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April 4, 2024 | Premium Service | As Q1 2024 earnings approach next week, investors are left with a plethora of confusing and contradictory indicators spurting from the Federal Reserve Board.  The unseemly parade of Fed officials around the media, offering their personal insights on monetary policy, is decidedly unhelpful. But one thing that we can say for sure is that, regardless of what the FOMC does or does not do in 2024, loss rates on commercial credit exposures are likely to move higher this year. A number of readers asked The IRA about the investigation by the Federal Deposit Insurance Corporation  into the massive public investments in banks b y Black Rock (BK)  and Vanguard . Short answer: The issue at work here is part politics, part statute.  Long-time readers of The Institutional Risk Analyst  will recall that FDIC once imposed tough restrictions on “passive” investments in banks, especially when there were other indicia of control in the form of brokered deposits or business ties. We learned about the criteria for assessing control of a bank at the FRBNY long ago, before the thaw in FDIC policy on passive investments in excess of expressed legal limitations. Our view is that the FDIC is right to ask the question. BK and Vanguard are two odious monopolies that can exercise effective control over the public securities markets and manipulate politicians like puppets. Both firms are clearly in a position to influence the actions of the banks in which they hold controlling stakes, particularly smaller banks. The table below from the 2023 proxy statement of JPMorgan (JPM) illustrates the source of the FDIC’s concern.  Large banks do a lot of business with these buyside behemoths. These relationships are typically bilateral and non-public, safely hidden under the cloak of client confidentiality. Yet even though Vanguard and BK loudly declaim beneficial interest and control in the JPM shares held for investors, BK and Vanguard, in fact, own these shares in their street name. Large institutional firms like BK and Vanguard control in excess of 60% of JPMorgan, for example, ostensibly on behalf of third parties. But the shares themselves are not really the point. The point is market power. In progressive Washington, the issue of controlling stakes in big banks presents a juicy opportunity in a difficult election year. Imagine if some third level official of Vanguard or BK decided to punish a smaller bank by, say, changing the weighting of a stock in an exchange-traded fund (ETF). Or the same functionary might suddenly threaten to drop a bank stock from an ETF for technical reasons. If the bank does not carry Vanguard fund products in its 401(k) program, for example, no more love. Oh, so sorry little bank! That scenario may sound entirely unlikely, but the possibility  of the market power of these vast firms exerting illegal influence on an insured depository institution is very real – especially if BK and/or Vanguard does other business with the bank. Thus the concern by the FDIC is entirely legitimate and, indeed, required.  As we noted above, both BK and Vanguard are above the 4.9% legal limit on ownership of voting shares of a bank. This fact gives the FDIC et al the power to ask for BK and Vanguard to apply annually to continue to hold the shares. If you exceed the statutory limit on ownership of voting shares in a bank, then you must submit to regulation by the Fed, FDIC and other regulators.  If Vanguard and BK don't like the idea of complying with the Bank Holding Company Act of 1956, then they should divest of these businesses that require the disclosure. Stay tuned on this one. The fact that BK and Vanguard are odious monopolies in the growing world for ETFs adds to the flavor. ETFs are half of the volume on US equity markets, thus the FDIC raising the issue of control of bank shares is entirely appropriate.  PNC Financial One bank that investors should follow is  PNC Financial (PNC) , at $561 billion the eighth largest US bank in between U.S. Bancorp (USB)  and Truist (TRU) . PNC has a net loss rate in 2023 that is roughly in line with its peers. But if you look at commercial real estate exposures, PNC had non-accrual CRE loans equal to 3x Peer Group 1 at year-end.  Fortunately, the bank has little multifamily exposures, but watch PNC in Q1 for a benchmark for the rest of the industry. Even though CRE is only about 10% of total loans, over 8% were non-performing in Q4 2023.  Criticized loans and leases were 24% of the portfolio. The table below comes from the Q4 2023 earnings presentation.  One of the little games being played by banks and the FASB when it comes to disclosure of loan losses is that “troubled debt restructurings” are no longer being reported. Instead we have “financial difficulty modifications” or “FDMs.”  This Orwellian doublespeak is significant, however, because it highlights the growing use of modifications (aka “a compromise with creditors”) to conceal credit losses.  If investors had access to all of the non-public data on FDMs, the view of the banking industry would be considerably affected and not in a good way. The table below shows non-performing loans for PNC. This paragraph appears on Page 115 of the PNC 10-K: "We originate interest-only loans to commercial borrowers. Such credit arrangements are usually designed to match borrower cash flow expectations (e.g., working capital lines, revolvers). These products are standard in the financial services industry and product features are considered during the underwriting process to mitigate the increased risk that the interest-only feature may result in borrowers not being able to make interest and principal payments when due. We do not believe that these product features create a concentration of credit risk." Before COVID and the related economic changes, we would have agreed with this statement. But the fact of the matter is that the half-life of commercial tenants in office buildings has been considerably shortened. When buyers of commercial office space assess an asset, the operative assumption today is that half of the tenants could leave in the next 12 months. As a result of uncertain net operating income and rising cap rates for new capital in office properties, we cannot see how any serious financial institution does not create a reserve against a significant drop in the value in these assets. Any credit at PNC or other banks that ties back to commercial real estate assets needs to be considered impaired until proven otherwise. United Wholesale Mortgage One of the more amusing developments this week came with news that United Wholesale Mortgage (UWMC) has been accused in a published report and related class-action lawsuit of thousands of potential RESPA violations arising from its take-no-prisoners approach to the wholesale mortgage channel. The firm now faces a racketeering lawsuit and, more significant, a public report that accuses the firm of widespread violations of state and federal law. For the past several years, UWMC has been engaged in a price war with the rest of the mortgage finance industry. CEO Matt Ishbia first locked up brokers to only sell loans to his firm, then allegedly gave consumers inferior execution in order to enhance his profits. And all the while, Ishbia has been selling his mortgage servicing assets to finance his price war. “ The first-ever report by Hunterbrook , a venture capital-backed outlet, claims UWM holds independent brokers captive and overcharged borrowers by hundreds of millions of dollars,” reports National Mortgage News . “The publication's editorial board suggests the wholesale giant is at risk of wide-ranging consequences, and shared its findings with regulators and a law firm that filed a class action suit.” The fact that investors were willing to spend large dollars to prepare this report, then publish it and then launch the related class action lawsuit is notable. The report also illustrates the huge reservoir of negative feeling that Ishbia has created in the mortgage industry. We cannot even repeat many of the comments we’ve heard from loan officers regarding UWMC’s behavior in the secondary loan market. And frankly none of the new allegations surprise us given the company’s kamikaze model when it comes to loan pricing.  We have said several times in The IRA  that UWMC looks to us like a bad copy of Countrywide Financial, with more aggressive tactics and fewer net assets. UWMC is a very efficient machine for buying and selling residential mortgages, make no mistake, but we don’t think the model is sustainable through a credit cycle. At least Angelo Mozilo , God bless him, kept his MSRs! Ishbia sells his seed corn to finance a price war he cannot win. Suffice to say that should Ishbia and UWMC go down in flames, you won’t see many people in the mortgage industry shedding tears. 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.

"All animals are equal, but some animals are more equal than others.” George Orwell Animal Farm (1945) April 1, 2024 | Last week, S&P downgraded five regional U.S. banks due to their commercial real estate (CRE) exposures, Reuters  reports, “in a move likely to reignite investor concerns about the health of the sector. The ratings agency downgraded First Commonwealth Financial (FCF) , M&T Bank (MTB) , Synovus Financial (SNV) , Trustmark (TRMK)  and Valley National Bancorp (VLY)  to ‘negative’ from ‘stable,’ it said.” Regional and large community banks have been getting shellacked since New York Community Bank (NYCB)  dropped a restatement earlier in Q1 2024. If you look at the results for the WGA Bank Top 10 Index, it is tracking the Invesco KBW Bank ETF (KBWB) but the WGA Bank Top 25 Index is underperforming. Why? Wall Street prefers size (aka "liquidity") to quality. The fact that the ratings community and the media are all in favor of big is no surprise. Source: CapIQ/Thematic Looking at the three month total return for the 110 names in Peer Group 1, who are the top three stocks? Citigroup (C) , American Express (AXP)  and Wells Fargo (WFC) , a name we have been writing about and accumulating since the start of the year.  Source: Bloomberg As you can see, a number of the banks in the WGA Bank Top Ten Index are in the group above, but so are some very large chronic underperformers. The major ratings agencies add a full notch of uplift for large banks on the assumption that they will be bailed out by the US Treasury in the event of default. Investors know this and select stocks accordingly. What is the message? When the wheels are coming off the wagon and the rating agencies are dropping the guillotine  on small banks, size matters, no matter how ugly or mediocre the large issuer. The top rating agencies have a bias in favor of size (aka “market share”) visible for all to see in their ratings criteria, even if market share can lead to outsized credit losses as we discussed earlier (“ Small Banks Have Big CRE Risk? Really? | Bank of America Update ." ) The distribution of banks based upon three-month total return tells the tale of size, but it also tells a story about stress. The bottom 60 banks in the group had negative total returns in Q1 2024. Some of the lowest rated banks in the WGA Bank Top 100 managed to run into the top quartile because of the fears of equity managers and the related passive strategies. Fact is, when the share prices of large crappy banks start to rise, the passive strategies buy more of the same crap. The chart below shows the WGA Bank Top 100 sorted by three-month total return. Source: Bloomberg/WGA LLC While the bottom quartile is tiny relative to the other groups in terms of market cap, the sharp downward moves of some names were enough to pull down the performance of the WGA Bank Top 25 and Top 50 Indices over the past three months. So while the WGA Bank Top Indices still outperform the KBWB over the past year, the trend is for smaller banks to underperform their larger peers in 2024. Source: Bloomberg/WGA LLC NYCB, for example, is the large skew at the far right side of the chart. The bank's share price dropped almost 70% over the past three months, but the performance for other small banks is far better. The large downward skew in NYCB had a disproportionate negative impact on the entire WGA Index. At the start of 2024, NYCB ranked 26th out of 100 in the WGA Bank Top 100 Index. Based upon the three-month returns through Q1 2024, NYCB ranked at the bottom of the 108 public banks in Peer Group 1. Because of the bank's restatement, poor fundamental factors and appalling market performance, it's a pretty good bet that NYCB will drop out of the WGA Bank Top 100 in Q2 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.

“I don’t do that. That’s really not my job. We hope and expect that other policy makers will respect our independence on monetary policy. And we don’t see ourselves as, you know, the judges of appropriate fiscal policy.” Jerome Powell FOMC Press Conference June 14, 2023 March 28, 2024 | Last night Standard & Poor's reaffirmed the credit rating of the United States at AA+ with a stable outlook. This is more than a little amusing since the fiscal status of the US has deteriorated dramatically since 2011. The fact that investors and policy makers can even talk about “fighting inflation” when the US federal debt is spiraling out of control says a lot about the national frame of mind in 2024 This past week, we asked on X.com whether the Federal Open Market Committee has a specific ratio in mind for the size of the Fed’s balance sheet in relation to the federal debt. We are reminded that the Fed thinks about the balance sheet in terms of liabilities – that is, reserves – but the purchase of federal debt for the System Open Market Account creates an asset and a related reserve liability. While there has been a lot of talk about the Federal Reserve Board tapering the runoff of the Fed’s balance sheet, in fact reserve balances have been growing for more than a year.  This may be why deposit balances at banks actually rose in Q4 2023 for the first time in two years. Measured by reserves at the Fed, the FOMC stopped fighting inflation more than a year ago. Source: FDIC If the Fed actually starts reinvesting maturing Treasury debt, the reserve balances and related assets will rise and more than likely inflation will follow higher. Federal deficits are inflationary, but as we see with busted CRE assets, not all asset prices rise even when the consumer price index of the month is moving higher. Will Chairman Powell tell Congress that fighting inflation w/o deficit reduction is futile? But if we cut the federal deficit, deflation ensues. Economist Robert Brusca put it succinctly in his latest comment : “There has been a Fed obsession with achieving a soft landing that I think has been a really bad idea. I have and continue to argue ‘soft-landing’ is the wrong pitch for US policy at this point. ‘Soft landing’ is a policy that emphasizes controlling the rise in unemployment and accepting whatever happens with inflation as a result. That is not where the US and monetary policy should be after three years of persistent inflation overshooting.” Since the Fed is entirely unwilling to put the US economy into a recession in the name of really fighting inflation, the best that seems possible is for the US to keep the effective inflation rate in mid-single digits. Were Federal Reserve Chairman Jerome Powell really concerned about taming inflation, then he’d tell members of Congress that any rate cuts are conditional first on deficit reduction.  Merely stating that deficits are "unsustainable" is not good enough. The question no one wants to ask is whether the US can tame inflation when the Treasury is running an estimated $1.6 trillion deficit in 2024. The COVID-era spending spree from March 2020 to December 2022 led to the worst inflationary wave since the 1970s, which led to a labor shortage, badly skewed financial markets  and broken supply chains globally.   Yet nobody in Congress accepts blame for this policy error. Chairman Powell will be making remarks at 11:30 ET on Good Friday. In the salons of Washington and Wall Street in the 1980s and 1990s, Fed Chairman Paul Volcker used to joke to people about how during the Fed’s battle with inflation, he received a large piece of wood from an aggrieved citizen who compared the Fed’s high interest rate policies to the crucifixion of Jesus Christ.  Volcker’s decisive action on inflation became a model for public servants for decades to come, but sadly, the willingness of America's leaders to sacrifice themselves and their careers to defend consumers from inflation has waned since that time. Will Powell stand up to the forces of mediocrity in Washington and speak truth to power?  Odds are pretty good that regardless of the election outcome, Powell will be out as Fed Chairman after November.  “Inflation has eased substantially while the labor market has remained strong, and that is very good news,” Powell stated at the FOMC press conference. “But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.  We are fully committed to returning inflation to our 2 percent goal. Restoring price stability is essential to achieve a sustainably strong labor market that benefits all.”    Sadly, low inflation and full employment is not really possible when the libertines in both major political parties in Washington are running trillion dollar deficits. The problem with a soft landing is that it does not really address inflation nor does it provide a sufficient pretext for sharp interest rate cuts to allow for a true economic recovery. When Governor Chris Waller says we should wait for interest rate cuts, maybe he gets the joke. Fed Chairman Paul Volcker testified before Congress in 1981 : "What can be done—and done consistent with our short and longer-run objectives—is to provide assurance that the federal fiscal position is indeed clearly on track to balance.” Whether we speak of residential mortgages or moribund commercial real estate, interest rates will need to drop 200-300bp in the next twelve months in order to clean up the approaching tsunami  of busted real estate, hidden consumer defaults and related bad debt.  If you figure that the buyer of the assets of a dead bank or REIT needs at least a 50% discount from par to make the restructured asset work financially, then Powell’s roadmap to the end of his term is quite clear. Fighting inflation means a hard landing and lower stock prices. This is the only way out for Powell and the FOMC -- if they really intend to fight inflation. In the spirit of sacrifice that is central to the Easter season, perhaps Chairman Powell will be kind enough to fall on his sword on way out the door to make things easier for a future Chairman Waller. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 25, 2024 | Premium Service | Updated | It’s one year since the bank formerly known as Credit Suisse started to wobble after several embarrassing losses, resulting in a forced marriage to advisory behemoth UBS AG (UBS) .  A year later, UBS is still trying to offload the largest servicer of legacy private-label residential mortgages in the US, Select Portfolio Servicing . SPS had about $150 billion in unpaid principal balance on over 800,000 loans at the end of 2023. SPS was acquired by Credit Suisse Group AG (CS) in 2005. With the June 2023 acquisition of CS, UBS is now the parent company of SPS. Apparently another auction is in process for SPS focused on private servicers. As before, UBS is trying to get par for servicer advances on the delinquent private label loans in the portfolio, advances that are in some cases 15 years old. Several bankers that have looked indicate to The IRA  that 60 cents on the dollar is closer to fair value for the SPS default advances.  It’s a comment on the current state of the markets that so many conversations in the credit begin around 60 cents on the dollar. Like the value of a house or condo in FL that is not covered by hazard insurance on the property. And the power is turned off, meaning no A/C. The walls are already growing. Our friend Nom de Plumber  asked what happens when a conventional or government guaranteed loan which is no longer protected by property casualty insurance on the house. The answer is that the servicer of the loan is in violation of the Guide  from Fannie, Freddie or Ginnie. The GSEs can probably waive the insurance requirement temporarily, but Nom de Plumber asks the obvious question: who takes the loss on the uninsured house when it is destroyed by a hurricane? The servicer. Small Banks Have Big CRE Risk? Really? Another favorite topic of conversation when it comes to discounts from face value is commercial real estate. Over the past several months, a number of members of the media have decided that the commercial real estate (CRE) concentration ratio is the key factor in determining a bank’s exposure to loss on moribund office properties. It's easier for the generalist reporter to seize upon a single metric instead of spending time to actually understand the issue. Naturally, the media narrative says that small banks have more problems than large banks in the $2.5 trillion in total CRE exposures. In fact this is not true and shows a considerable lack of nuance on the part of occasional visitors to the world of banking. Small banks have bigger percentage concentrations than large banks, but the big banks have far larger risk exposures in dollar terms. A small bank may have a CRE ratio over 300, but if you don’t count those buildings that are “owner-occupied” - that are not rentals but where the business is located in the building - the CRE ratio drops to slightly below 200. The owner occupied properties perform better, needless to say. The CRE concentration ratio was added to the regulatory disclosure at the behest of the FDIC after the 2008 financial crisis, but as Bill Moreland  of BankRegData notes in a must-see video posted last week, the ratio is not as useful for assessing large complex banks compared with community banks. So while the CRE concentration ratio is useful for predicting future problems with smaller community banks, it does not illuminate current problems facing larger banks right now. Bill's video is below. We have noted over the years that most of the top-five banks have less than half of total assets actually deployed in banking, while the remainder is for trading, capital markets and other non-banking activities. In addition, the regulatory data does not distinguish between performing loans and loans that have been modified by the bank into a troubled-debt restructuring (TDR). As Moreland notes, you need to add non-performing loans to TDRs to begin assembling a true picture of the bank’s asset quality. The CRE concentration data from FDIC also includes some unsecured exposures. The table below from BankRegData shows the concentration ratios by asset size. The ratios look gnarly, but the banks below $10 billion in assets are really small and they tend to own small loans. Go above $50 billion in assets and the banks start to change and have significant trading and investment advisory activities. Thus the large banks have low CRE concentration ratios, but very large dollar exposures. Moreland notes that most of the largest banks such as Wells Fargo (WFC) , Bank of America (BAC) and U.S. Bancorp (USB) already have non-performing CRE loans in mid-single digits or higher today. Source: BankRegData "Since higher is worse there is a continued media focus on the 'impending risks to the community bank' community," notes Moreland. "I've tried to explain to them that they are focused on a potential issue, rather than a current actual issue, but 'our Editor doesn't want that story' is the response. We should not get to focused on what may happen in CRE a year from now and focus instead on what is happening today. The storm is here for CRE." Moreland notes that if we add non-performing CRE loans to TDRs that are still considered "performing" by credulous auditors and regulators, then WFC's defaulted CRE exposures really are well-above 6% already and climbing. Other large banks show similar levels of morbidity on CRE loans, but nobody in the Big Media wants to talk about this because the equity managers who buy size via passive strategies will be very disappointed. The other issue at work here is not simply TDRs, but the broader tendency to formally or informally modify delinquent loans to avoid default. In the world of residential mortgages, for example, a compromise with creditors has become the first, second and even third option in the servicer waterfall post-COVID. In commercial credits as well, loans that have been extended on previously contracted terms or placed on interest only usually indicate a distressed debtor that has defaulted in all but name. The lender is slowly becoming the owner of the distressed asset. This is why the sharp correction up in loss given default on bank multifamily assets in 2021 and 2022 was significant. When you see lenders taking 100% losses on a secured 60 LTV commercial mortgage, that's a red flag. Given these caveats, how are consumers and investors supposed to tell good banks from bad? Our rule of thumb is to compare cash losses vs total assets and tangible Tier 1 capital.  Thus when we’ve written about the substantial net credit losses of Goldman Sachs (GS) , the remarkable fact is that the losses of this investment banking group are above  the losses of Main Street depositories when compared with the total consolidated assets. Indeed, the GS net loss rate is above the Peer Group 1 average for the top 130 banks. Source: FDIC Update: Bank of America When we try to convey the magnitude of the under-performance of Bank of America (BAC) compared with other banks, one of the first relationships we show is net interest income. JPM had $3.875 trillion in assets at the end of 2023, but BAC had $3.1 trillion or 17% less. Yet BAC generates 40% less net interest income than does JPM. This is a fundamental and striking indictment of CEO Brian Moynihan, yet the big media remains mostly silent. Source: FFIEC While JPM has astutely managed its duration risk over the past five years, BAC has not, leaving the bank with a 10 point operating deficit vs JPM. Below we can see the components of earnings and how the net income of BAC compares with the average for the top 130 US banks. Source: FFIEC As you can see in the table above, BAC is tracking below the average income for Peer Group 1. Why? First we start with overhead expenses equal to 2.11% of total assets, then add interest expense of 2.32% for a total of 4.4%. The bank's return on earning assets is only 4.48%, thus BAC is underwater on earning assets and is literally surviving on non-interest income . Source: FFIEC With an efficiency ratio in the mid 60s, BAC is not that far off the Peer Group average of 61, but the degradation of industry efficiency in Q4 was broadly felt by all banks. BAC already has lower than average operating expenses, although compensation per head now averages over $180k. Yet it is in the areas of credit that BAC has some of the biggest challenges. Simply stated, JPM and USB have higher net losses but they also have higher net income. Bill Moreland notes that as of year-end 2023 BAC had commercial NPLs and "performing" TDRs equal to more than 8% of total CRE loans. That is a big number. But the overall credit situation at BAC is poor and getting worse across all asset classes. The net losses disclosed by BAC and the other large banks at the end of Q4 2023 are significantly understated if we include "performing" TDRs in the calculation. We expect to see reported net loss rates for most US banks move higher in Q1 2024 and the balance of the year. Source: FFIEC The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 18, 2024 | Last week, several readers of The Institutional Risk Analyst asked whether the arrival of former Treasury Secretary Steve Mnuchin,  former OCC chief Joseph Otting, various other former regulators ,  and $1 billion in new equity does not indicate a bottom in New York Community Bank (NYCB) . Short answer: Maybe. And maybe not. Given that investors took significant losses in NYCB thanks to the bank’s failure to disclose material information, we ought to proceed with caution. Forgiveness is easy for members of the faith, but trust must be earned. Ask George Gleason  at Bank OZK (OZK)  about what it takes to earn and keep investor trust.  With NYCB, the first obvious issue for investors is that a change in control is in process. The new investors, who will control 40% of the bank upon regulatory approvals and conversion of preferred equity into common , seem intent upon returning the bank to the glory days of community banking in New York. The Empire State is the last venue in the US where we’d operate a bank. If Mr. Otting et al do try to execute a community bank redux in the New York market, then we'd be inclined to exit the stock. Milton Berlinski , a newly appointed member of the NYCB Board and Managing Partner of Reverence Capital , said: “We are happy to be investing alongside these strong investors. We believe NYCB has a tremendous opportunity to reposition itself as a regional bank and return to growth and profitability and we look forward to working with incoming CEO Joseph Otting and the management team." To us, with all due respect to the new owners of NYCB, the community bank model is the problem. The only reason to own NYCB was the purchase of Flagstar Bank two years ago. NYCB was a sleepy, under-managed asset with branches that looked like old OTB parlors, a concentration in multifamily and lots of core deposits. Multifamily assets in progressive states like New York carry MORE political risk than do residential assets. Banking multifamily mortgages had worked for a century for NY lenders. Low defaults and full rent rolls allowed banks like NYCB to carry way too much exposure in rent-stabilized apartment buildings than prudence would normally dictate. But in 2019, the Democrats in Albany turned these once sought after commercial properties into toxic waste.  A mark of 50% of the original loan amount is about right. The acquisition of the assets and deposits of the failed Signature Bank was the cream on the cake and more for NYCB, but this assumed that the Flagstar and NYCB teams had come together and were running the bank as a large complex institution under OCC guidelines. Even though NYCB was a bit over $100 billion in visible balance sheet assets, it was the $350 billion in servicing assets, the number 2 spot behind JPMorgan (JPM) in warehouse lending, and its role in the market for Ginnie Mae MBS that makes NYCB a systemically significant institution.   NYCB is now the largest bank servicer in the Ginnie Mae market. Yet now those interesting and valuable Flagstar assets may likely be sold at a loss so that the new investors can turn NYCB back into a typical community bank – in New York? Keep in mind that delinquency on FHA, VA and USDA assets are all rising, making any business with exposure to the operating expenses of government servicing suspect vs say two years ago.  Source: MBA, FDIC Selling Flagstar now will be difficult, especially if the pool of potential acquirers is limited to only banks. As we’ve noted in an earlier comment, there are a number of possible bank acquirers. But either way, the team that built Flagstar into a national residential mortgage business is not likely to survive the change in control. And once Flagstar is gone, why exactly do we care about NYCB? After the fact of a change in control, the second major issue for us and other investors in NYCB is the question of future losses.  The year-end disclosure featured a surprise revelation of asset quality problems and a dividend cut attributed to the need to raise capital because of the costs of being a large bank. The bank has since sold some problem assets. The bank states in its 10-K filed last week the good news and bad news of NYC multifamily: "[I]n New York City, where the majority of the buildings securing our multi-family loans are located, the rents that tenants may be charged on certain apartments are typically restricted under certain rent-control or rent-stabilization laws. As a result, the rents that tenants pay for such apartments are generally lower than current market rents. Buildings with a preponderance of such rent-regulated apartments are less likely to experience vacancies in times of economic adversity. At origination, we typically lend up to 75 percent of the appraised value on multi-family buildings and up to 65 percent on commercial properties." Going into year end, the message from NYCB was that portfolio quality was superior to lenders like Signature Bank and other NYC banks. Our concern now is that the bank has indicated no further change in its year-end 2023 financials : “As previously disclosed, the material weaknesses identified by the Company did not impact the financial results included in the Form 10-K.”  Really. Given the bank’s recent track record on disclosure, we think it is reasonable to ask whether the quarter-end that is two weeks hence represents a risk or an opportunity. For those who might view the $2 low for NYCB as a potential entry point, we’d not be inclined to join in the fun. Let's see what NYCB has to say for Q1 2024. Now it is true that the arrival of Secretary Mnuchin helped the stock. Mnuchin et al also got the folks at Moody’s to dance around like trained circus dogs . We cannot recall another time when within weeks of taking a major ratings action to downgrade an issuer, Moody’s Investors Service turned on a dime and upgraded an issuer without even taking a few days to review NYCB’s restated financials. So much for smooth ratings transitions.   Given the proportion of the NYCB balance sheet in tainted NYC multifamily assets, we’d like to see the Q1 disclosure before we make any judgments, much less investment decisions. As readers of the commercial press know, a property in NYC does not need to be rent-stabilized to be financially troubled. As NYCB notes in the 10-K: "At December 31, 2023, $21.1 billion or 57 percent of the Company’s total multi-family loan portfolio is secured by properties in New York State, of which $18.3 billion are subject to rent regulation laws. Of the $18.3 billion properties subject to rent regulation, approximately 38 percent are currently in an interest only period. The weighted average LTV of the New York State rent regulated multi-family portfolio was 58 percent as of December 31, 2023 as compared to 57 percent at December 31, 2022." Given that loss given default on bank owned multifamily loans is just below 100% of the loan amount, what does this say about the future of NYCB ex-Flagstar? Source: FDIC/WGA LLC We’d like to hear more from Mr. Otting about the future direction of the bank and whether he intends to attempt the sale of the Flagstar mortgage business. Our fear is that in order to create a big enough pile of cash to clean up the legacy NYCB mess, Mr. Otting may accept a steep discount for Flagstar. In the event, we'd be out of the stock that day. The MBA just reported record losses for lenders in 2023, including record costs for new, mostly purchase residential loan originations. Servicing costs are rising just as fast. Trying to get a decent price for the Flagstar lending and servicing business in this market will be a challenge, but the alternative is another highly dilutive capital raise.  The wild card in the equation is the prospect that Donald Trump returns to the White House and forces New York to take ownership of the rent-stabilized assets that Albany deliberately impaired.  As we noted earlier, FDIC Chairman Martin Gruenberg fully intends to stick the FDIC and the banking industry with the cost of retaining the rent-stabilized assets from Signature Bank, assets that NYCB and others refused to buy. A future FDIC Chairman appointed by President Trump, however, could force the sale of the majority stakes in JVs that control these impaired multifamily assets, creating an immediate financial crisis for New York State. Hopefully Secretary Mnuchin will have a private conversation with Governor Kathy Hochul to avoid that unfortunate eventuality. But FDIC Chairman Gruenberg seems to have a plan to bury the problem inside the FDIC's bank insurance fund. Is it not remarkable that despite the recent FDIC assessment to pay for the three bank failures a year ago, and the prospect of future expenses on the Signature Bank assets, the banking industry says not a word about Chairman Gruenberg's progressive gift to the State of New York? Private landlords may not be able to recover maintenance costs on multifamily buildings, but perhaps the FDIC will pay for the renovation of rent-stabilized apartments in NYC? The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy, or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 6, 2024 | Updated |A number of readers of The Institutional Risk Analyst have asked about the situation with New York Community Bank (NYCB) . The short answer is that we think that the bank may be sold, one way or another. The profitable Flagstar residential servicing business could be offered for sale in order to make a downpayment for the cleanup of the NYCB legacy multifamily portfolio. But in the wake of credit downgrades, NYCB itself may need to be acquired by another bank. Source: Google Finance KBW said in a research note that NYCB could tap into its $78 billion in unpaid balances of mortgage-servicing rights to raise capital through a potential sale. The portfolio has a carrying value of $1.1 billion, analysts said. That is a mere downpayment, however, on a larger mess emanating from the bank's impaired multifamily assets. W ithout an investment grade credit rating, banks cannot hold escrow balances for conventional or government loans. We cannot see how NYCB keeps the billions in conventional and government escrow deposits long-term. The whole Flagstar servicing platform and more than $300 billion in residential loan servicing, mostly for third parties like nonbank mortgage issuers, needs a new home. Obviously the shareholders of Flagstar are coming to rue the decision to join forces with NYCB, an under-managed community bank with a portfolio of performing but ultimately unsalable multifamily assets. Thanks to the New York State legislature’s 2019 rent control law, which was supported by Governor Kathy   Hochul , all banks in New York City that hold rent stabilized assets on the books are now capital impaired.  Several of these banks in New York City may fail as a result of Albany's actions. So who might acquire NYCB? First, we take  JPMorgan (JPM)  and Wells Fargo (WFC)  off the table. The former is already the largest residential mortgage servicer in the US and the latter is exiting the residential mortgage business with finality. The departure of Wells from residential mortgages is bad news for consumers and cause for glee among progressive cadres in the Biden Administration. In any event, neither bank wants any part of the Ginnie Mae sub-servicing book inside Flagstar.   Next is Citigroup (C) , an intriguing possibility for a bank that badly needs new ideas and revenue streams. Citi has been in and out of residential mortgages for the past 50 years. In the 1980s, Citi introduced the first no-doc mortgage in the US market. Since subprime consumer credit is a big part of Citi’s business, why not add a good sized residential mortgage business and get back into the housing finance game?  There are few other industry segments that have enough size to matter to Citi. Flagstar is the number two warehouse lender after JPM. Overnight, Citi becomes the top bank servicer in the Ginnie Mae market and a significant issuer of MBS.  After Citi the obvious candidate for NYCB is U.S. Bancorp (USB) , which is now the second largest residential bank loan producer after Chase. Although USB is still digesting the acquisition of Union Bank of California, they are a player in residential servicing and loan administration. USB could easily acquire the NYCB mortgage platform and billions in escrow deposits. The idea of NYCB losing stable escrow deposits argues against the sale of the Flagstar mortgage platform and in favor of selling or recapitalizing the whole bank. But is this possible short of an FDIC intervention? Again, the actions taken by Albany in 2019 make NYCB and other New York banks unsalable short of an FDIC takeover. If you are an investor looking at NYCB, the big question is the 40% of total loans and leases in multifamily assets. If NYCB were to either sell or risk-share a substantial portion of the rent stabilized multifamily assets, then the prospects for the business improve significantly. But given the disclosures about weak controls over loan underwriting, investors are going to be very cautious about making any assumptions on valuation. And risk-sharing is not yet broadly relevant for commercial assets. Looking at the volume of risk-sharing deals done by banks so far, virtually all of the transactions are for consumer facing assets. Banco Santander (SAN) leads the pack on risk sharing auto and consumer loans. Commercial loans are far more difficult.  Western Alliance (WAL) and Texas Capital Bank (TCBI) have done risk sharing deals in prime RMBS and warehouse loans, but commercial mortgages will likely be handled as customized, bespoke arrangements done on single loans.  Selling the loans outright to hard money investors may be easier.  NYCB might want to consider creating a separate “bad bank” containing rent stabilized assets from the legacy NYCB to put pressure on Governor Hochul and the New York legislature to come and clean up their mess. Indeed, FDIC Chairman Martin Gruenberg  ought to lead that discussion with Governor Hochul. His agency – and all the FDIC insured banks he represents – now hold the bag on billions in eventual losses on rent-stabilized Signature Bank commercial mortgage loans as well as loans held by other banks. The intemperate actions of the State of New York caused these losses.  We expect to see a number of creative structures being rolled out to address the impairment of multifamily commercial mortgages on the books of US banks. Risk-sharing is useful and can actually reduce the risk weighted assets of a bank and improve capital ratios, but at a cost to the bank in terms of income. Other techniques involve selling the low-coupon mortgage and replacing it with risk-free collateral that generates a similar cash flow, but frees up regulatory capital for other purposes. Despite the promise of risk-sharing transactions, at the end of the day raising new capital and managing the delinquency may be a better approach. In the case of NYCB, raising new equity seems not feasible. Indeed, any prospective buyer may demand some form of loss sharing from the FDIC on the multifamily book. If, for example, we assume a conservative 20% haircut on rent-stabilized buildings in NYC, many of the smaller institutions are insolvent. That said, we would not be surprised to see an arranged marriage involving NYCB and a larger player that wants a bigger role in aggregating, selling and servicing residential mortgages. Even the likes of Goldman Sachs (GS) , which has a significant presence in lending on residential warehouse loans and mortgage servicing rights, might find NYCB a compelling opportunity -- given the proper incentives from FDIC, of course. Bloomberg columnist Max Abelson wrote an epitaph of sorts for NYCB this week: "How NYCB got here is a tale of percolating financial risks, changing rules and shifting regulators. New rent restrictions became law in 2019, but instead of acknowledging a hit to its loan book, the bank got bigger. Back-to-back acquisitions, first Flagstar and then parts of Signature Bank, almost doubled the firm's size and set it on a collision course with new rules for banks holding more than $100 billion of assets." We still own NYCB, but we strongly recommend that our readers stand clear until management gives shareholders a very specific roadmap to recovery. The economics of the bank's multifamily book are gnarly at best. Does the FDIC want to resolve another $100 plus billion asset regional bank? Hell no. Because the mess flows downhill, it may be time for creativity on the part of the FDIC and the State of New York. FDIC Chairman Gruenberg ought to tell Governor Hochul and New York State to take over the rent stabilizeded loans from Signature, NYCB and other lenders or face an old fashioned FDIC liquidation as and when any banks fail. The number of public housing units in New York City will soar, placing enormous pressure on the city's finances. If the multifamily building cannot be financed by a bank, then the City of New York likely will end up as the owner. Imagine if FDIC went "by the book" and next week sold all of the rent stabilized Signature Bank multifamily assets for whatever hard money bid is available. New York would face a political crisis. Governor Hochul and progressives in Albany caused this mess, which now threatens the solvency of a number of New York banks. The State of New York should take ownership of its fine work and repeal the 2019 rent control legislation. But of course we already know the endgame put in place by the FDIC under Chairman Gruenberg. The banking industry via the FDIC will absorb the losses on rent-stabilized multifamily assets in New York City. The FDIC may retain the majority interests in the Signature Bank assets indefinitely. And as it states in the RFP from the FDIC offering the Signature Bank assets for sale, the rent-stabilized apartments must remain so forever, with no possibility of ever becoming market rate. 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 26, 2024 | During a discussion last week on Behind the Markets , Jeremy Schwartz  of Wisdom Tree asked how we feel about the banking industry. Our reply was that we would generally stay short most banks, but that does not mean that every bank stock is falling in value. Indeed, that is precisely the key point that investors should remember. Not all banks or companies are the same and not all follow the herd. Years back at Institutional Risk Analytics , our pal Dennis Santiago in LA liked to say that t he banking industry is a coral reef. The industry supports many different types of business models, large and small.  To help investors and other interested parties parse the difference between one bank and another, we published the WGA Bank Indices over the weekend . Big H/T to our friends at Thematic for getting it done. It's been years since we actually had to wait for a computer to finish a job. Indices are big. Unlike traditional price-weighted indices which are biased toward larger stocks, the WGA Bank Indices employ a quantitative and qualitative scoring methodology. The scores for each bank are then arrayed using a pure constituent weighting system. This ensures that the highest scoring banks have the greatest impact on the Indices regardless of size.  Most Wall Street indices tend to buy “representative” baskets of stocks. These baskets inevitably include stocks based upon size rather than quality. Compare the 24 components of the Invesco KBW Bank ETF (KBWB) with the WGA Top 25 Bank Index (WBXXVPSW) . Then look at the divergence in terms of performance.  The banks in the WBXXVPSW self-select based on market and operational factors and the results speak for themselves. WGA Bank Top 25 Index (WBXXVPSW) The difference between KBWB and WBXXVPSW is that with the latter we don’t include banks in the bottom half of the industry distribution when measured against classical market and financial tests. No sad doggies like Citigroup (C)  or Bank of America (BAC) . Indeed, is it not remarkable that virtually all of the exchange traded funds and passive strategies focused on financials make no attempt to differentiate among banks based upon market or financial performance? If we look at the WGA Bank Top 25 Bank Index, the difference between the Wall Street view and what investors actually want to see is striking. If you ask your friendly investment bank to show you the top ten US banks, they’ll probably serve up a list based upon total assets or maybe market capitalization. But don’t ask any of the conflicted investment banks and fund sponsors to make critical judgements about banks or companies when it comes to returns to investors. Michael Green, Chief Strategist  at Simplify Asset Management, said famously: "If you think about it, passive investing operates on the simplest set of instructions possible. If I give you money then buy. If I ask for money then sell." But the way that Wall Street often interprets these simple instructions is to buy everything without distinguishing between superior and inferior stocks. “I view the markets as fundamentally broken,” said manager David Einhorn  on Barry Ritholtz's   Masters in Business  podcast  via Bloomberg earlier this year. "Passive investors have no opinion about value. They're going to assume everybody else has done the work.” We believe that somebody needs to actually do the work on picking good banks from the bad, especially when the consumers are retail investors. Fortunately, the banks actually vote for themselves every day based upon classical measures of righteousness defined by prudential regulators and the markets over the past century. Is Wall Street so conflicted that they cannot select between banks that are superior performers and those that are not? Yup. For those of us who work as financial professionals and have a duty of care and also a duty to determine suitability, just how do we include chronically poor performers with weak management and/or poor business models in an index used by retail investors? Help us here. Let’s compare the WGA Top 25 Banks (WBXXVPSW) on the left with the 24 constituents of KBWB. Note that there are only three stocks in common between the two groups. Also note the poor rankings of many of the members of KBWB vs the higher ranking banks in WBXXVPSW. Night and day. Why should any retail ETF include bank stocks that are issued by institutions which are not even peer performers? Source: Bloomberg, CapIQ, FFIEC We must stipulate that we did forget to add Zion's Bancorp (ZION) to the list, but the omission was not intentional and will be fixed at the end of Q1 2024. Like Bank OZK (OZK) , ZION is a unitary bank issuer and has no parent holding company. We also excluded Bank of NewYork Mellon (BNY) and State Street (STT) because these entities are atypical banks that provide commodity clearing and custodial services. Obviously one reason to create an index is to use it for an Exchange Traded Fund (ETF). We have been exploring the world of passive investing over the past year and these inquiries impelled us to develop the WGA Bank Indices. Before you do the ETF, you must define the strategy via an index. More, during our investigations we discovered that there are few passive strategies focused on mortgage finance and fintech, and for good reason. We'll be addressing all of these areas in a future comment. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy, or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

February 19, 2024 | Are 30-year mortgage rates going to fall further? When? These are two of the questions that come from readers of The Institutional Risk Analyst  with increasing frequency. Truth to tell, if you work in housing finance and want to see lower interest rates , then you need to start screaming about the federal budget deficit. But this is the one topic nobody in DC wants to discuss. Confusion about the direction of interest rates is understandable. After all, the Sell Side narrative says  that rates are going to fall, right? Stocks are going to go "to da moon" at the same time. But the rate-cut-soon narrative being hawked not even 30 days ago by big Sell Side firms such as Goldman Sachs (GS)  is now in tatters. How does a large issuer of conventional mortgage backed securities plan for the rest of 2024?   Even industry veterans like Logan Mohtashami , media star and residential lender from Orange County, CA, have been stoking the flames of rate cut expectations ever higher. The lower rates sooner gospel has become an article of faith for struggling mortgage bankers, especially those who prefer gain-on-sale to retaining servicing assets. We respectfully disagree and continue to believe that normalization of the yield curve is the more likely scenario. What is normal? Normal is Fed funds closer to 4% than 5.5% presently, but 10-year Treasury yields closer to 6%. Or a spread between two-year and 10-year Treasury notes over 150bp, as shown in the chart below from FRED. Note that TED was driven 1% negative during the Fed's QE madness in '20-'21. There are, of course, two interest rates that matter in the world of housing finance. First is the rate paid by lenders to finance new mortgage loans between the time they close your mortgage and when it gets sold into an MBS. Speed is of the essence in the secondary loan market. The cost of hedging the annual percentage rate that the lender assigned to your loan at closing is part of this cost. Remember, lenders set your loan coupon rate, global markets set bond yields and spreads. Today the cost of warehouse financing for a bank or nonbank lender from market leaders like JPMorgan Chase (JPM)  or Flagstar (NYCB)  is a spread over SOFR. The spread over SOFR can range from +1% and higher depending on 1) the collateral and 2) the borrower’s credit. With 30-year mortgages around 7.25%, the spread over warehouse financing is still negative for many lenders. That 30-year fixed rate mortgage you just closed will be sold into the secondary market, resulting in a modest cash premium for the lender but nothing like the 3-4 point gains seen in 2020-2021. In fact, most lenders today are down points of cash on close because of rate pay downs and other costly incentives. The screenshot below from Bloomberg shows the too-be-announced (TBA) market for conventional mortgages being sold into Fannie Mae MBS pools for delivery in March 2024 at Friday’s close.  Source: Bloomberg (02/16/24) You are probably selling that new 7.25% loan into a FNMA 6.5% MBS. As you can see in the nifty TBA chart above, FNMA 3s are currently trading around 85 cents on the dollar for March delivery. That's better than ~ 70 cents at the end of Q3 2023. If you are a bank selling FNMA 3s today, you are taking a 15 point loss or higher, depending on your cost basis . But 85 cents on your FNMA 3 MBS may seem like very good value a year from now. And the spread between average MBS yields and the 10-year Treasury is at the 5-year wide, as shown in the chart from FRED at the start of this comment. Hint: Most banks are paying more than 3% for funding. Part of the suspect rate-cut-soon messaging that has been flowing from Sell Side dealers includes the idea that banks are going to start buying more MBS than they are selling. But the dealers who make markets in MBS know better. Until the Fed stops running off its balance sheet, bank deposits will continue to fall and with it investments in MBS. For the past year and more, banks have been puking up bloody chunks of toxic waste in the form of MBS with 2% and 3% coupons originated during the COVID lockdown. As we noted in our comments on the Basel III Endgame proposal , MBS with leverage are a lot more dangerous than whole mortgage loans with government guarantees.  Source: FDIC The big factor affecting mortgage rates is Treasury yields, but there are a host of other issues that we discussed in our Premium Service  comment last week (“ Interest Rates, Mortgage Lenders & MSRs ”). As the remaining laggards at the Fed’s Reverse Repurchase Facility flow back into T-bills and other assets, the ebb and flow of long-term interest rates will make markets more volatile. And as the Treasury’s vast General Account grows and subsides each quarter, banks, dealers and private investors will be dragged along behind like an afterthought.  President Joe Biden and Treasury Secretary Janet Yellen never talk about the budget deficit. Former President Donald Trump doesn’t evince any worry about budget deficits either. Federal Reserve Chairman Jerome Powell does not like to lecture Congress on budget deficits. Only after JPM CEO Jamie Dimon warned of market ‘rebellion’ against $34 trillion national debt, did Jerome Powell break his silence. Powell opined boldly that it’s past time for an ‘adult conversation’ about unsustainable fiscal policy.   Chairman Powell needs to get righteous on the deficit or risk looking ridiculous. The mad dance in Washington to avoid talking in public about the Federal budget deficit is the chief reason why we expect the Treasury yield curve to normalize and 30-year mortgage rates to stay elevated or even track higher. Until Congress addresses the federal deficit by cutting spending and raising revenue, the Treasury's credibility with the markets will ebb.  The assumption is that Donald Trump won’t talk about deficits either. He actually wants to cut taxes, an idea that will doubtless find a positive reception among Republicans in Washington. Yet if President Trump were to talk about fixing the federal budget deficit and redeveloping moribund urban real estate, he’d win in November by a landslide.  Joe Biden cannot even mention the word “deficit” without causing a rebellion inside the Democratic Party.   To us, all of this means that the long-end of the yield curve is headed higher for longer no matter what the FOMC does with short-term interest rates.  Think of the TED spread back out to 1.5-2% within a year.  Imagine how the mortgage market and related assets will look when we assume 7-8% mortgage rates for years to come. With SOFR below 5% by next year, as the forward swaps suggest, at least the few surviving mortgage lenders will be making money again.  But investors are completely unprepared for a major bear market steepener as the November 2024 election arrives -- and all too soon. 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.

"One of the greatest disservices you can do a man is to lend him money that he can't pay back." Jesse H. Jones February 13, 2024 | Updated | Several readers of The Institutional Risk Analyst  have asked of late: “how big is the commercial real estate mess in the US?” Answer, losses in the trillions of dollars over time. Think about the Texas oil bust of the 1970s, which led into the S&L crisis of the 1980s. The Great Depression started with deflation in the financial markets a century ago, but more recent bubbles in the US have been fueled by real estate speculation. In one potential future, the Great Crash of 2029 begins with shocks to commercial real estate in 2022, shocks that go mostly unheeded.   In the wake of the market reaction to the earnings surprise from New York Community Bank (NYCB) , there is growing awareness of a problem in commercial real estate. This problem, however, is a lot bigger than the mortgage loans owned by banks and REITs, public and private. Much of the mortgage debt for commercial properties has been sold to investors in the bond market. And the growing insolvency of commercial buildings in major cities is a dead weight on economic activity and job creation, not to mention the fiscal stability of major urban centers. We can all pretend that the collapse of valuations for many commercial and multifamily properties is not a major problem. Or we can act now to address the problem of moribund real estate before the deflationary effect of falling commercial real estate values affects other parts of the economy. Banks may be the most obvious sector hurt by property deflation, but equity owners, tenants and vendors also are disrupted. When landlords fatally damaged by two years of loan moratoria during COVID abandon a multifamily building, the tenants in the building face reduced levels of service and heightened insecurity. If there is no private buyer for the foreclosed apartment building, even at the reduced value, then the asset eventually becomes public housing. Progressive New York City already houses more than 360,000 people in public buildings.  Historically, when a landlord in NYC had a long-term tenant vacate an apartment, any apartment, the unit was renovated, brought up to code and the rent adjusted accordingly. A full gut and apartment rehabilitation in NYC today starts in six figures. Under New York’s progressive 2019 rent control law, though, landlords cannot recover the cost of renovations, so the apartments are simply locked and kept off the market.  The commercial insurer of the building, keep in mind, prohibits the rental of units not up to code. Indeed, New York law has penalties for landlords who rent substandard apartments. But nobody in Albany under progressive rule cares about costs or anything else. Meanwhile, the value of buildings with rent controlled units is falling, making them difficult to finance with a bank. The building has fewer tenants, lower net operating income, higher cap rates for prospective investors and thus lower appraised value.  Deflation. Falling valuations for commercial real estate is not only a problem for the US. The global economy faces stiff deflation due to 1) COVID and 2) massive property speculation in Asia, the EU and the US fueled by low interest rates. Changes in work behavior following COVID have left many – but not all – commercial assets facing enormous losses. But on top of these COVID-related issues lies the equally serious problem of aspirational pricing in global commercial real estate. We’ve noted the top-line valuation number from NAREIT of $20 trillion for all US commercial real estate, but estimates vary widely. Property values surged between 2022 and the end of 2023. And we’ve seen even higher estimates than NAREIT, what we call aspirational pricing. The Real Estate Roundtable said that commercial property could be worth $22 trillion in 2021, before the post-COVID feeding frenzy and subsequent collapse.   The Mortgage Bankers Association, using data from the Fed and Trepp, says total debt on commercial and multifamily real estate is about $5 trillion. Banks hold less than 25% of multifamily and commercial mortgage debt, says MBA, but the value of the underlying property has raced ahead of official inflation rates. Insurance companies, for example, own over $700 billion in commercial mortgages, which are held at book value. Insurers also invest in the equity of commercial real estate. It’s fair to say that the average value of the properties behind the mortgages held by banks and other lenders has fallen over the past two years. If there is $5 trillion in mortgage debt under commercial and multifamily properties, there are several times more trillions of equity that is now compromised. Yet the ebb and flow of commercial real estate in the US tracks the expansion of the economy in the post WWII era. Since the Roaring Twenties, the ebb and flow of American finance has changed the nature of risk. Whereas deflation on the farm, private speculation and clumsy actions by the Federal Reserve Board caused the Great Crash of 1929, in the 21st Century the various arms of government – particularly the Federal Reserve and the US Treasury – are the largest sources of risk to the US economy.  Linden Row Inn, Richmond, VA The Fed’s tolerance for higher inflation to facilitate burgeoning federal debt issuance boosted valuations for all real property, residential and commercial alike. During COVID, lower interest rates drove down cap rates and drove up property values around the US and the world. COVID plus the low-interest rate regime since 2008 set up the US property market for a major correction. But the larger and steady inflation of asset prices over half a century and more now compounds the pain on the way down. The steady inflation of the dollar since the Civil War has fueled nominal economic growth and driven increases in asset prices. But inflation has caused the greenback to lose more than 95% of its purchasing power over the past century. The real value of a $1 in 1920 equals almost $20 today. Investors seeking to protect themselves from this steady diminution of the real value of the dollar have invested in stocks and real estate. Indeed, the huge increase in the nominal value of stocks and all types of real assets speaks to the constant theme in human existence: inflation. Goetzmann and Jorion (1997)  in their classic NBER paper argue that equity returns in the 20th Century averaged 6% after inflation, as measured by government statistical agencies. But equity returns on commercial real estate, which typically carry 50% leverage to the value of the property or 50% LTV, have been far higher than stocks if you include the price appreciation of the asset. Look at the movement in average prices for CRE, as shown in the FRED chart below. Pension funds, endowments, sovereign wealth funds, private equity firms and family offices have piled into commercial real estate on a global basis, in some cases combining internal leverage within funds with external leverage provided by lenders and REITs. The use of leverage in China commercial real estate has been extremely aggressive, as illustrated by the collapse of China Evergrande and other developers. In many cases, Chinese liquidators are repudiating debts held by foreigners and giving preference to domestic creditors. Note in the chart above that after the initial price declines following the end of the COVID lockdown, global investors rushed back into existing and new CRE and multifamily assets. This flood of investment drove up prices by double digits even as the FOMC began raising interest rates. The speculative upsurge, however, had a limited duration and now has begun to reverse as realized losses on commercial assets have widened. Anything over 50 LTV in commercial real estate is unsecured. But the losses due to changes in work behavior add another dimension to the equation. So what is to be done? Policy makers in Washington need to start thinking about dusting off the Reconstruction Finance Corp of the 1930s to help finance the restructuring of an awful lot of now moribund commercial real estate. We are talking here not just about the CRE loans in default now or next year, but a whole class of urban commercial properties that are impaired because the original use case is no longer relevant.  Think about office buildings on Third Avenue in Manhattan from 34th Street to 59th Street. Trillions in commercial properties need to be restructured and probably redeveloped for other uses. We need to put aside the crazy notion, for example, that most commercial properties can be economically repurposed for residential use. If you don’t have large commercial tenants paying big dollar rents in a commercial building, residential tenants are not going to be able to pick up the slack. This means that the existing commercial buildings must come down and be replaced, with all of the attendant cost and environmental impacts.  The RFC was created by Congress at the request of President Herbert Hoover in 1932. “The RFC provided liquidity to struggling institutions through investments in preferred stock and debt securities,” notes the Congressional Oversight Panel January 2010 Oversight Report for Unwinding TARP. “Initially, the RFC provided liquidity for healthier institutions but was prevented from offering long-term capital to weaker institutions by restrictions such as high interest rates, collateral requirements, and short-term lending requirements. The Emergency Banking Act of 1933, however, gave the RFC the ability to offer investment capital, while looser collateral requirements expanded the RFC’s lending capacity. Ultimately, under President Franklin Roosevelt, successive expansions of authority helped the RFC evolve from its initial role as a short-term lender into an agency that provided federal support for the credit markets and became a major part of the New Deal program.” Why did Hoover create the RFC? Because he recognized that the Crash of 1929 had created a deflationary wave that was consuming the US economy, a terrible process of debt liquidation described by economist Irving Fisher . In the late 1920s, a businessman from Houston named Jesse Jones, who organized the private rescue of several busted banks in Houston, came to Washington seeking help. He remained for almost 20 years and described his work in the classic book, " Fifty Billion Dollars: My Thirteen Years with the RFC. " The role played by the RFC was to break the deflation in asset values that was destroying the US economy and buy time by funding these assets with long-term debt. Irving Fisher wrote in 1933: "Deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe . The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing." When Franklin Delano Roosevelt was elected in November of 1932, Jesse Jones nominated himself Chairman of the RFC. The other directors appointed by President Hoover had resigned following the election. But Roosevelt would not take office until the following March. The Banking Crisis of 1933 exploded in February, as we discussed in “ Ford Men ": "In 1933, the United States was in its fourth year of economic depression and many U.S. banks were on the verge of insolvency or worse. While the condition of the Detroit banks was probably as bad as or worse than anywhere else in the country, Ford’s actions touched off an explosion that exacerbated already-acute bank-solvency problems all across the nation. Henry Ford the inventor and industrial colossus singlehandedly turned the banking crisis of 1933 from a very bad situation into a national calamity... On February 14, 1933, all banks in the state of Michigan were closed for eight days by order of Governor William A. Comstock. This began a domino effect that would lead to the collapse of the nation’s financial system three weeks later. Michigan was forced to default on its bonds and the state government was crippled, a default that rippled through the savings and balance sheets of individuals and companies around the world." When FDR took office on March 4, 1933, every bank in the US was closed. By the end of 1933, Congress had created the FDIC and passed other emergency reform laws that gave FDR and Jones massive powers. After Roosevelt, “Jesus H. Jones,” as the President called him, was the most powerful man in America. Al Crowley , the financier behind FDR, organized the FDIC in 1933 and then later ran the Lend-Lease program through WWII. If your bank could not qualify for FDIC insurance after the 1933 bank holiday, then you went to see Jesse Jones. He'd tell you to go home and raise new capital, which he'd match. Otherwise he'd throw you and the other bank directors in jail. Jesse Jones restructured the US economy, including hundreds of banks and dead companies. Jones eschewed partisan politics at the RFC and relied upon the private sector to do much of the work of restructuring. And there was nobody in Washington dumb enough to argue with Jones. The federal government provided the financing via the RFC’s bond issuance, which also financed FDR’s gold purchases. The RFC performed a receivership function for busted banks and companies through the Great Depression and WWII. It was wound up only in 1957, a year after Jones' death.   Why is something like the RFC needed today? Because the numbers involved in the restructuring of trillions of dollars in busted urban commercial real estate are too big for the banking industry or the FDIC or even the Federal Reserve System to handle. The Resolution Trust Company of the 1980s is also a relevant model, but the RTC was designed to restructure dead S&Ls and dispose of real estate in a reasonably short period of time.  The financing and restructuring of urban commercial real estate in most US cities is a massive, long-term task that requires trillions in financing. But even before plans are made to knock down old offices and build new residential assets in major cities, the bigger question is how the city will support the cost of operating going forward. Cities were created centuries ago as commercial centers first and foremost. If progressive politicians in cities like New York, Chicago and San Francisco chase away the business community, who is going to pay to operate a modern city much less redevelop old buildings? Readers of the Premium Service  of The IRA recall that we expect to see another upward surge in home prices when the FOMC finally drops short-term interest rates. Volumes will rise for a while, but the lack of new home construction will push average home prices up dramatically. Within a couple of years after volumes peak, however, we expect interest rates to rise and residential home prices to correct sharply lower.  Between now and then, the US needs to develop a national plan for dealing with the massive amount of busted commercial property that is accumulating in cities and towns around the country.  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 1, 2024 | In this issue of The Institutional Risk Analyst , we ponder yesterday’s earnings release by New York Community Bank (NYCB) . But first we want to give a h/t to Nathan Tankus , the Research Director of the Modern Money Network . Nathan publishes “Notes on the Crises” – an always insightful discussion of the US political economy. In his January 16, 2024 missive , Tankus tells the little known story of former Treasury Undersecretary Paul Volcker  calling Federal Reserve Board Chairman Arthur Burns  in 1973 to discuss the federal budget. “A confidential memo documenting this event was declassified on August 21st 2020,” Tankus relates. “ That memo describes  the phone call this way:” “Mr. Volcker had telephoned Chairman Burns shortly after 9:30 a.m. on December 3 to ask whether the Federal Reserve, under existing law and regulations, could and would make a formal commitment at this time to refrain from tendering for redemption its holdings of Treasury bills maturing on December 6, in the event that the statutory debt ceiling remained below the amount of outstanding debt on that date. If the Federal Reserve did not tender those holdings for redemption, the Treasury would be able to meet other obligations for a somewhat longer period.” Tankus notes that because the Fed would receive no interest on the debt after the maturity date: “That means the Federal Reserve was both  foregoing profit,  in addition to effectively providing credit  to the Treasury.”  So much for the independence of the Federal Reserve Board. Simon White at Bloomberg  put things in perspective earlier this week: “ Born in the 90s and tested to destruction during the Great Financial Crisis, modern-day central bank independence is effectively over in all but name. Persistently large government deficits, central banks with trillions of dollars of sovereign debt and the political toxicity of elevated inflation make it impossible any longer for the Federal Reserve, ECB et al  to set monetary policy fully independently from their government overseers.” White more recently echoed our view and the view of colleagues in the world of warehouse lending and mortgage finance, arguing that the Fed needs to cut short-term rates to take pressure off both dealers and issuers of securities. “ Banking sector problems are a prescient reminder that elevated rates are cumulatively inflicting mounting damage across the economy,” White argues. “Ironically, that ultimately means yields are heading higher.” Repeat, higher yields ahead. Lower short-term rates will help dealers and issuers of securities that want to finance inventory, but lower rates will not do much to ameliorate the carnage in commercial real estate. Every commercial asset is different. That's why veteran managers like Barry Sternlicht are warning of over $1 trillion in losses on commercial assets. Nor will lower short-term rates necessarily help consumers, who pay for credit that is priced off the long end of the Treasury yield curve. Of note, Treasury Secretary Janet Yellen  is seeking to issue the full allocation of 10s and 30-year Treasury debt next week. That brings us to NYCB, which reported record operating results, but then charged-off two large commercial properties and took a big slug of losses related to the acquisition of assets and the assumption of deposits from Signature Bank via the FDIC receivership not quite a year ago.  The earnings snapshot from the $120 billion asset bank is shown below. As a holder of NYCB, we are disappointed in the way the bank announced the results to investors. The NYCB team is still coming to grips with the reality of being a large bank. The disappointing results should have been pre-announced. Also, the bank should do a better job explaining the results. The bank's written disclosure is poorly designed and presented. Where is the investor presentation? Also, the bank needs to up its game in terms of the management team. To Chief Executive Officer Thomas R. Cangemi’s point about being a Tier IV large bank, NYCB needs to have a chief risk officer in the leadership team before the regulators tell them to do so. We’ve got some ideas. You cannot expect to earn respect and credibility among investors as a large bank if you don't look and sound like a large bank. Duh. Sad to say, the business at NYCB is doing better than you'd think reading the bank's absurd disclosure. Net interest income more than doubled at a time that the industry is reporting down results. Non-interest income was up 10-fold to $2.5 billion. The bank booked a $2.1 billion extraordinary gain for the purchase of Signature from the FDIC receivership, but booked $330 million in restructuring expenses and a $40 million special assessment by the FDIC. Total commercial loans represent 46% of total NYCB loans held for investment, and multi-family loans represent 44% of total loans held for investment as of December 31, 2023. Residential loans and other loans represented 7% and 3%, respectively, of total loans held for investment. The bank charged off $189 million in commercial and multifamily loans in Q4, an aggressive move we view as a sign of strength. NYCB also cut the dividend to accelerate the capital build required now that it is a Tier IV bank holding company. Of note, NYCB’s unrealized losses on securities fell 33% in 2023 to less than 5% of capital, partly as a result of aggressive sales of legacy securities and partly due to lower interest rates. During the fourth quarter, NYCB recorded a $552 million provision for credit losses compared to $62 million in the previous quarter. Net charge-offs were $185 million during the fourth quarter 2023 compared to $24 million in the third quarter 2023, driven by just two commercial loans. Source: Google Finance (2/1/2024) All of this said, we still like the NYCB story and, indeed, bought more shares at the lows. Our basis was half of book and today NYCB is a 0.45x book value just under Citigroup (C) . The legacy NYCB is where the problems lie in this story, in our view, while the Flagstar team and franchise represent the future. We'd like to see Cangemi become Nonexecutive Chairman and see Alessandro (Sandro) DiNello , now Non-Executive Chairman, take over as CEO. DiNello ran a top-five national mortgage business at Flagstar and better understands the world of large bank regulation and investor relations. Eric Hagen at BTIG put the NYCB results and the reason we still like the stock into the context of small bank earnings: “ Some weakness in regional bank stocks this week could potentially help reinforce the strong supply of MSRs which we see developing this year, especially if interest rates fall ... Pressure specifically on New York Community Bank appears mostly a function of having achieved rapid growth following its acquisitions of Signature Bank and Flagstar Bank, prompting it to cut its dividend and build capital to satisfy new regulatory thresholds. Flagstar carries a significant presence in mortgage finance , starting with its $380 billion servicing portfolio, including almost $300 billion which it subservices on behalf of others. It's also the second largest warehouse lender behind JP Morgan with $12 billion of commitments, and it supplies around $2.5 billion of MSR financing to a range of investors/servicers. NYCB is also a top lender of commercial multifamily credit.” Readers of The Institutional Risk Analyst  should prepare for a bumpy and unpredictable year in financials. As we noted on X, commercial real estate is going to be the primary source of losses for commercial banks in 2024 and for much of the remainder of the decade. Banks like NYCB that have the operating income and capital to clean house will be the winners in the race for loss mitigation. Banks that cannot restructure losing securities portfolios and write off commercial bad assets will do badly.  Of note, Olivia Raimonde of Bloomberg wrote a fascinating story entitled “Insurers Are Set to Unleash $400 Billion Wave of Credit Trading.” Why are insurers getting ready to sell half a trillion in low-coupon securities?  Because the National Association of Insurance Commissioners is allowing insurers in the US to count realized losses on securities as capital through 2025. Tales of S&L net worth certificates redux. “Driving this is a change to a little-known accounting item, namely the interest maintenance reserve, Raimonde writes. “Insurers use these reserves to defer interest rate-driven losses or gains from fixed-income investments, for reporting to regulators. That way, any losses are spread out over several years rather than being realized as a larger lump cost upfront, keeping insurers’ regulatory capital buffers from yo-yoing.” Last year, the National Association of Insurance Commissioners allowed life insurers to include a portion of negative IMR — when realized losses exceed gains — as regulatory capital through 2025. This effectively enables them to absorb up to $55 billion of additional realized losses or nearly 2.5 times more than before, Barclays estimates in a research note.  So if the NAIC is making it easier for insurers to sell lower-yielding bonds, why isn’t the Federal Reserve and other bank regulators doing the same thing?  If analysts are right about the long end of the Treasury yield curve rising over time, the Fed should be moving heaven and earth to get banks to sell low coupon securities as soon as possible so we can prepare for the next challenge, namely losses on commercial real estate.   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 29, 2024 | Premium Service  | In this issue of The Institutional Risk Analyst , we revisit some of our earlier comments to benchmark our prognostications with the actuals. Banks, China, fintech and crypto – you know the list. All share a common thread in that the collective investment mania of the 2020-2022 period has now ebbed. Let’s start with China, a country we have studied for decades and is now sinking into an economic crisis engineered by the Chinese Community Party and paramount leader Xi Jinping . In China, only politics matters. When the father-leader totally screws up the economy, nobody says a word. Sad to say, command economics as practiced by the CCP under Xi or the Biden Administration in the US does not seem to deliver positive results. A Hong Kong Court has ordered the wind-up of what remains of isolvent China Evergrande , one of the largest real estate developers with over $330 billion in debt. The Chinese government has announced a rescue of the financial markets, but it is unlikely to be sufficient. We wrote last August (“ China's Debt Crisis Accelerates ”): “Markets and media are fussing about an active ‘defense’ of the yuan mounted by the People’s Bank of China , but the Chinese currency is as stable as a cold dead corpse lying in Tiananmen Square. Compared with the Japanese yen or the dollar, the yuan is an irrelevancy.  And there seems little question that the yuan and China are greatly overvalued.” The collapse of China's property sector coincides with mounting debt and falling population, both part of a narrative of accelerating deflation. It is notable that China has just prohibited securities lending for short-selling of domestic securities. Meanwhile, some bold foreign investors are deploying long positions in China to take advantage of an eventual rebound. Charlie McElligott at Nomura writes: "We’ve seen persistently large Buyside positioning for the China / EM “Right Tail” trade in the recent trade on PBoC “stimulus / easing” expectations paired with looser R.O.W. policy / “Short USD” outlook, occurring with even more rigor now that China PMI’s “triple-dip” below 50 into contractionary territory yet again to start the year on enhanced risk / reward profile." The property sector is not the only source of deflation in China. The implosion of the market for electric vehicles is going to add big losses to the ledger for Chinese companies. China’s cities are littered with thousands of unwanted EVs, as Bloomberg  reported last year .  But the biggest story is the turn away from EVs in many western economies. In 2021, President Joe Biden  heralded the arrival of the EVs as the start of a new era. Now Ford Motor (F)  is cutting production of its loss-leading F-150 Lightning pickup. Ford lost $36,000 for every F-150 EV sold in Q4. Was Toyota Motor Corp (TM) leadership right about EVs? Yes they are. The green progressives in the Biden Administration are wrong. Shame on Ford for allowing themselves to be bullied into wasting billions in shareholder funds on EV mania.  The political push for electric vehicles (EVs) is collapsing as subsidies for these lithium battery-powered toys ebbs. Most of the G-20 nations are up to their ears in public debt. There's no spare cash around to subsidize the infrastructure needed to support widespread adoption of EVs. Yet none of the nations that pushed for private production of EVs ever asked if doing so was possible. In our 2010 book “Ford Men: From Inspiration to Enterprise,” we noted that Henry Ford, Thomas Edison and many other 19th Century inventors wanted to build electric electric cars. Such were the obstacles to using batteries, however, that Edison ultimately advised Ford to use gasoline as an energy source. The rest of the industry followed. Not much has changed in the intervening 120 years since that conversation except greater efficiency of devices. Of note, the giants of electrification a century ago were working in Detroit years before Henry Ford built his first car. Edison created the Edison Electric Company  in 1889.  And all shared a vision of a fully electric world. Yet the technology remains lacking. TM Chairman  Akio Toyoda, speaking  at the Tokyo Auto Salon, noted that people are “finally seeing reality” on EVs. No surprise to readers of The Institutional Risk Analyst , the auto executive repeated his bearish forecast for EVs, predicting that just three in 10 cars on the road will be powered by a battery. And Dr. Toyoda is probably being kind.  We own TM and have followed Japan’s premier automaker for decades. TM moves very slowly and with deliberation and purpose, two qualities that are alien to many American business leaders. Dr. Toyoda knows that EVs never made sense commercially. EVs are not particularly practical (a/k/a safe & reliable) for consumers, they are very expensive to manufacture to minimum safety standards (forget China EVs), and EVs are not particularly green. Notice in the chart below that the explosion of Tesla Motors (TSLA) coincides with the manic market volatility in 2020. Yet the company went public in 2010. Source: Google Finance (1/26/24) Watch the migration of TSLA from techology novelty to automotive manufacturer as the stock sinks below 50% of its all-time high. Part of the challenge facing TSLA and Elon Musk is that all of the makers of EVs are becoming familiar. TSLA was once highly differentiated and desirable, to borrow the branding measure of Young & Rubicam , but today it is increasingly valued by investors for being a car maker. Leaving aside the vicious economics of the global auto business, t he legacy environmental cost of mitigating the pollution from electric vehicles and lithium batteries  makes EV manufacture even less attractive. In fairness, we must add this cost to the larger electronics waste heap of solar panels, PCs, displays and smartphones, and other complex silicon devices. As described in the 2017 Denis Villeneuve   film Blade Runner 2049 , the remediation of human waste is the growth industry of the future. Recycling one solar panel costs $15 to $45—significantly more than the $1 to $5 per-panel cost of just sending it to a landfill, according to a US Department of Energy. Many states are considering stiff taxes on electronic manufacturers to compensate for the cost of remediating the waste from their products. Now let’s take a look at how some members of the banking and fintech sector are doing in the first month of 2024. Just as nouvelle firms like TSLA are migrating from technology plays to mere automotive manufacturers, the tech stocks of yesterday are now becoming, well, commonplace. Affirm Holdings, Inc. (AFRM) lost more than 20% of its value since the start of the year, a reaction to the shift in narrative from recession to economic expansion.  We’ve written critically about AFRM and some of its peers because we see little value in the stock for shareholders. Insiders and corporate partners have taken huge amounts of value out of AFRM. At the close last week of $180 per share, AFRM is less than half of the $440 all time high reached in 2021. AFRM reported a $1.2 billion operating loss in its fiscal year ended June 30, 2023. That operating loss includes $130 million in D&A, $452 million in stock-based compensation for employees and $499 million in enterprise warrants and other share-based expenses for partners such as Amazon (AMZN) .  The close companion of AFRM, Upstart Network (UPST) , is likewise down sharply since the New Year. Like AFRM, UPST is still up double digits over the past 12 months, but institutional investors and analysts are fleeing both names since the Fed pivoted to a rate-cutting narrative. Like most fintech stocks, neither AFRM nor UPST will report Q4 2023 earnings until the last two weeks of the reporting period. Keep in mind that the market momentum of equity managers, not financial results, governs the movement of these two stocks. Our fintech group is shown below. Notice that Latin payments platform NU Holdings (NU) is now #2 in terms of total return after AFRM. Fintech Surveillance Group Source: Bloomberg (1/26/24) In the world of commercial banks, the heady optimism of December 2023 has been replaced by a more somber mood. Consumer-facing names such as CapitalOne Financial (COF)  and Ally Financial (ALLY)  have been giving ground slowly. COF actually delivered an up quarter in terms of net interest income in Q4 2023, a considerable achievement given the down trend in most earnings releases. Higher credit provisions and other expenses cut operating income by 60%. Higher losses on auto and credit card loans drove the reserve build and current losses. COF’s non-interest expense was increased by the FDIC special assessment of almost $300 million in Q4 2023. Of note, COF reclassified $888 million in commercial office real estate loans from loans held for investment to loans held for sale as of June 30, 2023.  Like many other lenders, COF is cleaning house and will likely be taking a loss on some of the asset dispositions later in 2024. COF is joining a crowd of banks looking to dispose of commercial property loans in NYC. The key point to emphasize is that the unfolding of the commercial property crisis will take years to work through the earnings of banks. Bank Surveillance Group Source: Bloomberg (1/26/24) The good news on COF is that credit expenses are rising slowly and the $440 billion asset bank reported a 61% efficiency ratio in Q4 2023, ten points better than some of its larger peers. Headcount was down, but operating expenses rose single digits. The gross yield on COF's loan book was nearly 10% in Q3 2023 for a net interest margin of 6.75%. Bad news is that COF has $90 billion in commercial loans and mortgages on its book. If there is a future problem at COF, the commercial loan book is likely going to be the source. Commercial and multifamily charge-offs were up sharply in 2023. COF's loss rate on commercial real estate loans jumped into the 99th percentile of Peer Group 1 in Q3 2023 at 195bp. COF has historically managed its consumer loan book with great skill, but the bank has had problems when it wanders away from this area of core competency in terms of credit underwriting and risk management. We don't think that the $880 million in commercial loans targeted for disposal by COF will be the last. We are also concerned about the high loss rates reported by COF on commercial exposures at the end of 2023. 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, 2024 | In this issue of The Institutional Risk Analyst , we feature William Kennedy , co-founder and CEO of RiskBridge Advisors , an Outsourced Chief Investment Officer (OCIO) firm serving endowments & foundations, insurers, family offices, and their principals. Bill has decades of experience in the financial industry and was most recently CIO of Fieldpoint Private Bank . We spoke with Bill at The Lotos Club of New York earlier this month. William Kennedy   The IRA: Bill, you have been heading RiskBridge Advisors since 2020 and have guided your clients through some difficult times. Tell us about the business and where you are putting client assets as 2024 begins.   Kennedy: We launched RiskBridge with a vision to “serve those who serve others.” After three decades at large firms with conflicted agendas, my calling seemed to be to create a boutique investment advisory firm dedicated to serving others by helping them grow their businesses, find more cures, award more scholarships, and offer more community services. The RiskBridge team believes this is a good reason to open the doors each day.   The IRA: Those are good reasons. What was it like starting a business during COVID?   Kennedy: Starting RiskBridge in July 2020 felt crazy. Looking back, however, I think our timing might have been pretty lucky. The risk landscape and investment problems stemming from the pandemic created a strong demand from insurers, foundations, and individuals to think about investment risk differently.  Today, we advise on $85 billion in client assets, including $600 million of discretionary assets under management across about 50 clients. We offer institutional advisory services, outsourced chief investment officer solutions, and private wealth management.   The IRA: There are several trillion dollars in assets being supported by outsourced CIO services such as yours, according to Institutional Investor . Several large players, including Vanguard and Goldman Sachs (GS) , have created OCIO efforts. In fact, Mercer just acquired the OCIO business from Vanguard. Walk us through the value proposition for funds vs a full-time CIO.   Kennedy: Whether it’s an institution or a family office, the decision to hire and retain a dedicated CIO is a question of mission, scale, and complexity. Does an in-house CIO enable the mission of the organization or the family? Are the assets under management large enough to cover the overhead costs associated with an in-house CIO? Is the organization or family structure complex enough to justify hiring a dedicated internal CIO, who often wears multiple hats? These are just a few considerations. It may make more sense for organizations to hire a discretionary OCIO if an investment committee or family wants to streamline decision-making, implementation, and governance without giving up control.    The IRA: Volatility remains perhaps the biggest risk factor today, mostly because of a lack of visibility on unexpected risks. The failure last year of three large banks with half a trillion dollars in assets surprised many. We told our readers to beware duration risk ℅ QE in 2017. You and many of our colleagues got the joke. Yet an awful lot of people don’t seem to be able to follow the Fed, interest rates and jobs.   Kennedy: The cornerstone of our investment philosophy is that the quantity and types of risk allowed in a portfolio are the primary determinants of future returns. We use volatility targeting to construct investment portfolios. Then, we manage the portfolio within a disciplined risk band no matter what the market throws our way.   The IRA: So you assume the volatility and prepare accordingly?   Kennedy: Yes. This approach was useful when equity and credit volatility spiked in 2022 and again in 2023 when rate volatility spiked following the collapse of Silicon Valley Bank. RiskBridge’s process blunted the pain of the 2022 bear market and spent much of the 2023 bull market playing catch up. Looking ahead to 2024, we are reminded that a hypothetical $1,000,000 portfolio invested in 60% stocks and 40% bonds returned $988,888 on December 31, 2023. In a way, 2023’s bull market was the mirror image of 2022’s bear market. Maybe 2024 will be more normal.     The IRA: So where are you putting money now?   Kennedy: From a strategic perspective, we are reminding clients that we remain in the shadows of a worldwide pandemic that shut down swaths of the global economy. On the one hand, market resiliency is remarkable. On the other hand, we don’t think there has been anything “normal” about the policy or market landscape since 2020.  As we move one year away from the surreal nature of the pandemic, we hope 2024 will be a bit more recognizable.    The IRA: Meaning more normal? How do you assess and measure risk?   Kennedy: From a tactical perspective, our risk models are constructive. Liquidity and financial conditions in the U.S. are positive, although Chinese liquidity looks problematic. Our business cycle indicators indicate a downturn characterized by slowing growth and stable inflation. One area flashing amber is cross-asset correlations. We see odd behavior between stocks, credit, rates, and commodities, which could imply market turbulence ahead.    The IRA: The big change since 2008 and COVID is a breakdown in correlations that heretofore seemed quite solid. How do you feel about soft landings?   Kennedy: We believe we are in a downturn regime characterized by slowing economic activity and stable inflation. We think 2024 U.S. real GDP could be 1.8% and inflation 3.0%. If our outlook turns out to be correct, 4.8% nominal growth should continue to support free cash flow generation and generally support risk assets. The question is how much of that is already discounted in current stock prices and credit spreads.   The IRA: Look at JPMorgan (JPM) . Jaime Dimon broke a record on annual earnings because of Q1 2023, but the numbers in Q4 2023 were down 40% sequentially, fell to single digits in fact. Bank earnings have been down for five quarters in a row and the Q4 earnings suggest that Q1 may also be light. Typically, Q1 is the best quarter of the year for many banks and other financials. How are you approaching allocation across the various market segments?   Kennedy: In our Investment Outlook for 2024, which is available at www.riskbridgeadvisors.com , we highlighted four “Ds” as our investment themes for 2024: Debt, Deglobalization, Demographics, and Downturn. We think the deglobalization theme will be characterized by shifting global interdependencies. We believe this will be a slow-burning theme, creating opportunities for emerging markets ex-China (debt and equities), infrastructure, aerospace and defense, and the global material sector.   The IRA: Sounds like you are not expecting a hard landing. What themes do you think are helpful in 2024?   Kennedy: The aging boomer generation theme is well known. We are playing it through funds with biotech, life sciences, and financials exposure. One theme we believe to be underappreciated by the market is the U.S. demographic profile, which distinguishes itself amongst the G-10. This may support consumption and household formation for several years ahead. In equities, we are allocating to active managers (long-only and hedged), where we have identified deftness at playing the dispersion between winners and losers. We prefer dividend-payers, high quality, and a SMID-bias.    The IRA: How do you feel about interest rates? We have been watching the long-end of the Treasury yield curve back up since the New Year.   Kennedy: We are tactically underweight fixed income duration with exposures in floating rate notes, high yield, and cash equivalents. This is because we expect higher yields related to the debt issuance theme. In addition to our shorter duration strategies in fixed income, we also like hedged credit, which we think should benefit from dispersion and the importance of credit selection. For companies with business models and capital structures that flourished in a low rate environment, higher rates and an uncertain economic picture are challenging their sustainability.   The IRA: Don’t hold your breath waiting for MBS spreads to contract. The signals remain very confused. We saw a lot of names in consumer facing businesses run in financials in Q4 2023, including Ally Financial (ALLY)  and CapitalOne (COF) , all on the assumption of a “soft landing” aka lower rates. But if the FOMC restarts QE and reinvestment of portfolio runoff this year, then why are we cutting the fed funds rate?   Kennedy: We expect Fed Funds to end the year around 4.50%-4.75%. This implies higher yields for the 2-year and 10-year parts of the curve. Our view for higher yields is supported by an assumed $1.3 trillion in new Treasury issuance, which may cause some market indigestion. For this reason, we are tactically underweight fixed income duration with exposures in floating rate notes, high yield, and cash equivalents.   The IRA: We disagree on LT interest rates. Treasury Secretary Janet Yellen has a spending problem. We are one failed Treasury auction away from a US financial crisis. Of course, if you successfully autorotate a stalled Blackhawk helicopter that might be considered a soft landing. Speaking of volatility, we worry that consumer credit loss rates may pop during 2024, making the people who loaded up on consumer facing exposures unhappy. Yet the markets are churning out some impressive new issue numbers in the debt markets, both in the US and Europe. Are investors worried about missing the boat on higher yields?   Kennedy: Part of the market enthusiasm is due to falling interest rates, and part is simply the huge amount of dry powder sitting in funds and corporate hands. This is not your father’s high yield market. In our view, quality is better, and there’s enough coupon to help mitigate anticipated spread widening. We like high yield and shorter durations. As mentioned, we also like emerging market debt on the assumption that emerging central banks will lead the rate cut cycle.    The IRA: What is your view on China? What is your favorite market in Asia?   Kennedy: We generally exclude China from our emerging market exposures. To use an aviation reference, we have either VFR (visual flight rules) or IFR (instrument flight rules) conditions in most markets and asset classes. When it comes to China, we feel like we are flying blind. It’s hard to manage it if you can’t measure it.     The IRA: None of the economic “data” from China deserves consideration. Paramount leader Xi Jinping will run the economy into the ground before giving up power. He is doing precisely that right now.  There does not seem to be a Deng Xiaoping anywhere in sight.   Kennedy: Our active managers in Asia prefer Japan, India, and China. At 16.0x forward earnings, Japan and Australia look relatively attractive relative to their regional peers. The same may be said for Taiwan at 11.8x forward earnings.    The IRA: How do you see financials?  We started to accumulate some Wells Fargo (WFC) because they are the most improved among the top-five names and still at a reasonable price, but you may well be able to buy many banks cheaper as the year progresses. If we start to see more significant bank failures in 2024, how will this impact your investment outlook?   Kennedy: Similar to 2023, our liquidity cycle and market models should capture future bank failures. These, in turn, impact our risk tolerance and portfolio optimization tools. We are not very good at the prediction game. When the facts change, our outlook will follow.    The IRA: Given your focus on family offices, endowments, and foundations, what is your most important message to these clients? How are their needs different from the large institutional shops?   Bill: With our institutional and individual clients, we continue to focus on three key messages. First, meeting one’s fiduciary duty is increasingly hard, given the complexities of a post-pandemic world. Fulfilling this duty requires expertise and experience. Inflation’s impact on insurers, nonprofits, and legacy assets is complex. Inflation is the ultimate enterprise risk factor. Higher interest rates and inflation reduce purchasing power. Finally, we think the best way to compound wealth over an investment cycle is to participate when times are good but protect during market drawdowns. By focusing on the quantity and types of risks in a portfolio, we think we can help our clients prepare, protect, and perform.   The IRA: Thanks for your time, Bill. Have a great year.   The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy, or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.