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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.

April 21, 2025  | Last week Capital One Financial (COF)  finally received approval to acquire Discover Financial Services (DFS) , a transaction that should have caused no concern but still was the subject of progressive grousing. Progressives like to hold merger acquisitions hostage so they can solicit extortionate concessions from the parties. In fact, if progressives in Congress had a clue about banking and finance, or actually cared about consumers, they would applaud the CapitalOne-Discover transaction.  Senator Elizabeth Warren  (D-MA) said when the transaction was announced : “President Trump promised to cap credit card interest rates, but his Administration just rubber-stamped the creation of the largest credit card company in the country, which will hurt consumers and small businesses with inevitably higher credit card interest rates, increased junk fees, and reduced availability of credit. Today Wall Street initiates the newest member of its Too-Big-To-Fail club at the expense of working Americans and our nation’s financial stability—a daily theme of the Trump Administration.” Liberals like to hound President Donald Trump for inaccuracies, but what about Elizabeth Warren, the sage banking expert of the Democratic Party? Warren’s statement about CapitalOne is factually incorrect. Not only is COF, the 11th largest US bank, definitely not the largest credit card issuer, as Warren pretends, this transaction actually gives the underdog in credit cards a chance for survival against the top-four banks.   Do you think CapitalOne bangs away with the television ads late at night because they like to spend money? Arguably COF is the weakest large credit card franchise in the US. Since Senator Elizabeth Warren has never in her entire life actually understood banking and finance, she misses this little nuance – and an opportunity to actually support a company that lends to consumers with less than stellar credit. Duh. Warren’s public lack of a clue is widely shared among progressives. The chart below shows the net loss rate for the top banks, COF, the US unit of Barclays Bank (BSC) and Synchrony Financial (SYF) . Notice that SYF leads the way with more than 600bp of net loss, followed by COF over 300bp and the US unit of BCS next. The larger banks and Peer Group 1 are at the bottom of the chart and also the lowest risk. JPM CEO Jamie Dimon does not lend to poor people. Source: FFIEC Rep. Maxine Waters  (D-CA)  said: “I am deeply opposed to Capital One’s announced acquisition of Discover. This merger, which involves two of the country’s largest banks and credit card companies, will have major implications for consumers and small businesses everywhere.”  Yes Maxine, the transaction will actually be good for consumers. Like most progressive yowling about banks , the comments by Waters and other Democrats were completely wrong on the facts and demonstrate remarkable naivete. First, COF had been renting access to the payments “rails” of Discover for years. Why? Because the larger bank did not have its own payments platform. COF has no rails and no card brand. Hello. Do you think Liz Warren knows this? Readers of The Institutional Risk Analyst  know that banks with payments platforms and unique brands are highly differentiated and greatly advantaged. Both American Express (AXP) and DFS own their own rails and brands. In this sense, the COF + DFS transactions represents no change to the competitive landscape at all. COF is buying an existing business partner in DFS. Clearly, neither Elizabeth not Maxine get it, but maybe they don't care. When Waters (and Warren) also called DFS “one of the country’s largest banks and credit card companies,” she was again completely misinformed – as usual. After former Speaker Diane Feinstein (D-CA) , Waters is among the best advertisements for congressional term limits we can imagine. The ranking member on the House Financial Services Committee, Waters inherited her seat in Congress in 1991 from Rep Augustus Hawkins . In fact, at year-end DFS was the sixth largest credit card issuer in the US and a tiny bank holding company at just $147 billion in total assets. The $225 billion credit card portfolio of  JPMorgan Chase (JPM)  is bigger than all of DFS, which was the 33rd largest US bank in 2024. But even at $490 billion in total assets, COF is only able to compete with JPM and other large banks by serving more risky customers.  How do we measure risk? The gross spread on the portfolio tells you the default target of the lender. JPM’s card book yielded 14.6% in Q1 vs 15.5% for its large bank peers. COF’s gross spread on its credit card loan portfolio was almost 20% in Q1 2025. The chart below shows the gross spread for the consolidated banking groups. Note that SYF and the US unit of BCS have the highest gross spreads followed by COF in the middle of the group. Source: FFIEC COF’s delinquency rate on consumer loans was almost 4% of assets at the end of 2025, putting the bank in the top decile of the average for the 110 plus banks in Peer Group 1. JPM’s level of delinquency on consumer loans was just over 1% at the end of 2024 or below the average for Peer Group 1. A 1% net loss rate for JPM is a "BBB" bond equivalent, but 400bp of net loss for all of COF is a "B" headed for "CCC" rating equivalent. These banks serve two totally different parts of the US consumer market. Again, Maxine Waters, Elizabeth Warren and their fellow progressives in Congress have no idea. They should applaud the COF purchase of Discover. Third and most important, the Discover and other brands owned by DFS are far smaller than the dominant Visa and Mastercard card franchises. Visa has almost 50% market share, Mastercard almost 40% and American Express and Discover together about 16% for their card brands. If progressives like Waters and Warren were really interested in helping consumers, they’d support a transaction that creates a larger, better funded competitor to JPM and the other big banks.  But they have no idea about such things and therefore opposed the transaction! When Elizabeth Warren and Maxine Waters spoke publicly against the CapitalOne-Discover transaction, they were actually supporting the monopoly position of JPMorgan and the other too-big-to-fail banks. JPM looked at acquiring Discover in 2021 , let us recall, to keep the Discover payments platform from going to CapitalOne. The CapitalOne-Discover deal will make the combined company's credit card book slightly bigger that JPM's $203 billion credit card portfolio , for now. JPM's consumer loan book excluding cards is another $400 billion. Big picture, the octopus known as JPM is six times larger than COF, has far lower funding and credit costs, and is growing in cards aggressively. By opposing CapitalOne-Discover and, indirectly, supporting JPM, Warren, Waters and other progressives are actually hurting low income consumers. Most of the big banks have exited the government-insured mortgage loan market and have no desire to do business with the bottom third of consumers in autos or credit cards. Indeed, Elizabeth Warren warned the largest banks to avoid risk, and that is precisely what they are doing and thereby reducing access to credit for millions of the poorest Americans. Release Scheduled for May 16 2025! The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. 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 14, 2025  | Last week The Institutional Risk Analyst  received a lot of mail from readers and fellow scribes. One long-time colleague in the housing market asked: “You don't think anything really bad will happen? I don't have to sell my portfolio and go to cash?”  Yes, you can go to cash, but then what? The dollar is currently 57% of global reserves, 50% of global invoicing and 88% of total foreign exchange transactions, according to the Atlantic Council . As we discuss in our upcoming book "Inflated: Money, Debt and the American Dream," the paper money economy created by President Abraham Lincoln opened the door to hyperinflation in the 21st Century. President Franklin Delano Roosevelt made fiat currency a monopoly during the New Deal, trapping Americans and the world into using paper dollars as money. Dollars are the poker chips, the Fed is the dealer and the US Treasury is the house. In metaphysical terms, think of bitcoin and other crypto tokens as a reaction against Franklin Roosevelt's seizure of private gold holdings from your great grandparents. FDR's confiscation of gold was about political survival, but the wave of public fear caused by Roosevelt's actions and the subsequent dollar devaluation made the Great Depression far worse. And the progressive Federal Reserve Board under Eugene Black  happily facilitated Roosevelt's repression of gold as money. We write in Inflated: "The Emergency Banking Act was introduced on March 9, 1933, passed the same day, and signed into law. Congressman Henry B. Steagall reportedly walked into the House chamber with the text of the legislation newly transmitted from the White House and waving it in the air said 'Here’s the bill. Let’s pass it.' After a few minutes of debate and no amendments, it was passed 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." FDR deliberately worsened the Banking Crisis of 1933 to serve his own political interests. Some 90 years later, President Trump threatens us with another economic crisis driven by similar political avarice. By fomenting a run on dollar assets, Trump simplistically thinks money will flow into Treasury debt, causing LT yields to fall. But instead the threat from Trumpian volatility is a more immediate widening of credit spreads, a dangerous development that may put the US government in danger of default as soon as Midsummer. The 19th Century economics of the Trump Administration have cost investors at least $15 trillion in paper losses since January. Remember, it's about Main Street over Wall Street, right? But interest rates are a two-dimensional concept, while credit spreads describe living markets in three dimensions. The Trump tariffs are causing a lot of investors who understand national income accounting to flee dollars. Without a change in direction, the Trump tariff war eventually results in a US recession, a long delayed credit crisis, and a massive resumption of QE by the Fed. Look at Treasury 10s minus 2s (green line) below showing spreads widening since June 2024. “I cannot decide whether to get angry, sad, scared or to laugh hysterically, wrote retired attorney and author Fred Feldkamp  last week in an email. “I can avoid hate. It achieves nothing, but am befuddled how best to react. Everyone other than Trumpets seem to now understand that the double entries required to correctly account for trade necessarily force an identity between current accounts and capital accounts.”  “Trade surpluses, therefore, mandate capital deficits and vice versa,” he continues. “So, as long as one wisely invests capital surpluses, current account deficits are inconsequential and shutting down one necessarily shuts down the other.  That’s just stupid. If the US trade deficit falls, the US capital surplus that has expanded net worth and funds budget deficits will fall in lock step.” Of course in recent years, capital surpluses flowing into the US have been used to finance consumption or refinance existing debt, a problem faced by all of the major economies around the world. President Trump, seeing the domestic result on consumers of dollar recycling, namely rising inflation and falling real incomes, has decided that change is needed, but only enough change to ensure that the GOP retains control of Washington. A lot of the fuss and bother in Washington over the past month may just be more Potomac Kabuki Theater. The stock rally on Friday illustrates the fact that global equity markets usually find a reason to get comfortable with the latest developments in Washington before the weekend arrives. The global credit markets not so much. The equity markets are important especially as a political barometer, but the bond markets are crucial. When you see that spreads on government insured mortgage bonds and corporate debt are blowing out, this indicates that the credit markets are becoming dysfunctional and the US economy is rolling over. Presumably Treasury Secretary Scott Bessent appreciates the risk. High yield spreads rising into double digits suggest that the US economy is in a stall. If you read the popular press, then you may believe that Trump trade actions will eventually cause an economic depression and that this is the reason for falling equity share prices. The more immediate cause of the financial market disruption is the fact that falling cash flows into the dollar are already forcing an increase in yields on Treasury bonds and private debt. We tend to view the equity market selloff as a buying opportunity, but this assumes that President Trump and his advisors will eventually accept that fiscal and trade deficits must be financed with capital inflows. Source: Goggle Finance As our reader's query suggests, t he perennial question people ask is whether foreign investors around the world will sell Treasury and agency debt as they flee dollars and go to cash. But go where exactly?  If all of the foreign holders of Treasury bills and Ginnie Mae MBS sold their holdings and went to cash, what would they do then? Buy gold? UK Gilts? Swiss Francs? Yen JGBs? Gold is one of the few asset classes that could absorb some of the excess liquidity now fleeing the dollar and US markets -- but only just some. Total gold holdings above ground were a bit over 200,000 tons last year and worth only ~ $15 trillion in 2024. Deliverable US gold stocks, however, are scarce as buyers take physical delivery, especially since the January Inauguration of President Trump. The western nations have re-discovered gold as a reserve asset, but the Russians and Chinese are not selling. Is gold the most undervalued asset on earth? Perhaps, especially given the visible deliverable supply today. As we note in "Inflated," the US Treasury should be buying gold and selling paper as part of a standing policy. While gold is not defined as a “high quality liquid asset” or HQLA for banks, gold market participants believe that gold will soon be added to the list of HQLAs under Basel III and made eligible to serve as collateral for ISDA swaps. Perhaps the Fed itself will start to hold gold as capital instead of say mortgage-backed securities. This will be a great irony since much of the gold sitting in Ft. Knox today was seized in 1933 from individual US citizens and the member banks of the Federal Reserve System. Readers also ask: Are China and Russia intent upon launching gold-backed currencies in competition with the dollar? Perhaps, but even with the market volatility of Donald Trump in the White House, the dollar remains the biggest game in town but also a game that few investors can really escape. There is not enough physical gold available for delivery in May to soak up even a fraction of the liquidity flowing out of dollar assets.  Currencies such as the yen or euro will appreciate rapidly if there are significant outflows from dollars. Perhaps this is precisely the outcome President Trump seeks, a modest devaluation of the dollar added to tariffs to reduce external deficits. But does currency devaluation work when the Treasury is generating huge fiscal deficits? No more than it did for FDR in the 1930s deflation. We suspect that Trump is beginning a grudging admission of the truth of national income accounting that will ultimately result in significant concessions to the trade war and an equal rebound in US equity markets, the ultimate inflation indicator. What that should mean to our readers is do your homework and get ready to go shopping. 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 7, 2025  | In this issue of The Institutional Risk Analyst , we provide an excerpt of the upcoming second edition of “Inflated: Money, Debt and the American Dream,” to be release by Wiley Global on May 16th. You may pre-order a copy of the book by clicking the link below . The excerpt comes from a section of Chapter Two of Inflated, “Silver & Tariffs,” which discusses the role of import tariffs and free coinage of silver in the US economy in the years following the end of the Civil War.  Scheduled for Release May 16, 2025! When someone suggests to you that the import tariffs imposed by President Donald Trump in 2025 could cause a global economic depression like the 1930s, just remind them that tariffs were already high decades before the catastrophe. The Smoot-Hawley tariff did not cause the Great Depression. The history of the United States over the past century was largely written by liberal Democrats, who at least rhetorically opposed tariffs and embraced currency inflation as core progressive values. In fact, tariffs have been used by governments from all of the major political parties to protect consumers and industry since the inception of the American Republic. Inflated: Money, Debt and the American Dream (2025) “Silver and Tariffs” As Congress slowly came around to the restoration of gold convertibility of dollars [following the Civil War], a great political debate developed about the restoration of silver coins as legal tender. Western silver interests made a straight-forward argument for government intervention to stop the slide in the price of silver relative to gold. The idea of returning silver coins to the money supply also appealed to farmers who believed that increasing the money supply would boost economic activity and thus prices for their goods, while reducing the real cost of servicing their debts. “A whole generation of Americans was embroiled from the 1870s to the 1890s in the argument over silver,” Richard Hofstadter wrote in The Paranoid Style in American Politics. In the 1880s, the public clamored for an increase in the money supply. Dozens of proposals were floated in the Congress in the next several years either to require government purchases of silver, increase the money sup-ply, or both. Senator John Sherman (R-OH), the brother of General William Tecumseh Sherman of Civil War fame and a strong supporter of a return to the gold standard, introduced a bill in the Congress in January 1874 to increase the money supply. Sherman’s proposal to purchase silver had the effect of  increasing the money supply via the issuance of greenbacks, which were used to make the purchases  The resulting expansion in the supply of paper dollars was less than was demanded by the inflationist, free silver proponents, but a larger amount than was acceptable to those in favor of resuming the gold standard. Known as the “Inflation Bill,” the Sherman legislation was debated for nearly four months. The measure eventually passed the Republican-controlled Congress, but on April 22, 1874, President Grant vetoed the legislation. This move would “make the stand of the Republican Party official” when it came to aligning itself with business interests rather than the working class, according to Grant biographer William McFeely. From the time of the Grant veto of the Inflation Bill forward, the Republicans for a time became known as the party of sound money and business interests, and the Democrats as advocates of inflation and the working man. So passionate was the national debate over silver that the Republican Party divided over the question for years to come up to the present time. The debate over the free coinage of silver and the national money supply eventually was a factor in the undoing of the Republican Party’s control over Washington. https://youtu.be/F7fizlxrOYA?si=u2Lg6Sqcj7fc_zPh In 1888, President Grover Cleveland attempted to use the growing Treasury surplus and a reduction in the tariff as an issue to gain reelection, but he underestimated the attraction of protectionism—a theme that modern American politicians led by President Donald Trump rediscovered in the twenty-first century. The incumbent Cleveland won a slim majority in the popular vote, but when the votes were cast in the Electoral College, Cleveland lost by 233 to 168 to Benjamin Harrison from Ohio. This was an early example of the election-winning power of the Republican political machine. By 1890 the Treasury amassed a surplus of nearly $150 million in gold, a symbolic affront to farmers and populists who proclaimed the federal government to be “an octopus” that was strangling the economy. In that same year, a young lawyer from Nebraska, William Jennings Bryan , won his first term in the House of Representatives. With the Republicans again in control of both houses of Congress and President Harrison in the White House, one of the more important items on the political agenda was raising the tariff. Known as the McKinley tariff after Rep. William McKinley (R-OH), the legislation only raised the national tariff slightly, but the political debate slowed the process to a crawl. The Democrats initially opposed the bill but eventually decided to allow the measure to pass and go to the Senate in the hope of using the tariff issue in the 1892 election. President Harrison, passed the McKinley tariff, raising the average duty on imported goods to 50 per-cent. Forty years before the passage of Smoot Hawley in 1930 and long before the start of the Great Depression, tariffs on imports were already very high in the United States. Republican proponents of the Tariff Act said it was necessary to maintain the high standard of living of the American workingman, “but as the employers were fighting (hard) against the trade unions, and were willing to import the new immigrant labor to reduce wages, this could not be taken quite seriously,” wrote James Truslow Adams in Epic of America. Republicans also presented higher tariffs as a way to protect farmers and the new states in the western United States from foreign competition—and found a ready audience for that viewpoint. The McKinley tariff bill was signed into law in October 1890. The political price extracted by the silver advocates for supporting the passage of the McKinley tariff was that Republicans would back legislation to increase purchases of silver and a resumption of free coinage of the metal. In addition to the tariff legislation, the Republicans, led by Henry Cabot Lodge in the House, pushed for new voting rights laws to protect black voters and Republican candidates in the South. Southern Democrats opposed the measures to protect black voting rights and dubbed the legislation the “Force Bill.” They claimed that the Republicans were prepared to use federal troops to enforce the political franchise of freed slaves in the South. When Republicans brought the Force Bill to the floor of the Senate in December 1890, the leader of the silverites, Senator William Stewart of Nevada, seized his opportunity. In January 1891, Stewart used a procedural motion on the floor of the Senate to substitute legislation for the free coinage of silver for the Lodge voting rights legislation, and the pro-silver forces in both parties sustained his maneuver. The free coinage of silver and, importantly, inflation of the currency, was more popular politically than protecting voting rights in the South. In the winter of 1891, the American economy was again sinking into depression, with unemployment and business failures spreading around the country. A solution via increased issuance of paper currency was seen by politicians in both parties as the answer. Even Senator Sherman, who long guarded against allowing the silver advocates to push their inflationist agenda, was forced to concede that the political pressure behind free coinage of silver was irresistible. A majority of Republicans believed that the combination of the new tariff legislation and a pro-silver bill would protect them at the polls in 1890. The compromise legislation crafted by Sherman in July 1890 repealed the Bland-Allison act and called for the Treasury to purchase four million ounces of silver per month, essentially equal to the amount of silver produced in the United States during that time. The Treasury paid for these purchases with paper dollars, and this had the effect of rapidly increasing the money supply. The increase in the supply of paper currency caused by the Sherman Silver Purchase Act placed a considerable drain on the government’s gold reserves. Many Americans immediately exchanged the paper money for silver in order to buy gold coins. Even though demand for paper currency continued to rise, the preference for either gold or paper money over silver was pronounced and silver prices continued to fall. Imports of gold into the United States surged since the demand for the metal increased with the supply of greenbacks as the Treasury continued its required purchases of silver. The fascination with silver was much like the craze surrounding crypto currencies in the twenty-first century but had an even more irrational quality. Treasury purchases of silver rose to 50 million troy ounces annually, but world production of silver rose from 63 million ounces per year in 1873 to over 150 million ounces in 1892. The market volumes expanded to meet the Treasury’s needs, and the price continued to fall. And silver advocates were unrelenting in their clamor for further government support. Representative Edwin A. Conger of Iowa, who was chairman of the House Committee on Coinage, Weights, and Measures and supported limited coinage of silver, called the lobbying effort by the pro-silver forces prior to the passage of the Sherman Silver Purchase Act “the most persistent, courageous and audacious lobby upon this question I have ever seen since my term of service began here.” Despite the passage of the National Bank Act several decades before, political meddling by Washington in the structure and com-position of the U.S. money supply resulted in nine different types of money being placed into circulation by the 1890s. The legal mandates placed upon the Treasury to redeem paper money with gold or silver, and to purchase and/or coin silver, became completely unmanageable and were depleting the once-large official reserves of gold. So great was the drain of gold from the Treasury and the increase in the money supply, as we discuss in the next chapter, that within three years of the passage of the Sherman Silver Purchase Act, the law was repealed. The money supply of the United States grew dramatically during these final years of the nineteenth century, yet public confidence in banks, financial markets, the U.S. currency, and the economy was at a new low. America would see more political discord and economic upheaval than at any time since the Civil War—and most of it caused by the debate over the nature of money. 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 3, 2025  | In the this issue of The Institutional Risk Analyst , we feature a guest post from our old pal Nom de Plumber , a senior risk manager on Wall Street who loves to send us little missives from the world of private equity, credit and, of late, insurance.  Is the flow of toxic waste pouring from busted private equity portfolios into credit trades a threat to insurance companies? Yup. Does the National Association of Insurance Commissioners (NAIC) even care? Hard to say....   Risk and PE-Affiliated insurer Funding Agreements Nom de Plumber   It is more than a little odd that Wall Street decided to launch retail credit strategies at a time when the bloom was clearly off the rose on the original credit trade. What was that trade? Insurers controlled by the likes Apollo Global (APO) bought retail annuities for mom & dad and funded them with a variety of credit strategies, including illiquid private equity assets, commercial real estate and even residential mortgages.   More recently, as the flood of annuity assets has dried up, Wall Street has decided to finance the credit trade by selling equity slices in these remarkable opportunities to retail investors and also by issuing funding agreement-backed notes (FABN)  via captive insurers to investors and other insurers. Most of the major Wall Street purveyors of ETFs and mutual funds, of note, have set up new rackets to sell subprime toxic waste in credit to retail investors.   In the US, the SEC, the National Association of Insurance Comissioners (NAIC ), other regulators and even the rating agencies, have not said a word of late. That is not the case in the UK and other markets, however, where sales of credit exposures and FABNs to pensions and banks is causing rising official concern. Why are FABN’s and similar securities a problem for insurance companies? Because some of the biggest players in private equity are unloading their mistakes unto the shoulders of investors, including insurers, and running for the door.   The unfolding credit train wreck in the world of private equity is episodic in nature and, like commercial real estate, only gets better with time. This mess has already caused the shares of the major credit shops to sell off sharply from the highs of mid-2024. The chart for APO and its peers looks a lot like the charts for the large banks. This is fortuitous since the banks have facilitated the bubble in private credit and will likely face considerable blowback when the proverbial bubble bursts.   Private equity funds are cashing out their illiquid equity stakes in moribund portfolio companies, by piling new debts atop unpaid debts. Lenders have enabled them to own their long-stuck portfolio companies, with almost no money down, a Heads-I-Win/Tails-You-Lose bets.  How does this work?   A private equity fund seeks to buy and privatize undervalued public companies, using mostly high-leverage buyout loans from banks, plus thin slivers of General and Limited Partner equity. Ideally, with operational improvements and higher market valuation multiples, the fund can later sell such portfolio companies back to public ownership (IPO), perhaps within five years or so, thereby repaying those bank loans and earning a large profit on that partner equity. But this model has broken down since 2021, when the Fed began to raise interest rates. General Partners control the private equity fund, and charge asset management fees to the passive Limited Partners. However, because many private equity funds have been unable to sell such portfolio companies for as much or as soon as expected, the assets are impaired. Economic stresses (higher interest rates, inflation, new competition, geopolitical shocks, etc.) have caused persistent operational and financial under-performance, preventing sufficient IPO sale proceeds to repay both the initial buyout loans and the partner equity.   In desperation, the private equity funds have resorted to borrowing even more money, from either banks or private credit providers, to recover as much of those stale General and Limited Partner equity stakes as possible. This surreptitious maneuver leaves both the banks and private credit providers holding the entire bag, with scant means or buffer to prevent default losses.  Lending money to borrowers with scant skin in the game rarely ends well.   Despite all of this self-dealing by the General Partners of private equity funds, neither the regulators nor the ratings community are saying a word. Fitch ratings wrote in a missive: “The increase in FABN issuance is not expected to affect issuer ratings due to their modest size relative to total liabilities and the limited impact on key ratios such as statutory operating leverage.” This is the essence of rating-agency and regulatory arbitrage. Pari-passu additional leverage dilutes the protection of other creditors.  Bad.   “The FABNs issued by the sponsoring life insurance company are considered equal to that of general account policyholder obligations., and as such, FABNs are assigned a rating aligned with the Insurer Financial Strength (IFS) rating of the life insurer issuing the FABN securing the notes,“ Fitch confides. Notes tied to funding agreements skyrocketed last year, reaching $58.55 billion, about 70% more than in 2023. Last year's total nearly matched the record $58.75 billion issued in 2021, Fitch notes.   Why are FABNs a problem for insurers? Like the securities-lending SPVs which blew up ABCP conduits, SIVs, and insurers like American International Group (AIG) in 2008/2009, the underlying credit is doubtful at best.  There is no such thing as risk-free matched funding for risky assets.  Yet for some reason, Fitch, other rating agencies and the banks are fully on board with enabling and financing this dubious racket.  Fitch writes: “Insurers writing FABNs benefit by investing the proceeds in higher-yielding assets that are typically both cash flow and duration matched to the FABN." But not everyone thinks that FABNs are a good thing. Almost a decade ago, a paper prepared by a Fed researcher noted that these securities increase the level of connectedness and thus correlation between insurers and the financial. Markets. That is bad. Insurers are not supposed to be correlated to the financial markets, right? Stéphane Verani , Principal Economist in the Systemic Financial Institutions and Markets section of the Federal Reserve Board, noted in a 2015 presentation to the NAIC that FABNs increase the connection between insurers and financial sector and that maturity and liquidity transformation increases vulnerabilities. He noted, significantly, that these vulnerabilities are amplified as FABN maturity shortens:   • Shocks to insurers or institutional investors could trigger a run • Initial withdrawals could cause a panic, and more withdrawals • The effect of the run depends on the availability of liquidity • Illiquidity at an insurer could lead to delays in payments • Delays could cause a panic in short-term funding markets   How does this growing investor fascination with FABNs end? Low-beta insurers with book value, held-to-maturity portfolios will be forced to redeem rancid FABNs when the underlying credit rolls over. Defaults in the more risky FABNs may then cause a cascade of sales by investors. Banks, credit managers and dealers who have created and sold this high-beta toxic waste for their PE manager clients will suddenly find themselves in the crosshairs as politicians react to losses in pensions and other regulated, "low-risk" institutions. And, as in 2007, the PE managers and investment bankers who created this mess will simply fade into the woodwork.     May 2025! The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 31, 2025  | Premium Service | In the this issue of The Institutional Risk Analyst , we ponder the world of consumer credit two months into the Trump Administration. Readers may recall that we were cautious in 2024 about calling a consumer recession despite the many voices in the media and elsewhere who have been predicting an economic slump since 2023. Didn’t happen, but 2025 is already very different. First and foremost, 2025 remains about deteriorating credit in the commercial real estate and multifamily channels, as illustrated by the shellacking that Bank OZK (OZK)  is taking in Chicago in two stalled commercial development deals.  As we discussed with Dan Proft  & Amy Jacobsen  earlier this week, what is uber banker George Gleason , CEO of OZK, doing lending on new development in suburban Chicago??  IOHO, Illinois in the hands of progressive Democrats is uninvestable. And New York State is right behind.  Second, the US economy is slowing and inflation is going up in the most recent release from the BLS. During the past four years of COVID and aggressive fiscal policy by the Biden Administration, the economy benefited from vast excess cash flows. These monetary and fiscal flows tended to overstate the true level of economic growth and employment, while suppressing the visible cost of credit. Now these factors are being reversed as the Trump Administration seeks to shrink the public sector even as the Fed is backing away from any interest rate cuts in 2025. Below we look at our consumer lenders surveillance group – including Ally Financial (ALLY) , American Express (AXP) , Axos Financial (AX) , the US unit of Barclays Bank (BCS) , CapitalOne (COF) , SoFi Technologies (SOFI)  and Synchrony Financial (SYF)  – as we prepare for the release of Q1 2025 earnings. Readers may recall that back in Q3 2024, the market was expecting a couple of cuts in the target for short-term interest rates by the FOMC. The financials saw a big uptick in lending volumes, and better revenue and earnings as well, largely because the bond market rallied. Since that time, however, a number of names have retreated as concerns about credit and the economy have come back into focus.  Meanwhile in Washington, the Trump Administration is rolling back many of the policies of President Joe Biden, policies that masked a significant amount of consumer pain. Reductions in the availability of credit from HUD, and Fannie Mae and Freddie Mac, may accelerate the deterioration of consumer credit already visible in credit cards and autos. Well-intentioned cuts in multifamily lending by the Trump White House may cause an already rancid sector to roll over entirely.  Multifamily loans supported by HUD and the GSEs are the new subprime. We expect losses in this sector to increase significantly this year. As we’ve noted previously, average credit delinquency rates for consumers are still moderate, but the bottom quartile of consumers are suffering. As Seton Motley  noted in his blog recently, a lot of Americans cannot afford to shop at Walmart (WMT) . That’s why President Donald Trump won the last election. The real delinquency rate for the quarter of all US mortgage holders represented in the data from the MBA for FHA mortgage loans is in the mid-teens. As credit conditions worsen, the Trump Administration will be forced to resolve these delinquencies, especially as home prices weaken. Source: MBA, FDIC More broadly, federal layoffs and other changes in the federal footprint may accelerate credit problems for both consumers and commercial borrowers. “The stock market faces an uphill struggle as the US government reduces the size of the state,” notes Simon White  of Bloomberg . “The fiscal impulse – the annual change in the deficit as a percentage of GDP – is already falling. Equities react to changes rather than levels, leaving the market in a more precarious place.” During our trip to Tampa this week for the mortgage conference sponsored by Fay Servicing , we had several conversations with bankers, investors and other professionals who do restructuring in delinquent consumer credit. All report that default rates and loss severity are rising rapidly in autos and cards.  Is that a recession on the horizon? Our view is yes. Of note, Marina Walsh of the Mortgage Bankers Association reports that consumers seem to be prioritizing mortgage payments in this cycle, unlike in 2008, but high home prices continue to mask the overall level of delinquency.  Ally Financial  During its Q3 2024 conference call, ALLY noted that the current “dynamic operating environment,” including high interest rates, volatility and “cumulative inflationary pressure,” has strained consumers.  The stock fell 25% in a day from the low $40s down to the low $30s, but is now down single digits for the year compared to the rest of the consumer group. Ally also announced an exit from residential mortgage lending last year and an intention to refocus on autos and credit cards. While net income fell in 10% between Q2 and Q3, results for Q4 were significantly lower due to a $140 million “repositioning” charge. As you can see in the chart below, ALLY is in the bottom of the group in terms of asset returns, but credit expenses for the whole group were down last quarter. This follows the trend already visible across the industry in Q4, but we expect loan loss provisions and net losses to be elevated in Q1 2025 earnings for the group. At a minimum, changes in expectations for the US economy will force all banks to boost forward estimates for credit expenses for the rest of this year . Source: FFIEC We expect to see credit costs for the banking industry and especially consumer lenders higher in Q1 2025. Given flat to down revenues and also compression of spreads over funding, higher credit costs imply lower earnings. The equity market is already anticipating this change, but many of the managers who piled into financials in 2H 2024 are loathe to sell. Of all of the banks in this group, ALLY has the weakest asset and equity returns, and earnings have fallen by a third since 2023. Notice that SOFI, on the other hand, continues to make progress in terms of profitability. American Express AXP saw net income rise in 2024 vs the prior year. As the chart above illustrates, the $270 billion asset bank is in the 99the percentile of Peer Group 1 in terms of profitability. After peaking on January 23rd up 45% over the past twelve months, however, AXP has given ground and is now even with the Invesco KBW Bank ETF (KBWB) up 21% LTM. The chart below shows net loss to average assets for the group. Only SYF and COF saw higher credit costs in Q4, but that reduction in net losses may have been a head fake before a period of sustained increases in credit costs. Source: FFIEC In terms of fundamentals, there is no particular reason for AXP to move lower. At 6.3x book the bank is still very pricey, yet lower than the 7x book at the end of 2024. If Q1 2025 earnings are a “surprise” to equity managers, then AXP could move lower because of concerns about credit in a recession. The premier US consumer bank was trading at 5x book at the end of 2023, thus the adventurous may take further declines as an opportunity to get into the stock. Our only caution is that in a consumer recession, all of the consumer names could sell off significantly from current levels. Axos Financial  Axos is one of our favorite names. When Hindenburg Research came out with an attack piece on AX last year, we laughed . Now Hindenburg has exited the advisory business and AX remains one of the few bad calls by the noted research shop. A year later, AX still has one of the lowest default rates in the group, but has sold off along with the rest of the consumer lenders. In November last year, the bank’s stock was up 65% LTM, but since that time has dropped to +24% LTM, just above the KBWB.  The $20 billion asset bank has seen credit losses double in the last year, yet its loss rate is still less than half of the broad average for Peer Group 1. The table below shows the income statement for AX going back five years from the FFIEC. Source: FFIEC Why does AX perform so well, even at such a small size?  Efficiency is one big positive. The bank’s overhead expenses are in the bottom quartile of the top 100 US banks. But the other big driver of value is growth, assets, equity and loans all averaging 3x Peer Group 1 growth rates. But like the rest of the industry, AX was actually shrinking non-core funding along with assets in Q4, consistent with our earlier comments about weak demand for credit by JPMorgan (JPM) CEO Jamie Dimon . Barclays USA When we walked into the American Airlines (AA)  Admirals Club this week, the Barclays Mastercard signage was long gone and there were piles of Citibank Visa applications with a come-on of 70,000 free miles. Barclays lost the card sponsor relationship with AA to Citi at the end of 2024.  Citi will acquire Barclays' suite of AAdvantage cards, becoming the exclusive issuer for American Airlines and aims to move existing Barclays cardholders over to Citi products sometime in 2026. Of note, the Admirals Club at LaGuardia Airport in NYC was pretty empty on a Monday morning in March, normally a very busy time. Travel demand is down significantly in Q1 due to President Donald Trump's broad tariffs and a crackdown on government spending. Airlines led by AA have cut earnings estimates accordingly.  The US unit of BCS saw credit expenses rise in 2024 to 2.75% of average assets for the full year, yet after peaking in Q1 net losses fell during 2024. Operating income for the $191 billion bank was up 11% in 2024, but the loss of the relationship with AA is going to present some challenges for BCS in 2025.  CapitalOne COF was one of two banks in our consumer lender group that saw net losses rise in 2024. Net income for COF was down year-over-year, in part due to expenses related to the termination of the relationship with WMT and the prospective integration with Discover Financial (DFS) . Several states led by New York are trying to derail the merger, which is now expected to close in May 2025. While DFS has long been one of our favorite banks, COF on the other hand is big and has higher operating costs. COF has an efficiency ratio of 55% vs 39% for DFS. The bank spends lots of money on advertising to acquire new customers, but then fritters away potential earnings by not managing credit, expenses or the balance sheet particularly well. As the chart below illustrates, COF’s yield on its securities portfolio is dead on the average for Peer Group 1 at 3%, while the rest of the group is significantly higher. Compare COF to AXP in most areas and the smaller card issuer is clearly a better run organization measured by profitability and asset returns.  Source: FFIEC Once the acquisition of DFS is closed, COF will be close to $700 billion in assets and will, finally, have its own payments platform.  But the integration of DFS is not going to result in a change in the culture of COF, which features a disturbing tendency to wander away from the core business of issuing credit cards. COF’s commercial real estate book, for example, is a source of credit expenses that is not contributing to the CapitalOne franchise. Thankfully the numbers for the COF office portfolio are small relative to the whole bank, but the loss rates are an embarrassment, as shown below. Source: CapitalOne SoFi Technology SOFI continues to make progress in terms of size and profitability, with assets over $32 billion at the end of 2024. Credit expenses remain very low, a validation of the SOFI business model which is predominantly loans to individuals. Yet the bank has an efficiency ratio of 90% vs the Peer Group 1 average of 63% and 30% for Synchrony Financial. The high efficiency ratio reflects the excessive overhead costs of SOFI, which fancies itself more a tech firm than a bank and pays its senior managers accordingly. In the event that the US economy goes into recession and credit expenses rise, SOFI’s luster could be diminished very quickly. The chart below shows the gross yield on loans and leases for our group, with SOFI just below AXP but well-above ALLY, AX and Peer Group 1 at the bottom of the range. Source: FFIEC The basic risk profile of SOFI remains consumer lending, this despite the company’s statements about diversifying into residential mortgage, credit cards and even (gasp) business lending. Also, the bank persists in using financial presentation that is more appropriate for a commercial company than a bank. Terms such as earnings before interest, taxes, depreciation and amortization (EBITDA) are not appropriate for a bank.  The graphic below shows the aspirations of SOFI, but consumer loans still make up 75% of total loans. In a recession, the bank could face some significant challenges that are not anticipated by many analysts and investors. Source: SOFI Synchrony Financial Last but not least, we look at Synchrony Financial, the most aggressive lender in our consumer group and a key bellwether for the consumer and the broader economy. Like COF, SYF saw credit expenses rising in 2024 including in Q4. But the bank’s very strong income at nearly 3% of average assets gives SYF a lot of firepower to deal with elevated levels of default.  The table below from the FFIEC shows the summary income statement for SYF over the past five years. One measure of this profitability is return on earning assets, which is over 15% for SYF vs 5% for Peer Group 1 and ~ 10% for AXP and COF.  Notice in the chart below that ALLY has the lowest ROEA in the consumer group and is just above the average for the top 120 banks in Peer Group 1. Source: FFIEC Obviously in a severe recession, SYF will take some lumps on its white label consumer finance portfolio. Yet SFY has a considerable advantage over issuers such as ALLY because its cost of funds is relatively low, especially compared with the nose bleed levels paid by the US unit of Barclays. The chart below shows interest expense vs average assets for the consumer group. Source: FFIEC SYF was one of the best performers in our broad bank group, peaking at up 65% in January of this year. Since that time, SYF has given back a lot of those gains and is currently up “only” 25% LTM vs +17% for the KBWB ETF. If as we expect the US economy slips into recession, we’d expect SYF to underperform the group on the way down and could easily slip into negative territory before mid-year if credit expenses are elevated in Q1 2025 earnings. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 25, 2025  | In the this issue of The Institutional Risk Analyst, we feature a guest comment from Michael Pyatski  of IVolatility . Now that the U.S. Senate has confirmed Bill Pulte  as Director of the Federal Housing Finance Agency (FHFA), industry reports say that Pulte’s top priority will not be removing Fannie Mae and Freddie Mac from government conservatorship. Instead, he’ll focus on rooting out fraud and abuse inside the two companies, CNN reports, and ensure they are running efficiently. But before Pulte spends a lot of time digging through the bowels of the GSEs, there may be an easier way to make the mortgage market more efficient -- by improving the market. May 2025 via Wiley Global! Greater Transparency Will Make the Mortgage Market More Efficient By Michael Pyatski In inefficient markets, bonds can trade at incorrect prices for extended periods before adjusting. Market inefficiency is typically driven by illiquidity. For example, in the municipal bond market, less than 0.5% of bonds trade annually, making it unclear just how these bonds should be priced.   The mortgage-backed securities (MBS) market, however, tells a different story. As of February 2025, the average daily trading volume for agency MBS was approximately $370.3 billion. Extrapolated over 252 trading days, this results in an estimated annual trading volume of around $93.3 trillion. This implies that the annual trading volume is roughly 7.8 times the total outstanding MBS volume, highlighting the market’s high liquidity and turnover.   So, why do MBS bond prices remain inefficient despite such liquidity? At his February 27, 2025 Senate nomination hearing, Pulte spoke about affordability in the U.S. housing market — something that was destroyed by the Fed’s low interest rates policies during COVID. But there are other important factors at play in the world of MBS that Pulte and HUD Secretary Scott Turner can address quickly and consistent with conservative principles of free markets.   We believe the core reason for the lack of efficiency in the mortgage market is similar to why U.S. hospitals can charge vastly different prices for the same services — sometimes with discrepancies of up to tenfold. The solution during the first Trump administration was to require all hospitals to publicly disclose all services provided and the prices charged on their websites. We hope this policy will be pursued again in a second Trump administration. The basic issue is transparency. In the case of MBS, though, it's not just about price transparency but also the transparency of the underlying data backing these bonds as well as the security prices themselves. If market participants could directly access and utilize this data to price bonds, it would significantly improve pricing efficiency in the MBS market. This, in turn, would lower borrowing rates for consumers and provide broader benefits to the U.S. economy. Who benefits from lack of transparency now? GSEs? Investors in MBS? Overall, no one benefits from a lack of transparency. MBS transactions are conducted with limited information and, therefore, carry a higher risk premium in the secondary markets, which is passed on to the primary market in the form of higher borrowing costs for consumers. Typically, when two parties transact under conditions of asymmetric information, the party with more information gains an advantage. Acquiring more information is called progress, which is beneficial. Earning profits from this can be even better—but not when it comes at the expense of the public good. This is a clear case of an economic externality, where government intervention is needed to make markets more efficient. Greater transparency in the MBS market leads to more efficient pricing, ultimately reducing borrowing costs for consumers.   A more efficient MBS market benefits everyone by lowering mortgage rates and making homeownership more affordable. The savings to the U.S. economy can be estimated: a 25 basis point reduction in the primary mortgage rate would yield more than $30 billion in annual savings on the $13 trillion U.S. MBS market.   Pulte and Turner Can Change the Status Quo   The GSEs and GNMA release only limited loan- and security-level data to market participants on the loans they guarantee. For some non-agency mortgages, data is available through a few large vendors, but it is limited, difficult to use, and prohibitively expensive. GSEs and GNMA are doing a great job of releasing data on conforming loans, but not all relevant data is being made publicly available or easily accessible. Data on 144A private placement deals is not typically publicly released and is extremely complicated to use when available.   Some pricing data is available (e.g., via FINRA TRACE reporting), but pre-market pricing data is not publicly available as it is most other markets. As a result, most of the MBS market relies on incomplete information, making it less efficient and more costly for consumers and global investors. So while the government and agency MBS markets are very liquid, they are also very inefficient. Consumers pay for this inefficiency. Who benefits? - the party with more information gains an advantage so there is an incentive to keep disclosure limited.   We propose that the FHFA and also HUD adopt the following implementation steps at no cost to taxpayers to improve the efficiency of the mortgage market.   Increase Transparency – The FHFA should publicly release all performance and reference data available on conventional mortgages. GSEs and Ginnie Mae have done an excellent job by releasing the data publicly in recent years, and they can build on this progress Encourage Broader Participation – The Ginnie Mae, servicers, and trustees should do the same for FHA, VA, USDA, Non-Agency, and 144A deals by making mortgage data accessible. Promote Public Release of MBS Pre-Market Pricing Data – This data is already available to many but not all market participants. Its broader release would enhance market efficiency without disrupting pricing.   Greater transparency in the MBS market will lead to more efficient loan pricing, ultimately lowering borrowing costs for consumers. A more efficient mortgage backed securities market benefits everyone by lowering mortgage rates and making home ownership more affordable.   “Housing and safety and soundness of the housing market is a bipartisan issue, and I firmly believe that we must work together to address the severe housing challenges that our country faces,” Pulte said. Why not start with these relatively easy steps that the FHFA and HUD can immediately address?   As Director Pulte and Secretary Turner work to improve affordability in the housing finance market, they should use the power of free access to information, data that is currently withheld from the public by the GSEs and HUD, to improve the quality of market execution that consumers receive when they get a government or agency mortgage to buy a home. Consumers will thank them.   3/24/25 Interview with Jack Farley https://open.spotify.com/episode/6BOQBPRZT94ulAPttZkUHR https://www.youtube.com/results?search_query=farleY+%2B+whalen The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 21, 2025  | In the this issue of The Institutional Risk Analyst , we look at the latest press conference by the Federal Open Market Committee and comment on what this means for banks and financials in 2025. Even as President Donald Trump demands rate cuts, the Powell FOMC is sharply reducing US economic growth estimates and increasing explicit inflation concerns, meaning that banks and other cyclical firms will reduce internal growth estimates accordingly. May 2025 Release!! On a positive note, the Fed is slowing the reduction of the system open market account (SOMA), meaning that bank deposits may start to grow in Q2 2025. Fed Chairman Jerome Powell said in a somewhat cosmic but remarkably indefinite response to the last question of the press conference from Jean Yung of MNI Market News : JEAN YUNG. Well, I guess my question is more, was [slowing QT] meant to be a temporary measure during the debt ceiling episode, or? CHAIR POWELL. You know, it was -- it was actually the TGA flows, Treasury General Account flows that got us thinking about this, but the more we thought about it, we came around to this. And you know, it is, yes it was provoked, the original discussion was provoked by that. But I think what we came up with though, was broader than that and different and it does address that issue but it really is also, it fits in really nicely with our principles and our plans, and the things we've done before, and the things we said we would do. It amazes us how so many monetary economists miss the significance of the changes in the Fed's balance sheet given 1) the size of the public debt and 2) the necessary expansion of the SOMA to keep pace with the federal debt. Perhaps when the Fed’s balance sheet exceeds the total assets of the US banking industry later in the decade US monetary economists will get the joke. Talk to our friends in Mexico and Argentina. They remember hyperinflation with tears. Source: FDIC The message coming from the top banks is cautious as Q1 2025 ends, although Bank of America (BAC)  CEO Brian Moynihan  went against the bearish narrative rising on Wall Street and said that the bank is tracking 6% spending growth compared to the same period last year. But is BAC financing that growth? Below we discuss the positive and negative factors affecting financials. The biggest negative factor for banks is the lack of visibility on the economy. There were a number of important comments in the press conference this week by Fed Chairman Powell, but the key point for banks and all financials is that the level of uncertainty about the direction of the economy is so high that the Fed is essentially prepared to go in either direction. To us this was perhaps the post important comment by Powell: “I'm confident that we're well-positioned in the sense that we're well positioned to move in the direction we'll need to move. I mean, I don't know anyone who has a lot of confidence in their forecast. I mean the point is, we are -- we are at, you know, we're at a place where we can cut, or we can hold, what is a clearly a restrictive stance, of policy. And that's what I mean. I mean I think we're -- that's well-positioned. Forecasting right now, it's you know, forecasting is always very, very hard, and in the current situation, I just think it's uncertainty is remarkably high.” Or to put it in the poplar lexicon: "We have no idea." The lack of clarity on the economy is a function of the Fed and the machinations of the Trump Administration in Washington. The changes that are occurring across the government are substantial and disruptive, but nowhere more than in housing. President Trump has gutted the FHA and Ginnie Mae, and most recently the Federal Housing Finance Agency. We expect to see headcount reductions at both GSEs and a shrinkage of the footprint away from anything but purchase mortgages. A reduction in the conforming loan limit may come before much longer. At a minimum, the layoffs and headcount reductions by President Trump will reduce the flow of credit to all US housing markets. While we support the general idea of reforming the government housing complex, we worry that the speed and arbitrary nature of some of the Trump policy changes may tend to increase the surge in credit expenses that is already visible. As we’ve noted in recent profiles and the most recent edition of The IRA Bank Book , credit expenses in areas such as commercial and multifamily real estate are already high, but net losses on consumer lines such as autos and credit cards are also rising.  When you take the lack of visibility on the economy and an expectation of slower growth, to us that means that our readers should assume a recession or at least a serious slowdown is approaching.  Add to this the already pronounced tendency of banks not to foreclose on commercial assets and instead forbear on non-performing loans.  Then we finally note that there is $100 billion worth of income accrued but not collected by banks – more than a quarter’s worth of earnings – another indicator of credit distress we noted in the Bank Book. Source: FDIC If you add all of this up, we have an uncertain view of the economy and an increasing certainty of higher credit expenses in the future. To us, the increased uncertainty in the minds of Americans and the tight labor markets is not a combination that leads to economic expansion and could easily slip into recession. Again, Fed Chairman Powell said this in the press conference: “You have pretty high participation, accounting for aging, you've got wages that are consistent with 2 percent inflation, assuming that we're going to keep getting, you know, relatively high productivity. We've got unemployment, you know, pretty close to its natural level, but job, the hiring rate is quite low. But so is the layoff rate. So, you look at initial claims or layoffs, so you're not seeing people losing their jobs, but you're seeing that people who don't have a job having to wait longer and longer. And you know, the question is which way does that break? If we were to see a meaningful increase in layoffs, then that would probably translate fairly quickly into unemployment because people are, you know, it's not a -- it's not a big hiring market. We've been watching that, and it's just not in the data, it hasn't happened. What we've had is a low firing, low hiring situation, and it seems to be in balance now, for you know, for the last six, seven, eight months.” In the next issue of The Institutional Risk Analyst , we review the Q4 results for the top seven depositories, with a particular view on credit and growth in Q1 2025. If credit expenses are to rise in 2025, then the industry needs to find a way to push up loan growth and asset returns. In Q4, the average return on assets for Peer Group 1 was still sub 1% after years of financial repression by the Fed.  Does market volatility create an entry point for investors or a signal for investors to head for the lifeboats? The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 12, 2025  | Updated | In the last issue of The Institutional Risk Analyst  (“ Silicon Valley and the Large Bank Dead Pool ”), we provided our annual subscribers with a list of the top 100 banks sorted by the yield on mortgage-backed securities (MBS). Our basic thesis is that all banks will be selling more low-coupon assets as it becomes ever more clear that the long-expected US interest rate rally is not going to materialize. May 2025 Release! Why are banks selling COVID era securities with low coupons now? First and foremost negative cash flow. The average cost of funds in the industry is over 5% of average assets, so owning an MBS with a 1.5%, 2% or 2.5% coupon is a really bad trade. Banks barely earn 1% on assets, so losing points on an underwater mortgage portfolio could literally kill the bank. Bank managers who have refused to restructure impaired MBS portfolios deserve the full critical attention of shareholders next month at the annual meeting. Bank of America (BAC) is top of the list, but they are not alone by any means. Charles Schwab (SCHW) , Comerica (CMA) and Bank OZK (OZK) all reported MBS yields below 3% in Q4 2024. Why haven't the managers of these banks been fired for such poor performance? The second risk issue with legacy MBS paper is spreads. Fannie Mae 6% MBS trade pretty reliably inside a point over the yield on the 10-year Treasury, but yield spreads for MBS 2s and 2.5s can range between a point and many points over the 10-year, if you have the stomach to stare at the TBA screen for a few minutes. As we wrote this comment on Tuesday, we actually saw some sellers in Fannie Mae 2.5s at yield spreads of 5 and 6 points over the Treasury curve. Hello. The indicated bid for 2.5s is about 83 cents on the dollar with a spread inside of 1% over 10s. The bid for size is a lot lower, points lower. The screen shot below from Bloomberg shows indicated prices for low-coupon MBS. The Fed is the largest owner of those tasty 1.5s and 2s, followed by large banks such as BAC and SCHW. Yummy. TBA Market Source: Bloomberg (03/11/2025) While we were working with the list of banks with low yields on mortgage exposures, we noticed that Northern Trust Co (NTRS)  had a negative 3% yield on its MBS, this after tracking well-above peer on this key metric. What gives? Mortgage Backed Securities by Yield (%) Source: FDIC/BankRegData The table above from BankRegData shows part of the Q4 data from the FDIC for the top 100 banks sorted by the yield on all MBS, commercial and residential. NTRS had been performing very well through Q3 2024 , with a yield on MBS over 4% which put NTRS into the 90 percentile of Peer Group 1. What happened? We called Bill Moreland  at BankRegData and of course he immediately surmised what was happening. “The negative value is most likely an error in the call report or some type of sale. A negative value for yield is rare, but not unheard of,” Moreland relates.   In fact, the data provided by NTRS to FDIC tells the tale. BankRegData derives the Q4 data but subtracting the Q3 YTD from the full year. “Note the enormous drop in Avg MBS Securities,” Moreland notes. “They apparently liquidated a huge chunk of their CMBS.”  In fact, the change related to a reclassification of mortgage bonds. "Turns out there was a change in classification that drove the apparent decline, Jennifer Childe at NTRS relates. "Beginning in 4Q24, ~$6.7b in mortgage-backed securities guaranteed by the Federal Home Loan Mortgage Corporation were moved to line 1.c – All other securities of schedule HC-K, per regulator guidelines. Previously they were reported on Line 1.b – Mortgage-backed securities." "The associated revenue lines were adjusted accordingly,'" they continued. "The 3Q24 quarterly income of $630mm on $20.8b is actually lower than the 4Q24 quarterly income of $515mm on $14.7b. The -$115mm below appears to be the difference between the $630 and the $515." The housecleaning by NTRS should be viewed as a positive sign by analysts and investors, in our view. Banks that take proactive steps to reduce legacy MBS exposures and thereby improve NIM and earnings get a gold star. And no surprise, NTRS is one of the best performing banks in the US based upon 1 year total return. The WGA Bank Top Index is shown below. With the selloff in financials over the past month, a number of leaders from 2024 have fallen by the wayside, most notably SoFi Technologies (SOFI) , now #3 behind Dime Savings (DCOM) and Bank of NY Mellon (BK) .  And to our earlier comments about consumer lenders, Ally Financial (ALLY)  is down for the past year after being near the top of the group in 2024.  Indeed, Ally is now in the bottom 10% of the 100 largest US banks based upon one-year total return. We expect financials to continue to give ground in the near term as investors slowly, painfully come to the realization that the FOMC is not looking to reduce short-term interest rates anytime soon. Meanwhile, as we will discuss in our new Housing Finance Outlook on Monday, the impact of the changes to the markets for MBS planned by the Trump Administration will add volatility to financials. If we told you that the Trump White House was planning to end the issuance of all MBS by Fannie Mae, Freddie Mac and Ginnie Mae, how do you think this will impact financials? How do you think this will impact home affordability? If we told you that there are people in the Trump Administration who believe that ending the government guaranty on agency and government MBS will result in lower Treasury bond yields, would you believe it? We kid you not. Stay tuned. Subscribe Now! The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 4, 2025  | With the first State of the Union message from President Donald Trump Tuesday night, we’ve started to collect commentaries about the Trump Administration and the phrase “unintended consequences.” No, those tariffs and other policy changes made by the Trump Administration are quite intentional and deliberate. We’ll hear more about additional cuts and tariffs during the State of the Union message. Trump is playing hurry up offense and that is not likely to change anytime soon. When Federal Housing Finance director nominee Bill Pulte focused on cost cutting (instead of releasing the GSEs from government control) during his confirmation hearing last week, that gave you a peek at the priorities in Trump II for housing. We expect to see layoffs at FHFA and the GSEs in coming weeks. In Trump's executive order last month laying out his new administration’s priorities, “investigating the causes of our country’s large and persistent annual trade deficits in goods” was a lead item. Watching the abortive meeting between President Trump and Ukrainian leader Volodymyr Zelenskyy , we are reminded that most people still really do not understand the change that has occurred in Washington. With the return of a purposeful, 19th Century conservative to the White House, President Trump is intent upon reversing the outflow of cash from the US to the rest of the world. This is a transcendental change that rejects the entire post-WWII era. But reducing the many deficits maintained by the US also means an equally dramatic change in the role of the dollar. Trump likes to think of President Ronald Reagan’s legacy as a model for his political journey, but Reagan accepted the post-WWII global security consensus that Trump now explicitly rejects. You must go back to Senator Robert Taft or before WWI, to Teddy Roosevelt or even William McKinley , to capture the full measure of isolationist conservatism represented by Donald Trump. Trump spurns the continuous state of war supported by both parties in Washington since 9/11, but also repudiates American economic and military support for allied nations going back to WWII.  The America first orientation of Trump’s agenda is the most disruptive economic event since the victorious allies insisted on full payment of war reparations by Germany after WWI. The scale of the change is difficult for people to understand and accept as a given. But ultimately, President Trump measures success by how much deficits are reduced. In order to deliver on the fiscal side, Trump armed with Elon Musk and DOGE will cut spending in all areas of government. In fact, Trump represents a dire threat to the entire global economy grown accustomed to ever rising US deficit spending. President’s Trump’s explicit goal is to reduce or even reverse the flow of dollars from the US to other nations. What does a sudden and sustained decrease in financial outflows mean for the world? How would a reduction in the $1.5 trillion trade deficit impact global GDP? Badly. Contrary to what many hope, in fact the Trump encore may not be especially good for the corporate world. The steady migration of global CEOs through Mar-a-Lago seeking opportunities to appease the commander-in-chief describes the amount of money at stake in Washington under Donald Trump. As President Trump works, for example, to reduce the number of US military engagements around the world, he must also reduce the flow of dollars into and around the global economy and the defense sector. Ponder the impact of DOGE terminating scores of contracts and leases throughout the federal government. Then extend this modern-day version of a Jacksonian, hard-money economics into a metaphor for fiscal probity around the world. Will Trump imitate President Andrew Jackson and require foreign nations to pay their tariffs in gold? Maybe. It's early yet. When President Trump proposed for Ukraine to use its mineral resources to repay the United States $500 billion for military aid previously provided, he meant it. This reflects the Trumpian worldview that America should be repaid for its help – in full. Many Americans who supported President Trump last November agree with the idea of other nations carrying the load and also want a reduced global role for America. This marks a radical departure from the model of America giving away billions of fiat dollars to other nations that has prevailed since WWII and especially in the Cold War.  As we note in our upcoming book “Inflated: Money, Debt and the American Dream,” most of the “loans” made by the US to other nations over the past century have defaulted or been forgiven. The reduction in US aid and, indeed, the imposition of tariffs on many nations will begin to reverse 75 years of economic hegemony for the US, a dominant role largely financed with borrowed money. How does the global role of the dollar look after a few years of American disengagement? Good question. What is perhaps most interesting about the reprise of President Donald Trump is that predictions of doom and gloom for the US always focused on foreign nations losing their taste for dollars. But as we note in "Inflated," the global convenience of the dollar as a means of exchange is a free good exploited by the entire world. Nations can merely use dollars for trade, but invest reserve assets in other currencies. Nobody is looking for a replacement for the dollar, at least not yet. But what happens if the US simply picks up the proverbial football and goes home?  The growing unwillingness of the US to finance the global role of the dollar via external deficits and internal inflation is the new narrative that carried Donald Trump into office last November. Watching the world figure this out over the next year will be great entertainment and also fuel for a lot of market volatility.  Available May 2025! The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. 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.