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June 25, 2025  | In this issue of The Institutional Risk Analyst , we return to Flagstar Financial Inc. (FLG) to see how the $95 billion asset bank is fairing after a near-death event in 2024. The bank f/k/a New York Community Bank nearly collapsed in early March last year, when its stock plummeted and the bank required a $1 billion emergency equity infusion by a group of veteran bankers led by former Treasury Secretary Steve Mnuchin to stay afloat. We owned Flagstar prior to the December 2022 merger with NYCB but do not have a position in the stock today. The crisis at FLG was triggered by a combination of factors, including concerns about its commercial real estate (CRE) portfolio, particularly its exposure to New York City rent-regulated multifamily properties, and a "material weakness" in its loan review process. In effect, NYCB got no credit for the addition of the national mortgage business of Flagstar. Since that time, the management team led by Chairman, President, and Chief Executive Officer, Joseph M. Otting  has sold assets and businesses to finance the remediation of its toxic multifamily book. We’ve written extensively about the bank in previous issues of The IRA  (“ NYCB Cleans House Badly, NAIC Gives Insurers Pass on Realized Losses, ”), so today we are going to focus on the bank’s latest results and outlook for 2025.  In order to survive, FLG has sold a lot of valuable businesses, including mortgage warehouse, servicing and third-party origination, which represented the future of the bank (“ Profile: NYCB + Flagstar Bancorp ”). What’s left is essentially a restructuring/liquidation exercise that continues to consume cash and shareholder value as the bank slowly shrinks. As we noted in our last comment, loan demand across the US banking industry is weak and pricing for commercial loans is falling. In this market, FLG is seeking to grow its C&I book and also create a new private banking business, which is one of the most competitive areas of banking today. Like many institutions that are working out a difficult loan portfolio, each quarter brings new expenses that are an unpleasant surprise for suffering shareholders. CEO Otting commented in the Q1 2025 earnings call: “First quarter 2025 results included two notable items. These items include $6 million in lease cost acceleration related to our previously announced branch closures and $5 million in trailing costs related to the sale of our mortgage servicing/sub-servicing and third-party origination business during the fourth quarter of last year. In addition, the Company also incurred $8 million of merger related expenses during the quarter. As adjusted for these items, the net loss for first quarter 2025 was $86 million and the net loss attributable to common stockholders was $94 million or $0.23 per diluted share.” In simple terms, FLG is not making money and does not seem to have any immediate prospects to pull itself out of a slow downward spiral of balance sheet shrinkage and operating losses.  Whereas before 2024, FLG was a peer performer in most respects, today the bank’s financial performance is significantly below-peer, the bottom quartile in many cases. The net-interest income for FLG was just 1.69% of average assets vs 2.9% average for Peer Group 1, this owing to low yields and high funding costs, as shown in the table below. Source: FFIEC Tier-one leverage for FLG was 8.45% in Q1 vs an average of 9.9% for Peer Group 1. But of more concern is the continued dependence on non-core funding sources to support the balance sheet. You might think that the use of hot money to support the FLG balance sheet is a recent development, but in fact the old NYCB made extensive use of non-core funding to support growth. Tragically, FLG was forced to sell the profitable national residential lending and servicing business, which generated significant low-risk liquidity for the bank. The comments by CEO Otting about the "risky" nature of the Flagstar residential mortgage business are just plain wrong, but you can understand the need for obfuscation by the former OCC chief. Notice that noncore funding dependence is slowly falling, but remains well above peer levels. Source: FFIEC The pre-Flagstar NYCB business model worked OK when credit loss rates were low. Indeed, lending on multifamily assets using hot money worked for decades for NYCB and other NYC lenders, when mortgages on apartment properties were considered prime assets. In the age of progressive socialism in states such as New York where FLG is based, however, multifamily assets are now assumed to be impaired by astute underwriters. Should Zohran Mamdani , an opely socialist state lawmaker, wins the New York City Mayor’s race, the value of NYC multifamily assets will likely sink, directly impacting FLG’s multifamily portfolio.  Whether located in New York, Chicago or Los Angeles, local politicians of all persuasions have little ability to address persistent inflation. The cost of operating multifamily residential assets in New York is only ever rising, thus when the state legislature tries to limit rent increases to “help” consumers, all they are doing is hurting consumers by limiting the supply of housing. These policies also hurt banks like FLG and other lenders in New York City and its environs by reducing the value of assets and discouraging new loans on rent-controlled properties.  The scale of the progressive value destruction in New York is truly massive. New York City multifamily real estate prices have experienced a significant decline since 2019, with some reports indicating a drop of up to 67% for rent-regulated buildings. This decline is attributed to a combination of factors, including the 2019 Housing Stability and Tenant Protection Act (HSTPA), rising interest rates, and increased operating costs. Since the New York State legislature passed the 2019 rent control law, the supply of rental apartments in New York City has fallen as landlords take older, unrenovated units off the market. New York City Housing Authority (NYCHA)'s portfolio reportedly has more than 5,000 empty apartments, a number that has increased recently due to the staggering cost of operating over 500,000 city owned rental properties. Today the City of New York is one of the world’s largest slum lords. With NYCHA tenants paying below the cost of operating the buildings, this means that the half million NYC owned properties are poorly maintained and have little value in the private market. Figure annual operating costs for a private landlord are around $3,500 per month per unit. Rent for a studio in a NYCHA property might average around $1,149 per month, while a two-bedroom could be around $1,391, according to NYC.gov . The average private market rental for a one-bedroom apartment in New York City is around $5,273, according to Rent.com . Since the success of the new business model at FLG requires a reduction in the bank’s exposure to multifamily properties, and since many of these properties are impaired due to the toxic combination of inflation and socialist politics, it seems reasonable to ask whether Otting and his team will be successful. Timing is important here, since the delinquency rate for both residential and commercial properties is on the rise and banks are employing increased forbearance to conceal nonperforming assets. CFO Lee Smith stated on the Q1 2025 earnings call: "We continue to see significant par payoffs in our commercial real-estate portfolio and we closed on the two nonaccrual loan sales that had been moved to available-for-sale during the fourth quarter with a combined book value of $290 million, resulting in a small gain of $9 million on these loan sales. We will continue to explore all options as it relates to reducing our multifamily and commercial real-estate portfolios and non-performing loans and will execute on what is in the best economic interest of the bank." While FLG has made some signifiant progress on reducing its multifamily credit exposures, the overall size of the non-performing loan book is growing as the bank shrinks, never a good sign. Also, the new business model targeted by Otting and the FLG management team is not very compelling in terms of growth in assets or earnings. From $123 billion in assets in December 2022 when NYCB acquired Flagstar, the bank is down to $95 billion at Q1 2025. Flagstar Financial FLG | Q1 2025 Source: FDIC/BankRegData The combination of NYCB and the legacy Flagstar Bank business might have survived after the 2019 rent control legislation, but the addition of some of the assets of Signature Bank added to the complexity of the institution and lowered the odds of success in our view. The reports of new loan originations are great, for example, but FLG's gross yield on its loan book is 5.1% or a point below the average yield for Peer Group 1. Interest expense is a point higher than the average for Peer Group 1. Do the math. The components of FLG's funding are shown in the chart below from BankRegData. Flagstar Financial FLG | Q1 2025 Source: FDIC/BankRegData Yet leaving aside asset quality problems and funding mix, the real question is why federal and New York State regulaltors allowed the undermanaged NYCB to acquire any other bank in the first place. NYCB's management team, let's recall, were largely a bunch of New York real estate pros who thought they were a "commercial lender." In fact, NYCB grew up in the very political business of financing multifamily rental housing in New York City when asset values were rising every year . Duh. But no more. Better Markets summed up the situation in March 2024 : "NYC Bancorp is the holding company for Flagstar Bank (“Flagstar”) and the former New York Community Bank (“NYCB”) as well as Signature Bank. After trying and failing to get FDIC and Fed approval, NYC Bancorp shopped for a more friendly regulator, the OCC, which resulted in Flagstar’s acquisition of NYCB on December 1, 2022. The result of this regulatory arbitrage was Flagstar ballooned from $25 billion in assets to $90 billion in assets. With the ink barely dry on that merger, the banking regulators—just 100 or so days later—approved Flagstar’s acquisition of Signature Bank, causing its total assets to jump to $123 billion." 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.

June 18, 2025  | This week, The Institutional Risk Analyst  is in Grand Lake Stream Maine for the start of the 2025 fishing season. The weather is cold and rainy, which means perfect fishing conditions. The bass in West Grand Lake are hungry and in some waters still on their spawning beds because of chilly weather conditions this Spring. This means that we are going to have some fun with surface action today at the upper end of West Grand Lake, then lunch at General Jimmy Doolittle's cabin. Of note,  half a dozen wings, two amazing lobster roll baskets, and two drinks was $82 before the tip at the Harris Family food stand in Lee Maine, yesterday. A quarter century ago, when we first travelled to Grand Lake Stream, that meal cost around $25. What does this say about price stability in America ℅ the national Congress and the Federal Open Market Committee?  Lee Maine US bank regulators plan to reduce the enhanced supplementary leverage ratio (eSLR) by up to 1.5 percentage points for the biggest lenders, Bloomberg reports, which will lower leverage ratios and thus capital requirements. A number of clients ask whether this means that banks will necessarily buy more Treasury paper and/or mortgage backed securities.  That depends. Source: FDIC Given modest loan demand and deposit growth in the industry, meager quantities of excess liquidity are chasing opportunities across the board, one reason that "other loans and leases" is the fastest growing bank asset line item. Banks finance primary dealers on an arm's length basis, let's recall. But new mortgage and MBS volumes are at 10-year lows. Banks will hold incremental Treasury debt, but this is not the first choice because of the poor returns. To President Donald Trump's point about rate cuts, deposit rates and loan yields of US banks have been falling for two quarters, a topic we'll be discussing for our Premium Service subscribers in our next issue. The big factor affecting whether banks buy Treasury debt will be when the FOMC ends "quantitative tightening" and starts to expand its holdings of government debt. As Treasury paper and MBS run off, the Fed of New York will reinvest in Treasury paper only mirroring the issuance by Treasury in terms of the distribution of maturities. If the FOMC grows the balance sheet rapidly, then bank reserves and assets will grow, and depositories will have no choice but to own more Treasury paper over time. The impetus to own Treasury debt will increase if Congress takes away the Fed's power to pay interest on reserves, a move that makes a systemic event in the Treasury markets more likely. The connection between expanding the balance sheet via open market purchases of Treasury debt and bank reserves is one of the starkest illustrations of how federal budget deficits translate directly into inflation. When you hear some facile economist say that the Fed can purchase Treasury debt without stoking inflation, remind them of the obvious. Tight lines. 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.   Premium Service

June 16, 2025  | With the financial markets wavering between risk on and risk off, the ethereal realm of crypto tokens is likewise showing an uncharacteristic degree of uncertainty.  YTD, the S&P 500 is up single digits, but bitcoin is up multiples of that gain. Earlier in the year, bitcoin was down even more. As a veteran crypto investor told The IRA  last week: “Bitcoin goes up a lot and goes down a lot.” The chart below from YahooFinance suggests bitcoin outperformed the broad equity market since the election of President Donald Trump , but with outsized volatility, and has since plateaued. Meanwhile, our earlier prognostication that Amazon (AMZN)  would be looking to launch a stablecoin for its users was validated within days. Seems obvious. How much of a discount will AMZN offer users for paying for purchases with coins? Let's call it "ZON" just for fun. What is the lifetime value of an AMZN customer? That will tell you the discount for ZON purchases. The question of a possible AMZN coin begs a bigger issue: integration with a sales funnel or asset manager to form a moated castle a la JPMorgan (JPM) or other bank and nonbank groups like Rocket Companies (RKT) . Maybe over a decade since the idea was announced, AMZN will finally merge with Google parent Alphabet (GOOG) to form GoogleZon and take over the world?   A stablecoin issued by a retailer is essentially another iteration of the prepaid gift card, an instrument that has made a lot of bank issuers a lot of money. That's a story for another day. What happens if a consumer does not spend a coin? Are coins eternal or just receipts? State law will govern this question in most cases. May customers of AMZN transfer coins to others? Can we steal coins from a ZON wallet? Or are coins like gift cards and purchased airline miles with a finite life? Again, state law and the fine print will govern stablecoins. That means issuers of stablecoins need a 50-state operating and compliance solution. So, for example, will Walmart (WMT) take advantage of the advent of coins to finally create a bank? Putting a coin inside a national bank affords the issuer state law preemption. The banking industry has been fighting to keep WMT and other commercial companies out of bank ownership for decades. The FDIC actually imposed an unlawful moratorium on approving industrial bank applications for fear of the reaction from Capitol Hill. But now, does it matter? Is the competitive threat from stablecoins to existing payments systems so dire that banks will be forced to make alliances with giant non-depositories like Walmart?  Synchrony Financial (SYF) , one of the best performers in the WGA Bank Indices , just recaptured the white label credit card business for WMT. OnePay, backed by Walmart and Ribbit Capital, will provide a comprehensive financial management solution alongside the SFY card offering, which will run on Mastercard and will be active in the Fall. Could SYF and OnePay offer a native stablecoin solution for WMT that rode upon the SYF payments rails? Oh yeah. And WMT does not, repeat not, need to own the bank. If the folks at WMT think about it, they should pay SYF to manage this risk and sleep soundly at night. The intriguing thing about private coin empires is that they are obviously not a positive for existing payment systems, yet neither are they dependent upon crypto. Larger sponsors may be able to create exclusive coin ecosystems without actually touching crypto assets at all. Fiat to AMZN coin, “ZON,” is really all that the sponsor needs. If SYF/OnePay want to facilitate crypto transactions, fine and dandy, but the KYC and other risk overhead of actually touching coins make that a far more expensive conduit for capturing cash and eyeballs. Ask your big bank about managing the risk from Zelle, for example, then multiply that number exponentially for KYC on crypto assets coming from offshore. The advent of proprietary coins is not necessarily a positive for offshore crypto tokens, which are believed to have a notional value in the trillions today. One sanitized onshore surrogate for bitcoin, iShares Bitcoin Trust ETF (IBIT),  is the fastest growing exchange traded fund in history. Owned by Black Rock (BLK) , the IBIT had $70 billion in net assets as of the Friday close. The big advantage of onshore offerings like IBIT is that you don’t need to actually touch crypto and the global counterparties that hold and trade these tokens.  One of the intriguing developments of the past few years is the emergence of stablecoins that are backed by or reference gold. Some proponents of crypto claim that tokens are a substitute for gold because of the ease of use and lack of a need for storage, but the re-socialization of gold ownership that we cover extensively in "Inflated" is accelerating. We featured a discussion on the rising use of gold as a reserve asset (" Interview: Henry Smyth on the Return of Gold as Global Reserve Asset ") earlier this year. Of note, gold just surpassed the euro as the number two monetary asset behind the dollar. In terms of market performance, coins based upon gold have been a decidedly mixed bag. In fact, Jalan, Matkovskyy and Yarovaya (2021 ,  found that during COVID, “selected gold-backed cryptocurrencies, their volatility, and as a consequence, risks associated with volatility, remained comparable to the Bitcoin. In addition, gold-backed cryptocurrencies did not show safe-haven potential comparable to their underlying precious metal, gold.” Many investors may feel like schmucks for missing the great upward surge in bitcoin and other crypto tokens, yet there is still big money to be made in various new offerings traded offshore. Insiders reap supernormal returns surfing the back end of the world of crypto, offering turnkey clearing solutions and leverage. Large institutional players such as Tudor and Millennium, for example, reportedly replicated a Treasury basis trade in crypto assets , buying the asset and selling the futures. As the trade has grown more crowded, however, the “risk free” spreads on the crypto basis trade narrowed. The functionality of crypto and coins will become more ubiquitous, thus the free alpha available will eventually decline and disappear. Of course, the whole point of crypto assets is that there is no basis save human credulity. A stablecoin referencing gold or the dollar is relatively dull compared to the opaque market for bitcoin or tether or sol or hype . The commentary swirling around the ersatz crypto markets is hyperbolic and completely conflicted since, after all, these tokens and the platforms that host them are private, like the “dark pools” set up decades ago to trade public stocks after hours. Sure the blockchain is public, after the fact, but there is no visibility on the forward market, no order book. The newest markets for crypto are deliberately domiciled offshore and configured so as not to be construed as securities. Some people play the crypto markets for speculative gain, but others use the facility of coins to move value around the globe outside of the regulated market for fiat dollars. The crypto narrative says that bitcoin and other tokens will grow in value, leaving the failed world of fiat dollars behind. But we suspect that two factors are likely to impede the glorious progression of crypto while stablecoins grow for no particular reason save the novelty and ease of use.  The first factor is marketing. Various legacy organizations from BLK to AMZN to GOOG to RKT all have an interest in creating stablecoins as a means attracting and retaining customers for other products and services. These coins offer no speculative pazazz, but do offer vast new opportunities for marketing. Think of ZON not just as a currency but also a marketing expense. When GOOG and AMZN and dozens of other large global orgs decide to issue their own stablecoins, the marketing message will be very loud. The second factor that may weigh against crypto assets is diversification. The big winners in the world of crypto are not just the folks who bought bitcoin in the early days, but those smarties who have set up virtual green felt card tables to attract trading and clearing volumes at near-zero cost. As in the world of investments, the operative model is near-monopoly, like BLK in front-end ETF offerings, payment for order flow (PFOF) leader Citadel Securities  in execution, and Bank of New York (BK)  in back office and custody.   Yet as the barons of crypto amass vast piles of notional value, the temptation grows to take the winnings off the table and migrate value back to fiat dollars, hot cars, stocks or perhaps even some tasty real estate. We call it diversification to be polite. With a growing mob of progressive losers looking to put lucky billionaires to the sword in the streets of blue cities, maintaining a low profile is a priority for the crypto kings. Not only is the real action in crypto today offshore, but the final resting place for many crypto kings may need to be in another country as well. We know some great beach towns in South America. Punta del Este Of course, diversification is not just something that is relevant to crypto facilitators. Robin Hood (HOOD) , which derives most of its revenue from PFOF, is likewise a rent taker, but then pays away much of the rent it takes. Will HOOD eventually capture more of the execution dollar, especially with crypto? Of note, HOOD clients don't actually own coins, but instead have a claim on a comingled pool of tokens owned by the firm. As the use of stablecoins grows, there will be a strong push by the existing rent takers like BLK, Citadel and Goldman Sachs (GS) , to name just a few, to position the proverbial funnel in the world of crypto and stablecoins. When Charles Schwab (SCHW)  starts to offer spot trading in crypto native on their platform next year , how will the kings of PFOF get their taste of the gate?  Like the world of banking, investments and also residential mortgages, the crypto world is consolidating down into large islands of assets and customers, protected by walls of incentives designed to keep the customer -- and their assets -- from ever leaving. Retailers like WMT and AMZN likewise have a monopolistic interest in retaining the attention and cash of the customer via stablecoins, but maybe not trading crypto. In such a world, the seemingly innocent stablecoin may soon become an important part of the anti-competitive defense mechanism of large corporations and financial institutions. But large companies that worry about reputation and OFAC at the US Treasury may stop short of delving in crypto assets directly. We'll be describing the competitive tension between SCHW, HOOD and some of the other asset gatherers in a future issue of The Institutional Risk Analyst. 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.

June 11, 2025  | For the longest time now, we have been struggling with the global marketing hype fest known as “AI” or artificial intelligence.  Before AI, you will recall, we had blockchain, but the tattered remnants of that sham are still with us. Some bubbles last longer than others. And some credulous souls invest in dead hypes long after the thrill is gone. We can recall a time with no computers, when intelligence was limited to moral persons and communication involved paper and pencil. Later we had typewriters and then word processors, and finally a Hewlett Packard (HPE) HP-12C with a piece of silicon inside that was actually made in the USA. When we first did interest rate swaps, we had to input the cash flows into the HP-12C, then push the "run" key and wait for a result. We covered the semiconductor capital equipment sector when Sunnyvale, CA, was the center of the known world. You can imagine how we laughed as we watched Nvidia (NVDA)  soar like a rocket post COVID on a wave of AI hype, then stepped off the elevator before the correction (h/t Jim Cramer ). We even bought a little NVDA as it plummeted past our exit point. Why? Hype aside, Nvidia is a great company.  It will interest readers to know that we are a good bit more negative on AI than we are on crypto. AI is the result of a coming together of many conflicted and confused global corporate interests, particularly in the US and China. These corporate sponsors know how to run a stock scheme. With crypto there is at least the possibility of a speculative profit. Jensen Huang , co-founder and chief executive officer of NVDA, seems to be one of the few profiting from the global AI bubble. One of the biggest drivers of the global AI bubble is China. As with domestic housing and electric vehicles more recently, China is “all in” on AI, which means that the amount of resources directed to AI is completely out of proportion to any real benefits. But China, lest we forget, is a nation where economic considerations are of no importance.  All that matters is defending the political monopoly of the Chinese Communist Party. For years, Toyota Motor Corp (TM)  has been telling us that EVs make no sense, either economically or in terms of the environment , but the decision of politicians in Washington and Beijing prevailed. Have we plummeted down a similar dark rabbit hole of massive misallocation of economic resources with AI? The waves of private and public support for emerging technologies has spawned a series of related periods of hype  and exaltation, followed by disappointment and financial reckoning.  Researchers at Apple just released a paper  that throws cold water on the "reasoning" capabilities of the latest, most powerful large language AI models. In the paper, a team of machine learning experts makes the case that the AI industry is grossly overstating the ability of its top AI models, including OpenAI's o3, Anthropic's Claude 3.7, and Google's Gemini.  Maybe Elon Musk should count the end of his political affair with President Donald Trump , and the negative impact on his AI project, as a blessing. Goldman Sachs (GS)  Chief Global Equity Strategist Peter Oppenheimer   noted in a recent report  that “bubbles form when the total value of companies involved in the innovation becomes much higher than the future potential cash flows they are likely to generate.” Since equity markets are all about discounting the future, the prospect of new technologies and related gains usually overwhelms any concern about the actual value of a given innovation. Oppenheimer wrote about the dot.com bubble three decades ago: “By December 1996, the head of the Federal Reserve at that time, Alan Greenspan , famously warned of “irrational exuberance,” where he later lamented in February 1997 that ‘regrettably, history is strewn with visions of such 'new eras' that, in the end, have proven to be a mirage.’" One of the signs that a tech bubble is getting long in the tooth comes when “investors” in a given technology or sector start to write-down these expenditures, usually at the insistence of an auditor or angry shareholders. Chief among these loss leaders is blockchain, which has not only absorbed billions of dollar in “investments” but has also enabled billions more in theft by hackers.  Blockchains are not only insecure, but they are very inefficient. "The bottom line is that while the blockchain system represents advances in encryption and security, it is vulnerable in some of the same ways as other technology, as well as having new vulnerabilities unique to blockchain," writes Stuart Madnick in a 2019 paper for MIT .  But the AI bubble is orders of magnitude bigger than blockchain. In 2023, the global AI market was estimated at $150 billion. This market was projected to reach $200 billion by 2025, a figure that has already been exceeded. In a 2019 paper, GS researchers, who always cover their gorgeously exposed flanks, asked whether the $1 trillion in prospective investment in AI would pay off.  The big risk, they noted : “It’s possible that the large language models being built by a handful of companies will find they are competing in a winner-takes-all market.” In a Bloomberg  interview, hedge fund mogul Paul Tudor Jones  said that AI is “the most disruptive technology in the history of mankind.”  AI is certainly disruptive, but we keep wondering if the focus on analyzing the significance of existing data is not a gigantic dead end for investors. Is the gigantic spend on generative AI too little benefit for too much spend ? We suspect that the answer is yes.   John Maynard Keynes  observed in his General Theory, most professional speculators are concerned “not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.”  That is, get out before the crowd notices their mistake. We think the time when investment in AI could produce a positive return for most companies is long since past. Indeed, as with the blockchain fiasco, the number of corporate sponsors of AI who are reporting losses or restructuring their assets and management teams is likely to grow a lot faster than AI stocks in coming months.  WPP Group (WPP) CEO Mark Read , for example, pushed to adopt artificial intelligence. Now he has exited with the WPP share price languishing and the company facing a massive write down of its AI spend. As William J. Bernstein writes in his book “ The Delusions of Crowds Why People Go Mad in Groups, ” central banks are ultimately the engines of investment bubbles. It was during the zero interest rates of 2020-21 that the marketing hype around AI accelerated. As Bernstein notes: “Low interest rates are the fertile ground in which bubbles sprout.” 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.

May 29, 2025  | Updated | Earlier this week, our friend Nom de Plumber  send us a missive from the ongoing collapse of the world of private equity and related insurance markets. If you have been paying attention over the past several years, you know that banks have been sellers of risk and insurers have been buyers, especially in private credit. Insurance companies led by Apollo Global (APO) insurance unit Athene (ATH) have been buyers of credit products to fund annuities. Credit products sold to insurers are in theory held to maturity and at historical cost, of note. This is why Wall Street loves using insurers as "balance sheet" to hide crap assets and also why American International Group (AIG) failed in September 2008. “US life insurers have shifted more than $1tn of liabilities offshore,” reported the Financial Times , “offloading more risk to foreign jurisdictions despite regulators’ concerns about protections for retirement savings and broader financial stability.” Could the great migration of risk out of banks into insurers and nonbanks hold risk for investors and retirees? Yup. “If the Private Credit, Private Equity, and other Alternative Assets which back these annuity liabilities become distressed, US annuity beneficiaries will need to petition offshore re-insurers and regulators (Bermuda, Cayman Islands, etc.) for protection against financial loss,” NDP offers with his usual optimism. “The US-based managers of these annuities, which have collected asset origination and management fees, would point beneficiaries to them. State insurance regulators would have scant resources or jurisdiction to help. This systemic risk dwarfs the 2008 Mortgage Crisis. Thank you.” Do millions of US retirees face total loss because their annuity underwriter invested their nest egg in private credit? And then transferred the liability offshore, with little or no protection in the event of default? You bet. Major banks continue to publish bullish notes about private credit, but the actions of insurers migrating liabilities offshore speak to another risk perspective. Yes, many Defined Benefit pension and Defined Contribution 401(k) recipients now rely upon these offshored annuities for payment. Imagine the conflict-of-interest risks for the very large insurers which Apollo, Blackstone, KKR, Carlyle, Brookfield, and other Private Equity managers directly own, potentially impacting the retail and group-contract annuities which they sell. Fundamental question: What control is continually monitoring the actual cashflow performance of the credit assets versus underwritten projections, and appropriately re-valuing if material shortfalls? "If neither the insurer nor its regulator imposes such control, breaching Fiduciary Duty," notes NDP, "then the un-monitored financial risks fall directly to the unwary annuity beneficiaries." Is Bank of America Insolvent? Leaving happy thoughts about private credit aside, a long-time reader named Alan returned us to a question we asked back in 2023, namely are Bank of America (BAC)  and other institutions with large portfolios of underwater loans and securities insolvent (“ Calculate the WAC of Bank of America ”). The question arose again following a comment on the Jimmy Dore Show  saying that BAC is on “the verge of collapse.”   We do business with BAC and also Merrill Lynch, so naturally we keep tabs on the antics of CEO Brian Moynihan , who has made avoiding risk and revenue the hallmarks of his storied career. With the 10-year Treasury note yielding 4.5% and many analysts calling for higher Treasury yields in 2026, the M2M solvency of BAC and poorly managed other banks seems relevant. But Moynihan has certainly built himself a cool party pad on Sixth Avenue in Manhattan. 2 Bryant Park “Looking at BAC balance sheet some interesting things pop out,” notes Alan, who worked at Countrywide, Bankers Trust and the Fed Board of Governors in Washington. “Since 12/31/20, total liabilities have risen by $500 billion or 20%. Interest bearing deposits are up $332 billion (30%), non-interest bearing deposits are down. Short term borrowings are up 83%, that is hot money. Investments securities are up 30%, but I am afraid that is filled with bonds that are trading at a significant discount to purchase price. Total equity is up 8.5% but would be down by 30% if the bond portfolio is trading at 90.” Unfortunately, an average price of 90 for the assets of BAC is a tad optimistic. If we turn to Page 9 of the excellent BAC Earnings Supplement for Q1 2025, we can see that the average return on earning assets was just 4.67%, down from 5.12% in Q1 2024. Short duration sucks sometimes, especially with Donald Trump in the White House. The average cost of the bank’s liabilities was 3.47% or down 50 bp from Q1 2024, but BAC has the highest funding costs in the large bank group after Citigroup (C) as shown in the chart below. Source: FFIEC The net spread between BAC’s assets and liabilities was just 120 bp BEFORE we subtract 2% for BAC’s overhead costs (vs the average of 2.4% for Peer Group 1). You see, Brian and his team of cost-cutters have already sliced the bank's overhead expenses to the bone, yet BAC still has an efficiency ratio in the 60s or more than 10 points above JPMorgan (JPM) . Why? Poor profitability. In other words, the interest rate side of BAC’s $3.3 trillion balance sheet is underwater by several points. The bank is surviving with non-interest income and revenue from Merrill Lynch and other nonbank affiliates. If BAC’s forward estimate for yields on the 10-year Treasury next year are correct, then stress on BAC and other lenders with significant portfolios of low-coupon securities will grow. But the linear view of risk shown in the numbers for BAC's risk exposures above is only half of the story. The most recent data from the FDIC shows that the industry is slowly reducing its negative carry by selling low coupon securities. That said, net losses on securities were only $1.9 billion for all US banks in Q1 2025. Even though US banks took $16 billion in realized losses on securities last year, there is still a huge problem hanging over the US banking industry.  This problem worsens as LT interest rates rise and spreads widen. As of Q1 2025, BAC’s unrealized losses on its $942 billion in total debt securities was $99.8 billion or almost half of the bank’s $203 billion in tangible common equity. The yield on the bank’s huge securities portfolio was 2.9% at the end of Q1. Of course, if we mark-to-market the bank’s $228 billion portfolio of residential mortgage loans, which have a 3.36% average yield, BAC is arguably insolvent. Fannie Mae 3.5s for delivery in June traded at 88 yesterday. The problem with the FDIC chart above is that is reflects a linear, two-dimensional snapshot of duration risk facing banks. Since the end of COVID and the increase in interest rates, the risks applicable to mortgage-backed securities have expanded dramatically. This is the primary reason why banks have not been increasing MBS exposures, of note, despite the constant drumbeat from Sell Side firms. Call bank reluctance to increase mortgage or duration risk the "Silicon Valley" syndrome. Since 2022, prepayments, market volatility and bond maturity premia have “normalized” and now reflect heightened expectations for inflation and also market volatility. Or to put it another way, if the chart from the FDIC measured actual duration risk, the Q1 2025 figure for unrealized losses would run off the bottom of the page.  Think about the dollar cost of decreased prepayments on the BAC mortgage book if the Treasury 10-year goes to say 5% yield. Even a small decrease in prepayments due to higher LT interest rates could significantly impact the fair value of the BAC mortgage portfolio, forcing unrealized losses higher. A half point rise in yields on the 10-year Treasury note could cost BAC points in unrealized losses. Should the 10-year Treasury go to 4.75% or even 5% yield, how will that move impact the fair value of the BAC mortgage portfolio?  How will higher LT yields for Treasury collateral impact the profitability and capital of other US banks? These are the questions that the folks at the Fed and Treasury need to ponder as they fight publicly about reducing short-term interest rates. But if LT rates continue to rise, one veteran banker told The IRA yesterday, then BAC and several other large banks are going to start to literally shake apart from unrealized losses on COVID era assets. Alan: "QE is a very powerful drug to which our financial system is addicted. All those low coupon, long duration MBS would trade even lower if the owners (Fed and big banks) tried to sell them." 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.

"Went to see the captain, strangest I could find Laid my proposition down, laid it on the line I won't slave for beggar's pay, likewise gold and jewels But I would slave to learn the way to sink your ship of fools" "Ship of Fools" -- Robert Hunter (1974) May 26, 2025  | Happy Memorial Day, the day when Americans honor those who died while serving in the United States Armed Forces. Sadly, as with Rome and Great Britain before us, the greatest threat to the future of the nation seems to come from within. Even as the market for US Treasury debt shows growing stress, members of the Trump Administration seem more focused on cutting taxes and encouraging various new speculations than on reducing deficits and financial risk.  Normandy American Cemetery We have compared President Donald Trump to President Andrew Jackson  because of the former's demonstrated potential to disrupt and destabilize the US economy, but perhaps we are being unfair. In addition to Jackson, analogies about the Trumpian era should also include equal measures of President Ulysses S. Grant , whose administration was marked by a period of reckless speculation and financial crisis. Grant did, however, restore the convertibility of the dollar into gold in 1879. As we noted in an earlier post originally written for The Daily Reckoning (“ The First Crypto Currency: The Dollar ”): “Around 1869 the already wealthy speculator Jay Gould , who was a partner of Jim Fisk  in the Erie Railroad, took notice of the fluctuation between the price of gold and greenbacks."  In the years after the Civil War, Gould and Fisk tried to corner the gold market. The result was a near collapse of the US economy. Scene in the New York Gold room during the excitement of September 24th, 1869. Library of Congress. On September 24, 1869, better known as "Black Friday," the infant US markets experienced the first systemic event. The situation was only rescued by Grant's decision to authorize additional Treasury sales of gold, thwarting the scheme of Fisk and Gould. Wind the clock forward 150 years. The tax legislation that just cleared the House will add trillions to the federal debt, yet the message coming from U.S. Treasury Secretary Scott Bessent  is to endorse bitcoin and reaffirm his pro-crypto stance. "We believe that the United States should be the premier destination for digital assets," Bessent said. "Our goal is to encourage firms to reshore, reshore or bring back to the United States best practices that are digital asset innovation and experimentation here in the United States without scaling back their ambition to influence the global industry," he added.   We view crypto tokens as an amusing form of fraud , but apparently President Trump and Secretary Bessent think otherwise. It is important to recall, however, that periods of speculative frenzy are often encouraged by government. In fact, Bitcoin is not the hot speculative vehicle in 2025, but rather residential housing, specifically the government sponsored enterprises, Fannie Mae and Freddie Mac . If you want some real "AA" -- artificial alpha --the GSE trade is the buzz. Strange that Secretary Bessent has not picked up on this point. Last week, during remarks to the MBA Secondary & Capital Markets event in New York City, FHFA Director Bill Pulte commented that he thought the estimates for the valuations for Fannie Mae and Freddie Mac were too low . Pulte then made clear that releasing the GSEs from conservatorship “is a decision for the President of the United States.” That was a hint. The next day, by no coincidence, President Trump said on Truth Social: “I am giving very serious consideration to bringing Fannie Mae and Freddie Mac public,” declaring that he would make a decision “in the near future.” The common penny stocks of these two de facto appendages of the state, Fannie Mae and Freddie Mac, are up over 600% in the past year, generating huge gains for the likes of Bill Ackman and John Paulson . Bitcoin is up a paltry 50% LTM. Indeed, much like old fintech stocks such as PayPal (PYPL)  and Block Inc (XTZ) , bitcoin seems to be losing the special novelty that always seems to drive these manic stories. Is bitcoin now just another boring Wall Street ETF? When it comes to the arbitrage between public interest and private gain, Ackman and Paulson are no different than Fisk and Gould. Both seek to profit at public expense. They want to leverage a relationship with the President of the United States, as did Fisk and Gould in their unsuccessful efforts to win the support of President Grant for their audacious scheme to corner the gold market. But the now prospective release of Fannie Mae and Freddie Mac from conservatorship promises to be one of the great speculative bubbles of the Trump Administration. But can we release the GSEs before the next maxi housing correction? That is the question. John Chancellor  wrote about speculative bubbles in The New York Review of Books  in 2021: “Governments frequently have a leading role. The French and British governments encouraged bubbles in the Mississippi and South Sea Companies because they wanted public creditors to swap their debt holdings for overpriced stock in these companies. Modern politicians often view the level of the stock market as a measure of their personal success: during his term in office, President Trump tweeted new highs on Wall Street and browbeat the Federal Reserve to loosen monetary policy in order to send shares even higher. The financial media, whose advertising incomes rise and fall with the markets, encourage trend-following behavior. Roger Ailes joined the business channel CNBC in 1993, just before the dot-com boom took off.” During our quarterly conference call for subscribers to the Premium Service  of The Institutional Risk Analyst , one astute reader named Stephen asked perhaps the key question facing financial markets, namely why is the line item known as “Other Loans & Leases” of US banks growing so rapidly? The short answer: The Treasury, hedge and private equity funds, and other nonbank financials firms are crowding out other borrowing. What are the three fastest growing asset categories for US banks? Other loans and leases was up 21% in Q4 2024, unearned income was up 44% and other real estate owned was up 27%.  Source: FDIC As Adam Josephson  notes in his excellent blog, “ As the Consumer Turns ,” the growth in other loans and leases comes from one source: “the rapid and accelerating growth in bank lending to levered nondepository financial institutions (NDFIs) compared to limited loan growth to the real economy (commercial and industrial loans, real estate loans and consumer loans).” Perhaps the biggest part of this growth in lending to nonbank financial institutions is the inventories of primary dealers, whose holdings of Treasury debt are at record levels and will only grow further with the rising federal deficits. As we described earlier (" The Single Fed Mandate & Bank Stocks "), President Trump's trade offensive may have fatally damaged the basis trade that is essential to the operations of the Treasury market. Of note, the same market is used for hedging interest rate risk in the mortgage market. When you consider the harm already done to the financial markets in the first few months of the Trump Administration, it seems fair to ask what will happen as Washington doubles down on trade sanctions against the EU and China over the summer. When President Trump says that the Fed should lower interest rates, he has no idea just how accurate is that statement. In our next issue, we’ll be providing subscribers to our Premium Service with the Outlook on Housing Finance and discuss the latest mega transaction in the rapidly consolidating world of residential housing. Just about every company in the residential mortgage market is for sale right now, an illustration of how late the Federal Open Market Committee is to the party. 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.

May 21, 2025  | This week, FHFA Director Bill Pulte appeared in front of a packed ballroom at the New York Marriott Marquis for the MBA Secondary and Capital Markets Conference. In his usual affable style, Pulte delivered some important messages that may have cruised over the heads of many attendees. And he made absolutely clear that his prime concern is the safety and soundness of the Enterprises, Fannie Mae and Freddie Mac, and that in all respects he is a good soldier who reports up to the White House and President Donald Trump . The comments were in a fireside chat, hosted by an official of the MBA with prepared questions. In response to the first question about his experience so far, Pulte commented that “the government is very different from the private sector, and the more they do, the more they come after you,” a reference to the Democrats in Congress and particularly Senator Elizabeth Warren (D-MA) . Pulte revealed how he had gone to see Warren and “wanted to work with her,” but then received an unfriendly letter complaining about Pulte’s removal of the directors of the GSEs. Pulte correctly noted that under The Housing and Economic Recovery Act (HERA) the FHFA has total authority over the GSEs in conservatorship. Pulte has no need to even maintain the pretense of a board unless and until the Enterprises are released from conservatorship. “The boards of the GSEs don’t have a fiduciary duty to the Enterprises,” he noted. “They have a fiduciary duty to the conservatorship.” He then went on to say that the boards were "fake" and slowed the management of the Enterprises because they have no real function so long as the GSEs are under government control. Pulte described how Senator Warren seemed unaware of the existence of manufactured homes, a remarkable revelation given that the considerable advances in manufactured homes make them ideal for creating affordable housing. Inflation has taken up the cost of home building so much that building a home for entry level buyers is almost impossible. If you figure that the average home costs $125 per square foot, that means $100,000-$150,000 just to build. “I get this letter [from Warren] that says I did something illegal, and it was nonsense, total nonsense,” Pulte asserted. When asked about his commitment to the MBA last year to bring a more business minded attitude to the GSEs (than had existed over the past four years), Pulte minced no words: “If its not in the law, not in the actual statute, then it needs to go. We will do what Congress has told us to do, but if its not in the law, then we are not going to do it. What has happened in the last many years is that the FHA Director came up with these ideas and they would try to legislate from the bench, so to speak.” Pulte described how he has been attacking the institutional bureaucracy created at the GSEs under the Biden Administration. He described “layers and layers” of internal bureaucracy at the GSEs. As we've noted in past issues of The IRA , the GSEs became entirely politicized under the Biden Administration. “I would hear from people in the industry that we just want to have regulatory certainty,” Pulte noted, who described how and why he decided to use X for many official announcements.  Pulte also said that he believes that the estimates of the value of the GSEs are too low, a veiled hint that the Trump Administration must eventually try to monetize these assets given the swelling federal budget deficits. He sidestepped a question about reducing the footprint of the GSEs as occurred under Trump I, but said his main focus is improving the financial performance of the GSEs. "An efficient, well-run Fannie and Freddie is a safe and sound mortgage market," Pulte declared. In response to a question about ending the conservatorship for Fannie Mae and Freddie Mac, Pulte remained non committal and said simply “we’ll see.”  While he indicated that he and Treasury Secretary Scott Bessent were in constant discussion about the GSEs and other issues, Pulte made clear that “this is a decision for the President of the United States.” At the end of the program, Pulte took several questions, including one from The IRA  regarding the four years of chaos at FHFA around the unworkable proposal pushed by Experian (EXPN)  to force lenders to US Vantage Score for underwriting loans .  When asked if FHFA would end the program to validate non existent data for Vantage, which is rarely if ever used by mortgage lenders for conventional loans, Pulte responded that it was “a good question” and suggested that the industry may see some relief soon. But during his remarks, Pulte minced no words when he said that Fair Isaac Corporation (FICO)  should reduce the cost of its credit files, a message he later posted on X. 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.

May 18, 2025 | "Moody's downgraded the U.S. sovereign credit rating on Friday due to concerns about the nation's growing, $36 trillion debt pile," Reuters reports , "in a move that could complicate President Donald Trump's efforts to cut taxes and send ripples through global markets." The ratings action by Moody's is long overdue and especially appropriate given last week's train wreck in the House on the "big beautiful" spending and tax bill. In this issue of The Institutional Risk Analyst, we feature a comment from the newly released book, "Inflated: Money, Debt and the America Dream." This comment was originally published in The Daily Reckoning . The First Crypto Currency: The Dollar President Abraham Lincoln is considered to be the moral savior of the United States for ending slavery. To pay for the war, he made enormous changes in the basic relationship between the federal government and money. These changes greatly diminished individual property rights and increased the power of Washington over the private economy. Lincoln Memorial The paper money created by Abraham Lincoln to finance the Civil War was the first crypto currency. Lincoln relied on the issuance of nonconvertible paper currency to support the military effort, in today’s terms like forcing people to accept buttons or miscellaneous crypto tokens in payment. Lincoln used interest bearing paper “money” or “greenbacks” to finance the Civil War and, more significant, passed laws mandating the acceptance of paper currency as “legal tender” for all debts. When Treasury Secretary Salmon Chase asked Congress to pass the legislation in order to maintain government bond prices and procure supplies for the army, the law provided that import duties and interest on the public debt would still be paid in gold. Paper money was seen as inferior to gold. In fact, paper was not seen as money at all, but rather as a form of debt. Though the Founders made provision under the Commerce Clause of the Constitution for trade between the states free of tariff, there was no provision for a common currency or banking system to tie together the nation or even the individual states. State-chartered banks issued various forms of debt to the public in return for some future promise to pay in hard money—that is, gold or silver. The major difference between the private money of the 1700s and modern crypto tokens is that the former at least promised payment in a tangible asset—gold. The latter explicitly promises nothing save a speculative flutter on price appreciation. When you buy a crypto currency, you buy an option on finding a greater fool, but nothing more, a transaction that would have provoked contempt in Lincoln’s day. Around 1869 the already wealthy speculator Jay Gould, who was a partner of Jim Fisk in the Erie Railroad, took notice of the fluctuation between the price of gold and greenbacks. The period of the Civil War and Reconstruction was one of opportunity, particularly for the new class of speculators and criminals attuned to the possibilities created by the federal government and Washington politicians on the one hand and government debt and paper currency on the other. These predecessors of today’s financial buccaneers in the world of crypto currencies built fortunes upon foundations of debt and paper money. The period of great economic growth and financial excess from the Civil War to the creation of the Federal Reserve System in 1913 was arguably as “pure” a private national banking model as ever existed in the United States. One of the ironies of the period was that the United States eventually restored the convertibility of the fiat dollar into gold by 1879. The decision to return to convertibility was actually made by President Grant in 1875, who ordered that convertibility would resume four years later. At the time, the paper currency was trading at about a 20 percent discount to gold, meaning that it took $120 in greenbacks to purchase $100 worth of gold. By the end of the 1800s, the proponents of using silver as currency managed to force legislation through the national Congress to force the US Treasury to buy silver for coinage by using newly issued greenbacks. The silverite tendency was more a religious crusade than a coherent economic or political faction focused on money. In the twenty-first century, the same true believer perspective that animated silverites is visible with supporters of crypto currencies. When the Treasury purchased silver with greenbacks, Americans immediately sold the greenbacks and bought gold, creating a huge wave of inflation. The gold sales by the Treasury almost caused the financial collapse of the United States before the turn of the century. But in those days, the idea of inflation was popular. The action by the Republican Congress to placate the advocates of free coinage of silver and higher inflation was a response to internal political pressures and the approaching election, but the results were felt around the world. The Progressive Party polled over a million votes in 1892 based on a platform that embraced the free coinage of silver at the old 16:1 ratio with the price of gold. By then, the price ratio between gold and silver was closer to 40:1, but the Progressives cared not. Today the ratio between the price of gold to silver is around 100:1. By 1900, the Congress had ended the inflationary purchases of silver and restored the gold standard. With the Republicans in control of Congress and the White House, the stage was set for one of the most conservative pieces of monetary legislation in modern U.S. history, the Gold Standard Act of 1900. This law passed by Congress in March of that year established gold as the only standard for redeeming paper money, and prohibited the exchange of silver for gold. For the moment, at least, this reassured the public as to the value of paper money issued by private national banks. Between the end of silver purchases by the Treasury in 1897 and the start of World War I in 1914, the money supply of the United States grew at a reasonably steady rate. This begs the question as to whether the supply of money in the U.S. financial system or the ebb and flow of a growing, free market society was the more important factor behind successive financial crises. The growth in the supply of gold coins and greenbacks was in excess of 100 percent over the 15 years leading up to the first great World War. Yet despite(or perhaps because of) the fact of gold convertibility, the United States experienced years of instability in markets and the banking sector. Before the creation of the Federal Reserve System in 1913, the movement of gold and the overall trade balance were the chief determinants of the amount of credit available in the U.S. economy. The Fed gave the country and its political class “choices,” observed Washington polymath Timothy Dickinson in an April 2010 interview. He went on to compare the creation of the Fed with the unanticipated increase in the supply of gold produced in the 1880s and 1890s, necessarily increasing the supply of money and also the means for politicians to buy votes. During the 1930s, Franklin Roosevelt caused even greater change for the perception and reality of money in America. The Banking Act of 1933 authorized FDR to seize gold held by individual Americans and banks. After a few minutes of debate and no amendments, the law was passed by the House and the Senate soon followed suit. The first section of the law simply endorsed all the executive orders given by the president or secretary of the Treasury since March 4. Congress gave FDR the power to confiscate gold, seize banks, and impose currency controls, a remarkable agenda of socialist expropriation that terrified American citizens. Even before the Banking Act was passed, the Federal Reserve Board was preparing lists of people who had withdrawn gold from banks in the previous weeks, a none-too-subtle reminder that hoarding gold now carried criminal penalties. The Fed then announced that it was widening the hunt for gold hoarders to withdrawals made in the past two years. By the end of the first week of FDR’s term, enough gold had been returned to the banking system to support nearly $1 billion in new currency issuance. In those days, there was still a link between gold and the amount of paper dollars in circulation. The bankers who were then in charge of the House of Morgan provided intellectual support for FDR’s move against gold. Their despicable actions would have shocked J.P. Morgan, who fought to restore the gold standard only decades earlier. But the fact was that the seizure of gold was more than anything else a political move by FDR. Roosevelt knew that Americans and foreigners were voting with their feet and running away from the Democrats, selling paper dollars and buying gold even as he tried unsuccessfully to resuscitate the sagging U.S. economy. Many Americans remember President Richard Nixon for closing the gold window at the Treasury in 1971, a mostly symbolic act that ended any pretense of a link between the dollar and gold. Yet by ending the use of gold as money in America four decades earlier, FDR ensured the political survival of the Democratic Party, enshrined the paper dollar as de facto money and put America on the road to hyperinflation and excessive debt a century later. The dollar today is simply a crypto currency supported by the legal tender monopoly of the United States. Editor’s note: Here’s what the legendary James Grant , founder of Grant’s Interest Rate Observer , has to say about Inflated: Money, Debt and the American Dream: “Who says that the sequel never stacks up with the original? The new edition of Inflated brings Christopher Whalen’s marvelously accessible history of American finance right down to the present day. Securities analyst, central banker, investor, deal-doer and author, Whalen is no mere recounter of the past but also an informed and provocative critic of the present. His ideas about the future will likely save his readers some large multiple of the price of his book.” T he 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.

May 14, 2025  | Updated | Why did the Fed under Chair Janet Yellen and other bank regulators adopt the Supplementary Leverage Ratio (SLR) a decade ago?  Nobody seems to actually remember what specifically drove the rule other than Washington's simplistic fixation with "capital." But not all risk is a function of capital, even if that is how we measure the cost. The   Federal Register  notice is largely silent as to why banks needed extra capital in 2014, when many bank balance sheets were actually running off. “The leverage buffer functions like the capital conservation buffer for the risk-based capital ratios in the 2013 revised capital rule,” the Federal Register  states. The SLR applies to all asset types — treating US Treasuries, reserves, and loans equally, in theory to limit bank on and off-balance sheet exposures from growing too large and thus creating systemic risk. For US global systemically important banks (GSIBs), the minimum SLR requirement is 5%, meaning they must hold an additional 5% of common equity capital above the simple leverage ratio in Basel.  This means that the GSIB must hold more than 10% capital total assets. Is this really necessary? The markets say no. A number of readers of The IRA have asked whether the Trump Administration should push the Fed to change the treatment for Treasury securities under the SLR. Francisco Covas , Sarah Flowers  and Brett Waxman  of Bank Policy Institute wrote last July: “In April 2020, the Fed temporarily removed reserves and U.S. Treasuries from the denominator of the SLR calculation for banks. This was done in response to the Fed’s massive purchases of U.S. Treasury securities in response to the market dysfunction caused by the COVID-19 pandemic. By removing cash and Treasuries from the SLR denominator, the Fed effectively lowered the amount of capital banks needed to hold against these assets, freeing up their balance sheets to support the Treasury market and the economy during the crisis. After the expiration of the temporary SLR relief in March 2021, the Fed stated that it would soon invite comments on several potential modifications to the SLR. However, more than three years later, no public consultation has been launched.” In theory, the SLR is a binding capital requirement intended to limit “excessive” balance sheet expansion among large banking institutions. It was introduced as part of the Basel III post-crisis regulatory reforms and implemented in the US a decade ago. Since 2014, the growth in the federal debt and the equal inflation of the US banking system through reckless actions such as quantitative easing (QE) have made the SLR seem ridiculous. Eventually the Fed will simply drop Treasury collateral out the the SLR equation permanently because of the size of the federal debt. Bank balance sheets have grown by 100% over the past 16 years due to the growth of the federal debt and Fed efforts to defend the Treasury market. In 2012, when the Fed formally adopted the 2% inflation target, that was a polite way of telling the financial markets that the dual mandate was kaput. But naturally nobody in Washington noticed. The increase in US bank assets and deposits represent the sort of bloat seen in an unhealthy patient who is taking prednisone to combat inflammation. Think of the $37 trillion in federal debt as a form of acute disease that is destroying the US economy and private banks. Not only has “excessive” leverage in US banks become a near-impossibility given their grotesque size, but the larger banks led by JPMorgan (JPM)  are busily seeking ways to return more unneeded capital to shareholders. There simply is not enough real demand for credit, outside of the insatiable needs of the US Treasury of course, to justify the current size of the US banking system. Net, net for the banking industry, asset returns are lower as a result. The chart below shows the impact of larger balance sheets on interest income, but note that net interest income is flat even though interest rates have risen 500bp from COVID. Source: FDIC Since 2008, the whole political narrative in Washington around banking regulation has been obsessively focused on credit risk. This is called fighting the last war, like the Maginot Line in France prior to the Nazi blitzkrieg  in WWII. Credit is the main focus of the Basel Accord going back to the 1980s. The default of less-developed countries (LDCs) is what drove the ministerial agreement known as the Basel Accord, an agreement never ratified by the US Senate or recognized in US law, but notably approved by former Fed Chairman Paul Volcker .  The big problem with Basel III is that the chief risk to banks today is not private credit risk, which remains quite muted despite almost daily predictions of the apocalypse in terms of an impending consumer recession. Instead, as Silicon Valley Bank illustrated in 2023, the chief risk to US banks and nonbanks alike is market volatility and attendant capital risk. The higher ST risk caused by the increasingly violent ebb and flow of the US Treasury market and the reaction by the Federal Reserve Board in response, may soon swamp even large banks and funds. As you can see below, the net loss rate on all bank loans and leases is still sub-1%. Source: FDIC When banks and their lobbyists in Washington argue that the SLR should be reduced to allow banks to hold more Treasury debt, the industry is deliberately missing the point. Large banks want the SLR reduced so that they can increase share buybacks and thereby boost stock prices and related executive compensation schemes. Banks definitely have overmuch capital vs total assets, but any change in basic capital levels or even the SLR needs to be calibrated to reflect the market risk of the asset.  Just for the record, we don't think most banks should own mortgage-backed securities (MBS) at all. Reserves at the Fed or T-bills should be ignored for the SLR calculation, but longer duration assets such as 30-year Treasury bonds or MBS should not. Just remember that Silicon Valley Bank had 40% of total assets in variable duration MBS during the most dramatic period of interest rate volatility in a century. The familiar chart below shows the swings in the total duration of $2.7 trillion in Ginnie Mae securities after the 2019 panic and policy pivot by Fed Chairman Jerome Powell . The subsequent explosion of COVID and the Fed's response drove average US home prices up by over 50% in just four years. SVB was actually dead two years before it failed, but nobody at the Fed or other regulators noticed. Now you know why the Fed and other regulators sit on bank performance data for more than two months after the end of the quarter.   Ginnie Mae Duration Index Source: Bloomberg   The big problem facing US banks is not a lack of capital, but rather too much Treasury debt and an increasingly dysfunctional market for financing the needs of the US government. No surprise then that comments by Roberto Perli , Manager of the System Open Market Account (SOMA)  and a senior leader in the New York Fed's Markets Group, drew a great deal of attention last week. Perli’s carefully scripted remarks revealed the growing fragility of the Treasury market, so much so that the FRBNY felt compelled to publish carefully edited discussion of excerpts of his report in a subsequent blog post. Since most economists ignore the Fed’s balance sheet and the central bank’s interaction with the Treasury General Account, public market commentary about monetary policy and also bank regulation is incomplete. Perli described the market action after the announcement of tariffs by President Trump: “Initially, Treasury yields dropped, in a classic flight-to-safety pattern. After a few days, however, longer-term Treasury yields started to rise sharply. One factor that appears to have contributed to this unusual pattern is the unwinding of the so-called swap spread trade. Reportedly, many leveraged investors were positioned to benefit from a decrease in Treasury yields of longer maturity relative to equivalent-maturity interest rate swaps, partially due to the expectation for an easing of banking regulation that would bolster bank demand for Treasuries. Since swap spreads are defined as the swap rate minus the Treasury yield, leveraged investors were making a directional bet that swap spreads would increase.” Perli then described how the Treasury market became unstable when the market reversed and yields rose: “However, on the heels of the tariff announcement, swap spreads started to decline and made the swap spread trade increasingly unprofitable. Because this trade is usually highly leveraged, prudent risk management dictated that the trade should be quickly unwound, which is what appears to have happened. The unwinding involved selling longer-term Treasury securities, which likely exacerbated the increase in longer-term Treasury yields.” Perli was at pains to say that the March 2020 Treasury market collapse was far worse than the media kerfuffle caused by President Trump’s tariff announcement earlier this year. Yet his description of the violent unwind of the basis trade that is used to finance most Treasury auctions should give banks, investors and policy makers great pause.  Investors assumed a flight to quality but instead got higher Treasury yields. Hello. The good news is that the Fed and Treasury are likely to eventually push for a change in the SLR to encourage banks to own at least short-term Treasury securities, which have little duration risk. The bad news is that the growing federal deficit and related dysfunction in the Treasury market will eventually mean that the government will look to banks to buy more and more Treasury issuance, including long-duration securities with considerable market risk. The tendency of the Fed to facilitate the Treasury's needs goes back to the inception of the central bank and WWI, as we discuss at length in "Inflated." We write: "The expansion of the Board of Governors as an independent agency in Washington not only influenced the evolution of the banking system and the currency, but also played an important role in the trend toward central planning and authoritarian political structures in Washington during and after the 1930s." Former Fed Governor Kevin Warsh told a conference at the Hoover Institution earlier this year: "The Fed has acted more as a general-purpose agency of government than a narrow central bank. Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending. And the Fed’s outsized role and underperformance have weakened the important and worthy case for monetary policy independence." It is relatively easy for Warsh and other critics of the central bank to make such assessments, but it needs to be said that the Fed's actions in 2008 and again in March 2020 were largely driven by the sole mandate of the central bank -- to keep the Treasury market opening and functioning. The dual mandate of full employment and price stability has not really mattered to the Fed since 2008, when its role as banker to the United States again became primary, as during WWII. Until Washington and most American economists stop pretending that the federal debt is sustainable or even manageable, the US economy and private banks are in growing danger. Markets are continuous until they're not. People who talk about increased bank capital as a protection against growing volatility in the Treasury market are fooling themselves and one another. The Trump Administration should not underestimate the gravity and the threat of the change facing the Fed in the event that President Trump appoints a new chairman. As with other agencies, the Fed staff in Washington would likely be cut back severely. We could easily see Jerome Powell finish out his term as governor through 2028 just to prevent Trump from naming Kevin Warsh or another conservative to the central bank. But no matter who President Trump names as Fed Chairman, the single imperative to keep open the Treasury market will remain paramount. 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.

May 8, 2025  | In this issue of The Institutional Risk Analyst , we feature a discussion with Henry Smyth , Director and Investment Manager, The Keep Fund Ltd . a Bahamas SMART Fund investing in the precious metals complex. Smyth has decades of experience managing precious metals and before that as a banker at Coutts & Co and Manufacturers Hanover Trust specializing in Latin American markets. He is a graduate of New College.     The IRA : Henry, thank you for making the time. Gold has outperformed the S&P 500 by a considerable margin over the past year, up 44% LTM vs just 10% for the broad equity market indicator. Is the run in gold and other precious metals over or is the upsurge just beginning?   Smyth : Just beginning. I started my career at the Manufacturers Hanover focused on Latin America in the depths of the LDC debt crisis. I moved to the US subsidiary of NatWest and eventually to Coutts & Co, where I helped create and manage several funds focused on Brazil and Mexico, taking money market and currency positions for our private banking clients. In 2000, I decided to go out on my own with the same strategy, but around 2003 I changed the focus of the funds to long precious metals. My partners is Brazil thought that I was crazy as did my former clients. I had been adding gold to my personal portfolio for some time. After the disastrous gold sales under UK Chancellor Gordon Brown between 1999 and 2001 , I believed gold had found its bottom after a generational bear market. To me that meant a generational bull market was underway and I wanted in.   The IRA : And that was about the time that we met as neighbors living on Red Hill, in Croton-on-Hudson New York. We had also been involved in the Mexican market and the political opening that led to the election of Vicente Fox Quesada  as President after decades of single-party rule. In 2003, the price of gold averaged $363.83 per ounce or one tenth of the price today. The year-end closing price for gold was $417.25 and nobody really cared.   Smyth : Correct. I went to Zurich to introduce the new gold strategy in 2005 and met with a number of clients that had worked with me at Coutts. Virtually none of the managers expressed interest. I asked what the allocations of precious metals were in client portfolios and the reply was close to zero. My Brazilian partner said “See Henry, there is zero interest in gold” but that was the wrong conclusion. If allocations to gold in Switzerland in 2005 were zero, then the price had nowhere to go but up.   The IRA : Your view was proven right. As the LT chart from Yahoo Finance  below illustrates, gold is up over 1000% since 2005 while the S&P 500 is up just under 300% over the same period. We caught some of the move in gold earlier this year, but clearly the positive run starts more than a decade ago.     Smyth : We have been running the gold fund since that time or almost two decades. We ran it up through the first major gold uptrend which peaked around 2011.   The IRA : August of 2011, to be precise. What happened after 2011?   Smyth :  The market sold off from the peak in 2011, but then we rode up the next cycle starting from 2015 which continues today. These two uptrend cycles are very different. In the first cycle, you had a couple of things happen that were particularly significant. First, exchange traded funds (ETFs) were becoming more prominent and this sucked in the bulk of the retail and institutional demand for gold.   The IRA : The first exchange-traded gold fund, SPDR Gold Trust (GLD) , was launched in November 2004 and traded on the NYSE. The first gold-backed ETF, ETF Securities Physical Gold, was launched in March 2003 on the Australian Stock Exchange. But the price action was still muted. What was the second factor that helped begin the next bull cycle in gold?   Smyth : The second and far more significant factor was the initiation in 2002 of the Shanghai Gold Exchange (SGE) . Nobody at the time took the SGE seriously. Nobody paid attention to it. Nobody asked what strategic significance this might have, both for gold and the global monetary system. Now it is completely clear what happened.   The IRA : At the time, Jiang Zemin was the President of the People's Republic of China and the economy was expanding rapidly. The SGE was established by People's Bank of China (“PBOC”) upon approval by State Council and supervised by PBOC. A decade later, in 2014 the Shanghai International Gold Exchange (“SGEI”) was registered in Shanghai Pilot Free Trade Zone and fully owned by SGE. A decade ago, Xi Jinping had only just risen to power, ending the latest period of liberalization in China.   Smyth : What we were seeing in Shanghai in 2002 was the return of gold to the international monetary system. You remember the Jamaica Accord in 1976?   The IRA : Let’s see, the Jamaica Accords were a set of ministerial agreements that ratified the end of the Bretton Woods monetary system. Ending Bretton Woods meant that the US could expand the US money supply without limit. President Franklin Delano Roosevelt tried to kill gold during the Great Depression. The end of Bretton Woods, following President Richard Nixon’s closure of the gold window at the Treasury in 1971, ultimately enabled the return of gold as a competitor to the dollar.   Smyth : Precisely. The IMF Jamaica Accords said members could have any foreign exchange arrangement they wanted – except gold. And that rule is still in force. It was clear to people who understood the global monetary system the long-term significance of the Jamaica Accords that the US, as the center of the Petro dollar system, did not want any competition from gold. But fast forward two decades it was equally clear that the creation of the Shanghai Gold Exchange represented a break from that understanding.   The IRA : The real point of Bretton Woods was that it pretended to be a gold-based standard even though the real intention of the US was to exclude gold from the monetary map forever. But as we note in "Inflated," putting debt atop a fiat currency will end in tears. Countries could settle their trade accounts with the US in gold until 1971, but few did so because their gold was already sitting in the vault at the Federal Reserve Bank of New York. And nobody was thinking about a threat from China in the 1970s.   Smyth : Exactly. So this brings us back to the second major gold cycle since 1971, which begins in 2015. There are several differences between the first cycle and the second which make for a potentially disruptive dynamic. Central banks have changed their posture from net sellers of gold to net buyers. Central banks are not price sensitive, they are sensitive to volume and tonnage. While the retail markets are still focused on price, the central banks are focused on tonnage. These are two different mindsets and it is supremely important to understanding the gold market today.   The IRA : As Jim Rickards says at the end of “ Inflated: Money, Debt and the American Dream ,” the US Treasury should be buying gold for paper. This is a pretty straight-forward proposition, but the credulous fools that we find today operating in American political circles have no idea that anything is changing.   Smyth : Effective July 1 of 2025, gold will become a Tier 1 asset under the Bank for International Settlements Basel III rules, so long as it is physical gold in the vault. This means that all global central banks will be buying gold tonnage on a set schedule regardless of price. Central banks have a tonnage target and they will hit it.   The IRA : Regardless of what it does to price. I like this trade more and more. Tell us what drove the increased interest in gold 15 years ago?  Was it the deteriorating fiscal situation in the US or are there other factors as well?   Smyth : That is a really good question and there is more than one answer. Part of the answer is growing unease at what is going on in the US in terms of fiscal policy and misgovernance more generally. The second factor is the realization in many foreign capitals that the increased weaponization of the dollar was making other nations more vulnerable. This is not just about sanctions but also the outright theft of dollar reserves as in the case of Russia, Venezuela and Iran. There is a confluence of factors contributing to the return of gold as an alternative to the dollar, but perhaps more important is the fact that price discovery has moved from London and New York to Shanghai.   The IRA : What are the implications of the shift in the center of gravity in terms of gold trading from London to Shanghai?   Smyth : The obvious change is the shift from 400 oz London "Good Delivery" bar traditionally used by bullion and central banks to the 99.99 fine gold 1 kilo bars that are used in Asia. Since the beginning of the Trump Administration, US gold imports have skyrocketed. Why is this happening? First, gold trading on the futures markets in the US has historically been designed for cash settlement but now the demand for good delivery is soaring.   The IRA: Not exactly a vote of confidence in President Trump or his “Make America Great Again” program. FDR had to seize gold from US citizens to avoid the collapse of this New Deal Administration in 1933. A spendthrift American government of the future may be forced to seize private gold again.   Smyth : You have to go back to the post World War I period to see this much gold moving around the world, this far and this fast. That period was marked by trade disputes, currency devaluations, inflation, and ultimately global war. We believe that there is a tectonic shift underway from the single currency, unipolar hegemonic system with the US at the center to a more decentralized system. The vast movement of gold that is visible today suggests a significant change is underway and there is no roadmap for this change. The change is organic and it is making investors less interested in speculating on gold prices and more interested in owning physical gold. While banks leave their traditional physical custody services, you are seeing a proliferation of dedicated physical precious metals storage facilities, both in the US and elsewhere.   The IRA : How do you view the US as a market for physical gold?   Smyth : The return of gold as a monetary asset within the US is well underway. This trend is moving from the bottom. There are eleven states that recognize gold and silver as U.S. currency, making them legal tender within those states which in turn makes gold contracts legally enforceable in those states. The writing is clearly on the wall. As Americans look for a way to manage market, inflation and counterparty risk,  gold and also silver will play an increasing role in the US economy in a way it has not in over four generations.   The IRA : So when the Treasury revalues the official gold stocks, which are still held at the arbitrary price set by FDR of $42 per ounce, the public rush back to gold may become a stampede? Since US currency issuance was still tied to gold in 1933, FDR actually revalued the gold to allow the Treasury to print more paper currency. When FDR revealed his plans to “profit” through the revaluation of official gold stocks, Carter Glass , the widely respected senator and former Treasury secretary under Woodrow Wilson, ridiculed the notion with open contempt. FDR believed that by merely changing the dollar price of gold upward, the government would gain a “profit” of some $2 billion measured in fiat paper dollars. Senator Glass immediately saw through the fiction.  So given the state of things in Washington, we should assume you see the price of gold moving higher?   Smyth: Decades of official efforts to repress the price and utility of gold are ending and we are now coming full circle. What does the world look like under a modern gold standard that is not controlled by the United States? We could see tokenized gold. The BRIC nations clearly want a trade settlement system that is independent of the dollar. Consider the irony that the Communist Party of China has allowed their citizens to own gold and encouraged Chinese banks to open accounts for their citizens as small as one gram. I expect the US Treasury will eventually make a virtue of necessity and revalue its gold reserves, pending an long overdue audit of course.   The IRA: That sounds like the price of gold is moving higher. Thanks Henry.   Comments on "Inflated: Money, Debt and the American Dream." https://dailyreckoning.com/the-first-crypto-currency-the-dollar/ https://prinsights.substack.com/p/exclusive-with-chris-whalen-inflated       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.

April 28, 2025  | Premium Service  | When President Donald Trump says the Fed should cut interest rates, he is probably right – at least speaking from the perspective of the real estate markets. After all, if commercial real estate values are not rising by at least 2% per annum, by definition we have a problem. The traditional 2% rule in commercial property, of note, states that a property's monthly rental income needs to be at least 2% of the purchase price in order for the owner to make a sustainable profit. But that also assumes that the building is rising in value and thus can be financed. High interest rates have been driving down valuations for commercial properties for several years. By no coincidence, prices for single-family residential properties are also starting to fall in many markets as relatively high interest rates throttle loan markets. The chart below shows the plummeting volume of new issuance in the government loan market. Source: Ginnie Mae Like the world of residential real estate, t he cash out refi was also part of the calculus of commercial real estate until about 2021. Now rising cap rates and falling valuations have killed the stairway to heaven of 50 plus years of rising commercial real estate equity valuations. An article in The Real Deal  last week talked about new, fully occupied residential buildings in New York City that are going into special servicing because of excessive debt taken out during COVID.  High interest rates are a problem, but so too are low rate securities left over from COVID. Back in 2024, the US Treasury began a program to repurchase low coupon bonds in the open market  in order to improve market liquidity. If you are a small dealer or fund paying SOFR +1% for money from your friendly neighborhood bank, you don’t want to own a Treasury note paying 0.125% per annum.  More than half of the Treasury note market is more than 10 points under water at todays yields and therefore illiquid, as shown in the chart below. Source: US Treasury When the Treasury began the debt buybacks on a small scale, the primary dealers observed that “while buybacks were moderately supportive of liquidity and market-making in specific sectors, it was difficult to ascertain the size of the impact because of recent robust liquidity conditions and the relatively small size of buybacks to date.” Apparently the widely loathed Treasury 20-year bonds were the maturity that gained the most liquidity from the Treasury's tiny repurchase operation.  Last week, one of our more astute readers who works in the offshore gold market suggested that Treasury Secretary Scott Bessent  ought to borrow a page from Argentina and encourage private investors to eliminate the overhang of low-coupon Treasury securities in the markets. Investors should be encouraged to purchase discount Treasury securities and tender same in payment of taxes or tariffs at par value, perhaps with little or no ST capital gains taxes depending upon the maturity and coupon rate of the note.  Extinguishing a 20- or 30-year Treasury security issued during COVID now is a big savings for the Treasury. There are $6 trillion in outstanding T-bills, $15 trillion in Treasury notes and $5 trillion in Treasury bonds.  There are literally trillions of dollars in Treasury notes with coupons below 1% that could be repurchased. And remember, the Treasury is realizing par value for the debt that is retired early. The chart below shows the distribution of Treasury note coupons from lowest to highest by CUSIP. Source: US Treasury US banks took $16 billion in losses on securities last year, but the overhang of low coupon Treasury and agency paper that trades well below par is a continuing problem, and one that affects both residential and commercial borrowers. JPMorgan (JPM)  averaged around 3.75% on its MBS in 2024, but the industry average yield on all MBS remains below 3% or roughly 85 cents on the dollar of market value. The chart below shows the distribution by coupons of the $2.7 trillion market for Ginnie Mae MBS Source: Ginnie Mae Secretary Bessent has indicated that he might increase repurchase activity in response to the threat of offshore selling of Treasury securities, one of those ridiculous media narratives that just won’t go away. But the better purpose of buybacks is to increase private purchases of low coupon notes and bonds in order to drive down yields and increase market liquidity. If the Treasury gives investors a reason to take the COVID era float off the table permanently, the result will be a significant tightening of pricing – and lower yields – for longer dated Treasury maturities in general.  A Trump Treasury Tax Sale is the perfect response to former Treasury Secretary Janet Yellen’s idiotic redux of “operation twist,” which arguably cost taxpayers billions of dollars. Purchases of LT Treasury debt would be funded with private sector cash! The original operation twist was actually implemented in 1961 by President John F. Kennedy , and delivered very modest results in terms of lowering LT interest rates, but we’ll talk about that another time.  Treasury Secretary Scott Bessent should take a page from US history. In July 1836, President Andrew Jackson issued the Specie Circular, which required that all payments for tariffs and federal lands be made in gold or silver, rather than paper currency. The stated purpose was to curb land speculation and reduce the amount of paper money in circulation, but the result was deflation. President Trump should authorize the payment of tariffs and taxes using Treasury debt purchased on the open market. The purpose is to reduce the federal debt and restore liquidity to the government bond markets by retiring low-coupon securities issued during COVID. Bank OZK A couple of weeks back, we were horrified to see Bank OZK (OZK) foreclose on another loan by developer Sterling Bay in the Lincoln Yards project in Chicago. “Bank OZK wrote down almost $17M on its loan to a subsidiary of Chicago developer Sterling Bay for a section of the land at the Lincoln Yards megadevelopment just months after recording a roughly $21M charge-off on the same loan,” reports BizNow .  The $38 billion asset development lender has since seized control of part of the stalled project, which it is now marketing to to prospective buyers. Yet in Q1 2025 earnings, OZK actually reported lower provisions for loss than in Q4 2024. Provisions for credit losses were $38.4 million in Q1 2025 vs $42 million in Q1 2024.  Perhaps of more significance, however, is that fact that the bank has seen yields falling on loans for four consecutive quarters even as loan balances have grown. Source: Bank OZK Unlike its larger peers, OZK’s yield on its investment book is well-above 4% and its net interest margin is likewise more than a point above its peers. “If the Fed leaves interest rates unchanged, we believe our net interest margin should improve somewhat in the remaining quarters of 2025 as deposit costs should continue to improve,” notes OZK.  “If the Fed reduces interest rates in 2025, we anticipate our loan yields would decrease faster than our deposit costs, likely resulting in some decrease in our net interest margin, at least until time deposits reprice and/or floor rates are reached on more variable rate loans,” the bank reports.  The chart below shows net interest margin for OZK vs its peers. Source: Bank OZK OZK peaked above $50 in February, but then retreated into the high $30s by the start of April 2025. While the bank has one of the best records of managing credit in the industry, the heavy emphasis on real estate exposure is likely to keep OZK under pressure for the balance of the year. The chart below shows the historical net loss rate for OZK vs its peers. Source: Bank OZK While OZK's net loss rate has risen since 2022, its heavy focus on real estate lending has not tarnished its track record for below-peer credit losses. Since that time, the bank's stock has fallen from 1.25x book to just 0.9x today. Is the bank a bargain at these levels? While we have long admired the management of OZK, we'll wait to see how long it takes the Federal Open Market Committee to realize that it is late once again in terms of changing interest rates. 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.

April 25, 2025  | Bank earnings are a decidedly mixed bag, with some banks showing falling credit costs while others see credit expenses rise sharply. US housing sales have stalled, a reaction that followed the MBS spread widening over Treasury debt we’ve seen in Q1 2025. In the latest edition of Inside Mortgage Finance , 30-year fixed mortgage rates have climbed back to almost 7% annual percentage rate (APR). Why have spreads widened? Two words: Uncertainty volatility. The IRA was in Washington this week, visiting with mortgage peeps and our friends in the permanent government. In our next Premium Service note, we'll be diving into results from several bank and nonbank issuers. We have been getting a lot of great comments about the review copies of Inflated: Money, Debt and the American Dream .  We are less than a month away from release by Wiley Global! Thank you to readers who have preordered . May 16, 2025 Release via Wiley Global Our trip to Washington this week was enlightening in both good and bad ways, but suffice to say that the city built on the muddy banks of the Potomac is focused on survival and, of course, personal enrichment. Survival is seen as a function of tax and spending cuts, combined with a manic effort to monetize the many, many moribund assets of the US Treasury, including Fannie Mae and Freddie Mac. And yes, if you are interested, the busted reverse mortgage book from the 2022 bankruptcy of Reverse Mortgage Trust is available . The race to the midterm election is well underway, but President Trump hopes that shock and awe keeps progressives in the current state of confusion through next November. Democrats is some states are mounting a limited counter-offensive, but internecine rivalry between moderates and progressives seems more likely. Meanwhile the Trump budget package is priority number one on Capitol Hill, but odds of the big tax bill passing are falling every day. The White House still needs 25 votes in the House and May is upon us. Jim Lucier at CapitalAlpha Partners advises that there is a placeholder for the House Financial Services Committee to find “savings,” but nothing specific as yet on the assumed value of a GSE release from conservatorship in a budget reconciliation. “That would properly be in the Finance title of the reconciliation tax bill  that gets marked up on April 30,” he muses. “We could get a chairman's mark the day before, but I suspect that we won't see a chairman's mark until the day of.”  Members of Congress are not particularly worried about reading legislation before the vote so long as all of the numbers continue to go up. Whether the GSEs exit conservatorship is mostly a matter of indifference. Most MCs could not even explain the meaning of the term GSE. The good news of sorts is that the GSEs will indeed exit conservatorship -- if the Trump Administration uses the cash value to support a budget reconciliation. The bad news is that the US will end up owning well-more than 95% of the equity upon release, including the crushing dilution of the private investors and also the Treasury’s own preferred position by the accumulating liquidity preference. Sorry hedge fund peeps, full dilution awaits common holders, no forgiveness. And for this reason, we think the Trump Administration will be forced to restructure the GSEs to unlock cash in the shortest period of time . As we told a room full of very smart people yesterday, o ur preference for restructuring the GSEs will be for the Treasury to convert its option into common shares, then further issue new common shares to repay the liquidation preference as required by the same federal law that applied to GM, AIG and Citigroup. But unlike these commercial companies, the GSEs will never be truly free of control by the Treasury. Selling common shares of Fannie Mae to the public was a fraud in 1968 and doing it again in the 2020s is also a fraud because the US retains dominion over the assets. As Supreme Court Justice Louis Brandeis wrote in 1925 regarding a fight over ownership of collateral in Benedict v Ratner , the question of control " rests not upon seeming ownership because of possession retained, but upon a lack of ownership because of dominion reserved. It does not raise a presumption of fraud. It imputes fraud conclusively because of the reservation of dominion inconsistent with the effective disposition of title and creation of a lien." But fortunately the Trump Administration has an opportunity to fix this conflict while also doing right by the private shareholders and without new legislation. "I understand the technical part of saying government has controlled these entities since 2008," notes our friend Fred Feldkamp , who 50 years after Brandeis issued his harsh dictum found a way to perfect a true sale using the pathway blazed by Ginnie Mae in 1970. "Fairly read, however, the GSEs have ALWAYS been controlled by government. They could not exist from 1925 to 1973 without government control (guarantee of debt, express or implied), because the ability to sell bonds backed by private pools of residential mortgages was 'dead' for that period of time. Once they were 'socialized' (necessary to fund at low premiums) the 'Animal Farm' problem hit home." For reasons we discuss below, we believe that if the Trump Administration needs to monetize the GSEs quickly, then the United States ought to remain the sole common shareholder of the two enterprises. Perhaps Fannie Mae and Freddie Mac could be consolidated into one GSE to operate alongside the Federal Home Loan Banks. The FHLBs buy loans from banks, perhaps one day from nonbanks as well. The GSEs will be securitization conduits and insurers of conventional loans. There is no point in having private common shareholders. How does embracing an explicit public/private model help President Trump and Treasury Secretary Scott Bessent ?  First, by having a frank discussion of the credit reality of the GSEs, we can make the process of release credible and eliminate the conflict of having hedge funds speculate in GSE shares with impunity. The big goal is to make the transaction so credible that the Congress will find it difficult to meddle with the public GSE operations. Second and more important, restructuring the capital of the GSEs will make the release process more credible fiscally, particularly with financial institutions and global investors, and raise a lot of money for the Treasury. Selling $500 billion in common shares to the public makes no sense in a market where investors want safe yield. Better to buy in the common shares down to say $50 billion and then let private capital fund the rest in senior preferred and debt. Upon release, the GSEs should repurchase and extinguish common shares from the Treasury and finance this process with cash profits and issuance of new nonvoting senior preferred shares. The GSEs should also offer to repurchase shares in the open market, offering private investors the opportunity to exchange common for new senior nonvoting preferred on an attractive basis. Eventually, most of the GSEs capital structure will be senior preferred and debt held privately, while the Treasury could hold the remaining capital as common, essentially a "golden share." And the capital needs of the GSEs should be reduced accordingly, increasing resources to support housing. Having the United States as the sole common shareholder is credible because ultimately the Treasury retains dominion over Fannie Mae and Freddie Mac, and can reassert direct control of the GSEs at any time. By keeping the US as the sole shareholder of the GSEs, we preserve the 30-year mortgage, rate locks for consumers and to-be-announced (TBA) market eligibility for conventional loans. Most important, keeping the US taxpayer as sole owner of the GSEs will avoid any need by Moody’s and other rating agencies to change the ratings of the issuers or visit the rating of the conventional MBS for the first time. In terms of taxes, by restructuring the GSEs into public utilities, we can end the free-riding by private investors on the public credit. Retiring all publicly held GSE common shares and selling new senior preferred shares to the public provides a very credible way to raise hundreds of billions of dollars for the Treasury in a short period of time. Domestic and global investors would be lined up out the door for this new, big risk-free asset class. By ending the games in GSE shares, the Trump Administration will make clear that the days of private investors profiting at public expense are over. We make Fannie Mae and Freddie Mac into true utilities with zero alpha to attract Pershing Square and other hedge funds. Sorry Bill. And by aggressively restructuring the balance sheets of the GSEs, we can give President Trump and Congress the cash needed to preserve the tax cuts and make other important changes to our fiscal house. As Ed Pinto of American Enterprise Institute and Alex Pollock of the Mises Institute wrote in “Not Another Free Lunch”  for Law & Liberty : “The conventional narrative is that an exit from conservatorship would be a ‘privatization’ and Fannie and Freddie would again become “private” companies. It is not the case. To be a GSE means that you have private shareholders, but you also have a free government guarantee of your obligations. As long as Fannie and Freddie have that free government guarantee, they will not be private companies, even if private shareholders own them.” On Sale! 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.