost of fraud in the consumer lending process is going to become an urgent priority for lenders and also regulators and government-sponsored entities that insure loans like Fannie Mae and Freddie Mac. The prospect of loan repurchase demands by the GSEs or private investors as loan default and also loan defect rates rise is a significant risk factor for banks and nonbanks alike in 2026. Annaly Capital Management (NLY) While we are focused on potential risks from lenders, we remain very sanguine about one of our core portfolio holdings, Annaly Capital Management (NLY), even as spreads tighten. NLY invests primarily in mortgage backed securities (MBS) and also mortgage servicing assets, an area where WGA LLC is actively involved.  Among the REITs, NLY was early recognizing the value of negative duration mortgage servicing assets which also have cash flows and valuable optionality. Imagine that. “We remain constructive on the opportunity in Agency mortgage REITs, mainly given the support for dividends if interest rate volatility remains this low, and particularly if expectations stay focused on the Fed cutting interest rates further this year,” notes Eric Hagen at BTIG. He continues: “But on a relative basis, with MBS spreads versus Treasuries near multi-year tights around 115 bps, we're preparing for a little more upside in NLY if spreads grind tighter, and we expect it could show a more stable stock valuation if spreads widen back out if interest rate volatility is resurfacing. We think the higher risk scenario for NLY would involve a plummet in long-term interest rates, which could expose the prepayment sensitivity in its MSR and non-QM portfolios. It's not currently our expectation for MBS spreads to revisit the absolute tights near 75 bps, like we saw at the end of 2021, although our outlook embeds some belief that the Trump Administration will try to orchestrate lower mortgage rates, especially if it dovetails with broader policy objectives surrounding a relisting of the GSEs.” Finally, we must close with the happy news that JPMorgan Chase (JPM) has agreed to take over the loans underpinning the Apple (AAPL) credit card portfolio from rival Goldman Sachs (GS) , extricating it from one of the last businesses related to the ill-fated excursion into retail banking. In Q3 2025, GS had a net loss rate 2x the average for Peer Group 1 and orders of magnitude above Morgan Stanley (MS) and other asset gatherers as shown below. Source: FFIEC Hopefully JPM cut a better deal with AAPL than did GS CEO David Solomon , who paid a considerable price for the operational and financial expenses from this modest sized $20 billion portfolio. JPM's growing credit card book was about $240 billion at the end of Q3 2025. “This transaction substantially completes the narrowing of our focus in our consumer business,” said Solomon in a statement. In our next issue of The Institutional Risk Analyst, we’ll be looking at the universal banks led by Goldman Sachs (GS)  and Morgan Stanley (MS) in front of next week's earnings. We’ll also provide our thoughts on financials for 2026 and review the positioning of our portfolio for the New Year.  The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 05, 2025  | In this edition of The Institutional Risk Analyst , we focus on a top performing US bank stock, LendingClub Corporation (LC) . We added LC to our bank surveillance group in 2H 2025 and the progress of this bank has been remarkable. Below we drill down into why this relative upstart managed to outperform some of the largest US lenders in 2025 and raised the bar for other fintech lenders in terms of operational leverage. In the past six months, LC has been the best performing bank in the US, exceeding even former market leader SoFi Technology (SOFI)  in the stock performance rankings. The only reason that LC did not figure more prominently is the WGA Bank Top 100 in Q4 2025 was its small size, just $11 billion in bank assets and $2 billion in market cap.  Size can be a major disincentive for institutional investors, yet tiny LC has hundreds of institutional shareholders. Source: YahooFinance

December 22, 2025  | The year 2025 will be remembered as the year when both gold and silver exploded on the upside as worries about the dollar and the fiscal posture of the United States drove investors to seek inflation hedges. Bitcoin, meanwhile, lost a lot of momentum and seems destined to end the year lower and weaken in 2026. But the key takeaway is the wonderful asymetry of precious metals given the weakness of the dollar. "Looking ahead, the 2026 and 2027 outlook for the metal remains bullish," notes JPMorgan last week on gold prices. "Prices are expected to push toward $5,000/oz by the fourth quarter of 2026, with $6,000/oz a possibility longer term. Central bank and investor demand for gold is set to remain strong, averaging 585 tonnes a quarter in 2026. " Both gold and silver are asymmetrical trades, as we discussed in our interview with James Rickards (“ Jim Rickards: False Narratives in AI & Crypto and the Case for Gold ”).  Technical factors combine with worries about the fate of the dollar to push silver and gold prices sharply higher.  As Rickards said to us last year: "Humans are incredibly adaptable when it comes to money. Witness crypto as a case in point. If you are the shepherd of the dollar, you cannot take the currency for granted. People will create new currencies when the old money fails. That is why the Treasury should begin to buy gold again to demonstrate that the dollar is real." Silver in particular caught fire in Q4 due to a powerful mix of surging industrial demand (EVs, solar, AI), strong investor interest as a safe haven amid economic uncertainty, a tight physical supply (mining constraints), and the "cheapness" of silver relative to gold, creating a perfect storm for record-high prices.  Silver has always been the common man’s metal, but the unique combination of industrial necessity and monetary appeal has helped to resolve its historical "identity crisis," making it both an industrial input and an investment asset.  Below we talk about some of the leading names in our metals surveillance portfolio. The full list is available below to subscribers of the Premium Service  of The Institutional Risk Analyst . And remember that our Winter Sale ends 12/31/2025!

“Beautiful credit! The foundation of modern society. Who shall say that this is not the golden age of mutual trust, of unlimited reliance upon human promises? That is a peculiar condition of society which enables a whole nation to instantly recognize point and meaning in the familiar newspaper anecdote, which puts into the mouth of a distinguished speculator in lands and mines this remark: 'I wasn't worth a cent two years ago, and now I owe two millions of dollars.” ― Mark Twain, The Gilded Age January 1, 2026 | This week in “The Wrap,” we feature a special comment focused on the past year and our expectations about what to expect in 2026. The past year was mostly about markets adjusting to President Donald Trump , but 2026 is likely to be more about the investing world learning to ignore the White House. And don't miss our new weekly podcast with Julia La Roche this Saturday. Does the Fed Lower Rates? Yes, but... First and foremost, what is going to happen with the Fed in 2026?  Much less than most people imagine. That's why Fed governors have 14 year terms, with appointments staggered so one new term begins every two years, ensuring independence . Over the past year, the Trump Administration has made a great fuss about implementing radical changes at the central bank and lowering interest rates to ~ zero.  But will it actually happen? Probably not. T he Federal Reserve is widely expected to lower interest rates again, but most forecasts point to just one more cut in early 2026. Some observers expect to see more changes in policy by the Federal Open Market Committee as Jerome Powell  ends his term as chairman. But here's the big question: Will then Governor Powell retire or will he remain on the Board through the end of his term in January 2028 to block the Trump agenda? Powell has declined to say whether we will remain on the Board. And even if Powell does retire, will Fed policy change substantially? Our view is no. The truncated term of Governor Steven Miran  ends in January and the assumption is that President Trump will fill this vacancy with a new chairman. But even with a new chairman, President Trump’s ability to dictate Fed policy will be limited. And whoever Trump selects will betray him as soon as the Senate confirms the nomination. As we noted in an earlier missive, the new FOMC starting in 2026 is likely to be more hawkish and less inclined to accede to the demands of President Trump. Regardless of whom President Trump appoints chair, the Fed Chairman must run the FOMC by consensus or fail. Fed chairs who lose FOMC votes usually resign the next day. More important, if the Republicans lose control of Congress next November, then President Trump immediately becomes a lame duck and will likely face impeachment by Congress in 2027. Trump's ability to demand policy changes from the Fed or other parts of the government will be diminished greatly.  Regardless of what happens politically in Washington, though, the new Fed chairman is likely to oversee some significant changes in how the Fed manages its open market operations and other areas, a policy issue controlled by the Board and particularly the Chairman rather than the FOMC. One big change we expect to see under the new Fed chairman is in the size of the Fed’s balance sheet. The table below from Bill Nelson at Bank Policy Institute  shows the astronomical increase in bank reserves orchestrated by the Fed's Washington staff since 2008. Since the great financial crisis, the required level of reserves has gone up several orders of magnitude? Really? And don't forget to read our essay in The International Economy , " How to Really Reform the Fed ." “The Fed stumbled into a floor system in September 2008 when its emergency lending followed by three rounds of QE boosted reserves far above the level the banking system needed, pushing the federal funds rate below the level the IORB rate,” Nelson writes. “It is worth emphasizing that the objective of QE is to reduce long-term rates by buying long-term assets; the resulting increase in reserves is an incidental side effect.” Of course, the Fed has been buying mostly short-term Treasury debt, an implicit admission that the role of the central bank is to monetize Treasury issuance rather than stimulate the economy. The fiscal realities of the federal debt has forced the Fed to conform its purchases to the maturity profile of the Treasury debt issuance, mostly T-bills. Fed purchases of Treasury debt subsidize the deficit with more inflation, but do little to help housing or the economy. Read our latest column in National Mortgage News  (“ A mortgage wish list for 2026 ”).  Worries about the deflationary effects of a debt crisis cause the Fed to err on the side of too much QE and an overly big balance sheet, thus the incredible increases in the estimates of Fed staff as to the "required" level of reserves. Our earlier concerns about liquidity stress in the US markets turned out to be correct, but the Fed buried the mounting liquidity problems in private markets at the end of 2025 in lots of short-term cash. Meanwhile, LT interest rates for Treasury bonds and residential mortgages rose in the second half of 2025 due to massive government debt issuance.  Veterans of the emerging markets are familiar with the syndrome of central banks buying short-term government debt. Of course, the United States is the oldest emerging economy in the world. But the current regime shows strong historical antecedents of cronyism and patronage politics that extend back to before the Gilded Age, the most corrupt period in American politics. The Mark Twain quote at the top of this comment pretty much sums up the past year. The impetuous and impulsive regime led by Donald Trump is careening headlong into a generational reset of credit metrics and asset valuations, a maxi market correction that may be memorialized in textbooks alongside the great financial crisis of 2008. By 2028, we will be two decades since the collapse of the US financial markets and primed for a new deflationary episode, this time led by corporate credit and the dissolute US Treasury. We expect to see the situation with corporate credit worsen in 2026, setting the stage for a sustained residential housing market decline in 2027-28. And nobody in the Trump White House, who generally get their news about the economy and financial markets from Newsmax , even suspects the approaching danger.   Cracks Widen in US Credit Last year we saw concerns about the private credit and private equity markets begin to surge, but the best is yet to come. Credit is slowly rolling over in the US markets, one reason why equity markets around the world are likely to outperform the US in 2026. Under-utilized banks have fed the two-headed mania in private credit and private equity caused by quantitative easing in 2020-2023 with loans to non-depository financial institutions (NDFIs). Source: FDIC/WGA LLC Equity allocations have seen significant shifts toward foreign markets since early in 2025, with a notable trend emerging early last year showing a major rotation out of the U.S. equities. Fund managers have been slashing U.S. stock holdings by the most on record as the Trump/AI/crypto narrative fades. AI bellwether Nvidia Corp (NVDA) has lost ground in the past month but is still up 40% YTD or 2x the S&P 500. But NVDA is no longer an automatic buy. In a lagging sign of the times, Masayoshi Son led SoftBank (SBTBF) just agreed to acquire data center investor DigitalBridge for $4 billion, CNBC reports. The deal is expected to close in the second half of next year. In a typically upbeat statement, Son said the deal “will strengthen the foundation for next-generation AI data centers.” SFTBF was up almost 200% in November, but got crushed by concerns over AI spending by large tech players like Oracle (ORCL) . The chart below from YahooFinance shows NVDA, SFTBF and the S&P 500. NVDA is up 1,330% over the past five years and is by far the best performer, but SBTBF reflects the manic investment style of Masayoshi Son. Source: YahooFinance The strong rally in silver and gold, and the weakness of crypto tokens, are leading the decline in US fortunes when it comes to the equity markets. Literally dozens of crypto ventures have failed in the past year, notes Comsure . C rypto exchange collapses have led to $30–50 billion in investor losses, the UK consultancy reports . But the greater concern is the mounting backlog of corporate insolvencies, a real and growing danger that could push the US into recession even as short-term interest rates fall. According to statistics released by the Administrative Office of the U.S. Courts, annual bankruptcy filings totaled 542,529 in the year ending June 2025 , compared with 486,613 cases in the previous year. Business filings rose 4.5 percent, from 22,060 to 23,043 in the year ending June 30, 2025. Non-business bankruptcy filings rose 11.8 percent to 519,486, compared with 464,553 in the previous year. The growing number of individual and corporate insolvencies are part of a rebound of a long-term trend of falling defaults. For more than a decade, total bankruptcy filings fell steadily, from a high of nearly 1.6 million in September 2010 to a low of 380,634 in June 2022. Total filings have increased each quarter since then, but like loan default rates, they remain far lower than historical highs. Like credit metrics, the statistical measures of default reflect a growing tendency for negotiation rather than formal events of default.  Some estimates suggest that 1 out of three insolvencies are restructured out of court. As the chart below illustrates, cash accrued but not collected is over $100 billion, but banks are avoiding taking possession of foreclosed real estate (REO). Source: FDIC One way to measure the stress building in private equity and credit is the poor performance of lenders to private businesses. Long-term equity returns for business development companies (BDCs) have been hammered since the middle of 2025 and now are running at a negative 4% vs up 16% appreciation for the S&P 500, KBW reports.  The chart below shows the VanEck BDC (BIZD) ETF vs the S&P 500. Source: Google Finance “Short sellers are taking note of rising signs of stress within the private credit market, and using publicly traded BDCs to signal that outlook,” notes our colleague Nom de Plumber from his perch high in the world of large bank risk. Banks have substantial exposures to private equity, but most of the risk is borne by private lenders lower in the credit stack. Or at least that is what many bankers believe. PIK or “Payment-in-Kind” refers to a mystical financial arrangement where interest or dividends are paid with additional securities, goods, or services instead of cash, allowing companies to conserve cash flow but increasing debt principal. PIK is commonly seen in high-risk sectors like leveraged buyouts and venture debt, with examples including PIK Notes and PIK Interest. But there are literally thousands of private equity financed companies now using PIK to avoid default. Income from payment-in-kind debt, which allows borrowers to defer interest and can signal an inability to pay with cash, has been rising across BDCs, reaching 7.9% in the third quarter, according to data from Raymond James . In the third quarter, 3.6% of investments across BDCs were on non-accrual status, a designation that indicates a lender expects losses, Raymond James data show. Like REITs, BDCs are pass through vehicles that must pay out most income. “BDCs still accrue the PIK loan coupons as non-cash income, but lack the corresponding cash to pay the required dividends, to maintain their favored IRS treatment,” NDP notes further. “If they lose that tax treatment, there is risk that such PIK loan coupons become taxable at the BDC level, rather than treated as simply passed through to BDC shareholders for taxation.  Then, the BDCs would lack the cash to pay the IRS, too.” The growing number of illiquid private equity-backed companies presents a huge problem for Wall Street sponsors and lenders. “Even with interest rates falling and the number of initial public offerings increasing in recent months, it has not made a dent in the industry’s backlog of at least 31,000 companies valued at $3.7 trillion, according to research from Bain & Company,” Maureen Farrell reported in The New York Times . She continues: “That amount exceeds last year’s record of 29,000 companies valued at $3.6 trillion. Many recent attempts by private equity firms to sell companies or take them public have stalled.... The private equity firm Thoma Bravo has failed repeatedly over the past several years to sell two companies it owns for an acceptable price. Thoma Bravo bought J.D. Power, the consumer analytics company, and ConnectWise, a software company, in 2019 and hasn’t found a buyer for either. This year, in light of the tough market, the private equity firm did not attempt another sale, according to two people briefed on the matter." Consider an appropriately named example. United Site Services, a provider of portable toilets owned by private equity firm Platinum Equity , filed for bankruptcy with plans to wipe out $2.4 billion in debt and hand the company to senior lenders, Steven Church, Reshmi Basu, and Harry Suhartono of Bloomberg report . They write: "The bankruptcy case comes less than 18 months after the company reshuffled its debt stack in order to raise cash. Platinum, which acquired United Site in 2017, would likely see its investment wiped out, since shareholders cannot collect anything in bankruptcy unless creditors are paid in full. The company owes secured lenders more than $2.7 billion, court filings show." We expect to see a growing number of BDCs, private equity sponsors and other parties forced to recognize asset impairments and related losses in the New Year. The backlog of private equity companies using PIK or other means to avoid bankruptcy is going to be cleared out substantially as it becomes clear that merely lowering short term interest rates will not make moribund PE companies attractive to investors. The damage done to the PE sector is massive and could see more than half of all managers unable to raise new funds. These Lame Duck managers will eventually exit the sector once the remaining proceeds of asset sales have been returned to investors. The Cost of Quantitative Easing Weakness in the US equity markets in 2026 could contribute to a negative environment for credit that has been years in the making. Moreover, we expect that the steady decline in bank default rates viewed over the past year, an accounting illusion manufactured by bankers, investment sponsors and regulators acting together, will end when it becomes apparent that the Fed is not coming to the rescue of the private equity and credit community. If we assume that visible default rates on bank loans and private debt are understated by the same monetary excesses and forbearance that caused bankruptcies to fall for a decade, the period ahead is very likely going to involve a painful and extended reversion to the mean in terms of credit expenses. The charts below shows delinquency and loss-given default on $13 trillion in mostly prime bank loans as of the end of Q3 2026. As any bank CEO or chief financial officer will tell you, credit loss rates have been very low for a very long time. Source: FDIC Source: FDIC/WGA LLC Although the Fed's QE program inflated home prices 50% it also took net loan loss rates for banks down to ~ 50% of par in 2021, this compared to ~ 95% after 2008. QE 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, but we suspect that 2026 earnings results will see the benign trend in bank credit defaults come to an end. In our next issue of The Institutional Risk Analyst, we’ll be looking at the universal banks led by Goldman Sachs (GS)  and Morgan Stanley (MS) . We’ll also provide our thoughts on financials for 2026 and review the positioning of our portfolio for the New Year.  The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

“The banks are all cheap; Capital One is the cheapest of all. It is the one that I think offers most upside and I have felt that for 60 points.” Jim Cramer, CNBC December 26, 2025  | Is Capital One Financial (COF) the top consumer lender in the US? Is the stock cheap? Jim Cramer at CNBC is certainly pounding the table. We like COF, but liked Discover Financial more. Like the way we feel about BBT vs Truist, the former a beloved exemplar destroyed by M&A leaving us with confused mediocrity and an absurd name in the latter. Capital One has experienced significant issues with expansion into non-credit card lending areas, most notably a major failure in mortgage lending and ongoing performance issues and regulatory scrutiny related to auto loans and savings accounts. And then there was the COF expansion into energy lending in 2020, which exposed them to risks from volatile energy prices, leading to a need for waivers from regulators (CFTC) for increased derivatives exposure. In this Christmas week edition of The Institutional Risk Analyst , we focus on the top independent bank lenders who specialize in providing unsecured credit to consumers. Our latest conversation with Julie Hyman of YahooFinance is below. The top four banks by assets plus Capital One account for 50% of all consumer loans in the US, but the smaller players in the consumer specialization group are also among the top performing stocks in the WGA Bank Top 50 . We just added one of these, LendingClub Corp (LC) , to our surveillance group, as discussed below for subscribers to our Premium Service . Please do note that our Winter Sale ends on New Year’s Eve 2025.  In the past six months, LC has been the best performing bank in the US, exceeding even SoFi Technology (SOFI)  in the stock performance rankings. COF has also performed well over the full year, but the poor GAAP earnings performance has not helped the stock – even with Jim Cramer of CNBC pounding the table for the largest monoline credit card issuer. The poor earnings performance at COF is the result of noise from the merger with Discover Financial, once upon a time one of the top performing US banks.   Source: Google Finance (12/24/25) Capital One's third quarter 2025 earnings were not weak; in fact, they beat analyst expectations with strong top-line growth and adjusted earnings. The perception of weakness stems from high non-recurring expenses related to the Discover acquisition. But Jim Cramer is right about the value proposition, we just wonder about COF's tendency to wander away from consumer credit.

December 18, 2025  | Earlier this week we had a great discussion with Carol Massar and Tim Stenovec of Bloomberg Business Week  about the state of the credit markets as we come up on Q4 earnings. As we told Bloomberg , what people are worried about today are the risks that are not visible in the financial data “because they know that a lot of things are being fudged.” Meanwhile, prosecutors have charged top executives of the bankrupt subprime lender Tricolor with what they called a years-long, “systematic fraud” scheme . As readers of The IRA  know very well, we expect to see more examples of the type of fraud visible in the defaults by Tricolor and First Brands in the new year. And as Eric Platt  and Sujeet Indap  noted in the FT  this week ( “‘JPMorgan has crossed a line’: How Altice’s debts ensnared US banking giant” ), the large banks are increasingly being forced to chose sides in the world of private credit. " JPMorgan Chase is facing the ire of some of the world’s biggest investors over the bank’s role in a complex multibillion-dollar refinancing at Patrick Drahi’s telecoms group Altice USA that threatens them with heavy losses," they wrote. Earnings Setup: The Top Seven Banks Below we take our readers through the top-seven US depositories by assets, a list which excludes Morgan Stanley (MS)  and Goldman Sachs (GS)  because their primary business units are broker-dealers, not banks. Goldman Sachs Bank USA had about $650 billion in total assets and $400 billion in domestic deposits in Q3 2025, but the more important metric at GS is the $3.5 trillion plus in assets under management.  As with the first two quarters of the year, the standardized data release by the Federal Reserve Board and the Federal Financial Institutions Examinations Council (FFIEC) shows improving earnings and falling credit expenses, but the picture beneath the surface tells a different story.  Banks today face a variety of market and risk exposures that are masked by credit risk transfers and other techniques to obscure the total risk taken by each bank. And, of note, we've added links in our final test group file for the FFIEC profiles to each bank.

In this edition of “The Wrap,” we give you our impression of the big stories of the past week. Each week, we provide our thoughts to subscribers of The Institutional Risk Analyst in advance of our new weekly podcast collaboration with Julia La Roche .  Yesterday, we gave our Premium Service subscribers a look at the top seven banks – Bank America , Citi , JPMorgan , PNC , Truist , U.S. Bancorp and Wells Fargo . The message, quiet credit on the consumer side of the ledger, but continued pain for commercial real estate and credit. And the top four money center banks continue to climb in the US equity markets despite occasional setbacks with perennial laggard Citigroup leading the way!  Who is our favorite of the top four banks? The Fed: Kevin Hassett's comments on Federal Reserve independence may have undercut his chances for the top Fed job. President Donald Trump has observed in recent days that there are “two Kevins,” Hassett and former Fed governor Kevin Warsh, who we personally support. Read our essay about how to reform the central bank in The International Economy  magazine’s latest issue. Hassett repeatedly stated that the Federal Reserve's independence is "really, really important". He clarified that while he would listen to the President's opinion if it was "based on data," the President's view would have "no weight" in the official decision-making process of the Federal Open Market Committee (FOMC), which operates by consensus. This statement no doubt surprised President Donald Trump , who will not make a final decision on the next Fed chairman until he does. Will departing Chairman Jerome Powell remain on the Board of Governors through January 2028, as Mariner Eccles did after his break with President Harry Truman in 1951? Of note, Bill Nelson of Bank Policy Institute says that the discount rate requests from Federal Reserve Banks imply there will be a slightly more hawkish FOMC in January. He writes: “At the upcoming January meeting, Cleveland (Beth Hammack), Philadelphia (Anna Paulson), Dallas (Lorie Logan), and Minneapolis (Neel Kashkari) will become voting members.  Based on the lack of conforming discount rate requests, it seems likely that Hammack, Logan, and Kashkari would have preferred no change at the December meeting, so three out of four.  By contrast, two of the four non-NY voting reserve bank presidents voted for no change at the most recent meeting.  By that count, the FOMC in January will shift hawkish by one member.”     Big Beautiful Housing Reform Meanwhile, somewhere in Washington, a search continues for good ideas to help housing and affordability, hopefully before next November. President Trump has promised a “radical reform” of the US housing market. So far the only policy proposals seem to be lower ST interest rates and pump-proming the market with more credit. But the more President Trump talks about lowering the target for Fed funds, the higher LT rates move, as shown in the chart below. Even though national average home price appreciation is slowing rapidly, the Trump White House seems to want to boost housing before the mid-term election. But most policy moves to pump housing today will only set the US housing sector up for a serious home price correction in 2027-28.  It's all in "Seeing Around Corners," our 2024 biography of Freedom Mortgage founder Stanley Middleman . The FHFA  just increased the conforming loan limit for 2026 by $26,250 (a 3.26% rise) to a baseline of $832,750 for one-unit properties, up from $806,500 in 2025, with even higher limits in high-cost areas. This increase, announced in November 2025, affects conventional mortgage borrowing power starting in 2026, allowing buyers to finance more expensive homes. If the Trump Administration was serious about addressing affordability, they would reduce  the conforming loan limit on conventional mortgages.  Ed Pinto , a fishing buddy and senior fellow and co-director of the AEI Housing Center at the American Enterprise Institute , has consistently argued against increasing the conforming loan limits. The former Fannie Mae official believes that increasing these limits expands the government's footprint in the housing market, crowds out private capital, and ultimately contributes to higher home prices and increased risk to taxpayers. Pinto contends that increasing loan limits and easing credit are not genuine solutions to the housing affordability crisis. Instead, he advocates for increasing the supply  of housing through local zoning and land-use reforms. FHFA Director Bill Pulte has been meeting with leaders in the housing sector for ideas on ways to enhance affordability, but there are few things that the federal government can do except make the situation worse by increasing already significant subsidies on residential housing for the middle class homebuyer. Crypto Coin Crime Across town at the Financial Crimes Enforcement Network , there is a growing awareness that the Genius Act passed by Congress earlier this year was actually a bonanza for criminal organizations who use stable coins to evade anti-money laundering activity.  The New York Times reported on December 7, 2025, that stable coins are being used by global criminal organizations. “These ‘cash to crypto’ swaps are an integral part of a global criminal ecosystem,” said Sal Melki , deputy director for economic crime at the National Crime Agency. The NYT is not alone in reporting the surge in criminal activity in crypto, Many other major media outlets and financial analysis firms have extensively reported on stablecoins facilitating crime, including WIRED , Reuters , Riskified , step.org , International Compliance Association. Financial firms like Chainalysis have also detailed the use of stablecoins in sanctions evasion, money laundering, and scams, with data showing their surging share in illicit transactions. “Criminals are swapping volatility for predictability: stablecoins tied to the U.S. dollar offer certainty and cross-chain speed needed to scale theft, forcing investigators to shift from post-fact subpoenas to real-time chain tracking,” notes BankInfoSecurity .  Our view is and has been from the outset that coins of all sorts are a legal, ethical and compliance nightmare. For investors who want to speculate on price movement in coins, using a registered ETF or futures contract is a far better way to participate and avoids the potentially catastrophic legal and financial risk of touching coins directly. Remember, every coin has a blockchain, a road map for FinCEN and other agencies to eventually apprehend individuals involved in elicit activities and their hapless counterparties. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

December 15, 2025  | Earlier in the year, we added some shares of Flagstar Bank (FLG) to our portfolio after spending much of the previous year watching slow but steady the progress of this $90 billion asset bank located in Hicksville, NY. In fact, FLG is currently the only bank common we own after taking profits in American Express (AXP) in July. Our friend Jim Cramer is not quite right. Banks are not cheap presently, but sometimes they become cheap. Wait for it. Source: Google The predecessor of New York Community Bank, FLG is now led by former OCC chief Joe Otting  and a group of new directors and managers comprised largely of managers from Flagstar. Suffice to say that had NYCB not merged with Detroit-based Flagstar in December 2022, the old NYCB probably would have failed along with Silicon Valley Bank, First Republic Bank and Signature Bank in Q1 2023. The problem then and now is multifamily real estate, the new subprime asset class for many banks owing to the inability of tenants to pay escalating rents. Inflation is the enemy of all but is particularly the nemesis of commercial landlords, who face shrinking net operating income (NOI) due to growing political angst over rising rent costs. NOI as we discussed many times in The IRA , is what determines the value of commercial property. In our earlier comment (“ Will Flagstar Survive ZoMa and Rebound? We Like the Leverage… ”), we noted that salon Marxist Zohran Mamdani  has promised to freeze rents in NYC rent stabilized apartments, an act of convenient theft against landlords who have no control over inflation. But truth to tell, New York mayors have mostly rhetorical powers. The actual authority to make such changes lies with the governor in Albany.  Since the FOMC has now seemingly decided that 3% inflation is acceptable, rents can only go higher. As a result, FLG and other New York banks are watching to see if the Republicans can knock out the unpopular Democrat incumbent Kathy Hochul  in an anticipated race with U.S. Representative Elise Stefanik . But regardless of who wins next year, we think that FLG is ahead of the game in terms of reducing exposure to toxic NYC multifamily assets vs other lenders in that politically impaired market. Truth is, low income families cannot afford to live in New York City without massive public subsidies. One of the reasons why we like the leverage in FLG is that CFO Lee Smith , who ran a national mortgage business for Flagstar, is growing capital and net interest margin as interest rates fall. Many of the bank’s multifamily loans have reset provisions that will either see the margin on these assets grow or the borrowers go elsewhere for mortgage finance. As a result, the bank has provided guidance to the Street (see chart below from Q3 earnings) showing NIM growing along with CET1 capital over the next year.  The average NIM for community banks in Q3 2025 was 3.7%, the FDIC reports, so FLG has plenty of room on the upside to improve beyond current guidance. One of our early concerns with NYCB going back to 2024 was the relatively low yield on loans and leases, but Smith and the team at FLG are working aggressively to change that dynamic. Net interest margin at FLG is projected to modestly move higher in 4Q’25 and beyond driven by a number of factors: Funding costs expected to decline further in 4Q’25 and 2026 Yield on multi-family loans resetting higher 300 to 350 bps New asset growth in higher yielding assets outside NYC market, and Further reduction in non-accrual loans in legacy portfolio We don’t minimize the challenges facing FLG and other NYC lenders, but we are encouraged by several factors. First, the near-failure of NYCB and the rescue led by Joe Otting and former Treasury Secretary Steven Mnuchin  allowed the bank to clean house more than a year ago, eliminating the legacy board and many of the managers who ignored the alarming deterioration of the once prime value of New York City multifamily assets.    At first, we (and many others) thought that a mere $1 billion in new capital was too little downpayment to fix the bank's problems, the former Flagstar team has already made radical changes to the bank’s troubled loan portfolio and also sold the residential mortgage servicing business to Mr. Cooper (now Rocket Companies (RKT )) and the #2 ranked wholesale warehouse lending business to JPMorgan (JPM) , two trades which may look very astute in coming years.  Let’s face it, board director Steve Mnuchin  is not known for his great love of residential mortgage risk, so while some observers (ourselves included) were disappointed to see Flagstar shed the top-ten national residential loan and securitization business, the timing was very astute and allowed the bank to monetize both assets at top dollar. With a growing number of multifamily property owners facing default in 2026 , regardless of what ZoMa does or does not do in terms of a rent freeze, lightening up on credit exposures for all residential assets – single family and subprime multifamily assets in NYC – seems like a good idea for banks. Indeed, Flagstar Financial, could be "attractive" acquisition target, CEO Joseph Otting said earlier this year at an industry conference. We agree. Multifamily: The New Subprime    FLG is not the only bank around the US to recognize the growing political exposure of multifamily assets. We don’t think future political changes in Albany or other blue states are going to alter the negative trend in terms of credit outlook for multifamily assets in major cities like New York. The huge disparity between the average performance of the $650 billion in bank-owned multifamily assets and the $3.6 trillion in prime bank first and second lien residential single-family loans tells investors all they need to know about such properties.  Beyond the $650 trillion in bank owned apartment loans, t here are trillions more in inferior multifamily assets owned by HUD, the GSEs and commercial mortgage backed securities (CMBS) investors.  The fact that HUD, Fannie Mae and Freddie Mac are reported to be buyers of multifamily loans in markets like New York makes us wonder. When will the taxpayer will be forced to restructure loans inside major blue cities like New York, Chicago and other markets where socialist candidates hold positions of authority? Source: FDIC/WGA LLC The rate of net loss or loss given default (LDG) on relatively prime bank-owned multifamily loans immediately normalized to 100% of the loan amount before President Joe Biden had even declared the COVID emergency to be over. Nobody in Washington thought to help commercial landlords who had to finance federal and state loan and rent moratoria by concerned socialists like ZoMa and NY Governor Kathy Hochul .  But to be fair, it was President Donald Trump who declared the federal crisis in 2020 that allowed loan forbearance. Team Trump worried not at all about how the residential and multifamily markets would finance hundreds of billions of dollars annually in loan and rent forbearance. Only the fact of massive purchases of Treasury debt and mortgage securities by the Federal Reserve Board in 2020-2021 generated the cash float needed to finance residential loan forbearance, but many commercial property owners took a total loss.  The 50% increase in home prices since 2020 represents the cost of COVID loan forbearance, which resulted in a massive flow of purchase and refinance loan volumes. Had the Fed not dropped the hammer on interest rates in March 2020 and enabled an explosion in lending volumes, one out of every five residential mortgages might have defaulted and gone to foreclosure. The impact on housing and the US financial system would have looked like the mid-1920s, as we described in our previous comment. The financial cost of the individual and business shock of this wave of such a large surge in loan defaults would have pushed the US into a 1930s style debt deflation, with banks and nonbank lenders failing and the US forced to backstop the guarantee on trillions in government insured MBS. The GSEs, likewise, would have been forced to absorb the cost of two years of conventional loan forbearance, an event that might have pushed one or both GSEs into default.  Across nearly all capital sources, multifamily delinquency rates have been rising throughout 2024 and 2025 due to factors such as higher operating costs (insurance, taxes), elevated interest rates, and increased supply of new apartments in some markets, which has led to higher vacancy rates and rent concessions. Lower interest rates will help in terms of refinancing for stronger properties, but forbearance remains the rule for many urban multifamily properties.  Source: FDIC/WGA LLC While the allocation of 1-4 family loans on the balance sheets of US banks has fallen dramatically, the portion allocated to multifamily assets has ranged between 3-5% of total loans going back half a century. Today the trend is definitely headed lower. The assets owned by banks tend to be the better quality loans, while the inferior borrowers go to the CMBS market or HUD and the GSEs in descending order of quality.  Yet given the demographic changes in the US economy over the past five decades, multifamily assets ought to be a larger share of total bank loans. "Delinquency rates for apartment commercial mortgage-backed securities fell 14 basis points to 6.98% in November, after topping 7% in October for the first time since December 2015, according to a report from data firm Trepp," reports Multifamily Dive . "After rising 23 bps in October, the Trepp CMBS delinquency rate for commercial real estate fell 20 basis points to 7.26% in November. It has only fallen three months this year. The delinquent balance rose $5.8 billion to $603.9 billion." These figures are a concern, but looking at the unusually low FDIC figures for other real estate owned (REO), we think it is safe to conclude that reported delinquency rates for many multifamily assets in blue, politically exposed markets are understated due to forbearance from lenders. And most lenders no longer report when a loan is subject to forbearance. But the growth in income earned but not collected suggests that some of the other metrics are understated. Source: FDIC “The delinquency rate for commercial mortgages increased in the second quarter of 2025 across most major capital sources,” said Reggie Booker , MBA’s Associate Vice President of Commercial Real Estate Research . “The largest increase was among CMBS loans, driven by rising delinquencies in both multifamily and office properties. Delinquency trends continue to reflect differences in property type, loan structure, geography, and borrower profile.”   The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

December 12, 2025  | In this special edition of “The Wrap,” we give you our flow-of consciousness impression of the past week. 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.

December 11, 2025  | At the Goldman Sachs financial services conference this week, the JPMorgan (JPM) consumer banking chief made a surprise earnings pre-release that startled the audience and not in a good way. Marianne Lake stated that the bank expects its 2026 expenses to reach approximately $105 billion, a figure that surpasses Wall Street analysts' estimates (and JPM guidance) of around $101 billion. Somehow between the end of Q3 and today, JPM's estimate of expenses grew by $4 billion. How's that for effective systems and controls?   The surprise pre-release of Q4 results led to a significant drop in JPMorgan's stock price and took down the entire sector along with it. But is this the only negative surprise likely to come from JPM? We think not. CNBC’s Jim Cramer said on X yesterday that investors should buy JPM on the dip, but we disagree. In fact, the markets seem to know something about JPM. Maybe this explains why Citigroup (C) has outperformed the House of Morgan all year. Source: Yahoo Finance (12/10/25) Below we discuss why we think that JPM and other large banks may have some additional negative surprises in store for shareholders in coming months, in part due to the growing carnage in private equity and credit. The US has not seen a credit led recession in over a decade and the rot is getting monumental. The deteriorating metrics in corporate debt, and private equity and credit, suggest that a correction long overdue is now arriving. And we also provide some ideas for our Premium Service readers about mortgage stocks that will benefit in a falling interest rate environment in 2026 and beyond. First Brands, Tricolor and Private Credit Major banks and financial firms like Jefferies Financial Group (JEF) , UBS Group AG (UBS) , Bank of America (BAC) , Goldman Sachs (GS) , and a slew of private credit funds including Marathon Asset Management, Monroe Capital, Evolution Credit Partners, and Onset Financial provided significant financing to the now-bankrupt First Brands Group. This private credit came primarily through complex debt structures, inventory financing, and off-balance sheet lending. JPMorgan and Fifth Third Bank (FITB) were major lenders and facilitators for another fraudulent borrower, Tricolor, a subprime auto lender that went bankrupt in September 2025. JPM and FITB were the enablers for Tricolor, providing crucial short-term "warehouse" financing and helping package Tricolor's risky auto loans into asset-backed securities for investors. And what do First Brands and Tricolor have in common? Private credit. Wells Fargo (WFC) leads US banks in direct private credit lending volume, followed by Bank of America (BAC) , PNC Financial (PNC) , Citigroup, and JPM, with banks increasingly partnering with non-bank credit shops, like Citi's deal with Apollo (APO) . We’ve noted the hyperbolic growth of bank lending to non-depository financial institutions (NDFIs), but now the prospect of rising credit defaults may start to weigh upon the equity market valuations of JPM and other major banks. The two charts below shows total loans to NDFIs as of Q3 2025 at $1.3 trillion and also all unused bank lines. The category "all other unused loan commitments" in the second chart (purple line) is over $4 trillion and includes undrawn lines to NDFIs. For every dollar of credit already drawn by NDFIs in that $1.3 trillion figure, there is another $1 or more that borrowers can draw just prior to filing bankruptcy. This is what they call "Exposure at Default" under Basel III. And many NDFI loans by banks are non-recourse, but most NDFIs have no net assets in any event. Source: FDIC Source: FDIC “Banks have adopted new strategies in reaction to the shifting market environment, with a focus on growing loans to non-depository financial institutions (NDFIs), which reached $1.2 trillion as of late June for domestically chartered US banks,” Moody’s wrote in October . “About $300 billion of these loans are to private credit providers, helping fuel the expansion of the sector.”  But we think that the total exposure to private credit by the largest US banks is far larger than most analysts appreciate. The Next Shoe to Drop: Private Equity Banks now actively offer non-recourse financing for private credit loans, notes our colleague Nom de Plumber . “Private Equity-affiliated insurers typically own the loans, but have posted them as collateral, in exchange for unencumbered cash, almost like buying stock on thin margin. As critical distinction, if the private credit loans go bad, these insurers can relinquish them and keep that cash, since the banks have waived recourse.”

December 8, 2025  | In this issue of The Institutional Risk Analyst , we feature some reader questions and look at several nonbank financials that may benefit as interest rates fall. Importantly, mortgage spreads (the difference between loan coupons and benchmark Treasury yields) are falling, a significant bull market signal for interest rate sensitive stocks that benefit from higher loan volumes. In our next comment, we'll drill down on several names that will benefit from a falling interest rate environment. Secondary mortgage spreads have tightened in 2025 due to strong investor demand from money managers and REITs, reduced interest rate volatility  (and lower hedging costs), increased liquidity from Fed actions, and a flight to quality favoring lower-coupon MBS, all signaling improved confidence and technical support in the agency mortgage-backed securities (MBS) market despite broader market flux. But US banks are not increasing exposures to 1-4s. Source: FDIC As we noted in our new working paper on nonbank mortgage issuers, “ Back to the Future in Nonbank Finance: Excess Servicing Strip Transactions 2.0 , ” banks remain reluctant to increase exposure to mortgage assets going back to before the great financial crisis in 2008. Why? Facing the American consumer is toxic. Source: FDIC Speaking of primary-secondary mortgage spreads, last week during our quarterly call for subscribers to our Premium Service , a reader named Geoff asked about Annaly Capital Management (NLY) , a LT holding in our portfolio: “You went over two key points related to NLY that piqued my interest. Namely how Hassett might not follow thru on his stated rate policy and what, if any, impact banks re-entering the mortgage market might have on mortgage rates and the servicing rights business pursued by NLY. The rate discussion is interesting because there has been a lot of interest in the steepener trade. NLY is in a particularly nice situation due to the limited credit risk and higher MBS yields vs say the 10 yr swap which is more or less scratch on short term funding costs at present. You brought to mind two risks to this trade. One, short term rates aren’t a shoe in to go lower, and two, could bank re-entrance lower mortgage rates, thereby compressing spreads via lower MBS coupons over and above any impact by lower rates in general. NLY's MSR business, however, is something I don’t really understand. It seems like this section of the business is really there to balance the spread business. I read your paper in the link at the end of today’s note and am trying to put the pieces together. Seems like NLY might struggle to compete with the banks in this business going forward as the cost of funds is likely lower for banks. I also wondered about the impact on volumes for originating companies like RKT, LC, PFSI, etc. as it seemed the banks are only interested in providing capital, not originating? Do any of these concerns reduce your inclination to hold any or all of your NLY shares in the portfolio? We’ve owned NLY on and off for many years and have a lot of respect for their management team. Our basis in the stock is well-below par, so we are quite comfortable owning the position, which we hold primarily for income rather than alpha. The fact that NLY acquires mortgage servicing rights or MSRs, which are negative duration payment intangible assets with cash flow, makes the investment proposition even more attractive for us. MSRs provide a natural hedge for mortgage loans and MBS. But we don't own REITs for alpha. REITs as a group are pass-through vehicles that are typically owned by income-oriented equity investors and are not generally good market performers in terms of alpha. Compare say the hybrid REIT Rithm Capital (RITM) , which owns a taxable lender, and PennyMac Financial Services (PFSI) , the external manager of mortgage REIT PennyMac Investment Trust (PMT). RITM purchased several lenders over the years in order to hold Ginnie Mae servicing assets, which are prohibited assets for REITs. PFSI trades on a trailing P/E of 14x vs ~ 8x for RITM. PFSI trades around 1.6x book vs 0.9x for RITM as of Friday. Case closed? We have long believed that RITM should spin off its manager to create a comp for PFSI and then externally manage the RITM REIT. Like PFSI, in this scenario the new RITM manager would need to retain the Ginnie Mae MSRs. Likewise, we believe that Two Harbors (TWO) , another hybrid REIT that owns a lender and creates MSRs with its captive lender, would benefit from spinning off the lender Roundpoint/Matrix, which would then become the external manager of the TWO REIT. Why Don't Banks Like Mortgages? No matter how many research notes our friends on the Sell Side right about banks buying more MBS, it's just not happening. As we noted in our paper, banks have not been major buyers of mortgages or servicing assets for decades, although there was an unfortunate increase after COVID leading to the failure of Silicon Valley Bank. Fact is, the portion of bank loans and assets allocated to 1-4s has been declining for a quarter of a century. Part of this indifference to mortgage exposures by banks may come from the absurd, 250% capital risk weighting for 1-4s in the Basel capital framework. After all, MSRs don’t have any default risk. The Basel Committee has never published an explanation for its punitive risk weighting for MSRs.   But the bigger obstacles to banks increasing their participation in 1-4s and MSRs are low risk-adjusted returns and reputational risk from facing consumers. The combination of idiotic progressive politics and the American trial bar serves as a significant disincentive for banks to lend money to low-income borrowers. Thus when you look at the allocation of bank mortgage and consumer credit assets, the lower 25% in terms of income and credit score are largely ignored by banks. Some 80% of all mortgage originations have FICO scores above 720. The big factor in the stock prices for many mortgage lenders is how aggressive the management team becomes in terms of capturing volumes and thereby drive higher ST earnings. The volumes may or may not be profitable, but the gain on sale accounting under GAAP manages to conceal the cash reality very nicely. The value of the mortgage-servicing right or MSR at the close of a mortgage loan represents the present value of future cash flows that have yet to be received, one big reason why we like the idea of large institutional investors financing the MSR and backstopping loss mitigation expenses. In our next comment, we will look at some of the top names in financials in a falling interest rate environment for subscribers to our Premium Service . Don't forget to take advantage of our Winter Sale by using coupon code "IRA2025" for 25% off for the first year of the Premium Service of The Institutional Risk Analyst. Offer ends 12/31/2025!   The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. 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December 5, 2025  | In this issue of The Institutional Risk Analyst , we recap the week’s key events and add our own insights and observations. We’ll be discussing some of these topics in our weekly conversation with Julia LaRoche , “The Wrap.” And for subscribers to our Premium Service , the audio file for our quarterly conference call is at the end of this comment.