April 6, 2026  | A number of readers of The Institutional Risk Analyst  have asked us whether the large Wall Street banks are good value at these levels. We currently own only some bank preferred and one common share, Flagstar Bank, NA (FLG) , which we bought much below current levels. Subscribers to our Premium Service can see the answer to that question at the bottom of this comment.

In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap with Chris Whalen” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  April 3, 2026  | The past week has been a decidedly volatile period, with spreads widening in response to growing concern about the US fiscal trainwreck ℅ the US Congress and President Donald Trump . Even the possible intervention of the Federal Reserve Board does not seem to impress a market about to see the largest IPO ever in Elon Musk’s SpaceX . This is a timely liquidity event for cash-poor Musk given the performance of Tesla (TSLA) , which was off 5% in the past week and down 17% in the past six months. As of early April 2026, bitcoin tokens are trading around $66,000–$67,000, experiencing a challenging start to the year with a notable decline from early 2026 highs, falling roughly 19% over the past 12 months. After breaking below $84K support in late January, the ersatz market has seen increased selling pressure as a growing number of whales head for the exit. The silence on Wall Street regarding all manner of coins is remarkable. President Trump continued to punish the financial markets with his erratic and unpredictable behavior regarding the war with Iran, pushing oil to the highest levels since 2008 near $150 per barrel and stocks lower. U.S. stocks fell this week with major indexes suffering from intensified selling pressure due to rising oil prices and geopolitical tensions. The S&P 500 is down for the 10th consecutive week in a row. The Nasdaq, S&P 500, and Dow all declined again this week, with the Nasdaq going deeper into a correction phase. As of early April 2026, in contrast, the U.S. dollar has experienced a notable rebound, gaining approximately 1.6% in the first quarter, marking its best performance since late 2024. We keep thinking of Treasury Secretary Scott Bessent  saying we’re nowhere near returning to QE, but the market reaction to the Iran war is decidedly negative. A shrinking spread (flattening curve) between the 2-year and 10-year Treasury yields indicates that investors are becoming less confident in future economic growth and expect lower interest rates or a recession. When short-term rates are rising toward (or exceeding) long-term rates, this often signals a future recession. One big worry, ironically, comes from the nonbank mortgage sector, where one of the biggest buyers of residential mortgages -- United Wholesale Mortgage Corp (UWMC)  -- is under growing criticism on several fronts following the failure of its acquisition of Two Harbors (TWO)  last week. A remarkable post on LinkedIn this week  alleges that the company is busted. We are impressed and also a bit worried that analysts will publicly challenge the famously litigious CEO, Mat Ishbia,  in such a bold fashion. Speaking of pump & dump, hedge fund mogul again Bill Ackman  significantly boosted GSE stocks (Fannie Mae and Freddie Mac) in late March 2026 by publicly calling them “stupidly cheap” with 10X potential in a social media post. His comments reportedly sparked a 30% to over 50% surge in share prices on Monday, March 30, 2026, as investors reacted to his bullish outlook. Mortgage rates, meanwhile, are well above 6% and rising. Of course there is zero evidence that either GSE is leaving conservatorship, but you never know with Trump. He just replaced Attorney General Pam Pondi  after threatening to hit Iran “very hard,” sending the markets tanking. Bondi’s goose was cooked in the Jeffrey Epstein  storm on Capitol Hill, but meanwhile new revelations about the business partners of this global pedophile continue to emerge .  Gold and silver prices fell sharply this week, with gold dropping over 3% to roughly an ounce and silver plunging nearly 5-7% to April 2, 2026. News reports said the decline was driven by a surging US dollar, rising oil prices, and reduced expectations for interest rate cuts following intensified geopolitical conflict in Iran.  While financial markets in the US and Europe have pushed gold and silver prices down from recent highs, a massive supply deficit in Asia for both metals is fueling bullish sentiment. In fact, a lot of selling in both precious metals and Treasury paper came from global investors raising cash. "Of course, these sales are interpreted as an erosion of confidence in the dollar-based system. So, here we go again…!" writes Alexandru-Stefan Goghie on Substack . He continues: "This interpretation misreads both the reserve management and the structural role of Treasuries in the global financial system. What appears as “selling” is (or could) be better understood as liquidity mobilization under stress. And the key to understanding these flows lies in the interaction between global dollar funding needs and the pricing of energy." As we noted in our interview with John Dizard  this week (“ Watch for Rationing of Oil, Gas & By-Products ”) a number of nations and companies have a sudden need to raise substantial liquidity. As the  damage to oil, gas and chemical assets in the gulf grows, the cost of the war also surges. Dizard predicts shortages and even rationing of fuels and oil by-products due to Trump's war with Iran. And finally in the big news this week, Italy failed to qualify for three straight World Cups, something no other World Cup winning nation has ever done. As co-hosts along with Canada and Mexico, the U.S. automatically qualified for the 48-team tournament, which runs from June 11 to July 19, 2026, with the final taking place at MetLife Stadium in New Jersey.    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.

March 30, 2026  | The big question facing bank investors in Q1 2026 is how much credit risk faces large institutions from the meltdown in private equity and credit. In an earlier missive in The Institutional Risk Analyst , we backed into the unused credit exposure facing US banks to non-depository financial institutions (NDFIs), nearly $3 trillion in potential exposure at default (EAD). The chart below shows our estimate of the nearly $3 trillion in bank commitments to NDFIs as of the end of 2025. Significantly, virtually all of the growth in "All Other Loans" comes from loan commitments to NDFIs. Source: FDIC/WGA LLC The chart below of drawn exposures to NDFIs is certainly one of the more popular charts in social media over the past quarter. The chart shows $1.4 trillion in actual exposures to all US banks as of year-end 2025. On top of the existing loans to NDFIs, astute risk managers must add exposure at default, a Basel I concept that measures the additional risk that banks face if their customers draw upon unused lines and immediately default. The rapid growth of loans and commitments to NDFIs, growing at "only" 5x other loan categories, is the reason for mounting uncertainty regarding the financial stability of US banks. Source: FDIC/WGA LLC The mad rush of investors and lenders into the murky world of private credit is one of the more remarkably examples of stupidity and greed in the past century, going all the way back to the Roaring Twenties. The fact that the “all other loans” category for JPMorgan (JPM) increased by 24% in the past year and 73% in the past five years describes the investment mania around private strategies. Source: FDIC/WGA LLC In early March, financial news outlets reported that JPMorgan was marking down the value of certain loans to private credit players, which reduces their borrowing capacity and limits JPMorgan's future exposure. These steps mirror actions by other lenders in the industry and may explain why the Federal Reserve Board’s remarkably inept data function sat on the Q4 2025 disclosure for large banks until the end of last week. Last week, Moody's Ratings downgraded the private credit fund FS KKR Capital Corp (FSK)  to junk status (Ba1 from Baa3), CNBC  reports, citing worsening asset quality and high non-accrual loans. This proactive downgrade of this $14 billion asset business development company highlights rising distress in the sector. This latest setback comes even as NDFIs are desperately seeking new bank loans to fund investors redemptions. If a bank lends to a private equity portfolio company that is paying-in-kind (PIK), will the bank ever be repaid?    It is significant that the Federal Reserve Board and other regulators have so far refused to release the specific data attributable for loans to NDFIs other than the aggregate loan amount included in the balance sheet portion of the FDIC’s Quarterly Banking Profile in Q4 2025. When "All Other Loans" get to be 15% of total assets, that is the signal to break out the components. The Board of Governors led by Vice Chairman Michele Bowman and other agencies should get ahead of this situation before investors start to run on bank stocks. Specifically, the Fed ought to provide the full disclosure for the banking industry with the Q1 2026 FDIC Quarterly Banking Profile data and also add the NDFI line item to the Y-9s for large banks. The selectively reported loss rates in GAAP disclosure are low, so why not disclose all of the data? And it would be ever so nice if the Fed and FFIEC could release the Y-9s on Day 75 after the quarter close if not sooner. Below for subscribers to The IRA Premium Service , we consider what the Q4 2025 disclosure tells us about bank risk and earnings.  NDFIs & Large Bank Earnings Setup Even though JPMorgan has a loan book that is half the size of most banks compared to the total assets of the parent holding company, the bank’s $500 billion “other loans and leases” category is almost 12% of total assets vs 6% for the average for Peer Group 1.  We infer the size of the NDFI portfolio of individual banks by subtracting the aggregate NDFI series of the FDIC from Other Loans & Leases. In 2010 when the FDIC first started gathering the data on nonbank financial firms, NDFI loans were less than a quarter of the “other loans and leases” (OLL) category, but today they are 60% of OLL and growing fast.  As shown below, JPM is the only large bank that has provided disclosure about private credit exposures in its GAAP presentations. JPMorganChase | Q4 2025 The “other loans and leases” (OLL) category at JPM is 32% of total loans vs 11% for the 128 banks in Peer Group 1, according to the FFIEC. The OLL portfolio represents 150% of JPM’s total capital vs an average of 65% for all large banks. JPM claims that its total exposure to NDFIs is $160 billion. Clearly as a percentage of total assets and loans, the exposure of JPM to NDFIs appear to be far larger than that of other large banks, but the credit losses disclosed to date by JPM are very small. Will the publicly disclosed level of loss attributable to NDFIs at JPM and other large banks rise in Q1 2026? Our guess is that the answer to that question is yes. Another large lender to NDFIs is PNC Financial Services Group (PNC) , which had $90 billion in OLL vs $333 billion in total loans. PNC has 15% of total assets in OLL, making us wonder why the FDIC et al have not broken out NDFI loans before this time. How big would “other” need to be before the FDIC tells us the components? Once again, the prudential regulators are well behind the curve. OLLs are 27% of PNC’s total loans and represent 150% of tier one capital. OLLs have grown 95% since 2024 and 150% over the past five years. This suggests to us that PNC was late to the NDFI party. Net losses reported at year-end 2025 were only 13bps vs an average of 16bp for Peer Group 1. The average for all banks was 10bp for OLLs. Of note, PNC securitized $1.1 billion in OLL in 2025. The bank provides significant disclosure about its own private equity investments in its year-end 10-K, but says not a word about loans to private equity sponsors. Another significant player is Wells Fargo (WFC) , a $2 trillion depository that has exited residential and commercial real estate lending, but now seems intent upon becoming a larger, more messy version of Goldman Sachs (GS) by focusing on Wall Street. We liked mortgages better. The OLL portfolio at WFC is the size of the entire loan book at PNC. OLL grew 40% YOY and a mere 75% over the past five years. WFC has 187% of Tier One capital in OLLs. WFC does not break out exposure to NDFIs in its GAAP reporting, but has a partnership with Centerbridge Partners to provide private credit solutions to commercial borrowers. Bank of America (BAC) , like WFC, has over $300 billion in OLLs, but the growth rate has been far lower than other banks. This suggests that BAC may have missed the NDFI party to some degree. BAC has 135% of Tier One capital in OLLs, but this is less than 10% of total assets. U.S. Bancorp (USB)  had 18% of its loan book in OLL at year-end 2025 equal to 106% of Tier One capital.  USB reported just 11bp of credit losses on OLL in Q4 2025. USB had almost 30% of total assets in OLL on balance sheet or in managed securitizations. Citigroup (C) , had just 7.8% of total assets in OLL in Q4 2025 or 28% of total loans. Citi’s exposure to OLL equaled 106% of Tier One capital at that date, but Citi also reported above-peer losses of 17bp vs the Peer 1 average of 16bp. Of note, Citi had securitized $4.6 billion in OLL exposures and has 30% of total assets in on balance sheet OLL exposures or managed securitizations.    Truist Financial (TFC)  had 13% of total assets and 23% of total loans in OLL at year-end 2025. The bank’s exposure to OLL equaled 130% of Tier One capital. TFC reported just 1bp of losses on OLL exposures and only 5bp of 30-89 days past due. Of note, TFC securitized $2.4 billion in OLL exposures in 2025.  What all of these data points above suggest is that the top-seven banks have substantial exposure to NDFIs and that the credit loss experience, so far, is quite muted, especially compared with the public reports about credit defaults in the private credit sector. We suspect that losses on loans to NDFIs are likely to rise in 2026 and that all large banks will be forced to increase their public disclosure about same. Bank Performance Charts In Q4 2025, the top seven banks by assets continued to report modest levels of default activity in line with the rest of the industry.  Net credit losses for Peer Group 1 averaged just a quarter of one percent and 0.63% for the entire industry, but most of the top seven banks were above Peer Group 1 levels of loss in Q4 2025. Citigroup, as usual was an order of magnitude above the rest of the top seven banks with a net loss rate of 1.23% in Q4. Source: FFIEC Falling interest rates in the fourth quarter of 2025 were reflected in falling spreads on loans and securities. The gross spread on total loans and leases fell to 6.16% vs 6.36% a year before. Again, Citi was the outlier because of the relatively high gross spread on its consumer loan book. You could argue that Citi ought to be compared with consumer lenders like CapitalOne (COF) , which is now over $600 billion in assets and larger than Truist. But COF’s business model is still primarily credit cards and unsecured consumer loans, which is why we do not include it in the top seven banks.  Source: FFIEC The yield on securities for the group, another key source of income for a bank after the loan yield, was stable in 2025 with JPM and Citi leading the group, followed by WFC and Peer Group 1. USB, TFC and PNC are next with Bank America at the bottom of the group with a ghastly securities yield below 3%.  The yield on a bank’s securities portfolio, like the efficiency ratio, is a direct indication of whether a bank’s management is paying attention. The chart below shows efficiency ratios for the top seven banks. A lower efficiency ratio means more of revenue drops down to the bottom line. Note that JPM is the lowest of the group with an efficiency ratio of 52%. Source: FFIEC In terms of the yield on securities, JPM went from the bottom of the group in 2021, when during COVID the bank had reduced the duration of its portfolio, to being the top performer in the group last year. The fact that BAC and PNC have been unwilling to restructure their securities portfolios speaks volumes about the competency of management. Source: FFIEC After credit results and the yield on loans and securities, we next move to funding costs, one of the most important components of any bank balance sheet. Citi naturally has the highest cost of funds at 3.24% because of the bank’s limited deposit base. Non-core funding makes up $1.4 trillion of Citi’s $2.4 trillion in total liabilities. Citi has only $640 billion in domestic core deposits and $690 billion in uninsured offshore deposits. Bloomberg  previously reported that senior leaders were weighing a regional bank acquisition in a move to boost US core deposits, but Citibank officially refuted this report and stated its sole focus is on organic growth and its ongoing transformation. Next after Citi in terms of funding costs is BAC at 2.3%, again illustrating the ineptitude of the management team of CEO Brian Moynihan and the lingering effects of the post-COVID period, when the bank was forced to take on substantial high-cost funding. By rights, BAC should have the lowest funding costs in the top-seven banks. Instead, PNC financial at 1.9% and Truist at 1.8% are the lowest. Source: FFIEC One of the key ways to measure the overall effectiveness of management is the return on earning assets (ROEA). Note in the chart below that Citi is the only member of the top-seven banks that has an ROEA above the average for Peer Group 1. Next comes USB, PNC and Truist, followed by WFC. JPM is next and BAC of course is at the bottom of the group because of the bank’s poor asset returns and high funding costs.  Source: FFIEC Finally we look at the net income of the bank holding companies, which includes both interest and non-interest income vs total assets. Top of the group is JPM, which benefits from having substantial non-interest income. Next is PNC, which also has substantial non-interest income but mediocre net-interest income. Then comes USB, followed by WFC and Truist. Next in terms of asset returns is Bank of America with Citigroup at the bottom with an ROA of 0.54%. If you want one chart that explains the poor performance of Citigroup stock, this is it. Source: FFIEC In terms of the markets, the price-to-book value multiples of the top-five money center banks are shown below. Are these large banks cheap? Based upon the results of 2025, today the shares are down modestly but hardly a bargain. JPM, for example, has retreated from almost 3x book to closer to 2x as Q1 2026 ends. Citi at around 1x book is very fully valued. While 2025 was an extraordinary year for banks, we are not currently a buyer of bank stocks because we suspect that the entire bank complex is going to get cheaper as the year progresses.   Source: Yahoo Finance 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.

In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap with Chris Whalen” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  "The dollar is our currency, but it's your problem" Treasury Secretary John Connally (1971) March 27, 2026 | The top news this week is obviously the Iran war with the US and Israel and how this conflict will impact financial markets and the global economy. But this 21st Century conflict is also a religious war with roots which stretch back centuries. While Iran was never formally colonized, the fall of the Shah of Iran in 1979 and the rise of radical Islam marked an end to centuries of struggle against foreign influence and colonial schemes by Russia, the European powers and the United States. President Donald Trump has decided to put his signature on US currency, yet a surreal atmosphere prevails in the Capital. None of the news reports this week seem yet to be focused on the long-term damage done to the global economy or to millions of people, issues we’ll be discussing next week in an exclusive interview in The IRA with John Dizard . Advisors and analysts have been reluctant to base recommendations on the long-term consequences of the conflict, but as time goes on the economic damage from the war will become impossible to ignore.   Beyond the news from the Middle East, investors are continuing to raise cash as a risk-off trade is predominating among markets and demands for redemption of private credit funds grow. Even Lloyd Blankfein , the former chairman and CEO of Goldman Sachs (GS) , remains wary of systemic "kindling" due to the unwind of private credit which we discussed earlier this week (“ Mortgage Market Notes; A Lehman Moment for Apollo Management? ”).  This week Ares Management (ARES)  and Apollo Global Management (APO)  blocked investors from withdrawing all requested funds, with Ares capping redemptions at 5% after requests surged to 11.6% in its Strategic Income Fund. The actions by ARES and APO to suspend redemptions follow similar actions by Blue Owl Capital (OWL) and Cliffwater in recent weeks. Concerns are also escalating regarding loan quality, with defaults in direct lending expected to rise from 5.6% to 8%, according to Morgan Stanley (MS). The reputation risk to the private credit sponsors is of equal concern, but does reputation matter on Wall Street any longer? The mad rush for assets and returns have largely eviscerated traditional investment rules. Global prices for crude oil have repeatedly moved above $100 per barrel as markets react to supply disruption risks and related inflationary concerns. These dynamics have also pushed Treasury yields higher and widened the term structure of interest rates as markets price in greater inflation risk going forward. Mortgage rates in the US, for example, rose for the fourth straight week and new loan coupons are approaching 6.5%.   The concern about the economic impact of the war and the need for Middle East investors to raise cash has pushed down prices for gold and silver, while oil and other commodities have benefitted. Gold and silver are still up double digits for the last year and over the past six months, but have significantly paired gains from earlier in 2026.  The key comment to make about the markets this week is that it is difficult to allocate capital to new strategies when investors are dealing with inadequate information. The pause by the Federal Open Market Committee and the continued selloff in tech stocks is another important part of this week’s narrative. Will the FOMC be forced to cut ST rates in April to get ahead of the sustained economic shock of higher oil prices?  We think the answer is yes. We also believe that the relative stability of the past decade in terms of risk and the rapid change in events following the Iran war have caught markets by surprise, making it difficult for investors to select investment choices other than moving to cash. The fact that the US fiscal situation has caused the term structure of interest rates to expand is a great argument for precious metals and other hard assets. Term Structure of Interest Rates Expands The term structure of interest rates is heavily influenced by rising inflation fears, geopolitical tensions in the Middle East, and a shifting Federal Reserve policy outlook. Bond market experts are noting a sharp increase in Treasury yields, particularly at the short end. Fifteen years after 2008 and the related actions by the Fed, interest rates are starting to reflect fiscal pressures. For instance, economist Steve Hanke  pointed out this week that the March 2026 US Treasury 2-year yield hit 3.93%, marking a significant rise from 3.45% in the previous month. But, again, the shift in the term structure of interest rates, shown below in the widening of corporate bond spreads in the chart from Fred below, is particularly worrisome. As Katie Martin of the Financial Times wrote today, corporate bonds are the new stocks. “What really matters for free enterprise, we know (since Smith wrote his 1776 book), is the impact of rising base rates and credit spreads to depress the PV of future cash flows (shifting more than the minimum cost to finance leverage for growth from owners of equity to creditors),” notes our friend and co-author Fred Feldkamp . “Since the start of the Iran war, base rates are up 48 bps and spreads (the six rates I use) are up 80 bps, for a total impact of 128 bps.  The impact on EBITDA to support equity is roughly $5 billion per bp.  At an EBITDA multiple of 8-1, each bp reduces equity valuations by $40 billion.  SIMPLY STATED, the “cost” of the war now stands at $5.12 trillion in reduced “fair value” of US investments. ARE WE HAVING FUN YET?” The diminution of value in the financial markets is the corollary to the shift in terms structure of interest rates. “A world where the expected long-term rate is closer to 4% than 2% fundamentally changes the term structure of interest rates, cost of capital, expected returns,” notes Bob Elliott , CEO and CIO of Unlimited Funds. He continues: “Many folks looking at today's long-rates are just assuming a return to the "normal" of the last 15yrs.”  As we’ve noted to readers of The IRA , 2025 was an extraordinary year in many respects, but 2026 may be the opposite in many ways. In an interview this week with Kitco News , Nitesh Shah , head of commodities and macroeconomic research at WisdomTree, said the recent selloff — which has seen gold prices drop more than $1,000 from peak levels — appears largely disconnected from macroeconomic fundamentals and instead reflects a combination of positioning shifts and forced liquidations. Shah continued: “People have been asking me for years, ‘I like gold but I’m looking for an entry point.’… This is probably what they were waiting for,” he said. “If you’re not going to buy at this time, you’re never going to buy in your life.” Reader Questions This week a reader asked about a frequently mentioned issuer, Annaly Capital Management (NLY) , given the move in interest rates since the start of the Iran war. We have a long-term position in NLY and may add to the position if the stock weakens. The key point to remember about NLY and other mortgage REITs is that they profit from spreads between long and short-term interest rates rather than the absolute interest rate at a given time. REITs raise capital in the equity markets via common and preferred stock, then access leverage in the repo, swaps and forward mortgage markets. The mortgage securities owned by REITs tend to trade off of longer-term Treasury securities such as the 10-year Treasury note. Unlike property REITs that invest in commercial property, mortgage REITs typically are not issuers of LT debt. So while short-term interest rates like the two-year Treasury note have risen in the past week, longer-term Treasury maturities have also backed up. A key relationship to watch if you own NLY is the spread between 2s and 10s in the Treasury market, as shown in the chart below from FRED. Notice that two-year Treasury notes were above 10s in yield for an extended period of time during 2023 and 2024. The Wrap with Chris Whalen 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.

March 26, 2026  | The Institutional Risk Analyst  is in Tampa this week for the annual event sponsored by Fay Servicing , this year at the Gathering Room within the Armature Works. We kinda miss the events at John Barleycorn Bar down the street from Wrigley Field, but next year we'll drive to the Fay event. No airport, no TSA lines. Just cruise up the I-75. Now that's a concept. We’ll be speaking about developments in and around the markets and in Washington that affect the mortgage industry later today with our friend Tim Rood , CEO of Impact Capital. Some notes in that regard follow below. Impact Capital is developing leading edge AI business solutions for the real estate and mortgage industries. Is Private Credit Systemic? First a quiz.  Q: Who was one of the top two borrowers from the Federal Home Loan Banks ("FHLBs") in 2025? A: Apollo Global Management's (APO) Athene insurance unit. Apollo/Athene didn't even appear on the top 10 advances list until year-end 2024, and has gone from 2.1% of total advances then to 3.4% as of year-end 2025.  Only Truist Financial (TFC) is larger than Athene in terms of advances, but the total exposure of the FHLBs to Apollo is far bigger, as discussed below. The FHLB annual report is available here .   JPMorgan (JPM) , Wells Fargo (WFC) , U.S. Bancorp (USB) and MetLife are all above 2% of total advances. Also notable on the top-ten borrower list is private Midland Financial , parent of MidFirst Bank and the largest buyer of early buyouts (EBOs) from Ginnie Mae MBS. MidFirst appeared as an FHLB borrower for the first time at year-end 2025, with 1.9% of total advances. If the $40 billion asset MidFirst Bank ceased buying defaulted EBOs from Ginnie Mae issuers, it is not clear who would pick up the slack. Notice that the FHLBs are indirectly, through MidFirst Bank, financing delinquent loans from nonbanks. Notice too in the chart below that the 90+ delinquent category has been rising since Q3 2025, when the Trump Administration ended COVID-era loan forbearance. Source: FDIC Does the forced liquidation of private credit strategies threaten the thinly capitalized FHLBs? Are Apollo and other sponsors of private credit strategies facing a Lehman moment in slow motion? Yet for all of the social media fuss about investors demanding early redemption from private credit funds, APO and other sponsors continue to raise new money. Certainly this is a striking comment on the state of the US financial markets.  Private equity/credit sponsors can hide liquidity problems in portfolios from investors and regulators by secretly arranging bank loans to hide insolvency. "Private Credit originators may now creatively 'staple' an iron-clad line of credit to an ostensibly “non-PIK-able” private credit loan," notes Victor Hong in a LinkedIn post . "The loan owner books this inseparable line of credit, as a distinct funding commitment TO the loan obligor—-but without describing its practical role as a hidden PIK option, and hence can report 'zero' PIK-able loans in portfolio. The loan obligor can elect to 'pay' any loan interest or principal cash flows due, by simultaneously drawing the equivalent cash amount from the Line of Credit AGAINST that very same loan owner (lender), as exact offset. Of course, the economic result is still PIK and advancing more principal on existing principal (" P.O.O.P")." Earlier this week we spoke with Charles Payne at Fox Business about the unwind of the private credit trade, something that had to happen once retail investors were allowed to participate in what is a completely illiquid investment strategy. ( See the rest of our comment on Private Credit below. ) Mortgage Market Notes The US Treasury market has backed up almost half a point since the start of the Iran war with the US and Israel. More important, this week's U.S. Treasury auctions showed weak demand, with the $69 billion 2-year note auction on Tuesday, March 24, 2026, described as poor, according to the Wall Street Journal .  Two year yields surged to 3.936%, the highest since July, reflecting investor unease. The subsequent 5-year note auction on Wednesday also saw underwhelming demand, following rising geopolitical tensions. The 10-year Treasury note closed yesterday on a yield of 4.35%. Not surprisingly, conforming mortgage rates have risen to 6.30%, even though some online retail lenders are still offering teaser rates down near 6%. As we never tire of reminding readers, mortgage lenders set loan coupons, markets determine bond yields. Mortgage applications fell 10.5% last week, led by a 14.6% drop in the refi index and a 5.4% decline in purchase applications, notes Scott Buchta at Brean. Primary rates rose 13bps last week, according to the MBA. We are now approaching the all-important 6.5% mortgage rate threshold, Brean notes, where lending volumes can decline significantly. As we note in our latest column in National Mortgage News  (“ Pulte got the condo insurance call right ”), on March 13th, the Trump Administration issued an executive order to roll back a number of rules and regulations that were put in place after the 2010 Dodd Frank law to encourage more availability of credit for housing from banks.  Many of the proposed changes are beneficial to the industry, but difficult market conditions are likely to force more market consolidation. We still don't know, for example, who is the winner of the sale of Two Harbors (TWO) . Eric Hagen at BTIG writes: "TWO's ad hoc committee determined the unsolicited all-cash offer from CrossCountry Mortgage (CCM, Private) at $10.70/share is considered superior to United Wholesale's (UWMC, Buy, $10 PT) existing stock-for-stock offer of 2.3328 shares of UWMC for each share of TWO. An additional unsolicited bid came in over the weekend from another unnamed bidder at $10.75/share. We see the potential for a bidding war, but we'd be surprised if it fetched more than a 20% premium to NAV, which we currently peg around $11/share net of the quarterly dividend." Meanwhile, on March 16, 2026, Freedom Mortgage Corporation announced, that its indirect parent company, Freedom Superior LLC, agreed to acquire Seneca Mortgage Servicing LLC (Seneca) and related entities from EJF Capital LP. The deal expands Freedom's top-five mortgage servicing rights (MSR) portfolio and enhances its operational capabilities. To us, it is notable that EJF founder and CIO Emanuel "Manny" J. Friedman , who has successfully focused on regulatory, event-driven investing in real estate and financial services for decades, decided to exit the mortgage servicing business.  The GSEs, Fannie Mae and Freddie Mac, have been busily buying MBS, but mortgage market scribe Rob Chrisman reminds us that “lenders and LOs know that we’re in a global economy, and decisions made overseas can impact our mortgage rates.”   The GSEs were the top performing mortgage stocks of 2024-2025, but have been dead money since the MBS purchases were ordered by President Trump earlier this year. Both stocks have fallen dramatically since the start of the Iran war, as shown in the chart below. The two big question with the GSEs, of course, are 1) are the stocks attractive at this stage and 2) whether or not they are hedging their portfolios effectively. We had a profitable short-term position in the GSEs last year, but would not be inclined to own them now. Simply stated, there is no catalyst. Part of our hesitation is that in order to have an impact on mortgage rates, the GSEs would not hedge their growing MBS portfolio. But the backup in mortgage rates that has occurred since the start of the Iran war could cause one or both GSEs to incur substantial market losses sans hedge .   The fact is that the GSEs are not the Federal Reserve and cannot buy trillions worth of MBS, unless of course FHFA Director Bill Pulte gets more creative. As we’ve noted in previous missives, Fannie Mae and Freddie Mac should buy back low coupon MBS at a discount, then sell the "AAA" rated paper into collateralized mortgage obligations (CMOs), and make money doing so. Treasury could do the same with low coupon T-notes.  If this is not clear, Director Pulte, please do give us a call. One of the more important issues affecting housing in Washington is the implementation of a partial claim process at the Veterans Administration. Last year Congress passed the VA Home Loan Program Reform Act (H.R. 1815), which was signed into law on July 30, 2025, establishing a new five-year partial claim program. This legislation allows the VA to pay lenders for delinquent payments (up to 25% of the loan amount), helping veterans avoid foreclosure by deferring payments to the end of the loan.    This new statutory authority replaces the temporary VA Servicing Purchase (VASP) program that ended in April 2025.  Since the passage of the legislation, the VA and members of Congress have been negotiating the details. While the law is in effect, specific lender procedures and amendments to the servicer handbook are currently in the “implementation phase.” The hope is to have a permanent program for VA that mirrors the partial claim process of the GSEs. Finally, the Real Deal  reports  that a federal judge in the Eastern District of Texas struck down the 2024 Financial Crimes Enforcement Network regulation that forced nationwide disclosure of all-cash residential homebuyers. U.S. District Judge Jeremy Kernodle ruled the agency overstepped its authority by failing to justify why all-cash residential transactions should be broadly treated as suspicious. The decision means federal oversight of illicit capital flows in real estate reverts to FinCEN's prior, narrower geographic targeting orders. Is Apollo Facing a Lehman Moment? Are the growing demands from investors for early depemption of private equity/credit funds a liquidity threat to Apollo and, indirectly, the FHLBs? Athene Holding Ltd. (ATH) was delisted from the New York Stock Exchange (NYSE) in January 2022. The delisting was due to a momentus merger with Apollo Global Management, which was completed simultaneously.

March 24, 2026  | In this edition of The Institutional Risk Analyst , we ponder the world of interest rates in the wake of the undeclared war with Iran and the considerable confusion in the markets about what happens next. Unlike 2025, when a bull narrative governed market perceptions, 2026 has been a year of risk-off in terms of market exposures and concerns about rising interest rates. The selloff in the Treasury market illustrates the present concern, but notice that the two-year Treasury minus 10s bounced last week. Is the bear flattener trade already done? The first question that needs attention is what happens when the term of Jerome Powell as chairman of the Federal Open Market Committee ends? Powell served as chair pro tempore from February 5 to May 23, 2022, following his renomination by President Joe Biden and before his subsequent confirmation by the Senate. But what happens when President Trump inevitably nominates another sitting governor to be acting Fed chairman? Economist Komal Sri-Kumar noted on Substack: “Rather than a clean handoff to [Kevin] Warsh, the United States may now face a scenario in which the incumbent chairman refuses to leave, the designated successor cannot be confirmed, and the legal process surrounding the investigation drags on indefinitely… Complicating matters further is the possibility — reported in The Washington Post —that the White House could attempt to designate a sitting governor as temporary chairman if Warsh is not confirmed. One name mentioned is Stephen Miran, a current governor and Economic Advisor to the President, who has consistently dissented at the FOMC in favor of lower interest rates.” Adding to the monetary mess, Stephen Miran's term as a Federal Reserve Governor was initially scheduled to end on January 31, 2026, as he was filling the remainder of a term. However, as of February 2026, he is on holdover status, allowing him to remain in his post until the replacement – Kevin Warsh – is confirmed by the Senate.  Thus there are now two holdovers on the FOMC. While the conflicted message emanating from the central bank is not helping the financial markets, we think that our readers should look through the present noise to the likely direction of Fed policy later this year, namely lower interest rates. As with Liberation Day on April 2, 2025, we suspect that the current political mess surrounding the central bank is creating another opportunity for investors with strong constitutions. Is the concern about the Fed and inflation a another head fake c/o the financial media? We believe that the risk-off mainstream narrative that has caused private credit sponsors like Apollo (APO) , Ares (ARES) and Blackrock (BLK) to crater in the past two months, and has also caused the bond market to back up, is about to end. Notice that the common equity all of these public credit sponsors bottomed earlier this month. Is this a buying opportunity? We picked up some BLK at the opening yesterday as a wee flutter. On Monday, President Donald Trump called off further strikes on Iran’s crumbling economic infrastructure and claimed (falsely, we suspect) that the US is talking to Iran’s leadership. The markets have responded immediately and positively, but is this another Trumpian head fake? IOHO, yes it is. We think that trading the US stock and interest rate markets based on the poorly considered outbursts from President Trump is a really bad idea. The Threat of Global Recession Trump’s earlier threat to attack Iran’s infrastructure was yet another gratuitous comment by the commander-in-chief. More, we doubt that Iran has any intention of talking to the US or ceasing military attacks on the Persian Gulf states. For Iran's radical leadership, there is no upside to peace. Thus the grim reality of economic dislocation caused by the war remains. How do we position for a world where key economic inputs are going to be in scarce supply? As we noted in an earlier missive, the backwardation of forward pricing for oil continues to suggest that the interruption to crude oil supplies will be limited in duration. The more profound question, however, is how to replace the various other products made from oil, including liquefied natural gas (LNG) and key chemical flows that are a crucial input to half of the economies in the world, starting with the EU, India and China.  While some analysts are worried about members of the FOMC raising interest rates to forestall inflation due to high oil prices, we think that an eventual cessation of hostilities in the Persian Gulf -- either through negotiation or military means -- will quickly refocus the Fed and other global central banks on the negative growth shock caused by the war. The damage to productive capacity to produce LNG, fertilizer inputs such as ammonia, phosphate, and sulfur, and other chemicals produced in the Gulf will take months or years to resolve. We'll be addressing the issue of long-term economic dislocation next week in a special interview in The Institutional Risk Analyst . Within a couple of months, the supplies of crucial petrochemical inputs currently on the water will be delivered and there will be nothing in the delivery pipeline after that point in time. Refined products are a far greater concern than oil. Kuwait, for example, produces a lot of aviation fuel for the EU. The Saudis are now shipping phosphates by truck to Yanbu, but this is not even a modest replacement for the disrupted supply chain in the Gulf. What does this mean? To us, it means that the FOMC is going to quickly pivot from worries about inflation caused by a short-term hike in oil prices to a policy mixture that is focused on preventing an economic slump in the US caused by the medium-term effects of the war and the considerable damage done to Gulf oil and, in particular, chemical production capacity. While the US is a net-exporter of oil, we import many crucial chemicals from the Middle East.   We agree with Michael Green , Chief Strategist and Portfolio Manager at Simplify Asset Management, who wrote over the weekend: “The Fed will be forced to cut. The markets may not recognize this for another 25 bps, although I am skeptical it will go that far, but they will be forced to cut… And cut with vigour… For investors who understand market structure and the U.S. structural advantage, the current despair is the setup for one of the most powerful policy-pivot rallies in years. The market is bleeding from a self-inflicted VaR wound, blinded to a bifurcated macro reality. Stay sharp. The window is wide open — but it won’t stay open forever.” 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.

In this week’s edition of “The Wrap,” we feature our view of the top-ten key events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap with Chris Whalen” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  March 20, 2026 | Gold and silver prices continued to pare gains from the past 90 days, even as deliverable supplies of both metals are shrinking rapidly in the Far East. Selling of gold accelerated yesterday as the Gulf States sought to raise cash in the face of continued attacks on oil and gas facilities. One point we repeat to readers and clients alike is that the market prices for metals in the US and London markets, where prices are reckoned in fiat currencies, are diverging from prices in Asia, where physical delivery is expected and required. The war with Iran is likely to keep downward pressure on metals prices in the near term, but this may be another buying opportunity a la Liberation Day last year . At one point silver prices were up 70% in 2026, confirming our view that the metals complex was going to remain volatile. But given the burgeoning federal debt and the outlook for inflation in the US, we like the precious metals component of our portfolio more and more.  As we told a viewer of “The Wrap” this week, investing in precious metals is about preserving value, but you must also maximize yield on fiat assets. That’s why we like residential mortgage REITs as a haven for cash and limit holdings of low-return T-bills.  Powell Stays on the Fed The Federal Open Market Committee made no change in the target for short-term interest rates on Wednesday. Most officials maintained earlier projections for at least one quarter-point reduction in borrowing costs this year. The members of the FOMC continue to pretend that they can control inflation.  As expected, Governor Stephen I. Miran issued his fifth straight dissent and voted for a quarter-point cut. This was the second FOMC meeting in which a majority of voting members kept rate guidance unchanged at a range of 3.5 percent to 3.75 percent.  “The FOMC surprised no one when it voted to hold the funds rate steady in the range of 3.5%-3.75% by a vote of 11-1,” notes John Ryding of Brean. “Governor Waller returned to the fold and recognized the reality of the inflation data.  The Fed continued to signal that one cut this year and one next year is the central case for the median committee member but the forecasts for growth and inflation were lifted.”  It is pretty clear from the latest FOMC meeting this week that Chairman Jerome Powell is going to remain on the Federal Reserve Board after May as we have long predicted. Despite growing calls from conservatives for Trump to end his legal campaign against Powell, the White House seems to be incapable of adjusting strategy.  In fact, Powell has indicated he intends to remain as Fed Chair until his successor is confirmed by the Senate, and Senate Republicans will not confirm Kevin Warsh until President Trump ends the legal campaign against Powell.  President Trump has repeatedly criticized Powell’s management of the Fed’s renovations and he is right to do so, but there are far better ways to make the point about the Fed’s operational chaos.  Will President Trump appoint an "acting chair" in May? A couple of quick questions about US monetary policy for our growing audience: Why is inflation stubbornly above the FOMC’s target range? Because of the federal debt.  Why did investors pour $2 trillion into unsuitable private equity and credit schemes? Because of the inflation caused by the federal debt.  Why did banks lend and commit almost $4 trillion more to unsuitable private investment and credit schemes?  Because of the balance sheet inflation caused by quantitative easing and the federal debt.  Why is affordable housing increasingly beyond the reach of millions of Americans? Because of the inflation caused by the federal debt.  Take an example: Rental inventory in New York City fell 5.5% YoY to 25,989 units in February as median rent rose 8.2% to $3,950,” CRE Daily  reports. “Manhattan led declines (−3.5%), marking a record 24-month slide, with rents up 6.9% to $4,700; Brooklyn and Queens also posted solid gains.” So why doesn’t anybody talk about the federal debt in Washington? Good question. This week the Federal Housing Finance Agency headed by Bill Pulte dropped replacement‑cost value (RCV) insurance rules for conventional mortgages underwritten by Fannie Mae and Freddie Mac, reverting to cheaper pre‑2024 standards.  One reader of The IRA noted on X: " RCV was always the GSE requirement. FHFA wasn’t solving for a real problem, but was instead chasing headlines to produce a deliverable on climate" during the Biden Administration. The rollback sidelines climate‑risk protections amid broader federal retreat from tracking weather impacts, but may not be accepted by the insurance industry. “The move offers optics, not solutions, showing FHFA’s reactive approach to housing costs,” notes Jonathan Miller of Miller Samuel.  Back on March 12th (“ Countrywide II: UWMC + TWO = ? Loan Depot Flops, Again ”) we predicted that the proposed merger between United Wholesale Mortgage (UWMC)  and Two Harbors (TWO)  would fail to get the support from a majority of TWO shareholders. That’s precisely what happened. TWO is now working to get support for the deal, but the sagging stock price of UWMC is not helping. This week, of note, TWO disclosed that a cash offer reportedly had emerged. The competing bid includes covering a $25 million termination fee, Housing Wire reports. The Two Harbors' board is evaluating the unsolicited offer as a potential superior proposal. Private Credit Festers On Wall Street, the run away from private equity and credit continues to widen, with pressure now being felt by funds that specialize in consumer credit. “ Stone Ridge Asset Management told clients in the fund last week that recent redemption requests were so high that it would honor only 11% of the amount investors wanted back,” according to The Wall Street Journal .   Stone Ridge purchases consumer and small-business loans made by companies including Affirm (AFRM) , Block (XYZ)  and Lending Club (LC) , the latter of which was one of the best performing bank stocks in 2H 2025.  Of note, the major Wall Street investment banks led by Goldman Sachs (GS) are now offering clients strategies to short the public equity of the major sponsors of private credit strategies. We told Tom Keene  on Bloomberg Radio  this week that the inclusion of retail investors in private credit funds was a fundamental error in judgement by the sponsors that made a run inevitable.  Why did the sponsors of private credit like Apollo (APO) , Ares (ARES) , Brookfield (BRK)  include retail investors? Greed and stupidity. Welcome to Wall Street. As we’ve noted this past week (“ Risk Concealed: Private Credit, PIK and the Banks ”), many banks have been shedding credit risk to the sponsors of private credit schemes, but some banks are smarter than others.  Even when a bank sells a loan to a credit sponsor, the risk may not be eliminated. “How can the regulatory-capital arbitrage break down and ‘boomerang’ counterparty/credit risk for a bank?” asks veteran risk manager Victor Hong  in an email to The IRA . “When the non-recourse bank financing of a private credit loan for its owner might arguably leave the bank FULLY exposed to that sold loan.” Despite the inflationary bias, the US economy is showing growing signs of weakening, according to Morningstar. Key factors include rising unemployment, declining consumer confidence, reduced consumer spending, falling corporate profits, and a slowdown in manufacturing. Other indicators also include an inverted yield curve, declining GDP growth, and increased credit delinquencies in areas such as mortgages and credit cards. One indicator of the K-shaped economy is hotels, where luxury properties are showing rising profitability but other venues are not (h/t Accounting Solutions ). Revenue per available room (RevPAR) in the luxury category for daily rates in excess of $500 was up by 9% during a recent week in mid-February versus the same period in 2025, according to data provider STR.  RevPAR fell for economy hotels, however, a category with an average room rate around $67. More significant, foreign visitors, who spend multiples of what domestic travelers do on food and lodging, have been scarce, according to the International Trade Administration.  In January, European and Asian visitor numbers were down 3.4% and 11.7%, respectively, compared with a year earlier. Visits by Canadians, for whom only November data is available, were 16.7% lower than a year ago.  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.

March 16, 2026  | In this edition of The Institutional Risk Analyst , we take our readers on a deep dive into the world of banking and private credit. As we’ve noted on X, there are two key attributes to bank lending to private equity/credit firms. First, the loans are generally made to or via a special purpose entity (SPE). Second, the loans are non-recourse, meaning that the bank cannot pursue repayment from the private credit or private equity sponsor. A third component seems to be that investment bankers think that they can create and sell these dodgy "opportunities" to clients without any legal or financial consequences. Can a banker really deflect any risk from allegations of securities fraud by standing behind private contractual terms and non-disclosure agreements? As we discuss below, the episode in 2007 involving several large banks and the collapse of Auction Rate Securities suggests that this assumption is fallacious. An upbeat note published by Vanguard describes the intersection of private credit and insured depository institutions: “Private credit is now embedded in portfolio construction decisions. Banks have become increasingly involved, not as originators of middle‑market loans but as providers of financing to private credit managers. Ample dry powder provides flexibility but also affects pricing, structures, and documentation, particularly later in the credit cycle.” The availability of bank credit has allowed the world of private credit to swell to more than $2 trillion in assets. Another aspect of bank involvement in private credit, however, is a tolerance for default, mirroring the forbearance practices used by banks in other markets such a commercial real estate and consumer finance.  Since 2022, as loan to non-depository financial institutions (NDFIs) have grown by double digit annual rates, banks loans where interest has been accrued but not collected have soared. Is this a coincidence? No, because the rest of the bank balance sheet excluding loans to NDFIs is barely growing. If loans to NDFIs are growing 5-10% a year on average, then the backlog in collections below is likely from NDFI loans. And $100 billion is 2x quarterly earnings for the whole industry. Source: FDIC According to KBW, nearly 9% of private investment income is now being paid via payment-in-kind or “PIK,” a stunning level of default that equates to a “B” bond rating for the entire $2 trillion portfolio. Can banks count a PIK payment as payment on a loan? Yes they can. Lenders treat Payment-in-Kind (PIK) interest as a valid, non-cash payment that increases the loan principal, allowing borrowers to defer cash payments. This is what veteran risk manager Victor Hong calls "Principal on original Principal" or "POOP." But the loan is in default, PIK or no.  Dubious practices such as accepting PIK as a valid payment on a loan make bank balance sheets illiquid and ultimately conceal credit losses from investors and regulators. The hidden credit risk on the books of US banks created by PIK is cause for concern since it increases the uncollected principal due to the bank. Banks that accept PIK payments without declaring the loan in default are essentially zombies. As soon as a bank receives a PIK payment, the full amount of the loan should be charged off. But more than the mounting arrearages represented by PIK loans., it is the reputational risk that faces banks and investment firms that may be the biggest hazard when it comes to private lending. Western Alliance, Jeffries Financial & Reputation Risk The litigation involving Jeffries Financial Group (JEF)  and Western Alliance Bank (WAL)  provides a good illustration of the structural issues involved in many private credit defaults. WAL is suing JEF for over $126 million, alleging breach of contract and fraud after Jefferies-affiliated SPE Point Bonita Capital  stopped payments on a loan secured by worthless First Brands Group receivables.  WAL claims Jefferies' fraud induced them into financing these "sham" receivables; Jefferies contends the loan was non-recourse and resulted from an extensive, independent fraud by First Brands leadership, Reuters  reports. Of note, WAL did receive more than half of its exposure in loan repayments on the Point Bonita Capital loan, even though other lenders received nothing.  "In my entire banking career, I have never ​witnessed a breach of contract that so deliberately places the reputation and operating integrity of a counterparty at risk, forcing future banks, clients and counterparties to seriously reevaluate ​the dependability of that organization's commitment," Western Alliance CEO Kenneth Vecchione  told analysts. But the truth of the matter is that banks have been pursuing “opportunities” such as First Brands aggressively, often without understanding the full risk. The reason for the headlong rush into private credit is that the rest of bank balance sheets have barely been growing, while loans to non-depository financial institutions (NDFIs) have been growing at close to double digit rates.  In a remarkable March 9, 2026 press release  and letter, JEF fired back at WAL and in doing so illustrated why private credit is going to be a mess for the banking industry. Memo to Miki: Reputation Risk. JEF stated: For over four years, Western Alliance made non-recourse loans in steadily increasing amounts to borrowers named LAM Trade Finance Group LLC and LAM TFG I SPV LLC, with no guarantee or credit support from Jefferies or other affiliates. The borrowers to which Western Alliance made loans are special purpose entities owned by the Point Bonita master fund, and their assets consisted solely of First Brands receivables and related proceeds. The Loan Agreement was clear that Western Alliance had no recourse beyond the assets of LAM TFG I SPV LLC. Western Alliance had no guarantee or other right of payment from Jefferies or the Point Bonita master fund. Shortly before First Brands’ bankruptcy filing in September 2025, when Western Alliance was considering a forbearance arrangement, Western Alliance asked the Point Bonita master fund and Jefferies to guarantee the Western Alliance loan to LAM TFG I SPV LLC. Those requests were denied. When Western Alliance agreed to forbear in any event, Western Alliance was well aware that its counterparties were limited to LAM Trade Finance Group LLC and LAM TFG I SPV LLC, and that it had no rights to assets other than First Brands receivables. The letter also addresses Jefferies’ exposure to UK mortgage lender Market Financial Solutions (“MFS”) , which we discussed in an earlier comment  to Daniela Cambone . One of Jefferies’ European subsidiaries loaned MFS £103 million under a warehouse facility secured by certain of MFS’s bridge loans to residential borrowers, property investors and landlords. Jefferies states in the letter the net impact to net earnings over time from the facility with MFS is likely to be less than $20 million. We’ll see.

March 12, 2026  | In this   edition of The Institutional Risk Analyst , we look at the world of housing finance as the collapse of UK mortgage lender MFS continues to unwind. Then we ponder the American mortgage finance scene as Q4 2025 earnings finally end here in the second week of March 2026. Barclays Plc (BCS)  and Castlelake LP, a unit of Brookfield Asset Management (BAM) , have alleged fraud in a UK court on the part of MFS CEO Paresh Raja , Bloomberg  reports . The Times of London describes the tawdry scene: "The case will increase questions over MFS and the due diligence of those who worked with it. Wall Street and City institutions and private investors are caught up in the failure of the bridging and buy-to-let property lender, which was placed into administration this month after a judge said insolvency practitioners needed to investigate separate 'very serious' claims of fraud." The MFS debacle is notable because some of the smartest people in mortgage finance were apparently taken to the cleaners. As we discussed earlier, the Atlas SP unit of Apollo Management (APO) was previously owned by Credit Suisse and literally recreated the market for financing private loans and mortgage servicing rights (MSRs) from the ashes of 2008. Credit Suisse owned the last significant servicer of non-agency loans. Yet somehow the crowd at MFS got the better of them. Of course, there is fraud and then there is fraud in the City of London. We'll never forget when around 1986 a certain Managing Director at Bear, Stearns & Co., a retired Marine colonel who was usually on his second Cuban cigar at 8AM, returned to his posh London residence only to find the entire house emptied of all his possessions. Everything, gone. Meanwhile in the US, mortgage bankers have spent the past several weeks trying to explain to institutional investors why their firms are not like PennyMac Financial (PFSI) . As we noted last month (“ The Wrap: Pulte Crushes PennyMac; Kevin Warsh's Conflict of Visions ”), PFSI missed Q4 earnings and other key metrics such as loan recapture, causing the entire sector to crater in the debt and equity markets. Leading residential mortgage firms typically recapture two-thirds of loan prepayments, but PFSI was reportedly below 30% in Q4, according to several industry observers with sharp pencils. Does UWMC + TWO = < 2? Also under scrutiny is United Wholesale Mortgage Corp (UWMC) , which announced the acquisition of Two Harbors (TWO)  in December and has since seen its stock sink to a five-year low. UWMC released OK earnings for Q4, but then spooked investors by not taking any questions from Street analysts. CEO Mat Ishbia touted UWM’s Q4 2025 results as a dominant finish to an "amazing year," highlighting a $164.5 million net income and $49.6 billion in originations. He emphasized that 2025 solidified UWM as the top overall and wholesale lender for the fourth consecutive year, with strong momentum for 2026 driven by in-house servicing, the Bilt partnership, and the Two Harbors acquisition. UWMC has since revised earnings guidance for Q1, and done a live call with investors sponsored by their loyal investment bankers, but the highly leveraged mortgage lender is struggling to gain shareholder approval for the TWO acquisition in a vote scheduled for this Monday March 16th. Will an upward revision in Q1 earnings guidance be sufficient? “What might be driving this announcement is how UWM's stock price has declined since the deal was announced on Dec. 17,” writes Brad Finklestein  of National Mortgage News . “The previous day, UWM closed at $5.12 per share. After the deal was publicized, UWM fell to $4.81. Its consideration is a fixed exchange ratio of 2.33 times Two Harbors shares for each share of UWM.” The fixed exchange ratio offered by UWMC implies a significant discount to the book value of TWO. Since peaking at $13.66 in mid-January, the valuation of TWO has collapsed along with the share price of UWMC, closing yesterday below $10 per share or a market cap of about $1 billion. Once again, the management of TWO seems to have managed to destroy shareholder value in great bloody chunks. Given that the mortgage servicing rights of TWO had a book value of $2.4 billion at the end of Q4, it seems fair to ask whether the best trade for TWO shareholders is to vote against the merger with UWMC and simply sell the MSR.  If this wretched transaction goes ahead, we suspect that the management of TWO may face some new litigation from aggrieved shareholders. Sell the MSR and keep the REIT, right? What are we missing? Try as we may, it is difficult to understand the motivation of TWO to proceed with a transaction that seems to badly prejudice its long suffering shareholders, again. You can bet that the trial lawyers are cheering! We do not have a position in UWMC or TWO. Countrywide II In terms of the business model and risk profile, we like to think of UWMC as the spiritual heir to Countrywide Financial. The big issue with the all-stock offer from UWMC is that the acquisition currency has not been performing very well over the past year and more. The aggressive business model pursued by UWMC enables them to claim mortgage market leadership in terms of loan purchase volumes, but with very aggressive pricing on its loans and MSRs, and continued consumption of operating cash ( See Page 70 of the 2025 10-K ). UWMC has also seen loans available for repurchase double in the past year, a troubling sign of poor asset quality. More, the Detroit-based company has considerably more non-funding debt liabilities than MSR. Why is the balance between MSR and non-funding debt mot used to finance new loan production important? Because the MSR represents an intangible representation of the net present value of future cash receipts . In a classical analysis used by bank, mortgage and insurance regulators, you exclude all intangible assets and subtract them against capital. What's left is the real business. This is why both Basel III and the Ginnie Mae risk-based capital rules require lenders to subtract the MSR from capital. When Fed Vice Chairman Michelle Bowman proposed to allow banks to stop subtracting excess MSRs from capital, that is a big deal as we wrote in National Mortgage News . Insurance regulators (and countries other than the US using IFRS) don't recognize intangibles at all, but this does not prevent US insurers from lending against MSRs on a secured basis. The current style of the rating agencies, of note, is to give one or more notches of credit uplift for "secured" MSR financings that are placed at the very top of the credit waterfall. In 2025, as in the previous year, UWMC sold $2.4 billion in MSRs for cash to offset operating losses. The high prices paid for loans in the broker channel flows into equally high valuations for UWMC’s MSRs. Looking at the 10-K for 2025, the reported capitalization of the UWMC MSRs appears to be north of 7x annual servicing income. Selling these valuable intangible assets at a lower price than cost to raise cash strikes us as a losing trade long-term. More, UWMC appears to be upside down on its debt, with the fair value of $4.1 billion of MSRs significantly below the total $2.5 million in combined MSR credit lines from Citigroup (C)  and Goldman Sachs (GS) , and the $2.9 billion in senior notes. UWMC cannot really accumulate servicing because of the need to sell assets to offset cash operating losses. UWMC says that the combination with TWO “has the potential to unlock substantial value, a stronger balance sheet, and streamlined operations,” but we think this deal could be a case where 1 + 1 = < 2. Both TWO and UWMC have lost significant amounts of value over the past five years, with UWMC down more than 50% and TWO down almost 70%. Are the largely retail, income-oriented shareholders of the TWO REIT going to be long-term holders of UWMC, a stock with no significant dividend?  Probably not. Loan Depot in Loss Again Going from the sublime to the ridiculous, we look at the year-end results for loanDepot (LDI) , one of the better performing and volatile mortgage stocks, but also one of the worst operations among large mortgage lenders. Net loss of $108 million was down 47% in 2025, compared with net loss of $202 million in the prior year, primarily a result of higher revenue. What this means is that LDI still has not reduced enough operating cost from the COVID years to be profitable. “In the fourth quarter we originated the most volume since 2022, gained share in an expanding market and achieved a 71% recapture rate from our in-house servicing platform,” said Founder and Chief Executive Officer Anthony Hsieh . “These results reflect progress in our return to the core competencies that enabled the scaling to become the 2 largest retail lender nationally during our first decade." OK Anthony, but why aren't you profitable?? As we’ve noted in the past, LDI is under water on its debt, with more non-funding debt liabilities ($2.1 billion) than MSR ($1.6 billion).  LDI also has over $1 billion in loans eligible for repurchase, which are defaulted loans in GSE, Ginnie Mae and private label MBS pools. As with UWMC, this line item is likely to increase as the year goes on and delinquency rates rise.   The LDI bonds due 2028 have widened 300bp in recent weeks to yield 12.5%, a striking indication of how investors have reacted to the earnings volatility that began with PFSI. Bottom line on LDI is that the low stock price makes it an ideal plaything for retail investors. To quote Eric Hagen at BTIG on LDI: “It's an inexpensive way to position for higher refinance volume in the retail channel without paying as much of an earnings premium to be in Rocket (RKT, Buy, $25 PT) , although we're also prepared for LDI's stock valuation to take on a wider range when interest rate volatility picks up.” 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.

This week, “The Wrap” features our view of the key events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  March 13, 2026 | What were the top events of the past week? First is the continued unwind of private credit and also private equity, with JPMorgan (JPM) saying that it is market down private loans and pulling back on credit available to these clients. We published a recap of our thinking on private equity in The Daily Reckoning , which was picked up in Zero Hedge .  "Private credit has expanded significantly over the past decade and forged linkages with traditional financial institutions, the Office of Financial Research reported this week . "While vulnerabilities within this sector appear contained, counterparty exposures between banks and private credit funds are the main channel for risk transmission. This channel merits close monitoring given the industry’s rapid growth." In DC, the Senate passed a housing bill that reads like the agenda of Senator Elizabeth Warren (D-MA) . The House is going to make a lot of changes, but President Donald Trump  is not really paying attention to housing. Foreign policy and bombing Iran is a lot more fun. As things stand today, the Senate-passed housing legislation could easily die in the House. "There is an incredible amount to like in this bill, from the modernized treatment of manufactured housing to the focus on small-dollar mortgages,” said Isaac Boltansky , Head of Public Policy at PennyMac (PFSI) . “Nevertheless, there is clearly room for improvement in both certain technical matters and the SFR section. To truly move the needle, we should ensure the final language doesn't create unintended headwinds for supply, consumers, or lenders." We wrote a long comment on housing finance in our last issue (“ Countrywide II: UWMC + TWO = ? Loan Depot Flops, Again ”). Thirdly Fed Vice Chair for Supervision Michelle Bowman  outlined bank-friendly Basel III endgame and GSIB surcharge proposals, reports Ian Katz at CapitalAlpha in Washington. Bowman say the proposal will be released in a week. Overall, the changes will result in a small decrease in capital requirements for the largest banks and more significant changes for smaller institutions. We’ll be responding to the request for comment on Basel III.  Gold and silver prices continued to move sideways, but oil prices remained just below $100 or roughly double prices that prevailed most of the past year. We expect oil prices to remain elevated unless and until the Straight of Hormuz is reopened. Iran is basically seeking a cessation to airstrikes in return for negotiating an end to attacks on merchant ships in the Persian Gulf. Gold vs Silver Futures Data on the U.S. labor market unexpectedly deteriorated, with a net loss of 92,000 jobs in February, contradicting forecasts that predicted a gain of 50,000. This marked a significant, unexpected setback, compounded by downward revisions to employment figures for the previous two months.  The poor jobs data led to increased concern in some quarters about a potential economic "hard landing," but higher oil prices may constrain the Fed and other central banks from easing. In fact, central banks ought not to factor the oil price change into the calculous because the rise of energy costs comes from a non-monetary factor, namely war. Higher oil prices must lead to higher inflation.  “An oil price shock...has some dampening effect on growth and raises total headline inflation for a time, but doesn’t really pass through much to core inflation,” former Cleveland Fed President Loretta Mester told Kathleen Hays on Central Bank Central . “They’re not going to really know how long the oil prices will stay at elevated levels, so they’ll use the models to sort of work through that.” As for the coming Fed policy meeting, Mester recommends that officials take a cautious approach. “They’d be wise to leave things where they are...until they get more evidence on how things are going to evolve in both employment and inflation.” And US Treasury Secretary Scott Bessent stated that the Federal Reserve is a long way from returning to quantitative easing. Indeed, we suspect that once Kevin Warsh is confirmed as the next Fed Chairman, the Fed is going to make changes to the bank liquidity rules that will allow another $1 trillion reduction in the size of the Fed's balance sheet. We'll be writing about this in a future comment. 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.

To read our post in The American Conservative on the growing bitcoin fraud, see the link at the end of this issue. Happy holidays! December 19, 2017 | The US housing market is completing another year of rising home prices in many – but not all – parts of the country. We’ve been in a sellers market for single family homes since 2012, fueled first by low prices, then by low interest rates, then lower FHA premiums, and also the relative dearth of new home construction. So with interest rates slowly normalizing and significant changes to the tax code, what does the future hold in store for housing finance? For the past eight years, the FOMC has been boosting housing with low interest rates and purchases of MBS. More, for the past half century, public policy in the US has encouraged home ownership with a variety of subsidies and tax breaks. Now, however, Congress is turning the thrust of public policy away from encouraging home ownership in a way that could have serious negative implications for an important part of the US economy. Chart 1 below shows the Case-Shiller home price index since 2007. As the tax legislation takes effect, a number of observers are predicting that high-cost markets on the east and west coasts could see prices fall by double digits – this despite the continued squeeze on supply. Over the longer term, notes Jonathan Miller of Miller Samuel, the loss of deductions for state taxes and mortgage interest will put downward pressure on prices in high cost markets. Think Scarsdale NY. Elimination of mortgage deductions for second homes and home equity lines also will negatively impact affluent destination markets around the US. The impending tax reform legislation in Washington could not only mark a significant change in the price dynamic for home prices, but it may also signal a negative credit trend for investors in 1-4 family mortgages. As households are forced to pay out more cash for federal taxes and mortgage payments, there will be less remaining cash flow in these households overall. Price compression will also affect perceived wealth and also aspirational pricing. But the big question is how the tax bill will impact overall volumes for home purchases and new mortgages. The latest data from The Mortgage Bankers Association shown in Chart 2 shows a slight uptick in mortgage lending volumes for Q3 and Q4 2017, a welcome bit of good news for the industry after the single-digit profitability seen in the first half. Even today, lending profitability spreads are running a tad under a quarter of 2007 levels, putting intense pressure on non-bank lenders especially. Source: MBA The good news is that the MBA estimates show total mortgage debt volumes growing 10% to $11 trillion by 2019, this due to expectations of rising interest rates and lengthening durations on mortgage-backed securities (MBS). Purchase mortgages are expected to grow steadily while refinance transactions are flat-lined at around $100 billion per quarter in the MBA estimates. More than a little of that increase in total mortgage debt, however, comes in the form of rising home prices and mortgage balances. Of the 1.7 million loans originated in Q4 2016, the average of the $461 billion in originations was about $275,000 per loan. Of note, the average size of purchases mortgages is now around $310,000 vs $260,000 for a mortgage refinancing, as shown in Chart 3. Source: MBA The big question near-term is whether all of the talk about higher interest rates will actually result in higher yields for the benchmark 10-year Treasury bond. In the wake of the latest rate hike by the Federal Open Market Committee, spreads actually tightened. We continue to believe that the size of central bank portfolios globally means low volatility and no significant selling pressure on long-dated government debt in 2018. Even if the FOMC were to take our advice and start selling MBS outright, we don’t believe that long rates would rise very much if at all. As we noted last week in our conversation with Bob Eisenbeis of Cumberland Advisors, the FOMC is more worried about losing money on the Fed’s portfolio than it is about the impact of QE on the bond markets. The result will be a flat yield curve and spread compression for leveraged investors such as banks and REITs. But the forward Treasury issuance calendar suggests at least some upward pressure on rates in the medium terms, as mortgage finance maven Rob Chrisman opines: “Foreign central banks that use Treasuries to manage currency exchange rates are not facing the market forces that would require a return to the amount of accumulation seen over the last decade. As a result, the private domestic and foreign sectors would be left as a principle buyer of Treasuries. Baring another financial crisis, it is unlikely that a significant increase in demand for safe-haven assets is on the horizon. If demand for Treasury debt does not keep up with the expected increase in supply, yields will need to rise.” We think that the supply/demand scenario in US Treasury bonds becomes an issue, ironically, when the Fed accelerates its planned asset reduction and thereby allows volatility and volume to return to the trading markets. The FOMC ought to be concerned with restoring something like normal function in the bond markets after years of induced monetary coma, even if it means taking a loss on the system portfolio. It will be interesting to see how Chairman Powell deals with this sticky political issue of losses on the Fed’s huge securities book, particularly in an environment where the FOMC continues to raise short-term rates. Historically, the 10-year Treasury has floated about 2% above inflation, but as Jim Glassman at JPMorgan ("JPM") noted in June: “The slump in Treasury yields is almost entirely due to quantitative easing distorting the ‘real’ component of interest rates.” Ditto. The FOMC currently has Fed funds targeted at 1.5% and hopes to move this benchmark rate to 2.75% over the next couple of years. With statistical measures of inflation still at or below the 2% target for prices, this suggests a 10-year bond closer to 3% than to 4% -- at least in normal circumstances. But with global central banks still sitting on $20 trillion in securities and still buying, market conditions are hardly normal. Central bank positions in US Treasury and MBS suppress both volatility and trading volumes, reducing upward pressure on long-term yields. We believe that one of the better trades for 2018 may be a long position in the 10-year Treasury with a short on the 2-year Treasury note! Looking at estimates from the MBA and other economic estimates, the consensus seems to have the Fed funds rate hitting 2 ½% by 2019 and the 10-year over 3%. We wonder, however, if the continued purchases by the ECB and Bank of Japan, and the go-slow policy of crawling normalization adopted by the Fed, won’t keep an effective cap on long-term interest rates. We see the possibility of a rally in the 10-year in 2018 with tighter spreads and an inverted yield curve, a turnabout that could have an interesting impact on housing finance. The tight spread regime engineered by the Fed and other central banks has negatively impacted all manner of consumer lenders, with effective loan pricing near all-time lows. Large banks fight for jumbo prime mortgages at pricing that makes no sense – but they simply want the assets. The same pricing logic governs credit spreads in auto paper or commercial real estate and other types of business lending. The fact that most of the major investment banks have guided down, again, on trading revenues reflects the fact that QE and low rates have sucked the life out of the private financial markets. With most global asset classes still largely correlated, predicting what happens out beyond 2019 becomes real guesswork. Until the Fed and other central banks agree to stop accumulating securities, the private markets measured by volatility or volume or trading profits will suffer accordingly. How is this helpful? Final thought on housing. One other impact of the tax reform legislation is that the reduction in corporate tax rates will cause a proportional reduction in the value of tax loss assets to shelter future revenue. Citigroup ("C") will reportedly write-down $16 billion alone, but will still have plenty of accumulated losses to shelter income for years to come. And the erstwhile GSEs, Fannie Mae and Freddie Mac, will likewise need to write down capital to reduce the value of tax loss assets. In the event, both GSEs are likely to need additional capital draws from the US Treasury. We wonder if the Trump Administration will use the fact of the additional advances to the GSEs as a legal pretext to put both of the entities into receivership. Without new legislation, the only way to end the conservatorship of the GSEs is to put them through a formal receivership process. While for many in the housing industry restructuring the GSEs is truly thinking the unthinkable to borrow the title of Herman Kahn’s classic book, “On Thermonuclear War”, receivership has been discussed as a policy option at the White House and would be supported by many Republicans. In the event President Donald Trump decides that housing finance may provide some political leverage, all of the comfortable assumptions about mortgage production or credit spreads or even interest rates will fall by the wayside. Next year is an election year, after all, and tax cuts and reforming the GSEs makes for good conservative political fodder. 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 10, 2017 | In this issue of The Institutional Risk Analyst, let’s first ponder last week’s revelations that the European Central Bank is taking a loss on its purchase of bonds issued by Steinhoff International, the high flying (and highly levered) South African-based home retailer that was struck down by an accounting fraud scandal. This event illustrates how central banks have distorted the credit markets and allowed inferior borrowers access credit at investment grade spreads. This notion of central bankers booking trading losses on their extraordinary open market intervention over the past decade is important because it provides context to understand their decision making. For example, based on our conversation last week with Bob Eisenbeis, Cumberland Advisors’ Vice Chairman and Chief Monetary Economist, we’re pretty certain that the Federal Open Market Committee will further flatten or even invert the Treasury yield curve in 2018 and for reasons that will astound and amaze many investors. Going back as early as 2010 (“MBS – WHEN WILL THE PURCHASES END AND WHAT WILL HAPPEN TO MORTGAGE RATES?”), Bob has been writing timely analysis for Cumberland describing the dynamics of the Fed’s large scale asset purchases, euphemistically known as “quantitative easing,” and what would happen to the bond markets once QE ended. Now that the end of QE is in sight, we ask Bob if the return to normal will be as “beautiful” as Mohamed A. El-Erian suggests in his effusive Bloomberg commentary. The IRA: Thanks for speaking with us Bob. We wanted to talk a bit about your recent comment on Marvin Goodfriend’s nomination to the Fed Board but also talk about your broader view of the normalization process. You may have seen Mohamed A. El-Erian’s fulsome public praise for the FOMC’s policy direction. We’ve always been of the view that the Fed should have stopped after QE1. How do you see it? Eisenbeis: When you look at the research on QE, the opinions are all over the map both inside and outside of the Fed. I think there is a consensus that there were diminishing returns in the additional QEs that were engaged in after QE1. Then it’s a question of what are the costs and benefits of getting out of the program. Those who suggest that QE has been a huge success are premature in my view. You don’t really know until we are completely out. It looks to me like we are going to be OK on balance, but what really bothers me is this constant drum beat inside the Fed and by some outsiders about the huge “profit” earned from QE. They have the accounting all wrong. The IRA: Well, the board is aligning itself with the idiocy on Capitol Hill, where the interest earned by the Fed is viewed as “income” for budget purposes. Most members have not read your 2016 testimony on the Fed's fiscal relationship with Treasury. But Bob, really, is it possible that PhD economists don’t understand the financial relationship between the Treasury and the central bank? We always like to remind people that the US Treasury issued the original $150 million in greenbacks directly into the market to help Abraham Lincoln fund the Civil War. The Fed is the Treasury’s alter ego and is an expense to the government, which is subtracted from the earnings on the portfolio and then returned to the Treasury. Eisenbeis: Correct. The Fed almost by definition cannot make a profit. It baffles me how people inside the system can fail to see the accounting reality here. The Fed issues short term liabilities to buy Treasuries taking duration out of the market. The Treasury makes interest payments to the Fed who takes out its operating costs, including interest payments on reserves and returns the remainder to the Treasury. If this intra governmental transfer were settled on a net basis like interest rate swaps, there would always be a net payment from the Treasury to the Fed. It is too obvious, yet I am not privy to the sidebar conversations on this issue. But back to the point on QE, if the Committee can run off the portfolio through attrition, then they’ll probably escape any need for additional action barring some unforeseen change in the economy. The current path for growth and employment in the third quarter seems pretty positive. The IRA: Does the FOMC understand how their actions and the actions of the ECB, Bank of Japan, etc has not only pushed down the price of credit, but has suppressed volatility since these positions are not hedged? Just as with the Volcker Rule and bank investment portfolios, there is no trading around Treasury and mortgage backed securities (MBS) positions held by central banks. As we told CNBC, "Financial sector on fundamental basis is considerably overvalued," it's no surprise to see Citigroup (C) and other banks guiding the Street lower on trading results for the year. The dearth of duration and trading volumes is a direct result of QE, correct? Eisenbeis: The volatility impact of QE is not something that was on anybody’s radar screen at the time to my knowledge. The bigger concern was that the longer you keep rates low, you start to get dislocations that take place in various markets. Everybody is looking for a bubble here or a bubble there, but the only place you can really argue a bubble exists is in the stock market. But that is really the concern, not the volatility issue or the impact on the markets. The IRA: That suggests a remarkably linear view of the bond market on the part of the Fed. In the $1.7 trillion MBS portfolio, the Fed has sequestered a huge amount of duration extension risk. If prepayments fall due to rising rates, the effective maturity of the security extends and the price of MBS can fall faster than that for benchmark Treasuries. But nobody is hedging the Fed or ECB or BOJ or Bank of China holdings of MBS. As a result, we seem to be headed for a flat or even inverted yield curve environment and with flatlined volatility. Do the folks at the Board understand what the combination of passive central bank portfolios and falling trading volumes is having on large bank earnings? Eisenbeis: If you would see anybody in the system focused on this question it would be the Fed of New York. You mentioned the May 2014 FRBNY blog post on convexity of MBS in your comment earlier. I haven’t seen anything in the FOMC minutes suggesting that Bill Dudley raised the volatility issue during his tenure. But I think the Fed is going to go very cautiously on rates for reasons you suggest. With a new Chairman and governors, you might think there would be room for some change, but in fact they are going to go very slowly. The Fed staff is going to describe to the new governors why certain things were done and under what circumstances. The IRA: So you don’t see a lot of change in policy under Chairman Powell? Eisenbeis: Not a chance. He and the new governors are going to move slowly in terms of any change in direction. They are looking for a community banker for the Board and that person will also tend to be cautious. And the appointment process in the Senate is likely to be slow and contentious. Marvin Goodfriend is too experienced to come onto the FOMC and start rocking the boat. The four bank presidents who are economists and voting on policy in 2018– Bostic, Dudley, Mester and Williams -- are all very solid and experienced, so I’d look for a pretty slow and steady process from the Fed. Some of the governors (Powell and Quarles) and presidents, who will be FOMC participants this year, are not economists, which has a big impact on the policy process from a research perspective. The IRA: Well, back to the market, the folks at the Fed who brag about making money on QE are about to let the markets take the risk on a bunch of FNMA 3s and 3.5s that contain a lot of duration extension risk. As this paper is held by private investors, the positions will be hedged and volumes and volatility should be restored or not? Eisenbeis: What that will do is essentially put upward pressure on rates. This would moderate the need to make policy changes. We published a comment on the runoff of the Fed’s portfolio and when it would come into “equilibrium” so to speak in terms of size. There is no coincidence that MBS on the System Account are paying down about $20 billion per month and the Fed has chosen $20 billion threshold number for monthly portfolio reductions. We estimate that according to the Fed’s plan, the portfolio necessary to restore the currency-to-GDP ratio to its pre-crisis level, would be about $1.9 trillion and normal runoff would achieve this objective in the fall of 2023. Just from a runoff perspective, though, the impact on the markets is not going to depend so much on the Fed as on the Treasury as their issuance needs increase. The Fed is going to reinvest portfolio maturities across the yield curve in proportion to the Treasury issuance. The IRA: Well, precisely. This goes back to the earlier point about profitability. The Fed and the Treasury are one and the same. Different faces of a Hindu deity. Eisenbeis: But this is precisely why these MBS cannot be sold. The IRA: Is this an institutional issue for the Fed? Are they avoiding sales of MBS to avoid taking a loss on the portfolio and thereby eroding the need for chest thumping about the profitability of QE? Eisenbeis: I think that is a good bit of it. If you recall, the Treasury robbed the Fed’s capital a few years back to fund spending for a highway bill. There’s a cap now on Fed equity at $40 billion. And the Fed cut a deal with Treasury that if the Fed takes a loss on the sale of assets they don’t have to write it off against capital. They create a “negative asset” account. What is that? You can do the math and see that the bank’s net worth may be negative. The IRA: It’s like a net operating loss for a central banker. But Bob are you suggesting that the Fed is more worried about the possibility of embarrassment over taking a loss on the sale of MBS than they are about the impact of policy on the financial markets? Even to the extent of seeing a negative yield curve in the Treasury market? How can we do three hikes in 2018 and not have an inverted curve? Eisenbeis: Substantively as we’ve discussed, it is the Treasury that backs everything up. But it’s the optics that matter. The optics of the Fed losing money or being insolvent are bad, both in Washington or around the world. Thus they will run off the MBS naturally via prepayments to the extent possible and avoid losses on sales. More important, though, it is very clear that we will have a flat yield curve both on the long end with continued demand and on the short end with the Fed raising benchmark rates. But all of this means that the Fed will go slow. The IRA: Thanks Bob 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. 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