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February 24, 2025  | In this edition of The Institutional Risk Analyst , we go back to 2017 when we published “ Ford Men: From Inspiration to Enterprise, ” and ponder what has changed in the global auto sector since that time. Passenger vehicles are more commodities than ever before, whether powered with internal combustion engines (ICEs) or DC motors with lithium batteries. The global auto industry has significant overcapacity, moreover, as the US government threatens tariffs on all imports into the world's most valuable car market.  The flow of capital into the automotive sector has surged over the past decade, primarily driven by the politically mandated transition to electric vehicles (EVs). Automakers have poured large sums into EV research and development, manufacturing facilities, and battery technology, but the returns on these investments are in doubt. As we noted in "Ford Men," battery driven cars have been the goal since the days of Henry Ford and Thomas Edison , yet remain impractical: “While there is no question that a DC electric motor is a superb way to power vehicles such as train locomotives and warships, the lack of a compact power source continues to constrain the development of electric automobiles or even aircraft. It is interesting to note in this regard that technologically advanced manufacturers such as Toyota, Daimler and Honda initially avoided the all-electric vehicle in favor of hybrids  that combine gasoline engines with battery power.” The progressive swerve into EVs was more aspirational than intentional. When President Joe Biden entered the White House, the progressive left made EVs a centerpiece of a larger agenda than included massive deficit-driven spending and social engineering on a vast scale. The prescriptive regulatory world of the Biden Administration has now been replaced by Donald Trump and his 19th Century approach to fiscal spending and “reciprocal tariffs.”  How will this impact the global auto sector? Badly. Ford Motor (F) CEO Jim Farley  says that the auto sector is going to be forced to consolidate due to the sheer cost of investing in electric cars. “Farley said the market that EV start-ups are going after isn’t ‘big enough to justify the capital that they’re spending or the valuations,’” CNBC  reports .  Ditto. But why isn't Farley running away from EVs? Too embarrassing to admit error? This is why we own EV-skeptic Toyota Motor Corp (TM)  as our bet on the winner in electric vehicles, but perhaps not in EVs as they are known today.  Looking at the sad spectacle of Nissan Motor Corp engaged in talks with Honda Motor Co. (HMC)  about an “investment” illustrates the difficulty of putting down moribund national champions. Nissan was just cut to junk by Moody’s and is in the process of downsizing in the costly and difficult US market. Nissan and Renault are part of the Renault-Nissan-Mitsubishi Alliance, which was founded in 1999. By rights, all three brands should get bought and absorbed by a more viable automaker, but note that Chrysler is still here 50 years after it too should have disappeared.  Lee Iacocca  saved Chrysler from bankruptcy in 1979 after being fired from Ford Motor Company by Henry Ford II . Iacocca was more than anything else a great salesman who made miracles happen at the low-tech Ford of the 1970s. Remember the Ford Pinto? Chrysler made products that were not notable but could be sold to consumers. The fact that Iacocca needed a federal loan guarantee to save Chrysler 45 years ago illustrates the strange politics of killing zombie automakers. But 50 years ago, the US still believed in "free trade." Look at the merged Stellantis NV (STLA) brand, including Jeep, Dodge and Chrysler, and you see a business in danger of dying of its combined mediocrity. Stellantis was created in 2021 when Fiat Chrysler Automobiles and Peugeot merged. Stellantis has managed to assemble an impressive collection of niche sports cars and also-rans in the broader passenger category, many of which ought to have been shut down years or even decades ago: Abarth : Iconic automotive brand Alfa Romeo : Italian sports car brand Chrysler : American car brand Citroën : European car brand Dodge : American car brand DS Automobiles : A car brand Fiat : A global brand Jeep : American SUV brand Lancia : Italian brand Maserati : Italian sports car manufacturer Opel : German car brand Peugeo t: European car brand Ram : American truck brand Vauxhall : European car brand The global auto industry is expected to produce 90 million new passenger cars in 2025, but has at least 10% overcapacity. Stellantis is the second largest auto producer in Europe, but has less than 10% market share in North America. The prospect of tariffs on imported vehicles could force Stellantis to retreat from North America entirely. Fiat, for example, has exited the US market twice in the past 30 years, first in the 1980s and most recently in 2022.  “The production outlook for 2025 is dominated by the assumption that the incoming US administration will levy a new wide-reaching tariff regime, effectively creating a universal tariff of 10% on all goods coming into the US except for Canada and Mexico where the terms of the USMCA are assumed and mainland China where it is assumed a tariff of 30% will be applied,” notes S&P Global. Even if all of the Stellantis and Nissan brands were shuttered tomorrow, the global auto industry would still have overcapacity due to more recent entrants in China and Asia. More important, the surge in EV-related spending may not produce any investment returns for global automakers and may actually drive some smaller producers out of business. Over the next two decades, we expect Toyota to be the winner in Japan and for the EU market to eliminate roughly half of today's existing brands. Morgan Stanley (MS) noted in a 2022 research note that " EVs’ share of global auto sales is likely to grow from about 7% today to nearly 90% by 2050." Really? While we expect to see uptake in hybrids and other new technologies in coming years, the expectations for growth in battery-powered EVs seem wildly out of line with consumer preferences and the available technology. The automakers which shed money-losing EV investments most rapidly may be the survivors. General Motors (GM) introduced the EV1 "Impact" electric car in 1990, but little has changed. Today Tesla Motors (TSLA) has 4% market share in North America, but nothing has changed in the physical world of physics and materials science. If Thomas Edison were alive today, would he tell Elon Musk to make electric cars with batteries? Or would he repeat the advice given to Henry Ford 120 years ago and tell Musk to use gasoline engines? In the pre-Trump world, mediocre auto brands might linger for decades, but after years of malinvestment in EVs, many automakers may struggle to rationalize operations quickly enough to survive. The addition of tariffs imposed by the US could force an acceleration of the global process of consolidating moribund auto brands. Does the US need three domestic automakers and several more transplants? More, does Japan need half a dozen different automotive marques? Looks like we are going to find out.  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.

February 18, 2025 | For long-time readers of The Institutional Risk Analyst , hearing that the Federal Open Market Committee is uncertain about the direction of inflation or the US economy is no surprise. Even though FOMC members have managed to travel to warmer climates to express their carefully considered views of monetary policy , their assessments remains frosty regarding the prospect for near-term interest rate cuts. Meanwhile, residential mortgage rates are over 7% and default rates are rising across asset classes. The cautious Fed view is informed by data as well as partisan politics inside Washington. The Fed is the most political institution of all. Nothing better illustrates that dimension of the central bank than the discovery of the secret FOMC minutes in 1993 by our friend Rep. Henry B. Gonzalez , Chairman of the House Banking Committee. As we note in the upcoming second edition of “ Inflated: Money, Debt and the American Dream, ” the Fed chair must be above all political: "The FOMC minutes that contain the discussion of the S&L bailout and many other topics remained secret for two more decades, until the author reported their existence in the Wires Washington news service in October 1993. Greenspan was almost forced to reveal the existence of the minutes under oath, but was saved by the gavel of Chairman Gonzalez in one of the greatest public crises to ever threaten the central bank. I wrote in the Christian Science Monitor about the congressional hearing with Fed Chairman Alan Greenspan to discuss the minutes: After last week’s congressional hearing, Greenspan was overheard telling one Fed bank official that, had Roth been allowed to ask another question (he was cut off by a punctual Gonzalez gavel), he might have been compelled to reveal the existence of an entire set of secret written transcripts. Dr. [Anna] Schwartz likewise says, ‘Gonzalez cut Roth off from asking a further question.’ Whatever Greenspan’s reasons for not addressing the issue, the ambiguous result of the Oct. 19 hearing makes it clear that neither Congress nor Gonzalez will soon drop the subject of Fed reform. Roth was shaken by the hearing and warned that the Fed soon must accept the political and practical necessity of releasing more information about the FOMC’s deliberations. Today none of the questions asked of the Fed Chairman by the Big Media elicit particular concern. The media does not know what to ask. Indeed, since the election of President Donald Trump , the FOMC has been in a state of disarray and confusion, both with respect to the Fed’s legal mandate and the impact of the Trump Administration’s actions on the inflation outlook and financial markets. In basic terms, the FOMC has pivoted from a positive view of inflation, to a posture of cautious pessimism driven largely by what the Trump Administration may or may not do in coming weeks and months on tariffs and other policies. Rising equity market valuations are now apparently part of the monetary policy analysis as well. Fed Governor Michelle Bowman noted Monday that the Fed's recent progress on inflation may have been hampered by rising asset prices. We might offer that asset prices have been rising because of the enormous amount of liquidity that remains in the US financial system, liquidity that the FOMC has been unwilling or unable to remove. The uptick in consumer prices shows how increases in food and other areas continue to reverberate through the economy. “Having entered a new phase in the process of moving the federal funds rate toward a more neutral policy stance, there are a few considerations that lead me to prefer a cautious and gradual approach,” Bowman opined at an ABA event in sunny Phoenix. “Given the current policy stance, I think that easier financial conditions from higher equity prices over the past year may have slowed progress on disinflation.” Linking the movement in equity prices and the inflation outlook is a novel construction for an FOMC member, but hardly the most notable. Strictly speaking, changes in bank reserves should not impact stocks, but the shrinkage of the Fed’s balance sheet also shrinks bank deposits 1:1. More to the point, do you think Governor Bowman and other FOMC members understand that the post-election equity market rally that greeted Donald Trump may be over? "A strong signal of stock market downside risk is when hedge funds are going short yet retail money is still pouring in," writes Simon White of Blooomberg . "That's the case today... The market has overcome recent shocks such as DeepSeek and tariffs to sit near all time highs, yet stocks face a widening gulf of risks." Many FOMC members have pivoted to super hawk status even as equity markets and other speculative endeavors such as dealing in crypto tokens show signs of exhaustion. Dallas Fed President Lori Logan , intellectual author of the big Fed balance sheet, had been calling on the Committee to slow the pace of shrinking the Fed’s balance sheet. Now, however, she’s saying that further contraction is in order for the balance sheet. The chart below from FRED shows the Fed balance sheet and the S&P 500. “Even if we do get better data — and it does look like it’s coming close to 2% — I think we should be cautious,” Logan said Friday during a moderated discussion in balmy Palm Desert, California. “Because if the labor market and the overall economy is strong, even in that environment, it doesn’t necessarily mean there’s room to cut rates further.” “What if inflation comes in close to 2% in coming months?” Logan asked earlier in prepared remarks for an event in lovely Mexico City. “While that would be good news, it wouldn’t necessarily allow the FOMC to cut rates soon, in my view.” The data dependent FOMC now seems to be increasingly prone to fine tuning, but is the caution regarding inflation really about monetary policy or politics? Federal Reserve Governor Christopher Waller says recent “disappointing” economic data support keeping interest rates on hold, but if inflation behaves as it did in 2024, policymakers can get back to cutting “at some point this year.” In remarks to be delivered in Sydney, Waller basically allows for a wide range of possibilities and outcomes. So much for being data dependent. Behind the scenes, however, Fed governors are worried about a lot more than monetary policy. As we’ve noted in past comments, President Trump signed Executive Order 12866 in his first term, which essentially updates a Bill Clinton era budget initiative that requires all executive agencies to “report up” to the White House and the Office of Management & Budget in the absence of specific instructions from Congress. “So, it was an open question what Executive Order 12866’s status would be during a second Trump administration, notes the Center for Progressive Reform . “For now, it seems like Trump intends to retain it. If so, we can expect more haphazard reviews and slapdash cost-benefit analyses. In the future, though, it is possible Trump may replace Executive Order 12866 with a new centralized regime that is more amenable to deregulation.” Everything that the Fed does outside of monetary policy, from Basel to payments to cooperation with international organizations, is now subject to review by the Executive Branch. If DOGE wants to propose privatization of the FedNow payments platform, for example, there is nothing that Chairman Jerome Powell and the other governors can say about it. Congress never specifically authorized FedNow and the over $550 million spent to date launching this redundant payments platform. While Fed governors ponder the impact of seasonal factors on inflation, the Trump Administration is working on a deregulatory agenda that may surprise many Fed watchers and related media. It is entirely possible that the updates to the Basel bank capital framework, for example, which is not explicitly authorized by Congress, will not happen at all. Once the Trump Administration passes its tax and spending legislation through Congress, and gains approval of new agency heads at FDIC and OCC, the focus will move to deregulation and deconstructing the administrative state. So when JPMorgan (JPM) declined to provide confidential client data to federal regulators interested in credit exposure from buyout firms, Jamie Dimon showed that the times they are a changing. The rule mandating increased disclosure on credit exposure to nonbank firms was inserted into the bank reporting taxonomy late in the Biden Administration, but the Trump White House will ignore it. And there is nothing that the Fed can do about it. Other banks will figure this out in good time. “JPMorgan Chase has dealt a blow to regulators’ efforts to understand the depth of ties between banks, buyout firms and the fast-growing private credit sector,” reports Stephen Gandel in the FT . “declining to disclose its lending in an area of increasing systemic concern.” Is bank exposure to nonbanks and buyouts a legitimate credit concern? Oh yeah. The whole landscape of buyout loans and private equity is a cesspool with a significant blockage on the outbound end in terms of IPOs. So while President Trump will pursue removing the special tax treatment for carried interest for private equity funds, he’ll ignore hundreds of billions in losses in private equity portfolios. And there is nothing that the Fed can do about it, especially with Trump appointees at the other agencies. “You can only wonder about how Private Equity-affiliated insurers are valuing their Private Credit portfolios, especially as many underlying corporate borrowers are defaulting in silence and without penalty,” observes uber risk manager Nom de Plumber this week. “This comes under Payment-in-Kind provisions, by adding past-due interest and principal payments to outstanding principal. Extend and pretend. Mark down as late as possible, to earn as much fees for as long as possible.” We’re not sure that the changed regulatory environment will necessarily help valuations for financials over the next four years, but it will certainly help earnings to reduce operating expenses and aggravation from dealing with federal regulators. So Powell has told Congress that the Basel III Endgame proposal will be re-proposed as soon as possible, but he has not given given a specific date. Maybe Powell will get a chance to discuss Basel III with Kevin Hassett , a key economic adviser to President Donald Trump, who said this week that he will hold regular lunch meetings with Fed Chair Jerome Powell. In the future, the Fed will be compelled to “report up” to the Treasury and White House on bank bank supervision, market structure and many other matters. Kevin Hassett is now effectively Powell’s boss on everything other than monetary policy. Welcome to the world. 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.

February 12, 2025 | Premium Service |  Update : Last night President Trump sent to the Senate the nominations of Jonathan Gould to be comptroller of the currency and Jonathan McKernan to be director of the C​FPB, ​ according to news reports . This is interesting because McKernan reportedly wanted OCC, but is now tasked with the abolition of CFPB. Gould looks like a permanent hire at OCC. Both will easily be confirmed.​ And now maybe Fed Gov Miki Bowman goes to FDIC? Opens a Fed governor slot for Trump, who could then appoint that nominee ​Fed chairman . Jerome Powell would remain a governor. The thundering herd on Wall Street is piling back into all manner of assets, confirming our view that the amount of residual liquidity in the US financial system has essentially forestalled further interest rate cuts. Yesterday Fed Chairman Jerome Powell said that "there is no hurry to adjust interest rates." Can we have double-digit loan growth in 2025 and still be worried about a recession? Yes we can. But don't make the mistake of thinking that the outlook for the US economy and interest rates is clear cut with President Trump in the White House. Treasury Secretary Scott Bessent may be the only person in the Trump Administration thinking about LT government bond yields. And White House Chief of Staff Susie Wiles has largely eliminated all flow of information to the public about the transition process. Looking at strong market activity in both the banking system and the bond market in Q1 2025, we can see more possibility of a rate increase  later this year than a rate cut. The little hint in that regard is that fact that the Fed is continuing with balance sheet reduction (a/k/a quantitative tightening or QT) despite the earlier protestations about ebbing liquidity from Dallas Fed President  Lori Logan . The first observation to make is that US banks are continuing to shed securities and take losses on COVID era assets. Loans grew less than 1% in Q4 2024, but securities available for sale and in repurchase agreements dropped by double-digits or almost $250 billion. In the near-term, shrinking bank balance sheets may not be a positive for bond yields. “Wells Fargo's paper losses leapt $13.84B to $48.63B and their 12.13% is the highest since the 15.24% posted in 2023 Q3,” notes Bill Moreland  at BankRegData. “We also see they took another $450 Million in Realized Losses from Securities sales.” Overall, bank assets in the US continued to shrink due to the impact of QT, as shown in the table from BankRegData below. Source: FDIC/BankRegData The fact that Wells Fargo (WFC) is selling underwater securities means that earnings will improve. The second point, however, is that banks and nonbanks alike are loading up on new-issue loans and securities to boost earnings. Commercial real estate lending surged in Q4 2024, with CBRE’s Lending Momentum Index up 37% year-over-year, driven by abundant capital, strong fundamentals, and increased bank activity, reports CRE Daily . The lack of Fed rate cuts is not dampening demand for new assets and, indeed, may be encouraging banks and other investors to load up on duration before market rates fall. FOMO is widespread among investors, but will rates fall? Notice in the chart below that bank deposits fell in Q4 as the cash in the Treasury General Account increased. The million dollar question posed by the chart above: What happens to bank deposits and demand for assets if the Fed continues to shrink the balance sheet and the Trump Administration takes steps to throttle government outlays? As assets run off the Fed’s balance sheet via QT, let us recall, bank deposits disappear 1:1. The Fed’s liquidity model assumes a "normal" cash outlay profile for Treasury, but what happens if President Trump reduces cash outlays in his quest for budget savings?  Meanwhile, the search for yield by institutional investors is intensifying. Issuance of collateralized mortgage obligations (CMOs) was the highest in four years last month, according to Bank of America (BAC)  researchers, driven by a 79% surge in sales of conventional deals from December’s level. With Ginnie Mae issuance jumping 40%, overall CMO issuance was $36.2 billion, the most since February 2021. “The conventional relative increase as of late largely reflects the subdued bank demand at the moment, as non-bank investors are likely to prefer the spreadier  conventional collateral whereas bank investors prefer the superior regulatory treatment offered by Ginnie Mae,” BAC notes. A final factor in the analysis is the slowdown in securities issuance generally, even with the uptick in CMOs and commercial real estate lending. The surge in issuance in September 2024 is very clearly seen in the data from SIFMA. Notice that US Treasury issuance is falling rapidly and corporate debt issuance in January 2025 was huge. If, as we note above, the Trump Administration reduces federal outlays in 2025, then the relative flow of cash into corporates and other sectors may increase, forcing corporate yields lower.  With the Fed clearly positioning for no interest rate cuts in 1H 2025, markets are headed into a period of uncertainty when it comes to market yields. Banks continue to show a strong preference for late vintage loans over securities, a fact which may cause loan yields to continue falling in Q1 2025. With the bias of federal spending tending towards lower outlays under President Trump, the markets are already tightening in terms of liquidity and yields. The political standoff between the FOMC and the White House may result in less liquidity in the markets and a higher probability of a surprise later this year. The Fed is positioning for no changes in the target for federal funds and continued balance sheet shrinkage, meaning that we may actually see a reduction in reserves in 2025. The chart below shows the Treasury TGA in blue, reverse repurchase agreements (RRPs) in red, and the level of total bank reserves in green. Does the FOMC dare to allow total bank reserves to fall below $3 trillion for the first time since 2021? Will Donald Trump be helpful in this regard? With reverse repurchase agreements near zero and bank deposits set to fall in Q1 2025, the political change underway in Washington may be the source of greater market volatility in the weeks and months ahead. As Chairman Powell told the Senate Banking Committee yesterday, long-term interest rates are high "for reasons not related to Fed policy." 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.

February 10, 2025 | As the first month of the Trump Administration ends, the deconstruction of the administrative state is accelerating.  First rule: Personnel is policy. President Biden converted many of this political appointees to career positions, but the Trump Administration is moving to remove these employees. Last summer before the November election, we described how a key weapon President Trump and other conservatives are using is Schedule F, a new federal job category established in October 2020 by Executive Order 13957. It allows federal agencies to convert certain civil service positions to Schedule F. This makes them at-will appointments and removes rights to appeal in the event of termination.  President Trump initiated Schedule F in 2020 .  The executive order was rescinded by President Joe Biden in 2021, but Trump immediately reinstated the EO after the election.  Since then, Trump has idled or dismissed thousands of government workers. Thousands more have been given offers for early retirement . But suffice to say that the spoils system has returned to Washington and with it a certain level of operational chaos in the early days.   As with Trump I, the encore features a laser focus on loyalty by all Trump appointees and an unconstrained vision, to recall author Tom Sowell, when it comes to possible government action. Unlike Trump I, the new regime is prepared to take action in many more areas than court appointments with the support and blessing of the conservative establishment. And notice in particular how quiet and deliberate are the public workings of Trump II as it executes a classic conservative agenda and more. Remember when Cantor Fitzgerald CEO Howard Lutnick  told the New York Post  that all those who worked on the Heritage Foundation Project 2025 would be "toxic" under Trump II? Not. By no coincidence, Luknick found himself marginalized and even subject to opportunistic attack by Washington conservatives for shocking lapses like conflicts of interest . Now Lutnick may look forward to a rewarding tenure heading the Commerce Department.  Treasury Secretary Scott Bessent  has emerged as the adult in the room in Trump II, a steady and reasonable counterweight to the swirl of ideas and political rhetoric erupting from the White House.  Bessent has rightly said that short-term interest rates are the Fed’s problem, but LT interest rates are the Treasury’s problem. Show progress on the fiscal side in terms of reducing the deficit and LT interest rates will fall, but so far long rates have risen. Growing political noise is continuing to push reserve asset managers increasingly into gold, says Katie Martin at the FT . Despite the burgeoning fiscal deficit, global demand for short-duration risk free assets remains brisk and will reward any real progress made by the DOGE team under Elon Musk (h/t Eko) . There is huge potential upside for the Trump Administration in any reductions in scheduled Treasury debt issuance in terms of falling LT interest rates. Given the tightness in corporate debt and other markets, Secretary Bessent may be able to deliver some early wins for the Trump White House as federal cash outlays fall as a result of DOGE excavation inside the federal government. And falling LT rates directly impact political priorities such as home affordability. Upon Bessent’s confirmation by the Treasury, President Trump made him acting head of the Consumer Financial Protection Bureau and promptly ordered the entire agency to stand down. Whereas the CFPB tormented lenders with unnecessary fines and sanctions at the behest of Senator Elizabeth Warren (D-MA) , today the agency is essentially shut down. Look for legislation to change the CFPB into a traditional Washington agency or eliminate the CFPB entirely. Note: Hundreds of corporate lawyers face unemployment as a result. The policy agenda in Trump II is clearly informed by the conservative community in Washington, but the unconstrained view allows for literally any possible outcome. President Trump picked Jason De Sena Trennert , a respected Wall Street investment advisor, for a senior Treasury Department role overseeing financial market policy. Trennert is another adult in the room who will ultimately need to defend his agency, but meanwhile politics is the order of the day. “President Donald Trump has renewed calls to end a popular Wall Street tax break,” reports Kate Dorr at CNBC . “The ‘carried interest loophole’ refers to favorable tax treatment for certain compensation received by private equity, venture capital and hedge-fund managers.” Getting rid of the hideous carried interest tax exemption is good politics and Trump knows it. By pushing for an end to lower taxes for deserving private equity executives, Trump outflanks the Democrats politically and gains a big stick to use with Wall Street in other discussions. Do the big PE firms and Buy Side funds want to fight the White House on carried interest? Maybe. Do the Big Banks care? Not really.  They have more important things to consider. As Trump and his DOGE team struggle to cut federal spending by subjecting discretionary programs to a zero budget test much beloved by Elon Musk, folks in the financial sector are beginning to wonder if certain parts of the government apparatus will continue to function. Droves of government employees are leaving Ginnie Mae, for example, making some wonder if new issuance of mortgage backed securities will continue. HUD legal has told Ginnie Mae issuers, of note, not to present any new agreements for legal review.  As with Trump I, the world of banking and housing finance are not particular priorities for the White House, but that does not mean there is inaction. While  Bill Ackman  and other investors are still hoping to see the GSEs released from captivity, in fact the larger mortgage issuers are arguing privately to the White House that we should eliminate Fannie Mae and Freddie Mac entirely and move the guarantee function for all residential mortgages to Ginnie Mae.  The Trump Administration knows that releasing the GSEs from conservatorship is bound to be a political fight. Handing the entire residential mortgage industry to the banks and large nonbank issuers may be an easier lift, especially when done in the name of reducing risk to the taxpayer. In the grand scheme, the banks and independent mortgage banks (IMBs) that dominate housing finance have a lot more to gain by doing away with the GSEs. Of course, a deal with the banks and IMBs to kill the GSEs would include a way for agency MBS to remain risk free assets by paying an annual fee to Treasury. But as we’ve noted previously, when we unbundle the MBS insurance function from the two GSEs, the remaining business is limited and frankly not particularly attractive as an investment. From a conservative political perspective, eliminating the GSEs and putting all subsidized housing activity into the Federal Housing Administration makes a lot of sense. In the free-for-all of Washington today, we do not exclude any possibility that delivers fiscal savings and also brings positive political attention to President Trump and his administration.  As readers of The Institutional Risk Analyst ponder events in coming days and weeks, remember not to confuse political bluster with calculated change. The President needs explosive headlines, like Trump's idea to build resorts in Gaza, to maintain the roar of disapproval that is his political capital. He needs to fight. Fighting with countries is more fun that baiting pathetic Democrats. But President Trump does want to destroy much of the progressive political apparatus in Washington dating back to the New Deal. President Trump's actions are very considered and informed by the community of conservatives in Washington who have waited decades for this opportunity. If anything, the business community still does not appreciate the breadth and scope of the changes underway and in prospect in government under Trump II. We'll be describing the brave new world of Donald Trump in coming months. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 24, 2025  | In the strange world of Washington, speaking truth in public is a capital crime. Truth is often revealed accidentally. Sometimes truth emerges in a response to a question that somehow is asked, but the reply goes unnoticed. In other cases, cowed and confused media are held spellbound by Washington pharisees , never daring to ask an obvious yet impertinent question of some high official. Yet whether asked or ducked, the questions remain. Our favorite example of questions not asked is the relationship between the Big Media and the Federal Reserve Board. Despite the fact that some of the most senior members of the media in Washington “cover the Fed,” they never ask any meaningful questions about the most important aspect of monetary policy, namely the changes in the balance sheet of the central bank and related “open market operations.”  So completely vacuous has the media discourse with the Fed become that several fellow scribes have privately confessed befuddlement and frustration with their colleagues, people who seemingly cannot report on the obvious. For example, since the Fed is supposedly reducing its balance sheet, why has the Board basically maintained the level of reserves? And just where is the “floor” of total reserves in terms of dollar amount and the average rate?    If someone in the Big Media was actually prepared to ask such questions, the response might surprise the questioner and also the public at large, which is why we don’t ask the question. In order to cover the Fed and actually be allowed to ask questions during the FOMC press conference, you cannot ask Chairman Powell any embarrassing questions that he is not briefed on in advance.  And virtually every question the media asks Powell is couched in the happy talk of “monetary policy” so as not to roil the equity markets. In days past, members of the media who “covered the Fed” actually had to read the statistical releases prepared by the staff and thereby discern the direction of Fed policy. In the world of post-2008, however, the Board has become much more overt in trying to steer public "expectations" (and related media) with verbal direction that often times is at odds with the policy suggested by the data.  Under "quantitative tightening," the balance sheet is shrinking yet reserves are not falling. Does this suggest a divergence between guidance and data? You won't read any critical analysis of Fed policy in The Wall Street Journal . What sort of questions should the media ask the Fed? They might start by reviewing the questions published before each FOMC meeting by Bill Nelson at Bank Policy Institute . But even more important, stalwart reporters (h/t Alex Harris) might take a look at the questions that the US Treasury asks of primary dealers about the Fed’s balance sheet. These questions are sent to primary dealers for the quarterly refunding discussions . For example: Please provide your views regarding potential changes to the size and composition of the Federal Reserve’s SOMA portfolio.  When do you expect the Federal Reserve to cease redemptions of Treasury securities from the SOMA portfolio?  Do you expect the Federal Reserve to begin purchasing Treasury securities with proceeds from principal payments received on its MBS holdings? If so, when would such purchases begin? When do you expect the Federal Reserve to begin open market operations to grow the size of its balance sheet in order to maintain ample reserve balances?  What Treasury security tenors do you expect the Federal Reserve to purchase and why? What if any concerns do you have about money market functioning during such changes to the Federal Reserve balance sheet? That last question is a doozy.  And yet, for some reason, none of the anointed members of the financial media seem to be willing or even able to ask Fed Chairman Jerome Powell the most obvious questions about Fed monetary policy.  To make things easier, perhaps the Fed covering media could simply ask the questions posed by the Treasury to primary dealers?  This final query is especially of note: Please discuss how foreign demand for Treasury securities has evolved over the last year. What have been the recent drivers of demand for Treasury securities by foreign official sector and foreign private sector entities? How is demand likely to evolve over the next year? Please elaborate. The Treasury questionnaire for primary dealers certainly seems to merit attention. How do members of the media get a copy of the bank responses to these questions? Hmm?  Now that is a good question.  Meanwhile on Capitol Hill, the written responses by Treasury Secretary nominee Scott Bessent provide some insights on where single-family housing and the possible release of Fannie Mae and Freddie Mac stand in the priorities of the Trump Administration. Basically, Bessent seems to be distancing the Trump Administration from the idea of release from conservatorship “as is” and is leaving all options open. Sound like Trump I? Yeah. Ponder these questions and responses:  Question 69: If you decide to end the conservatorships of Fannie and Freddie, will you seek to do so through administrative action or through legislation by Congress? In your view, what conditions must be met before ending the conservatorships? Are there any congressional actions that must take place to end the conservatorships? Answer: If confirmed, I look forward to exploring all options available and being briefed by Treasury staff and all interested parties on the status of Fannie Mae and Freddie Mac, and if confirmed I will commit to acting in a manner that is thorough and thoughtful, and consistent with the law. If any legislative changes are warranted, I commit to working collaboratively with Congress in this process. Question 70: In your estimation, how long would it take to meet any required preconditions and complete the process of releasing Fannie and Freddie from conservatorship?  Answer: I look forward to being briefed by Treasury staff and all interested parties on the current status of Fannie Mae and Freddie Mac, and if confirmed, I will commit to carefully assessing and instituting a process if it is deemed appropriate. Question 71: Should the Trump Administration bar any individuals or entities who would financially profit from the end of Fannie and Freddie’s conservatorships from discussions and decision-making about potential release? Answer: If confirmed, I look forward to hearing from a wide and diverse range of interested parties in seeking the best path for Fannie Mae and Freddie Mac in compliance with applicable law as set by Congress. Question 79: During the 2008 crisis, the federal government bailed out Fannie and Freddie, vindicating widespread investor views that the GSEs were backed by an implied government guarantee despite their lack of an explicit government guarantee.  A. If the conservatorships are ended, would you support extending a full faith and credit guarantee to Fannie and Freddie, their securities, or their debt? In your view, would doing so require congressional action or could FHFA or the Treasury extend such a guarantee through administrative action? B. Should Fannie and Freddie be charged a fee for any government guarantee, whether explicit or implied? If so, how much should that fee be and how would such a fee affect mortgage costs?  Answer: It is my understanding that legislation from Congress would be required for an explicit, paid-for guarantee backed by the full faith and credit of the government. If confirmed, I look forward to being briefed on options regarding a government guarantee.  Question 82: If Fannie and Freddie were released from conservatorship, do you anticipate that credit ratings for their products would be downgraded? If so, how much do you estimate that their ratings would be downgraded by and how would that rating downgrade affect investors’ willingness to purchase their securities? How would these changes affect mortgage rates for homebuyers?  Answer: If confirmed, I look forward to working with all interested parties, including the Director of the FHFA to understand the potential implications of a release from conservatorship of the GSEs, including potential impacts on their credit ratings and the downstream effects.  Reading these questions from the Senate Finance Committee, the false narrative about releasing the GSEs from conservatorship "as is" seems to be unravelling. Is the blatant "pump & dump" operation in the securities of the GSEs that has been ongoing for months about to end? Notice that Fannie Mae seems to have peaked near-term and volumes are falling. Will you hear anything about the deliberate manipulation of GSE stocks in the Big Media? Not a chance. Source: Google Finance (01/23/25) 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.

February 5, 2025  | First, we have updated the WGA Bank Top Indices for Q1 2025 . As you can see below, the WGA Bank Top 10 Index (WBSXW) has significantly outperformed the Invesco KBW Bank ETF (KBWB) over the past three years. If we look at the 104 banks in our index test group by score and market capitalization, the skew towards large-cap names is as extreme as it has been in more than a year. The highest score bank starts from the left with Discover Financial (DFS) followed by JPMorgan (JPM) just over $750 billion in market capitalization. Source: WGA LLC/Thematic As the first month of the term of President Donald Trump ends, Scott Bessent  has been confirmed as Treasury Secretary and Elon Musk  has been given read/write access to the national payments system. Researcher Nathan Tankus  broke the shocking story last week in a post for Rolling Stone ,  describing how Trump intends to gut the career staff at the Treasury and start selectively defaulting on Treasury payments. Remember, "Schedule F." More recently, WIRED  reports :  “The Bureau of the Fiscal Service is a sleepy part of the Treasury Department. It’s also where, sources say, a 25-year-old engineer tied to Elon Musk has admin privileges over the code that controls Social Security payments, tax returns, and more.” Of note, the union representing Treasury employees has sued Secretary Bessent over giving Musk and his employees access to the payments system. "The lawsuit, which was filed days after Treasury Secretary Scott Bessent agreed to a plan giving department officials allied with Musk access to the system," Politico reports , "landed amid growing pushback to the Tesla founder’s slash and burn efforts to cut hundreds of billions in federal spending." Even as President Trump toys with disrupting the Treasury’s ability to make timely payments, the dollar and gold are both surging to new highs. The global dependence upon dollars for payments and investments is allowing the dollar and gold to both increase. How is this possible? Because the era of dollar hegemony that suppressed both the price of gold and other currencies is about to end. Think of the start of Trump II as a macro inflection point, like the arrival of President Andrew Jackson in Washington circa March of 1829. As we note in the upcoming second edition of " Inflated: Money, Debt and the American Dream, " the eight year term of President Jackson left the US without a central bank and in fiscal chaos. Likewise, as we discuss in our latest conversation with Julia LaRoche , the Federal Reserve Board is playing a game of chicken with the White House over interest rates and market liquidity. Simon White  of Bloomberg sets the scene: “Traders and investment managers are positioning for higher inflation and weaker growth. The net long position in Treasuries is rising sharply, while positioning in short-term rates futures is becoming very net short. Dollar and gold longs are near highs, while the net long in stocks is falling, yet still has plenty of scope to drag prices lower.” What prices will be dragged lower? Bond and stock prices. Everything else will go higher thanks to inflation. Rising gold prices are an indication of growing unease at some of the policies taken or intended by the Trump Administration, but the strength of the dollar reflects latency on the part of global investors, who very literally have nowhere to run when it comes to fiscal instability in the US dollar system. The real threat of tariffs announced by Trump is not inflation, but rather a LT decline in the use of the dollar as the global reserve currency. As the Trump Administration steers the US towards fiscal chaos, LT interest rates are moving higher, putting further pressure on the Fed, banks and other leverage investors who have the misfortune of owning low-coupon assets. Fannie Mae 3s are trading at 84-18 this AM or 1.75% over the Treasury 10-year note. Bank of America (BAC)  owns $507 billion in MBS with an average yield of 2.5%, but the average yield for $3 trillion in MBS owned by the US banking industry is just 2.9% or figure a 15 point discount to par . Rising yields are likely to push mortgage rates higher and, eventually, home prices lower, perhaps with a weaker dollar, but this adjustment could take years to materialize. Remember, none of the traditional measures of fiscal and monetary policy make any sense in 2024. Economists worry about conventional notions, like the impact of tariffs on statistical measures of inflation, yet they miss the larger threat which is how President Trump intends to manage the fiscal posture of the US. Robert Busca  notes in a recent comment on Substack : “Changing relative prices via tariffs does not affect inflation unless the change in relative prices is dealt with in a strange way by the Monetary Authority. So that bends attention back to the Fed and how the Fed is going to respond to the Trump tariffs and to their impact on import prices which could turn out to be broad depending on the exact nature of the tariff or could turn out to be episodic across products.” Remember, one of the favorite business negotiating tactics of President Trump is to withhold payment. As it becomes apparent that taxes and spending are the primary focus of the Trump White House, shares in the GSEs – Fannie Mae  and Freddie Mac  – are retreating from the exuberant highs of mid-January. Freddie Mac peaked at $7.15 on January 15th, but has since dropped more than 30% below $5.  Source: Google Finance In the strange world of Washington, the GSEs will be released from conservatorship and the several hundred billion in common shares that will be owned by the Treasury will be sold to the public in order to finance more Trump tax cuts. A more likely scenario, however, is that the Treasury will exercise its option (which expires in 2028) and convert into common, leaving the US government the majority shareholder of the GSEs, indefinitely.  The GSEs will be released from conservatorship, but the Treasury will own 80% of the equity and face a significant loss on the trade. If, as we suspect, two years hence the Trump Administration’s fiscal hijinks have caused interest rates to rise and the dollar to fall, selling the shares of the GSEs will be a minor concern. In a world where US budget deficits are surging and the economy is contracting, global investors may be fleeing greenbacks into gold and foreign currencies. The long-only world of dollar-based ETFs and passive investing will be collapsing on itself. And President Trump will be doing a reprise of President Richard Nixon , imposing currency and price controls on a hyper-inflating US economy. During his confirmation hearing, Treasury Secretary Bessent said: "Congress presently has the ability and responsibility for addressing and managing the statutory debt limit. I look forward to working with you and your colleagues to ensure that we do everything possible to protect the U.S. economy and guard against default on our nation’s debt. Honoring the full faith and credit of our outstanding debt is a critical commitment." Stay tuned. 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.

February 3, 2025  | Premium Service | Ameriprise Financial (AMP)  and PennyMac Financial Services (PFSI)  are two of the leaders in their respective industry segments and both delivered good results in Q4 2024, yet each has attributes that are making analysts and investors cautious about 2025. What do the earnings from these two high-flyers tell us about the economy and the investing environment? What are some of the common themes for these very different firms which depend so heavily on income from intangible assets?  Ameriprise Financial One of the clear headlines coming out of Q4 earnings from AMP is that guidance is softening, both in terms of the investment business and the balance sheet of the bank, where loan growth has been largely a function of mortgage lending.  Total assets under management were actually down 2% in 2024, in part due to competition from passive strategies and other market dynamics.  Yet GAAP net income was up strongly, as shown in the table below. Of interest, AMP CEO James Cracchiolo  thinks the advisor market is “a little pricey right now” and he does not see acquisitions in the future, preferring organic growth. “We expect more cash to be put to work and greater transactional activity as we move through 2025,” he told analysts.  But the more important question is whether AMP is a little pricey at almost 10x book value. While the parent holding company of AMP has roughly $190 billion in total assets, the bank unit is relatively small at $23.6 billion. The larger group includes two broker dealers, several insurance companies and hundreds of other vehicles and special purpose entities. Total earning assets of the holding company were only $71 billion at Q3 2024, according to the Y-9, while intangible and other assets were $110 billion, representing derivatives, customer relationships and other ethereal assets.  Source: FFIEC AMP had over $350 billion in assets under management in proprietary mutual funds and annuities at Q3 2024. Total Assets Under Management, Administration, and Advisement increased 10% in 2024 to $1.5 trillion at year-end. While some Sell Side analysts have underweight ratings on the stock, the reason is primarily valuation. At 10x book value and a forward P/E of at least 10x earnings is well above the group, but AMP has delivered equity returns that are also well-above peer.  The source of the earnings beat in Q4 2024 was corporate, however, while asset and wealth management was light at the end of last year. “While this was definitely a reported beat,” notes John Barnridge  Piper Sandler, “that the driver was primarily Corporate and taxes suggests a low quality beat as underlying earnings power is less than investors were expecting for 4Q24 and prospectively out of its largest business - Advice & Wealth Management (AWM) = ~2/3 of '24 pre-tax EPS ex-corporate).” To us, the real question with AMP is whether the crowd of equity managers that has caused this small asset gatherer to outperform the rest of the industry over the past five years is going to continue to push valuations higher. A sum of the parts analysis suggests that AMP is well-ahead of fundamental value vs retail asset managers, yet there are some institutional comps such as Apollo Global Management (APO)  and Ares Management (ARES)  that are even higher in terms of book value and/or earnings multiples. Source: CapIQ The fact that AMP has outperformed JPMorgan (JPM) over the past five years is interesting, but we see the slowing performance vs the industry leader over the past year as being more significant. AMP has been relatively stable in terms of market multiples, especially compared to ARES. That said, we’d be inclined to protect any LT gains in AMP with some sell stop orders on the theory that growing skepticism about future earnings growth may indeed be a sign that the best days in terms of appreciation are behind us. An equity market retreat would be a catalyst for a more substantial decline in AMP and other members of our asset gatherers group. Indeed, we think it is notable that AMP has underperformed the other members of the group other than SCHW over the past year. Notice that Goldman Sachs (GS) currently leads the group. Source: CapIQ (01/31/25) PennyMac Financial PFSI is one of the leaders in the mortgage industry and generally the first to report earnings and drop the Form 10 with the SEC. It is a long-proven axiom that the righteous report early in the 45-day period at the end of the quarter while the more devious hide in the back of the reporting period. PFSI is part of a binary paired with PennyMac Real Estate Trust (RMIT) , which reserves as a balance sheet for conventional loans, MBS and MSRs. PFSI serves as the issuer and external manager of the REIT, but retains the Ginnie Mae exposures directly.  We wrote recently (“ Residential Mortgage Finance 2025 ”) about how Rithm Capital (RITM)  should finally create a clear comp for PennyMac and Mr. Cooper (COOP)  by spinning off NewRez as an issuer and manager, leaving RITM as an externally managed, multi-asset REIT.  At present, RITM and the residential REIT, Two Harbors (TWO),  own seller/servicers as taxable appendages, a less than ideal corporate structure from a credit and capital markets perspective. REITs basically allow issuers to access retail investors looking for income, but are poor vehicles for accumulating capital. In 2024, PFSI was locked in a price war with United Wholesale Mortgage (UWM)  at the top of mortgage producers, Rocket Mortgage (RKT)  at number three and Freedom Mortgage at number four, according to Inside Mortgage Finance . A  number of other issuers showed double-digit gains in 2024, largely due to the surge in production in Q3 and into Q4, but the leaders in 2025 will be the firms willing to pay for the expensive purchase loans. As we go into 2025, production is slowing and profitability is uncertain because a few issuers led by Freedom are willing to pay premium prices for loans and servicing. Are the valuations for MSRs unreasonable? That depends upon your view of loan volumes and LT interested rates.  Source: Fannie Mae/Freddie Mac/Ginnie Mae/IVolatility Notice in the chart above showing new production in government loans how PFSI, RKT and Freedom were leaning into Ginnie Mae in Q3 and Q4, while other issuers were far less aggressive.  Like most issuers, PFSI is not making a lot on loans and more than 80% are expensive purchase loans, thus the servicing side gets far more attention from analysts. The chart below shows servicing results for PFSI. The table above shows servicing results from the Q4 2024 PFSI earnings presentation. First we see the servicing pre-tax of $168 million, followed by a non cash increase in the modeled value of the mortgage servicing rights (MSR) of $540 million and a loss on the hedge of $608 million. While PFSI is able to report a cash profit for GAAP purposes, PennyMac is down because of the “noisy” hedge results, to quote one noted analyst.  The total loss on the hedge for 2024 is bigger than net income. Note in Q3, when interest rates fell, PFSI took a loss on the MSR and a much smaller gain on the hedge. Freedom does not hedge the MSR at all.  During the Q4 2024 conference call, PFSI CEO David Spector said “the [GSE cash] window becomes less of an issue in periods of time of higher interest rates because sellers don't want to retain servicing because they don't hedge that servicing. And so, when rates were zero, there was a much better economic thesis to holding on the servicing when rates -- mortgage rates are 7%, and that's not so much the case.”  We suspect the folks at Freedom and other issuers might disagree with this observation on MSRs, but Spector may have been speaking generally about correspondents that sell loans and servicing to him. While larger firms like PFSI and others continue to retain and purchase MSRs, we push back on the idea that these assets are overvalued. Indeed, in a world where mortgage rates fluctuate between 6-7%, MSRs and firms that create them are arguably undervalued. Capitalization rates for retail properties start in the 6 times range and move up from there. Commercial office cap rates are in the 7s and 8s. Government MSRs with a 3% average coupon are trading in the 4.5x range, according to SitusAMC.  Looking at comparable assets across the real estate segment, residential MSRs look cheap. PFSI is up only half as much as JPM over the past year, but out performed the banks by 2x over the past five years. As and when the FOMC drops ST interest rates, the mortgage sector leaders are likely to outperform the banks and nonbank finance peers. If we eventually get a couple of quarter point rate cuts over the next 24 months, the hyper-efficient survivors in the world of residential mortgages will be positioned to deliver outsized equity returns. As you can see in the chart below, COOP currently leads the mortgage issuers group, followed by PFSI, RITM and TWO. We believe that the unified business model of COOP and PFSI are more attractive that the two REITS, RITM and TWO . As we've noted earlier, the REIT structure is less attractive to investors than the C-Corp configuration of COOP and PFSI. We think that both would benefit from spinning out the issuer as an independent seller/servicer, which would externally manage the REIT. COOP is up 700% over the past five years, PFSI a mere 200% and both RITM and TWO are actually down. The first chart below shows the past year's performance, while the second chart shows the past five years. Source: CapIQ (1/31/25) Source: CapIQ (1/31/25) The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 27, 2025   | When President Donald Trump says that interest rates are too high, he may not fully understand just how right he is about the cost of credit. The “normalization” of interest rates has not only driven home purchase volumes to decade lows or more, but it has subjected trillions of dollars in commercial and residential assets created after 2008 and especially 2020 to a price reset. Large swaths of the financial landscape are under water in terms of loan-to-value (LTV), suggesting future credit losses ahead. We have written about the generally positive situation with bank credit, but the banks are only showing you part of the story. Underneath the carefully curated pictures of current bank credit and earnings lies a disturbing cash reality as more and more borrowers fall behind on payments and are given forbearance. The chart below shows almost $100 billion in bank revenue accrued but not received through Q3 2024. Source: FDIC That's right, US banks have reported $100 billion in revenue they have not received or about two quarters of earnings. Outside of the regulated confines of commercial banks, the picture is even less rosy. And the credit picture at the lower end of the spectrum in terms of default probability is eroding rapidly.  In fact, although the aggregate credit picture going into 2025 still appears fairly normal, we continue to collect data points that suggest the reported credit loss and delinquency numbers, and the cash actuals at ground level, have never been further apart.  Whether we are talking about the inflated valuations of private equity portfolio companies, revenue of banks accrued buy not collected, or the default rate on government insured loans, the picture of credit is growing darker. For example, the quest for government efficiency under the Trump Administration could have a significant impact on commercial real estate credit (CRE). New reports suggest that the Trump administration may sell 2/3 of federal office stock in Washington CRE daily reports , “which could reshape DC’s real estate market and leave landlords reeling.” That's one way to put it. Of the $500 billion in CRE loans maturing this year, 14% are considered underwater, meaning the outstanding debt exceeds the asset's current value, according to MSCI. Multifamily housing and office properties are said to be particularly at risk.  The chart below shows average prices for CRE nationally. One of the enduring legacies of COVID and the Fed’s massive open market purchases of securities is that many banks and other depositories are insolvent, just as the central bank itself is insolvent. Yet despite the very public and obvious fact of insolvency, the Fed pays the bills of the Consumer Financial Protection Bureau and also handsome dividends to member banks. “For the first nine months of 2024, the Federal Reserve Banks in the aggregate paid over $1.2 billion in dividends to their shareholders,” notes our friend Alex Pollock . “Yet at the same time, they together lost the gigantic sum of $63 billion.  On an annualized basis, they are paying dividends of $1.7 billion, for a dividend yield of about 4.5%, while losing about $80 billion, with negative retained earnings and capital.  How is that possible or ethical, you might wonder.” In the same way that we pretend that the Fed is positively capitalized, we are also pretending that literally hundreds of banks, thrifts and credit unions are solvent, even though published financial data suggests otherwise. If your bank has retained a lot of 2% MBS, CRE loans and other types of low coupon assets from the vast volumes forced by the FOMC during 2020-2023, then the bank or credit union is probably insolvent. Today coupons are higher, but new loan volumes have fallen off dramatically.  Even with the gradual runoff of mortgage portfolios, 56% of all residential loans are below 4% coupons and 70% are still below a 5% coupon. This metric tells us that any refinance wave is a long way off. Also, the volume of new MBS is going to be under downward pressure even if the Fed eventually drops short-term rates. Not only is the 10-year Treasury note a good surrogate for residential mortgage rates, but it also informs our view of mark-to-market problems inside banks and other depositories with the 10-year yield approaching 5%. Confirming the view seen so far in Q4 earnings, the data from Experian shows auto loan delinquency down slightly in Q4. Auto lease write-offs are at 14.0 bps, down from 15.4 bps last year.  And bank and private label credit cards are likewise muted in terms of delinquency through November.   However, total delinquency in residential mortgages is rising. The severe delinquency rate (share of balances 90+ days past due, in bankruptcy or foreclosure) is now 0.60%. This is up 13 bps from a year ago, when it stood at 0.47%, reports Experian. If we then start to factor in the degree of forbearance reflected in the official data, the picture becomes more serious.   Residential Loan Delinquency Source: MBA, FDIC The Biden Administration spent the past four years hiding financial problems from the federal budget deficit to increased morbidity among low-income borrowers. If we look at some of the Ginnie Mae issuers with the highest DQ2 and DQ3 ratios (for 60 and 90 days delinquent), there are a number of state-supported issuers with visible default rates in the mid-teens. These issuers are in default on the credit provision of the GNMA Guide and thus are also in default on bank warehouse lines as well. If, as we suspect, the incoming members of the Trump Administration take a tough line on credit costs and enforcement, some Ginnie Mae issuers with elevated levels of delinquency may lose access to bank funding. Whereas in 2021, when we saw high levels of delinquency and vast corporate cash flow due to refinance business, today we see slowly rising delinquency and falling loan volumes – a very dangerous combination.  The chart below from the Ginnie Mae global markets report shows LTVs for different loan categories. Source: Ginnie Mae Without new production volumes, residential mortgage issuers must rely upon corporate cash to make up any shortfalls in outbound payments to MBS holders at the end of the month. If the Trump Administration raises the FHA mortgage insurance premium (MIP) back to pre-2023 levels, new loan volumes will suffer as a result. An increase in the MIP in today’s market may even be counter productive in terms of reducing industry volumes.  Other changes that the Trump Administration is likely to make in pursuit of fiscal righteousness could actually tip over the proverbial apple cart in the world of residential lending. One proposal we have mentioned in previous issues of The Institutional Risk Analyst is the idea of limiting partial claims on delinquent loans guaranteed by the Federal Housing Administration. If this proposal is finalized by whoever is lucky enough to lead the FHA under President Trump, then the visible default rate on FHA loans and Ginnie Mae MBS will surge. Hundreds of thousands of loans currently hidden in an endless cycle of loan forbearance will suddenly become very visible. Just as many CRE loans are under water in terms of the value of the asset vs the existing debt, many residential loans are likewise at risk. At the end of November 2024, the average LTV ratio of loans in Ginnie Mae pools was an eye-watering 98.2% meaning that there is no equity in the $2.5 trillion in government insured loans. The average LTV for all residential loans was 85% -- if you give full credit to the private mortgage insurance in the conventional market. In a general housing market price reset, the boundary line between apparent stability and financial crisis has never been so thin as in 2025. 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.

January 21, 2025  | Premium Service | Over the past year and more, the sharp upward moves in the market value of the Fannie Mae and Freddie Mac, those high-flying penny stocks, have distracted some observers from the changes underway in the land of mortgage finance. With the nomination of Bill Pulte  to lead the Federal Housing Finance Agency, however, maybe the GSE trade is done. Below for readers of our Premium Service , we dig into the mortgage finance complex as a year of 7% plus residential mortgages looms ahead. The first, big picture question to ask is about the outlook for new production of 1-4 family loans and mortgage-backed securities (MBS). The answer is that average production in the industry was running below $1.5 trillion in 2023 and at $1.7 trillion in 2024. Estimates for production in 2025 were above $2 trillion based upon the assumption of interest rate cuts that are no longer anticipated. We expect the actual production in 2025 to be below $2 trillion.  S ource: Mortgage Bankers Association Profitability in the industry is likewise improving from the lows of 2023, but only just barely.  Not quite three quarters of all IMBs were profitable in the first 9 months of 2024 (h/t Joe Garrett), according to the Mortgage Bankers Association. But being barely profitable is a long way from financial stability and soundness. S ource: Mortgage Bankers Association The profitability of IMBs at the loan level us improving, but only just barely. The majority of the actual cash profit generated from lending is found in the mortgage servicing rights (MSRs), especially in the conventional loan market. The premium for selling the MSR with the loan is so attractive, and gain-on-sale profits are so hard to generate, that many sellers that might have preferred to retain servicing are simply compelled to sell to cover operating expenses.  Ginnie Mae volume growth continues to outpace both of the GSEs individually, accounting now for 40% of total MBS issuance. Many lenders lean towards the government market because the execution is far better than in conventionals. Volumes in Q4 were down low double digits, Inside Mortgage Finance Reports , with a 15% decline observed in December. The table below shows the TBA market for Ginnie Mae MBS as of the close on Friday. To-Be-Announced (TBA) | Ginnie Mae MBS Source: Bloomberg (01/18/25) Notice that the premium contract is a 6.5% for February delivery, one reason why 30-year fixed mortgage rates are rising above 7%.  Effective rates in the VA market, however, are far lower, driving refinance volumes.  As mortgage rates increase, lenders are leaning even more into the VA market to generate returns. “Securitization of VA loans was up 14.6% in the fourth quarter, and FHA volume rose 6.1%,” reports  IMF . “While the GSEs reported a 3.4% increase in conventional loans with no mortgage insurance, the quarterly volume of loans with private MI fell 1.3%.”  But the single biggest negative factor on volumes remains home prices, which continue to rise in most markets nationally, as shown in the chart below. One of the more notable aspects of the FOMC under Jerome Powell was the refusal to raise interest rates enough to force home prices down significantly. Because of concern about Treasury market liquidity, the FOMC did not even force system reserves down (h/t Bill Nelson ), even while engaging publicly in “quantitative rightening” by reducing the balance sheet. The residential housing market softness observed in 2023 lasted barely a year, followed by a resurgence of lending volumes and home prices in 2024. The boom in new loan production in Q3 2024 was not very long lived, however, and was visibly collapsing by the end of December. Despite weak production volumes, the larger issuers continued to bid aggressively for servicing assets in 2024.  The standard reason advanced for the aggressive behavior by players such as Freedom Mortgage and Rocket Mortgage (RKT) in the bulk MSR market is that superior recapture allows for higher valuations for MSRs. Rising interest rates is another reason often advanced for paying up for MSRs. But one key reason for higher MSR valuations is the growth in escrow balances for taxes and insurance, a systemic phenomenon that means much higher custodial balances and float earnings on MSRs. The chart below shows the fair value of bank owned MSRs with the average valuation around 160bp. Source: FDIC/WGA LLC The Mortgage Issuers The table below shows our enlarged real estate surveillance group, both public and private issuers. We have captured all of the public and private 144a deals available on the Bloomberg and from other sources to give readers some idea about what these firms pay for debt and equity capital. If there is no data, the field is left blank. Below we discuss selected issuers and REITs, and how we think they will fair in 2025.  The good news is that the larger Ginnie Mae issuers have taken advantage of a positive investor reception in the bond market to issue substantial amounts of term debt to finance servicing portfolios. As you read through this list, however, notice how many issuers with ~ $100 billion in servicing assets and marginal profitability are waiting to either sell the MSR or get bought out entirely. In 2025, consolidation is the name of the game in residential mortgage finance.  Mortgage Finance Source: Bloomberg (01/18/25), WGA LLC Annaly Capital Management (NLY)  is a REIT that has historically focused on agency MBS, but more recently has followed the herd into investing in conventional MSRs. The REIT is trading about book value, but is at a bit of a discount to some other REIT comps in terms of P/E ratio. The equity features a 13.5% dividend yield, which is the primary reason for investors to hold the shares. REITs are essentially passthrough vehicles that have difficulty accumulating capital, thus while we have owned NLY in the past, it is not part of our portfolio today. There are better ways to get exposure to MSRs. After NLY, we have Better Homes & Finance (BETR) , a mortgage platform that debuted in 2023 after a long and painful gestation period  that culminated in a SPAC merger. The stock had the bad fortune of coming out when the mortgage market was going through one of its most difficult periods in many years. The BETR stock did show signs of life in 2024 and even flirted with $30 per share in July, but closed last week below $10 per share.  After BETR on our list are two private placements for Bayview, the privately-held mortgage issuer that is paired with Lakeview Loan Servicing, the largest owned servicer in the mortgage industry. Bayview is active in the bulk MSR market and is one of the more sophisticated mortgage issuers. Bayview caters specifically to the insurance industry for the management of 1-4 family loans and MSRs. Bayview owns several insurers, giving the group access to the Federal Home Loan Banks for funding. Bayview just settled a 50-state inquiry regarding alleged deficient cybersecurity practices, but generally the firm has a very low profile. Bayview was recently involved in Everbank's acquisition of Sterling Bank of Michigan. Next on the list is  Cherry Hill Mortgage Investment Corporation (CHMI) , an agency REIT that has also begun to invest in conventional MSRs. Because REITs cannot become government issuers, they are forced to either focus on conventional assets only or purchase a seller/servicer, which is operated as a for profit appendage of the REIT, as discussed below. CHMI has a dividend yield of 20% and a P/E or just 3, both a reflection of the fact that the REIT trades at 0.75x book value.  Chimera Investment Corporation (CIM)  follows after CHMI and again we have a REIT that focuses on residential mortgage assets. CIM has only a 10% dividend yield, thus no surprise that the stock trades at a steep discount to book or 0.64x. During COVID, CIM surged up to nearly $50 per share, but at Friday’s close the stock was below $15 per share. The all-time high was $296 in 2008. Go figure.  After Chimera, next on the list is Finance of America Companies Inc. (FOA) , one of the smallest public issuers in our group. FOA is focused on originating and servicing reverse mortgages, and has been suffering from a lack of profitability. Of note, Onity Group (ONIT) acquired the reverse mortgage assets of Mortgage Assets Management (MAM) from Waterfall Asset Management in August 2024. FOA is now the only other independent reverse issuer and Reverse Mortgage Funding is owned by the US Treasury. FOA has rallied strongly over the past year, when the stock was trading well less than half of book value, and is near the 52-week high. Today FOA trades over 0.8x book, but faces the possibility of another year of high interest rates and low volumes. One of the largest lenders and servicers in the US is Freedom Mortgage , a private issuer located in New Jersey. Freedom had over $600 billion in owned servicing as of Q3 2024 and saw MBS issuance rise over 300% YOY as the firm leaned into the conventional and government markets. Although the equity of Freedom is private, it has issued significant amounts of term debt in the bond market and earned steadily declining credit spreads. The average yield on the “BB-” (Fitch) Freedom debt is below 8%. Like Lakeview Loan Servicing, Freedom typically does more government loans than conventionals, and is especially adept at recapturing loan prepayments in FHA and VA assets.  In the past several years, however, Freedom has been the bid to beat in the MSR market and has also increased lending activity overall based upon the belief that MSRs are still not fully valued in the markets. As we’ve noted in past missives, compared with commercial real estate, residential MSRs still trade at relatively low cap rates. Guild Holdings Company (GHLD)  is one of the best managed companies in the mortgage sector. Despite the ebb and slow of Fed interest rate policy, GHLD has managed to trade within a narrow range. The recent high was $17 in  early 2021 and the low was $7 in 2022. GHLD was near the highs in Q3 2024 when many thought that further rate cuts were coming from the Fed, but the stock closed at $12.74 on Friday or 0.68x book value. A top-20 issuer, GHLD did $14 billion in mostly purchase volume in 2024 (IMF), a 20% increase YOY, but lost money on a GAAP basis in the first nine months of 2024. The firm has $90 billion in unpaid principal balance (UPB) of servicing.  After GHLD comes loanDepot, Inc. (LDI) , a top-20 issuer which has been struggling to align expenses and falling revenue since 2021.  LDI had $114 billion in UPB of servicing at the end of Q3 2024. LDI saw volumes fall 10% in 2024 and 24% in conventionals last year. LDI ran up to 1.7x book in Q3 2024, but has since retreated to just above book value at Friday’s close.  The chart below comes from the Q3 2024 LDI earnings presentation. With just over $100 billion in MSR remaining, the obvious question is why doesn’t CEO Frank Martell simply sell the company? The answer is that at 1.2x book, there probably is not anybody other than retail investors willing to pay that price. LDI is a classic example of an issuer that has struggled to make expenses fit the greatly reduced level of volumes flowing through the firm. But the problems at LDI are deeper than mere indifference to a lack of profitability.  LDI looks a lot like other firms that exist to preserve industry employment rather than generate returns for investors. The $1.5 billion MSR at Q3 2024 is 3x the market cap of the company. The obvious trade is to sell the MSR, dividend most of the proceeds to shareholders, delist the issuer, and then sell or downsize the remaining business. When you notice that LDI has no term debt or preferred, the obvious answer seems to be that management is waiting for the phone to ring. Competitive issuers that want to survive the next year need to be buying MSRs and raising new funding aggressively. Mr. Cooper Group (COOP)  is one of the larger servicers in the US and also one of the few issuers in the industry that has been consistently profitable and has also built shareholder value. Since 2020, COOP has steadily built shareholder value by adding to book value through earnings, bulk purchases of MSRs and the acquisition of other businesses and valuable assets. The stock stood at 1.4x book as of Friday’s close.  COOP ranked fourth in owned servicing at the end of Q3 after JPMorgan (JPM) , Wells Fargo (WFC)  and Lakeview. Along with Freedom and PennyMac (PFSI) , COOP is likely to be one of the key consolidators in the mortgage sector. Notice that COOP has a substantial presence in the bond market and can easily access new capital to drive further acquisitions. The acquisition of Roosevelt Management Company gives COOP asset management capabilities and thereby additional scope for future growth. Another issuer that is looking for a new storyline is Onity Group Inc. (ONIT) , f/k/a Ocwen Financial. ONIT is a top twenty issuer but had just over $119 billion UPB of owned servicing at the end of Q3 2024. PHH Mortgage is one of the largest servicers in the country, with 1.3 million loans with a total UPB of $288.4 billion on behalf of more than 3,900 investors and 115 subservicing clients. The Liberty unit of ONIT is one of the nation's largest reverse mortgage lenders and, significantly, does only HECM loans.   The ONIT stock has been dead in the water for years. On Friday it was trading at 0.5x book value. Like LDI, the best thing for the ONIT shareholders would be the sale of the MSR and subservicing portfolio, and a wind up of the business. The servicing operation and Liberty may also have some value, but ultimately the owned servicing is the primary asset of ONIT.  PennyMac Financial Services (PFSI)  and its paired REIT, PennyMac Mortgage Trust (PMT) , are two of the more efficient and well-valued businesses in the mortgage sector. PMT is the lower yielding vehicle for holding conventional exposures while PFSI is the issuer and also holds the Ginnie Mae exposures. Since the end of 2021, PFSI has steadily climbed in terms of market value and closed Friday at 1.4x book value. PFSI had $650 billion in owned servicing at the end of Q3 2024, making the issuer one of the top players in the world of MSRs. The stock is near the all-time high and has been rising since 2020, due in large part to growing awareness by investors of the value of the large MSR portfolio. Like Freedom and COOP, PFSI has made extensive use of the debt capital markets to build a solid foundation for the firm’s liquidity and MSR funding.  We expect that PFSI will also be one of the winners in the coming consolidation of the industry. First, the firm is well-run and generates solid returns from both issuance of MBS and servicing. Second, PFSI has access to funding for bulk purchases of MSR or acquisitions, and also to build their own servicing platform. And third, by having the issuer/manager separate in PFSI from the conventional balance sheet at PMT, the firm has an advantage over Rithm Capital (RITM) , Two Harbors (TWO) and other ersatz REIT/issuer constructs.  Back in December, IMF speculated on whether the long-discussed spinoff of the NewRez lender might be in the cards for Rithm Capital Corp. (RITM) . At present, NewRez is the taxable appendage of the REIT known at RITM.  For some time now, shareholders have been agitating for a spinoff of NewRez as a way to unlock shareholder value. Specifically, the PFSI issuer model at PennyMac trades at a considerable premium to the REIT PMT. Based on price to book, RITM has not really moved in years. We think that moving forward with a spinoff would be good for RITM because the issuer could become the external manager of the REIT, which would include conventional, commercial and other exposures. Unlike PMT, RITM has a multi asset focus and can serve as a balance sheet for any mortgage related exposures that Mike Neirenberg and his team source. Post-spinoff, the RITM/NewRez binary could outperform PennyMac. The Ginnie Mae exposures and MSRs, however, must be housed inside PFSI and not the REIT. RITM acquired Shellpoint and then Caliber to solve a problem with Ginnie Mae. For the same reason that federal regulators will not allow a REIT to buy a bank, Ginnie Mae does not allow REITs to be issuers. The passthrough structure of the REIT does not allow the accumulation of capital needed to be a source of financial strength a depository or an issuer.   But if Nierenberg has the courage to go forward with the spin of the manager and the lender/issuer, we think that will unlock value for both RITM and NewRez. The accepted model in the industry is the issuer PFSI with the REIT PMT, a model that RITM ought to emulate. The broader, multi-asset mandate for RITM, however, could make it more attractive than the deliberately pedestrian conventional portfolio of PMT. We will talk about some of the other issuers in the world of Mortgage Finance in a future edition of The Institutional Risk Analyst.    The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 13, 2025  | Fannie Mae 6% 30-year MBS for February delivery traded below par last week as the 10-year Treasury rose above 4.75% in yield. Rational residential lenders are now writing mid-7% loan coupons for sale into FNMA 6.5s. As the rate cut narrative has been once again downgraded, the markets sold off and financials continue to give ground. But rising interest rates is causing a lot more damage than simply pushing down prices for publicly traded securities.  One big reason for the selloff in financials is the fact that delinquency in commercial real estate exposures continues to rise even as banks reduce unused credit available to the sector.  Forbearance is now the order of the day, rendering bank financial statements more aspirational fiction that fact. Does this sound like 2010? Sure does. And, as yet, corporate debt spreads give no indication of trouble ahead. “The largest Non Owner CRE lenders are Wells Fargo ($64.52B), Bank of America ($36.67B) and JPMorgan Chase ($35.79B),” notes Bill Moreland  at BankRegData. “All three have elevated Non Owner NPL levels and all three are pivoting to historic loan modification levels (i.e. lowering payments so that borrowers can avoid delinquency).” Moreland notes that CRE delinquency is not nearly at peak levels for this cycle, suggesting that 2025 could see some significant losses to banks from commercial exposures. Just as published delinquency levels for consumer exposures are understating losses significantly, commercial exposures like real estate are likewise heavily manipulated by banks with the full knowledge of federal bank regulators. Commercial Real Estate | All Banks Source: FDIC/BankRegData “Frightening numbers, but perhaps the high is in?," Moreland muses. "Well, no. The gold chart on the right details the NOO CRE loan modifications where the payment has been lowered and the TDR has been left on accrual. They do this so that it avoids the NPL designation since NPLs are loans 90+ Days Due accruing Fee/Interest Income PLUS loans on Nonaccrual.”  After commercial real estate, one of the ugliest sectors in finance is private equity.  Portfolio companies that were supposed to be sold in public offerings are festering in portfolios years after the hoped for sale date. And loans against these private portfolio gems are now likewise increasingly suspect. Do investors understand that most PE companies are distressed on day one? They do now! When private markets had the wind of low interest rates behind them, private equity was easy. Buy the crap company, lever it up and do an IPO three years later. But in a higher-for-longer interest rate environment, PE is now toxic for institutional investors. If we assume that long-term rates will remain at current levels or even higher, what does this suggest for private equity returns? Or even better, private credit. “Lenders and regulators are beginning ask if NAV loans on private equity fund stakes have materially overstated LTVs, and hence understated default-loss risks,” notes our colleague Nom de Plumber . He continues: "After all, if a long-outstanding Private Equity Fund has been unable to IPO its increasingly stale portfolio companies, in hopes of repaying the highly leveraged loans which had financed their initial privatization buy-outs, then such portfolio companies are likely worth less than those loan balances (especially if below-expectation operating earnings, soft valuation multiples, and higher interest rates). In turn, that Private Equity Fund would have little or no residual value to repay any NAV loan.  If an NAV loan has a reported 25% LTV, but the “V” is iffy at best, it may effectively be uncollateralized." By no surprise, NDP reports that prudential regulators have begun to ask banks about their NAV loans to private equity fund Limited Partners----and any other financing transactions collateralized with private equity or private credit instruments. The larger phenomenon of forbearance has helped obscure PE related credits, but it is the lack of a market value that allows for malfeasance in reporting NAVs. Suffice to say that the estimates for loss provisioning against PE exposures at banks will be going up in Q4 and 2025.   Meanwhile, Bloomberg  reports that Blackstone’s (BX) former global head of GP stakes, Mustafa Siddiqui , has launched SQ Capital, which will invest in private equity secondaries with a focus on the middle market. BX sold their clients a load of crap in the form of private equity, but now a former BX partner will buy them back at a discount! So thoughtful! “Due to a dearth of initial public offerings and a gap in valuation expectations between buyers and sellers that has chilled some private equity deal activity,” Bloomberg  reports, “the secondaries market has been particularly appealing to investors seeking liquidity.” “SQ Capital estimates that a lull in exit volumes since 2021 has created a backlog of roughly 28,000 unsold companies, and around 40% of those have been in private equity ownership for at least four years. Private equity secondaries “is the most compelling area of the alternatives industry,” said Siddiqui, who likened the opportunity to the fat pitch he’s been waiting for. “It’s time to swing.” As firms like BX position new platforms to buy losers from their private equity clients, the flight away from PE and private credit is gaining momentum. But don't tell this to David Solomon and his colleagues at Goldman Sachs (GS) . Coming off its huge success in managing a portfolio of white label credit cards for Apple Computer (AAPL) , Goldman is creating a new business unit and elevating two executives in an effort to combat the growing competition from private credit funds. As we've noted to readers of the Premium Service, GS has the worst credit performance of the top-ten banks other than Citigroup (C). The abysmal GS credit performance against other investment banks is shown in the chart below. Source: FFIEC Part of the irony of the present predicament is that bond spreads are near record lows, suggesting that visible indicators of credit quality are at odds with the rancid fundamentals. Scott Carpenter of Bloomberg notes that spreads on collateralized loan obligations are at record lows, suggest that there may be a big adjustment in corporate loans and credit impending. Now that Wall Street firms have bid up corporate assets to absurd levels to feed retail credit strategies, the stage is set for a massive selloff of debt, loans and also issuer equity as markets adjust to a world where interest rates may not decline below current levels. Just as PE managers expected to be taken out of portfolio positions in a falling rate environment, buyers of distressed debt where also anticipating a tail wind from falling interest rates. But maybe not. As the credit losses from CRE and PE grow, the backlash against private equity investing is growing, even from established organizations within the financial community. "Statistically, there is an increased risk of failure with private equity ownership," note Alvin Ho and Janet Wong in a blog published by the CFA Institute ( " Private Equity: In Essence, Plunder? " ). "PE portfolio companies are about 10 times as likely to go bankrupt as non-PE-owned companies." And commercial bankruptcies are on the rise. According to data from Epiq, commercial Chapter 11 filings increased by 20% in 2024 compared to the previous year, with overall commercial filings rising by 17%. 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.

January 6, 2025  | Premium Service  | As the New Year began, worries were being expressed about the uptick in consumer delinquency seen as 2024 ended. Is the US economy finally slipping into recession after several false alarms last year? Maybe. Will consumer loan default rates be higher in Q4 2024? Probably, but this is not yet a crisis or even a traditional credit downturn comparable to 2008. While loss rates in percentage terms are rising, the volume of loss affecting US banks remains very low, as we discuss below in our latest update on the largest US consumer lenders. Our suspicion is that the excess liquidity pumped into the US economy by the Federal Open Market Committee in 2020-2022 is finally dissipating, part of a recession of the monetary tide that caused crypto currencies to peak near $100k as measured by bitcoin.  Like all games of chance, trading in crypto currencies is a zero sum game that does not result in an increase in aggregate wealth. The buyer of bitcoin provides liquidity to the seller, but there is no increase in money in the system.  The value of crypto can go up or down, but there is no carry and no net economic benefit. But the Internal Revenue Service and other tax agencies around the world are certainly focused on the exchange of value represented by trading in crypto tokens. “The recent surge in Bitcoin prices has been a financial boon to its investors. Many have been cashing out with gains exceeding their wildest expectations,” notes Chris Amundson , President of Accounting Solutions in Chicago . Amundson publishes a must read comment on taxes and accounting each week that goes from individual to corporate perspectives. “Bitcoins were trading in the $97K range yesterday,” Amundson wrote last week. “If you had invested in this asset four short years ago, your capital gain would be around $80K per unit. In response to this windfall, the IRS has significantly increased its oversight on these transactions.” Amundson notes that new IRS initiatives include: 1) A question on both business and personal income taxes of whether or not the entity has sold any crypto assets inside the tax period, 2) -Broker / Dealers will be required to report all sales of digital assets to the IRS on newly created form 1099 - DA (Digital Assets) next year for the 2025 tax season, and 3) IRS and Justice Department Enforcement of the tax and criminal codes has increased substantially.” He concludes: “Taxpayers should note that if you use a crypto currency to purchase anything directly from an investment account, that this constitutes the sale of the asset. As such, Short or Long Term Capital Gains Taxes are due and payable that year.” And yes, if you work in the world of banking, FINRA or the SEC and touch crypto assets, you are flagged by compliance for enhanced monitoring. Thank you. The increased tax revenue collected by the IRS as a result of trading in crypto in 2024 does not represent true growth in economic terms, merely the allocation of losses to the seller (aka the greater fool). Warren Buffett noted that Bitcoin's price is rising only because Bitcoin holders are trading with each other – the private equity fund approach to investment. With each round, you hope that a greater fool will buy your asset for a higher price than you paid for it.  Of note, Gordon law writes  that the IRS has issued guidance on how to claim losses from worthless and abandoned cryptocurrency investments on your tax returns. According to  IRS Memo: 202302011 , if an individual’s cryptocurrency has decreased significantly in value, they may be able to deduct the loss under IRC Section 165. But only maybe, we’re told by informed auditors. The speculative gains on crypto are a blissful concern compared with the dire situation facing many low income consumers as Donald Trump returns to the presidency. There is even speculation that President Trump will attempt to start his second term with a $2,000 "stimulus" payment to struggling consumers, a modern version of the "bread and circuses" of ancient Rome. The Consumer Lenders In the final days of December, the Financial Times and other media published several reports about the fact that the Q3 2024 delinquency rate on credit cards was back up to 2010 levels, this after years of loss experience muted by the action of the FOMC. " Consumers are ‘tapped out’ after years of high inflation and as pandemic-era savings have evaporated," the FT reports. The chart below showing data from the FDIC going back 40 years is the series in question. Yes, net loss rates in percentage terms post default are back up to 2010 levels, but the dollar volume of net charge-offs remains very low. Also, we should all note the total outstanding receivables for bank credit cards have almost trebled since 2008. What is the problem? Source: FDIC While the net charge-off rate in percentage terms has crawled up to 2010 levels, in dollar terms the volume of loss is smaller vs the $1.1 trillion total asset credit card book.  Net-charge offs is another way to say loss per dollar of default . Net charge-offs in Q3 2024 were just $1.5 billion. Is delinquency on credit cards rising? Yes. Is it yet a significant negative for bank credit or earnings? Not yet. Could card delinquency rates move higher? Yes, but we’ve been waiting for that upward inflection in consumer credit for a year and more.  Source: FDIC When we look at some of the larger bank players in consumer credit, the picture that comes across is hardly alarming. Net loss rates across the industry have normalized since COVID, but the dollar volume of losses remains very low relative to the total portfolio. The chart below shows the net loss rates for the members of out consumer lenders group, including Ally Financial (ALLY), American Express (AXP ), Axos Financial (AX) , Barclays US LLC, Capital One Financial (COF) , SoFi Technologies (SOFI)  and Synchrony Financial (SYF) . Together they represent over $1 trillion in industry assets. Source: FFIEC Notice that Axos and SOFI are both below the loss rate for ALLY and Peer Group 1, a remarkable performance. The negative Hindenberg Research thesis on AX is still not validated. Even as the group has seen net loss rates on loans flatten out in the past several quarters, pricing on loan portfolios has also moderated after several years of increases. We are probably past peak levels for loans yields in the industry for this interest rate cycle, but the moderation in language coming out the last FOMC meeting probably indicates a slower downward trend in loan yields, as shown below.  Source: FFIEC SYF is the leader in the group in terms of the average gross loan spread near 18%, but the bank also has a net loss rate above 6% or around a “B” bond equivalent. Most banks have loan yields of 6%. After SYF we have the US unit of Barclays followed by CapitalOne. ALLY has the lowest spread of the group but thankfully is still above the average spread for Peer Group 1. Loan spreads have improved dramatically since 2022, but the yield on securities not so much, as shown in the chart below.  Source: FFIEC As you might expect, almost all of the lenders in the group are above the average securities yield for Peer Group 1, even though many larger lenders have securities yields well-below average. COF is slightly below the average along with ALLY, an enormous embarrassment but still better than Bank of America (BAC) . Axos is the best in the group in terms of yield on securities, followed by SOFI and American Express. What this means for the leaders is that the bank is focused on managing its portfolio and that the investment book is not a drag on earnings. Like operating efficiency, watching a bank's returns on its securities book is a good measure of whether management is paying attention.  After credit, perhaps the most important measure for any consumer lender is the cost of funds, which along with SG&A determines the bank’s net spread over its earning assets. Since Q4 of 2022, all banks have seen funding costs normalize after the extraordinary period of 2020-2021. For the past year or more, funding costs have been quite stable and spreads on corporate debt have rallied significantly, giving many issuers access to cheaper funding.  Source: FFIEC Barclays remains the outlier of the group in terms of funding costs, but all of the members of the consumer group remain well-above the average cost of funds of Peer Group 1 of around 2.5%. COF has the lowest funding costs in the group vs average assets, followed by SOFI and AX. Stable net loss rates and funding resulted in relatively stable net income, but the results for specific banks are remarkable. AXP is best in class in terms of asset returns, followed by SFY, which displays a large degree of variability in its results due to the high loss rate and variable funding costs. AX is dead center of the group and quite stable going back years, while the rest of the members of the group are at or below the industry average for asset returns. ALLY, as usual, is at the bottom of the distribution with SOFI next in terms of ROA.  Notice that SOFI peaked above 1% ROA in Q1 2024 but has sunk since then. Source: FFIEC When you see the poor asset returns generated by the US business of Barclays Bank (BCS) , it certainly begs the question as to the LT objective of BCS in the US consumer segment. American Airlines (AMR) has announced that Citigroup (C) will be the exclusive card partner for American's advantage program going forward, thus we have speculated that Barclays may make a move for the Apple (AAPL) card program currently operated at a loss by Goldman Sachs (GS) . Last October, the CFPB fined GS and AAPL almost $100 million for lapses in servicing. Nothing yet. AXP has high single digit growth estimates from the Street for Q4 2025 and 2025. The operative term her is consistent, with little variability in the operating metrics or analyst estimates. In all of the factors presented in this report, AXP moves less quarter to quarter than the other banks. At 3.4x book value, AXP is a full multiple above where it was a year ago and has been making new all-time highs all of 2024. But you can also argue that AXP is the most overvalued of the largest banks. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 2, 2025  | Just before New Year’s eve, Bill Ackman of Pershing Square posted a long comment on X  encouraging investment in the common shares of the GSEs, Fannie Mae and Freddie Mac .  Below is Ackman’s comment in its entirety with our comments and questions in italics. Readers of The Institutional Risk Analyst  should review our earlier comments (“ Kamikaze GSE Release? Oh Yeah… ”) and ( “Liquidity Preference: SVB Financial Group, WaMu & Reemerging GSEs ”). We also recommend reading the latest notes from Moody's and other agencies on the credit implications of an end to conservatorship. Bill Ackman X 2:46 PM · Dec 30, 2024 I am often asked for stock recommendations, but generally don’t share individual names unless I believe the risk versus the reward is extraordinarily compelling. As we look toward 2025, one investment in our portfolio stands out for large asymmetric upside versus downside so I thought I would share it. We have owned Fannie Mae and Freddie Mac common stock for more than a decade. Today, they trade at or around our average cost. As such, they have not been great investments to date. Cute reference to "average cost," but total return to date would be of greater interest. We would be greatly surprised if Pershing Square and other fund investors have not reaped big returns on the ST gyrations in Fannie Mae and Freddie Mac, as shown below in a chart from Yahoo. The GSEs are among the two best performing financial stocks in 2023 and 2024 in percentage terms, but much of the latest return came after the November election of Donald Trump. These stocks are clearly attractive for ST trading opportunities, but are they a good LT investment? Do we even know how these business will operate upon release in 2026? What makes them particularly interesting today versus any other time in history is that there is a credible path for their removal from conservatorship in the relative short term, that is, in the next two years. Not sure how to define a “credible” path, especially since the largest party at interest is the US Treasury.  Also, the likelihood of a price "reset" in residential housing is growing. Until the Trump Administration lays out a specific proposal, it is hard to know whether there is a credible way to exit conservatorship without legislation. The Trump I team at the Federal Housing Finance Administration was never focused on release nor was the Treasury under Steven Mnuchin . His successor at Treasury, Janet Yellen , would not even discuss releasing the GSEs. During Trump’s first term, Secretary Mnuchin took steps toward this outcome, but he ran out of time. I expect that in the second @realDonaldTrump  administration, Trump and his team will get the job done. *** By popular demand, we have extended our holiday sale through January 7th, 2025. For 50% off The IRA Premium Service for life, use the coupon code "TheIRA2024" **** A successful emergence of Fannie and Freddie from conservatorship should generate more than $300 billion of additional profits to the Federal government (this is on top of the $301 billion of cash distributions already paid to the Treasury) while removing ~$8 trillion of liabilities from our government’s balance sheet. This statement is a little misleading. The unsecured debt and secured MBS are not counted as US liabilities. We don’t know how the Treasury will liquidate the original investment in the GSEs and, most notable, the growing tab for the liquidation preference since the GSEs started to retain capital. Every dollar of capital retained by the GSEs is a dollar owed to the Treasury, like buying equity with a credit card. The cash distributions were to rent the “AAA” rating, something that ends with release along with the funding support from Treasury. That support and the liquidation preference of Treasury is described in last year's 10-K from Fannie Mae : $119.8 billion has been paid to FNMA by Treasury under the funding commitment; $113.9 billion of funding commitment from Treasury remains. This amount would be reduced by any future payments by Treasury under the commitment. The senior preferred stock had an aggregate liquidation preference of $195.2 billion as of December 31, 2023. In the October 2024 Form 10-Q : The aggregate liquidation preference of the senior preferred stock increased to $208.0 billion as of September 30, 2024 from $203.5 billion as of June 30, 2024, due to the $4.5 billion increase in our net worth in the second quarter of 2024. The aggregate liquidation preference of the senior preferred stock will further increase to $212.0 billion as of December 31, 2024, due to the $4.0 billion increase in our net worth in the third quarter of 2024. The GSEs have built $168 billion of capital since Mnuchin ended the net worth sweeps in 2019. This is already a fortress-level of capital for guarantors of fixed-rate, first mortgages to creditworthy, middle class borrowers. References to a "fortress balance sheet" are usually an allusion to JPMorgan (JPM) , but it is useful to remember that JPM has the most double-leverage of any US bank. More important, no amount of private capital will get you to a "AAA" unsecured rating. The scenario we envision is that: (1) the GSEs are credited with the dividends and other distributions paid on the government senior preferred, which would have the effect of fully retiring the senior preferreds at their stated 10% coupon rate with an extra $25 billion profit (in excess of the preferreds’ stated yield) to the government. This extra profit could be justified as payment to the government for its standby commitment to the GSEs during conservatorship. Pershing Square seems to conflate the Treasury’s equity investment with the senior preferred stock dividends. These are two different things entirely. Treasury is owed full repayment on its equity investment and also has a claim against the GSEs shown in the liquidation preference since the 2019 amendment to the sweep agreement . Moneys paid in cash distributions on the preferred were to compensate the US as majority shareholder and guarantor. The private shareholders of the GSEs have no claim on these public funds. Treasury's position on getting repaid on cash advances is very clear from the experience with General Motors (GM) and Citigroup (C) and at odds with the Ackman description. (2) the GSEs’ capital ratio is set at 2.5% of guarantees outstanding, a level which would have enabled the GSEs to cover nearly seven times the their actual realized losses incurred during the Great Financial Crisis — a true fortress-level balance sheet. The private capital of the GSEs is not really adequate through an economic cycle. First, private capital does not really help. Only sovereign support can backstop an $8 trillion market. People who talk about private capital as being significant to the credit standing of the GSEs don’t get the joke. When Fannie Mae was created in 1938, there was no market in 30-year mortgages. Once US credit support is withdrawn from the GSEs with release, we think the conventional loan market will reprice significantly. A 2.5% capital ratio is the same required for mortgage insurers who by comparison guarantee the first ~20% of losses on often riskier mortgages with less creditworthy borrowers, compared with the GSEs’ guarantee which attaches at the senior-most <=80% of the property’s mortgaged value. Mortgage insurers therefore typically incur 100% losses on a default whereas by comparison GSE losses on a default are minimal. Comparing the GSEs to private mortgage insurers (PMIs) is not flattering to the GSEs nor a particularly good argument. Like health insurers, the PMI’s tend to avoid paying valid claims, creating risk for the GSEs and their correspondents.  For lenders, the biggest risk in the conventional market is GSE loan putback claims for delinquent loans, usually after a PMI has denied insurance. The GSEs also have enormous ongoing earnings power, particularly during challenging periods in the housing market where they tend to take significant additional market share. This enables them to quickly recapitalize after a period of housing market stress. True. This is the best argument for the credit standing of the GSEs, but that still won’t get them close to “AAA.”  Of note to retail investors, Ackman never mentions the possibility of a credit ratings downgrade for the GSEs upon release in his stock recommendation. The fact that Moody's, Fitch et al have already written about the conditions for a downgrade sure seems like a material fact. Assuming a Q4 2026 IPO, the two companies collectively would need only raise about $30 billion to meet the 2.5% capital standard, a highly achievable outcome. Freddie needs more than Fannie (which will need little if any capital) because it has grown its guarantee book more quickly than Fannie in recent years. The FHFA capital rule for the GSEs is excessive and will likely be reduced. When Moody’s rates the GSEs prior to release, the agency will make very clear that the market position and earnings power of the portfolio, and the support of the United States, are the main positive credit factors for the GSEs. The private capital level is a secondary concern. The $8 trillion in conventional residential and multifamily MBS relies upon the unsecured issuer rating of the GSEs. We estimate the value of each company at the time of their IPOs in 2026 at ~$34 per share. We assume their IPOs are priced at $31 per share reflecting a ~10% discount to their intrinsic values. We calculate a profit to the gov’t of ~$300 billion assuming full exercise of its warrants and a sell down of common stock in both companies over the five years following the IPOs. This number is a tad low. The cash advanced and commitments, plus the accrued liquidation preference, is over $350 billion now and will be closer to $500 billion by 2026. Ackman seems intent upon converting the money owed to the Treasury visible in the liquidation preference to the benefit of the private shareholders. This is a short-sighted move since it will generate a political firestorm inside the Treasury and in Washington. If President Trump, Bill Ackman and other institutional holders really want to see the GSEs released, then they must push for full payment of moneys owed to the Treasury. Otherwise, Ackman's positive statement regarding the GSEs should be viewed as just another ST trading opportunity. We believe the junior preferreds are also a good investment, but they do not offer nearly the same return because their upside is capped. Ditto. Trump likes big deals and this would be the biggest deal in history. I am confident he will get it done. There remains a high degree of uncertainty about the ultimate outcome so you should limit your exposure to what you can afford to lose if you choose to invest. And after making a public recommendation to buy the GSE common stock, Ackman tells readers to be careful. That shows a fine spirit. But as we have told readers of The IRA, the whole narrative about GSE release is a canard behind which the astute gain significant short-term trading gains. Whether the GSEs will ever be suitable LT investments for retail investors post-release is something that depends upon a number of decisions that have yet to be made. Our advice to readers is very simple: GSE release is a trade, not a LT investment. Happy New Year! 2:46 PM · Dec 30, 2024   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.