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April 29, 2026 | 银 | The growing awareness about the massive “oil shock” that is inundating the global economy echoes loudly in our April 1st discussion (“John Dizard: Watch for Rationing of Oil, Gas & By-Products”). The remarkable part is that many observers in America still do not fully appreciate the scale of the inflationary tsunami that is gradually but relentlessly impacting the US economy. We saw it this week in rising diesel prices as we migrated down I-81 and then I-75, through the mystical fog of southern Georgia. Everybody will figure out affordability by the second week in November. Road Dogs/Knoxville TN /April 2026 Given the US blockade of the Strait of Hormuz and the elimination of Iranian exports of energy and by-products from the global economy, the supply situation for primary and secondary products is going to get even worse. The United Arab Emirates, by no coincidence, just announced that it was leaving the OPEC oil cartel, abandoning any price/volume discipline in oil as the market devolves into a free-for-all. One word sums up the biggest threat to the global economy: Sulfur. John Dizard spoke about the importance of sulfuric acid for many industrial products in our interview. He noted: "Most, around half, of traded sulfur in the world goes through the Strait of Hormuz. It's a byproduct of refining very sulfurous, or “sour”, crude. They take out the sulfur and export it. Sulfur wasn't being considered as a pain point in the past. Now it is. You need sulfuric acid in order to produce copper, steel, nickel and many other products. Apart from fertilizer, you really need it to keep an industrial society running. The White House didn't take that into account." China is the world's leading producer of sulfur (19 million metric tons in 2025), but already faced tight supply and rising prices in January. China has since implemented a ban on sulfuric acid exports starting in May 2026. Along with a 37.67% year-over-year drop in Q1 2026 imports, China is restricting global supply of sulfuric acid dramatically. What does this mean for stocks and precious metals?

April 27, 2026 | After an interminable period of intransigence, the Trump Administration last week abruptly ended the Justice Department investigation of Fed Chairman Jerome Powell's massive HQ renovation for the Federal Reserve Board. President Trump was right to be critical of Powell's enormous boondoggle on Constitution Avenue, but he should have called for a public inquiry by the Senate. Had Trump done that, Chairman Powell would already be gone. This change in posture by President Trump opens the way for Kevin Warsh to be confirmed by the Senate perhaps by May 15th. More important, it provides a way for Powell to retire, which opens a second governor seat on the Board. Big question: Even with the investigation by the DOJ ended, does the Trump White House have the votes to get Warsh confirmed? Once he is confirmed, we expect Warsh to be a relative hawk on money policy and also on the management of the Board's powerful staff. The advent of Warsh means big changes for how the Fed is organized, how policy is guided and how the staff spends its time. We reminded Hedgeye CEO Keith McCullough last week that the Federal Reserve Board is the heart of the progressive socialist project in Washington. In our October 2025 interview with Alex Pollock, he described the Chairman's power: "The Fed became a centralized body dominated first by the Board of Governors, but really by the chairman. So you got two centralizations going on here in the Fed after 1935. One is a centralization of power out of the rest of the country into Washington, into the Board. And the second is the centralization of power in the office of the Chairman of the Federal Reserve Board, who is the chief executive of that agency and for whom all the staff works. All the hundreds of PhD economists and everybody else all work for the Chairman. And so you get this much increased power of the Chairman hitting a peak, I will say, in the days when Greenspan became “The Maestro.” What's the Deal with Wells Fargo?

In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. And please do watch “The Wrap with Chris Whalen” on The Julia LaRoche Show every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  April 24, 2026 | The situation in the Middle East is largely unchanged, with the US maintaining a unilateral ceasefire “indefinitely” and Iran still attempting to interdict merchant vessels transiting the Strait of Hormuz. The inflationary pressures from the Israeli-US war against Iran continue to build with each day that the standoff continues.  Nineteen of the world’s 20 largest airlines, for example, have cut scheduled flights for May 2026, driven by surging fuel costs. “Navy Secretary Is Out, Pentagon Says,” was the headline in The New York Times Wednesday. John Phelan left the Pentagon and the Trump administration after months of infighting with senior Pentagon leaders, says the Times. One can only wonder about the acrimony between the Trump Administration and the traditional US Navy staff. Intervening in Venezuela was one thing, but the war with Iran is the precursor to endless naval conflict in the Persian Gulf.  One casualty of the war with Iran is bankrupt Spirit Airlines. A mediocre operation in a brutal industry, Spirit has not reported a profit since 2019, but apparently will  receive a $500 million bailout from the US Treasury. President Trump previewed the rescue Tuesday in an interview on CNBC, saying that “maybe the federal government should help” the company. He also stated that he would “love somebody to buy Spirit.” Senator Ted Cruz (R-TX), chairman of the Senate Commerce Committee, labeled it an "absolutely TERRIBLE idea" on X and argued the government "doesn't know a damn thing about running a failed budget airline." Pulte Boosts Vantage Score In a Soviet style building on 7th Street SW in Washington, D.C., HUD Secretary Scott Turner and FHFA Director William J. Pulte announced that the Federal Housing Administration and Fannie Mae and Freddie Mac are implementing their first live pilot for new credit score models for mortgages in decades. This is all great, but fact is that Vantage 4.0 is mostly used in larger jumbo, non-agency loans, which is not about helping affordability is it?  Secretary Turner announced that the FHA will permit the use of VantageScore 4.0 and FICO 10T as eligible credit scoring models for mortgage underwriting. “This historic move is intended to lower costs for the American people after years of rising prices under the status quo credit score system,” says the FHA press release. The only trouble is that virtually no one in the industry uses Vantage Score and none of the major vendors including InterContinental Exchange's (ICE) Encompass platform support it.  As our continuous poll among executives in the mortgage industry indicates, few lenders currently use either of the new scores, which include utility and rent payments as part of the calculation for credit utilization. If lenders use Vantage Score at all it is mostly in third party acquisition channels like correspondent / co-issue.  Same with the FICO 10T hybrid, which likewise has no significant use data.  The more severe FICO 5 has 35 years of data through several recessions, which is why it is and will remain the de facto baseline for default probabilities. No amount of lobbying spend by Experian et al or political puffery can eliminate the FICO 5 advantage in terms of historical loss data, with private obligors, banks and insurers, to name the largest subsets. But the banks and rating agencies that matter to non-agency loans and securitizations are using Vantage for non-QM loans, a development we find fascinating but hardly surprising. Maybe a more flexible credit score model is really optimal for high-end, high-income but atypical loans. But FICO 5 remains the incumbent model for buying loans in the conventional and government market. Kevin Warsh Hearing Circus On Capitol Hill, Kevin Warsh appeared before the Senate Banking Committee this week to consider his nomination as Fed Chairman. Warsh reiterated that Fed “monetary policy independence is essential.” But he got some rough questions from Democrats, especially ranking member Elizabeth Warren (D-MA) She asked whether he will be a “sock puppet” manipulated by President Trump. Warren called Warsh “uniquely ill-suited for the job as Fed chair,” but frankly Warren is uniquely unqualified to be a member of the Senate.  US bank earnings continued this week, with banks reporting record repurchases of common stock. Financials specialist Keefe, Bruyette & Woods reports that G-SIFI and super-regional banks saw heavy primary issuance last week in the debt markets, with Bank of America (BAC), BNY Mellon (BK), Goldman Sachs (GS), JPMorgan, M&T Bank (MTB), and Morgan Stanley (MS) issuing nearly $40bn across 19 debt tranches, including two subordinated deals. Strong investor demand resulted in solid new issue performance metrics, headlined by spreads that were roughly in line with pre-war levels. As the week draws to an end, stocks are back near record highs and a familiar force seems to be in play: automated retirement contributions, otherwise known as passive investing, notes Edward Harrison at Bloomberg. “These steady inflows can act as an accelerant in rallies, stabilizing markets after selloffs — but they can also amplify declines when momentum turns negative.” In the past five trading days, the S&P 500 is basically unchanged, gold is down about 2% and silver futures are down 5%, reflecting the market dynamics in Chicago and London more than the physical markets in Asia. Gold prices are reportedly dropping due to a combination of dollar strength, surging energy-led inflation fears, and a market shift in expectations for interest rates to remain higher.  Recent Posts Private Credit and Large Banks https://www.theinstitutionalriskanalyst.com/post/theira834 D. Ricardo on Private Credit & the Real Risk to Financial Markets https://www.theinstitutionalriskanalyst.com/post/theira836 The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

April 20, 2026  | First some important news. A working group at Financial Accounting Standards Board (FASB) finally has voted to explicitly include loan recapture in the valuation of mortgage servicing assets (MSRs). We suspect that the change, if adopted, will be used to support current MSR valuations instead of boosting fair values higher, but we appreciate the thoughts of our readers in this regard. The value of bank-owned MSRs over the past 30 years averages about 1.5% of the unpaid principal balance of the underlying loans, as shown in the chart below. Source: FDIC/WGA LLC As we pondered the Sunday media, the Strait of Hormuz remains closed to maritime traffic and the Trump Administration has decided to start boarding Iranian flag ships following the attacks last week on two Indian vessels. Truth to tell, Trump’s savvy decision to blockade the Strait of Hormuz is actually going to bring Iran to its knees economically, as Brandon Smith  of Alt-Markets predicted in Zero Hedge  last week .   In the US, financial markets are doing their level best to ignore the Iran conflict, but the continued focus of attention is the slow collapse of the AI trade and its components in the world of private equity and credit. For those of us fortunate enough to ride the momentum trade up on Nvidia (NVDA)  for some impressive triple digit gains, the latest musings about this tech darling from Shanaka Anslem Perera  on Substack (“ The NVIDIA Chokehold ”) may cause people to toss their proverbial Cheerios.  Perera describes a situation where NVDA has a potentially lethal concentration in terms of customers in the AI domain and captive company funding for said customers. Like private credit, AI is an opaque world where the number of planned data centers is rapidly being dwarfed by projects being cancelled. This imbalance in terms of debt, anticipated vs likely revenue and the sources of finance reportedly has caused a number of former NVDA cheerleaders to flee for the exits. Has SoftBank CEO Masayoshi Son really left the Nvidia building? Perera writes: “SoftBank disclosed in November 2025 that it had sold its entire 32.1 million-share NVIDIA stake for approximately $5.83 billion as it reallocated capital toward OpenAI and related AI infrastructure bets. Peter Thiel’s Thiel Macro LLC separately exited its full 537,742-share NVIDIA position in the third quarter of 2025. NVIDIA insider sales aggregate in excess of three billion dollars across hundreds of transactions over the trailing window per Form 4 filings, with Chief Executive Officer Jensen Huang’s personal 10b5-1 plan liquidations above two billion dollars since mid-2024, with Chief Financial Officer Colette Kress and Executive Vice President Ajay Puri and Director Mark Stevens among the most active sellers, and with the single characteristic that unites every insider filing across the entire period: the complete absence of open-market purchases.” To add further spice for our readers regarding the outlook for the coming week, below we feature a fascinating comment on the risk known as private credit from a prominent New York banker who writes for us on occasion under the nom de plume of D. Ricardo . Long-time readers of The IRA may recall his series of comments from 2019 (" China is Weak "). On Private Credit By D. Ricardo I’ve been following your posts in The IRA on private credit. Wanted to chime in. I’d start by asking a question: Is there more debt about, in aggregate, because of the growth of private credit, or would debt levels be the same had regulators not encouraged banks to shy direct lending to middle-market, non-investment grade debt following the GFC of 2007-08 and private credit funds/direct lenders, business development companies stepped in?  I think the answer is a toss-up. And rather what we have seen is a shift in risk and a change in who is lending to whom, not an increase in how much risk is in the system, or how much is borrowed in aggregate. Second question then would seem to be: What drives the term, quantity and quality of debt, in aggregate?   And to this I think we could point a finger at central banks, ZIRP and a decade of Modern Monetary Theory (MMT).  Low yields forced natural buyers of yield and duration into “alternative asset classes” and riskier debt (inc. Cov-Lite, increases in allowable PIK, etc.).  Private debt companies and instruments simply provided convenient mechanisms to gain exposure.  In this case, cheap money has increased risk in the system.  Another question one could ask about private credit: Is debt issued in/by the private market riskier than debt issued by publicly regulated entities?  Here I think one can begin to raise legitimate questions about opacity of valuations and classifications of exposures. But having sat on innumerable loan and credit committees, I am not sure that which transpires on the regulated side of the credit market is any less variable, capricious or optimistic than that we see from the private side.  Yes, regulators and auditors through reviews can challenge risk assessments, but regulated institutions still have considerable latitude when assigning PDs, LGDs and expected recovery rates to credits.  Which leads to the question: Is this market structure of private debt (CLO, BDC, etc.) replacing public debt more risky than the alternative structure (i.e. having these middle-market non-IG loans directly and wholly on Bank balance sheets)?   Here again, private credit works to shift risk, not amplify it, as in the structural covenants, like tranching, subordination, collateral tests and interest coverage tests work to make senior debt holders better off (though to the detriment of junior creditors and equity holders); and, other structural covenants, like gating, prevents simultaneous systemic wholesale liquidations less likely, making the system more resilient than the alternative of a bank-only marketplace for credit.  What I think is underappreciated is the “normal credit cycle.”  We had brief credit pains in 2015-16 related to oil companies, some hard-hit sectors during Covid, and of course the GFC in 2007-08, but before that, what?  The 2001-03 recession following the Dotcom bust? Perhaps the last real normal cyclical credit event was the recession of 1991-93.   How many current lending executives remember recessions in the early 1990’s or before?  Fast forward to GFC - which was nearly 18 years ago - how many senior finance executives were in a position of real power then to have learned lessons, and are still employed today - few, unless they are in the C-Suite like Jamie Dimon at JPMorgan (JPM) , Colm Kelleher at UBS AG (UBS) or Ted Pick at Morgan Stanley (MS) .  Very few senior executives in the credit space are experienced at managing a normal, let alone large market downturn. To these points add the extraordinary levels of debt that exist today in the system, which limits central bank policy options. Add the hollowing-out of real value in companies by the private equity/private debt ‘extend and pretend’ discipline, which has extracted value from underlying assets at each turn, leaving less real value in the company, and making historical LGD estimates way off the mark from what we should expect from future recoveries in a bankruptcy event.  And then add the increase in market velocity over the last twenty years (think: meme stocks); and the fact so few have experienced a slowdown or recession, given central bank practices over recent years, and we are primed for a nasty awakening when a slowdown eventually comes, whether global macro event driven, or otherwise. “Private debt” gating retail investors is the whipping boy du jour , but not the canary in the coal mine, nor the real problem, nor the real risk. Over-investment and malinvestment in things like data centers or unprofitable business models that require cheap money and are based on hype and suspension of common sense, excessive government spending, inflation and currency debasement, populism and socialist rhetoric manifesting itself in real policy and tax decisions, these are the real risks. The public-private divide is merely a nuance. 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 25, 2018 | With the global punditry assembled in Davos this week, the topic of the dollar seems to have bubbled to the surface again. Down more that 10% from the December 2016 peak, the greenback has started to sag at just the time when Treasury deficits are climbing and the Fed is paring back its purchases of US government debt and agency mortgage bonds, as shown in Chart 1 below. With the 10-year Treasury back over 2.6% yield, gravity seems to have been restored to the global economy. The last peak of the trade weighted dollar was in mid-2002, after which the US currency slid steadily into the 2008 financial crisis. Did investors and government officials outside the US perceive the approaching contagion? You bet -- but especially in China, where the political leadership understands the process of “dollar recycling.” Simply stated, if China stops buying US Treasury debt or other dollar assets, the surging yuan strengthens even more. And even as President Trump starts a trade war with China, the yuan is already soaring against the dollar. Duh? Starting in 2008, the dollar climbed steadily even as interest rates and credit spreads remained suppressed. But from 2009 through 2011, the dollar actually gave back ground even as the Federal Reserve ramped up purchases of Treasury debt and mortgage securities via QE. By 2012, the flood of foreign capital pouring into US real estate and financial assets finally began to lift the dollar, which by 2014 began a sustained rise in value that finally peaked at the end of 2016, just after the election of Donald Trump. The peak in the dollar in December 2016 came after years when strong capital inflows helped to reflate the US equity and real estate markets, the latter both for commercial and residential properties. But as prices for US stocks and real estate reached absurd levels, foreign purchases began to decline. In particular, changes in US tax rules for foreign investors in real estate as well as political changes in nations such as China have caused the dollar to slump over the past year, as shown in Chart 2 below. Notice that the yuan/dollar exchange rate and the dollar/euro rate have both seen the value of the dollar deteriorate over the past year under the leadership of Donald Trump. Of course, some observers would blame the slump in the value of the dollar on President Trump, especially now that Treasury Secretary Steven Mnuchin is publicly lauding the benefits of a weaker dollar. In Davos, for example, Mnuchin said: “Obviously, a weaker dollar is good for us as it relates to trade and opportunities.” Secretary Mnuchin is said to think President Trump is an "idiot," but compared to what? In reality the factor which seems to govern the movement of the dollar is not the pronouncements of Mr. Mnuchin but rather mounting federal budget deficits. The US deficit fell to “only” $438 billion in 2015 and has been growing substantially ever since. With the just passed tax legislation thrown into the mix, US deficits are expected to surge to more than 5% of GDP annually. Chart 3 shows the US fiscal deficit vs the trade weighted dollar. It’s interesting to note that while President Trump and Secretary Mnuchin may think that they are driving the proverbial bus when it comes to the value of the dollar, in fact the deteriorating fiscal situation for the US seems to be the key determinant. Indeed, the passage of the tax legislation at the end of 2017 makes us somewhat more cautious about our bullish view of the 10-year Treasury, which now seems headed lower in price and higher in yield under the weight of expectations regarding Treasury debt issuance. But while we may be less bullish on the 10-year Treasury bond, the curve flattening trade is still a very real scenario because of the Treasury’s huge debt issuance calendar. The fact that the Federal Open Market Committee is slowly allowing its portfolio to run off is an important factor in the analysis. We continue to think that the Fed is being overly optimistic as to how quickly the late-vintage MBS in the System portfolio will prepay. Let’s review the questionable actions of the FOMC under Chairs Ben Bernanke and Janet Yellen from 2008 to 2014: QE1 (December 2008-March 2010) : The FOMC started with $600 billion in “sterilized” purchases of MBS (funded with sales of Treasury debt), then increased to a further $750 billion in outright purchases of MBS funded with excess bank reserves. QE2 (December 2010-June 2011) : Fed purchased another $600 billion in longer dated Treasury paper funded with bank reserves, extended duration of System portfolio. Operation Twist (2011) : The FOMC sold short term Treasury paper and bought longer dated Treasury maturities, significantly extending the duration of the System portfolio. QE3 (September 2012-December 2013) : FOMC committed to buy $40 billion per month in MBS and purchased an additional $45 billion in Treasury debt funded with excess bank reserves. Since then, increased interest rates and falling prepayments have extended duration of System portfolio. The FOMC under Chairs Bernanke and Yellen did everything possible wrong in managing the System portfolio. Now the Fed is illiquid, trapped in a long duration position in a rising rate environment because they violated the cardinal rule of central bankers: stay short duration. As we've noted previously, the FOMC dares not sell any of the System portfolio out of fear of generating losses. So the Mnuchin Treasury is planning to fund its spending deficits with short-term debt issuance, but the runoff from the Fed’s MBS portfolio may, in fact, be so slow that the central bank will not be able to purchase much of the Treasury’s new debt. As the FOMC tries to rebalance the System portfolio back to 100% US government debt, it may take years longer than currently estimated by the Fed staff for the System MBS positions to actually runoff. This means that the full weight of Treasury issuance of short-term debt will hit the markets with no support from the Fed and at a time when the dollar is falling. So the good news is that the FOMC has ended its long, strange period of social engineering known as QE. The bad news is that the Republicans in Washington have just cut taxes and the resulting red ink could see the US dollar test post-WWII lows. Because of fears regarding future deficits, the 10-year Treasury bond may not rally appreciably. Yet there remains a dearth of long-dated Treasury paper available in the markets, in part due to purchases by the FOMC. The surprise for newly installed Fed Chairman Jerome Powell is that the short-end of the yield curve could surge above the Fed’s target for short-term interest rates once Treasury begins to seriously increase issuance to an expected deficit of 5% of GDP annually. By 2022, the annual US deficit could be a trillion dollars. And even with significantly higher short-term interest rates, the dollar may continue to fall under the weight of rising fiscal deficits and the falling credibility of the US government. Doug Bandow stated the situation nicely in The American Conservative last week: “The United States is effectively bankrupt, but that doesn’t matter to the GOP. Once evangelists of fiscal responsibility and scourges of deficit spending, Republicans today glory in spilling red ink. The national debt is now $20.6 trillion, greater than the annual GDP of about $19.5 trillion. Alas, with Republicans at the helm, deficits are set to continue racing upwards, apparently without end.” So two questions: First, will the surge in US fiscal deficits cause short-term interest rates to rise and the dollar to fall faster than currently expected? Second, what happens to the overheated prices for stocks and US real estate in such a scenario? Further reading: No good reason for banks to offer more government-backed mortgages American Banker January 23, 2018 https://www.americanbanker.com/opinion/no-good-reason-for-banks-to-offer-more-government-backed-mortgages 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.

Tyler Durden, "Fight Club" (1999) January 7, 2018 | Last week our comrade at Zero Hedge astutely noted that, in the October 2012 FOMC minutes , Fed governor and soon to be Chairman Jerome Powell opined that the Fed has a “short” position in volatility. Powell said: “[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.” Of course, none of the economistas who supposedly follow the Fed for a living actually noticed Governor Powell's honest comments about how unwinding a short position in volatility might impact the markets. As we noted at the end of last year (“ Banks and the Fed’s Duration Trap ”), the Fed’s open market purchases of securities or “QE” has taken trillions of dollars in bonds out of the market, effectively reducing the amount of securities or duration available to private investors. The Fed’s $4 trillion or so in Treasury securities and mortgage backed securities (MBS) is not hedged, thus the Fed is long duration and has capped volatility in the markets as a result. Securities trading volumes by banks are also lower as a consequence of QE, hurting bank earnings. Most large banks have guided down trading revenue for Q4 ’17. But when Powell said that the Fed would “sell” $20 billion per month, he actually misspoke. The Fed is not going to actually sell any securities. And is his comment about the Fed having a “short volatility” position correct? We think not. Mark Dow on Twitter noted: "Being long MBS you are implicitly short treasury volatility. This is what Powell meant. The tinfoil hat charlatans left it ambiguous so that their readers would infer all kinds of nefarious direct manipulation of the VIX." Volatility is commonly viewed as a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or a market index such as the S&P 500. But like measuring "liquidity," trying to quantify forward price movements of a security based upon past data is a fool's errand. Students of Dow theory know that the past tells you nothing about the future. Yet since the Fed has suppressed interest rates and credit spreads through purchases of Treasury debt and MBS, is the central bank really “short” volatility? No. The Fed is certainly long duration, which is why the Federal Open Market Committee will not actually be selling any securities from the portfolio. Instead, as we discussed with Bob Eisenbeis of Cumberland Advisors in December , the FOMC intends to merely end its reinvestment of cash when securities are redeemed. That’s it, no outright bond sales. So is the Fed short volatility? No, but that is the joke on all of us. Thanks to the Fed’s manipulation of the credit markets, we are all short-volatility. The mostly commonly discussed measure of volatility is the VIX contract traded on the Chicago Board Options Exchange (CBOE). Unlike measures of actual market volatility, the VIX is a popularity contest; the measure of expected future volatility which is generally calculated as 100 times the square root of the expected 30-day variance or value at risk (VaR) of the S&P 500’s rate of return. By holding down bond yields and, indirectly, compressing credit spreads, the FOMC has reduced actual volatility and, more important, also gradually reduced the market’s expectations for future movements in the prices of securities. Chart 1 below shows the VIX over the past five years along with the spread between the 10-year Treasury bond less the 2-year Treasury note. Observe that as the Fed prepares to end bond purchases, the VIX has reached all-time lows. Expectations, after all, are a lagging indicator. Former Fed Chairman Ben Bernanke has argued that the FOMC should not begin to shrink its balance sheet until short-term interest rates are well away from their effective “lower bound,” one the magical terms employed by economists to convey the impression to the public that they know what they are doing when it comes to financial markets. Yet as we and a growing number of investors seems to appreciate, the Fed cannot force up long term rates so long as it is sitting on $4 trillion worth of securities that it does not hedge. More, given that the Treasury intends to concentrate future debt issuance on short-term maturities, downward pressure on long-term bond yields is likely to intensify, as Eisenbeis observes in his most recent comment on the FOMC minutes . What the FOMC has done to the markets via QE is essentially reduce potential volatility by holding securities and not hedging these exposures. The European Central Bank and Bank of Japan (and all global; central banks) do the same by purchasing securities and not hedging against price movements. In normal times (whatever that is), central bank purchases were so small relative to the markets that actual volatility served as a good indicator of future risk. But today, in the induced coma known as QE, measures of volatility are suppressed along with bond yields. Thus ZH asks the obvious question: How does Powell feel about volatility today? Dan writes: “Maybe someone can ask Powell at the next FOMC press conference just where that stands today, and whether he is still as skeptical the Fed will succeed in unwinding its balance sheet, as he was in October 2012.” ZH also quotes Powell on the risks of ending QE: “My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.” Yes, markets can be dynamic when they are allowed to operate. The whole point of QE has been to prevent the normal operation of the financial markets. As we all know, the social engineers on the staff of the Federal Reserve Board in Washington have a huge God complex . The Fed’s gnomes think they can manipulate markets with no downside risks. But they also fear taking losses on the Fed’s portfolio for fear that it will awaken critics of the central bank in Congress. So while the Fed is certainly long duration, we dear friends are short volatility thanks to QE. Or as Grant’s Interest Rate Observer said so well: “The Fed is selling, you are buying.” As the Fed ends its reinvestment of cash when bonds redeem, volatility will return to the markets, spreads will widen and trading by private investors will rebound. A lot of market participants will get their eyeballs ripped out when the weight of option-adjusted duration shifts back to private investors. Can't wait. "What everyone is missing is that as the US Treasury and MBS holdings roll off, the duration of their overall holdings is hardly affected," notes industry veteran Alan Boyce, referring to the possible extension of the MBS. "It is the higher coupon MBS plus the 15 year paper that are going to prepay. The new Fannie Mae 3s are not going anywhere. On the US Treasury side, ZERO of the long bonds are going away, they will just slowly March down the yield curve over the next 30 years. Amazing but true, the FOMC's taper could result in longer aggregate effective duration of System holdings even though the footings shrink." The return of market function, however, will spell bad news for the Fed’s MBS portfolio, which will decline in price faster than the market thanks to the convexity of mortgage securities. But as Boyce notes, the portfolio will also extend in duration as prepayments slow. This is just one reason why we don’t expect Chairman Powell to have a lot to say about volatility in future utterances. Fed Chair Janet Yellen and the majority of the FOMC have created a trap for themselves and Powell get’s to clean up the mess. The FOMC cannot sell securities without creating losses for the System Open Market Account, thus triggering criticism from the Republican majority in Congress. But they cannot hike short-term interest rates three more times in 2018 as currently planned without inverting the Treasury yield curve and provoking fears of a recession. In order to manage the normalization of interest rates, the Fed ought to be selling the bonds and MBS, TBAs and dollar swaps to force long-term yields higher and thereby maintain a relatively normal curve. Hell, the Fed could even buy some mortgage servicing rights or MSRs as a hedge against its MBS. But that would require imagination and courage. A flat curve will be bad for financials, which are already facing an earnings bloodbath in Q4 ’17 thanks to reduction in corporate tax rates (and a commensurate mark-down in the value of tax loss carry forwards). Lower trading volumes will likely also be a negative for bank earnings this quarter. And lending volumes in just about every bank asset class are also soft, begging the question as to when big bank equity valuations will reset. More important for Chairman Powell, a flat yield curve will demonstrate to the markets and Congress that the majority on the FOMC has not the slightest idea how their policy moves impact the real world of money and credit. Powell certainly seems to get the joke. His first challenge as Fed Chairman may be navigating the dangerous political mess created by Chairman Bernanke and Chair Yellen, who actually seem to think that the US bond market can endure several years of an inverted yield curve as we wait for the Fed’s portfolio to run off before the central bank completes the normalization of policy. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

In this issue of The Institutional Risk Analyst, a long-time reader and occasional source emerges from the shadows of corporate silence during a garden leave to opine on the West’s view of China. “ D. Ricardo ” is a corporate finance and risk officer who has decades of experience in New York, China and Korea. He may state the obvious for long-time students of Asia, but for many in the financial markets these views are a revelation. Could it be that narratives in the mainstream media about China are not entirely accurate? The IRA: What is one of the larger misconceptions people have of China? Ricardo: To start, contrary to common views, China is inherently weak. This doesn’t mean that China is not dangerous or aggressive, but they are not strong. Points: China is resource poor - it cannot feed its large population with its modest arable land, and must rely on importation of food-stuffs. China is energy poor – apart from poor quality high-sulfur coal, it lacks hydrocarbon deposits and radioactive fuel for reactors and must import to meet its growing energy needs. China suffers from horrible demographics – exacerbated by 40 years of ‘one child policy’. China is disliked by its neighbors – having fought armed conflicts with every one of its neighbors in the past 120 years – including skirmishes with Communist Vietnam, and the USSR. China has internal instability with minority populations in their western provinces, and among the young in the cities. China boasts fratricidal internal politics – as showcased via the Bo Xi Lai events. China is poor at basic research and the generation of new, cutting-edge intellectual property. China’s industrial policy is to steal and copy, not create. China is not an open, modern, 21st century pluralistic society that attracts talent from around the world – rather they remain closed to outsiders in almost every organizations senior ranks. China’s senior leadership knows this. Weakness drives their political decisions. And it’s critical for understanding China’s actions. The IRA: So what explains what we see and read in the news about China as a rival and economic and military threat to the United States? Ricardo: I suspect Xi Jin Ping and the Chinese Communist Party (CCP) elite are following the centuries-old tactical advice of Sun Tzu’s Art of War: “Appear weak when you are strong, and strong when you are weak.” When we look at China’s actions through this lens, the One Belt Road initiative, recent naval build-ups in the contested Spratly Islands, ‘new alliances’ granting the Chinese navy access in far flung ports in India and Africa do not suggest a strong China projecting power, but rather a weak China that is falsely projecting strength, where it cost effectively can, to mask internal weakness. The IRA: Why would China want to appear strong at all? Ricardo: This is the second key point, namely, that China’s visible (first-order) external foreign policy actions are orchestrated to address a hidden and more important (second-order) internal agenda, namely maintaining internal social stability in the face of mounting political and economic pressures. The bluster reported by western media is purposely masking the weaknesses that China does not want outsiders to see. The IRA: Policy makers do not seem to speak of a ‘China that is weak’? Ricardo: I am certain Sinologists inside the beltway are aware of China’s ‘inherently weak’ position, but I doubt few domestic Western interests, economic, political or military, etc., are served by espousing such at the present time – no, a strong China that we must actively counterbalance, is probably the preferred narrative. And again, this is not saying that China is not a rival in certain spheres, like control over advance technologies, but we need to clearly understand our opponent if we are to properly plan and respond to their actions. The IRA: So what happens next, in Hong Kong? With China’s currency? In the trade war with the Trump administration? Ricardo: In simplest terms, China will do whatever is in the immediate best interest of maintaining internal stability for the majority of its population (and by default political power for its elites in the CCP). Or, in other, more familiar words to finance professionals, similar European Central Bank Chairman Mario Draghi, China will do: ”whatever it takes.” China leaders do not want to lose the Mandate of Heaven, nor do they want to see any return of chaos. As to those specific issues – Hong Kong, renminbi and trade – each probably deserves it’s own discussion. The IRA: To be continued. Thanks Ricardo.

New York | In this issue of The Institutional Risk Analyst, we continue our discussion with a long-time reader and a corporate finance and risk officer who has decades of experience in New York, China and Korea. He goes by the Nom de Plume of D. Ricardo The IRA: When we last spoke you were explaining how China is ‘weaker’ than many in the West perceive, and that weakness in turn influences China’s actions. How does this play into what we are witnessing in the current trade war? Ricardo: China’s economy was facing challenges and had been slowing before the trade war with the US erupted, but the trade war certainly does not help. The GDP growth rate has been declining for years, but is now touching 27-year lows. China is structurally over-invested in manufacturing and real estate development capacity. Over-investment and unproductive investment leads to low and even negative productivity growth. And these ‘investments’, when uneconomically viable, lead to bad debts, which by many estimates have been increasing, separate and apart from the recent trade war impacts. China’s overall official debt levels continue to worsen. Unofficial estimates from International Institute of Finance and others place China’s debt at more than 300% of GDP. Truth is, given the government’s heavy involvement State Owned Industries and Town Village Enterprises, along with the government simultaneously owning banks, pension funds, and common corporations, and one branch of government lending to another, no one really knows China’s debt level. Worse yet, from a risk perspective, the cross-lending concentrates risk, rather than dispersing it. If the trade war was not happening, I suspect more discussions in financial circles would be focused on China’s debt problems. The IRA: The figures you cite seem to support the “China is weak narrative.” We've been fascinated by the absurd saga of heavily levered conglomerate HNA, which seemed to place unacceptable burdens on China's payments system. What action can Xi Jinping and the CCP do then in its spat with the US? Ricardo: The US just slapped billions of dollars on Chinese goods, and China retaliated with more tariffs on US goods. The impact is as would be expected, with the trade war hurting industries on both sides. But for Xi Jinping and the CCP to buckle under perceived foreign pressure would politically damaging in front of their domestic audience. Especially with the 70th anniversary of the founding of modern China approaching in October – China needs to project strength. One would hope and expect that quiet negotiations were going on behind the scenes and out of the limelight to reach an accord, but even here we face unique constraints. On the Chinese side, Xi Jinping has tightened ideological control in all aspects of life, demanding that the party line be strictly adhered to, which means information is getting filtered much more before it gets t o the top. This is partly why China misread Trump. And on the US side, Trump equally disdains expert opinions and old “China hands”, meaning back-door channels are fewer than at any other time in the last forty years. This leads to a higher risk of wrong decisions or mistakes. The IRA: That does not sound promising. Ricardo: What I am highlighting in possible “wrong decisions and mistakes” are tail risks. Most likely path involves cooler heads prevailing and a more modest path. The real question is when do US consumers, farmers and manufacturers feel the pinch and voice their concerns, such that political pressures start to sway Trump? The IRA: And Hong Kong? What are we to make of the events there? Certainly seems that the Trump trade measures have contributed to popular protests against Xi and the Chinese Communist Party. Ricardo: The protests in Hong Kong are not like the ones in Tienanmen thirty years ago, but there are important lessons to be learned. The protests in Tien-an-men thirty years ago posed an existential threat to Communist rule. There were visible fissures in the politburo leadership between Zhao Ziyang and Deng Xiao Peng; local military was not believed to be reliable towards putting down the movement, thus requiring 250,000 troops be brought in from the remote provinces; the protests were spreading to other cities; the protests were gaining legitimacy with ordinary workers outside of the student-led protests; the protests were happening in the heart of the nation’s capital - Beijing. The IRA: All true. But today social media is far more widespread, accelerating the potential for disruption inside China. Or is this a misreading of the situation? Ricardo: Fast forward to today. There are no visible fissures amongst CCP leadership; local HK forces are working to quell the disturbances; the protests are not spreading outside of HK; ordinary people in China view HK as already spoiled and coddled; and HK is far from Beijing. Basically, there is a very different situation between then and now. The (tail) risk again, however, is wrong decisions and miscalculations. Beijing will not hesitate to use force if it believes such is necessary, though they have and will try to avoid such as long as possible, with the hope that the protests dissipate similar to the Umbrella Movement of 2014. The IRA: So how does one trade this? Ricardo: In the short run, if I was running a quant shop I’d train my algos to watch internet traffic from HK. If that drops dramatically, i.e. China makes HK suddenly go dark, I’d brace for the worst. Unlikely, but a non-zero risk. Medium term, I’d look at how to play the renminbi. Given what we’ve discussed, would you want your life savings tied to their currency? The IRA: Thanks Ricardo

In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap with Chris Whalen” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  April 17, 2026  | Bank earnings this week have been mostly what we expected, with income up, reported credit loss rates continuing to trend lower and most banks refusing to provide additional disclosure on private credit exposures. As the private credit mess proceeds in the weeks and months ahead, a lot of the “debt” in these deals will turn into equity – which is what it should’ve been all along. Goldman Sachs (GS) increased its Q1 2026 provision for credit losses to $315 million, a nearly 10% rise year-over-year and its highest since 2020, driven by impairments in wholesale loans and corporate lending rather than consumer debt. But it also reflects the fact that unlike Morgan Stanley (MS) and the other large advisory firms, Goldman takes a lot of credit risk on its book.  Despite strong earnings, the rise in loss provisions at Goldman and other banks reflects concerns over commercial real estate and potential inflationary risks. Even as the problematic credit card relationship with Apple (AAPL) slowly fades from memory, Goldman may see higher credit losses from its subprime commercial portfolio. Ponder the fact that Goldman’s gross yield on its loan book is ~ 10%, 2x JPMorgan (JPM) and higher than Citigroup (C) .  Source: FFIEC Speaking of commercial real estate, Bill Moreland at BankRegData reports that the three largest lenders on non-owner occupied commercial real estate, Wells Fargo (WFC) , JPMorgan & Bank of America (BAC), all saw an increase in their delinquency rate.  “While a bit early to definitively state, it's possible we're starting to see a 'second wave' of delinquencies from prior loan modifications,” Moreland notes. Every asset size category of bank below $50 billion in assets saw an increase in commercial delinquency as well. As faithful readers of The Real Deal , we can testify that many legacy commercial properties continue to trade at a discount to the last valuation, Financial markets rallied as the prospects for a negotiated deal with Iran seemed to move forward. Stocks turned higher after Trump posted on Truth Social that Israel and Lebanon reached a 10-day ceasefire agreement, lifting hopes for a break in the Middle East conflict. As of April 16, the S&P 500 and Nasdaq Composite have reached new all-time highs, surpassing previous records despite ongoing geopolitical tensions in the Middle East. The S&P 500 is up 3% over the past five trading days, while silver futures are up 4% and gold was up just 0.5%.  The Invesco KBW Bank ETF (KBWB) bank ETF was basically unchanged over the past week, as investors seem to be uncertain about what to do with financials. That said, we anticipate a strong rally in the financial markets after the weakness of the past month. In Washington, federal Judge Richard J. Leon ruled that aboveground construction on President Trump’s White House ballroom must halt until lawmakers authorize the new wing. The White House construction project, which is considerably more modest than Fed Chairman Jerome Powell’s bombastic remodel of the central bank’s HQ on Constitution Avenue, is now on hold indefinitely.   Of course, the Fed never asked the Congress for permission to spend 10x the $500 million or so that President Trump wants to spend to create yet another ballroom in Washington. Meanwhile, President Trump has threatened to “fire” Powell if the Fed Chair does not depart at the end of his term in May. Sad to say, the President does not have the power to remove Fed chairman, a task that lies entirely with the national Congress. To that point, noted researcher Peter Wallison of American Enterprise Institute writes this week in Law & Liberty : "The Supreme Court seems to have adopted a theory of the constitution that will essentially eliminate the separation of powers as the central structure of the US Constitution, in favor of an idea called the unitary executive. The case was argued in December, in a case called Trump v. Slaughter , and a decision is expected in June or July. Given its historic significance, it has not received the attention it deserves in the media. " Recent Posts John Dizard: Watch for Rationing of Oil, Gas & By-Products https://www.theinstitutionalriskanalyst.com/post/theira828 Private Credit and Large Banks https://www.theinstitutionalriskanalyst.com/post/theira834 The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

April 16, 2026  | As we noted in our discussion with Julie Hyman on Yahoo Finance this week , the big question facing banks in Q1 2026 is disclosure about private credit. The big losers in private credit are not banks, but rather institutional and retail investors who were lured into these wholly unsuitable, structurally illiquid investments by the false statements made by the sponsors.  As Goldman Sachs (GS) President John Waldron said this week: Private credit vehicles lack "clarity that this is really not a liquid product." The banks, so far, are safe so long as the equity standing in front of them in loans to nondepository financial institutions (NDFIs) remain money good. Some of these exposures are in collateralized loan obligations (CLOs), which typically feature 30-40% equity in front of the investment grade tranches. Some banks have enhanced their disclosure of private credit exposures, others have not. Below we review bank earnings so far and give some thoughts on what to expect in Q2, both in private credit and other areas.

April 13, 2026  | Updated | The US-Israeli war with Iran has created a lot of negative headwinds for the global economy, but in the US one of the bigger casualties is the residential mortgage industry. After more than a decade of subsidy by the Federal Open Market Committee via massive open market purchases of securities or "QE," the world of mortgage lending is in an extended drought. But drought may be the new normal.  Whereas in the early part of the year, mortgage lenders were looking forward to lower interest rates and higher lending volumes, the start of hostilities in Iran suddenly reversed this narrative. As we discussed this week in our podcast with Julia LaRoche , the war with Iran will likely keep inflation and interest rates elevated for months or even years to come. Refinance volumes reached a three-year high in 2025. The first two months of 2026 were also strong for mortgage lenders, but March has become a disaster for many IMBs and also some large vendors, both in terms of per-loan business volumes and hedge market results. The uptick in mortgage rates and the related drop in volumes means that the mortgage sector is facing a renewed push for consolidation and even survival. Literally dozens of vendors and professional service providers, for example, who meet the operational needs of residential lenders that have recently combined with other firms will be forced out of the industry. Some of the larger issuers in our mortgage surveillance group had been maintaining excess capacity in the hope of eventually, eventually  generating some outsized profits to catch up. This tendency to tolerate operating losses is partly a legacy of the easy money made in the COVID years and partly wishful thinking. Mortgage people are the quintessential American dreamers.  United Wholesale Mortgage Corp | 2025 10-K Exhibit A in the loss leader category is United Wholesale Mortgage (UWMC) , which just lost an important all stock acquisition to retail channel leader CrossCountry Mortgage . Buying Two Harbors (TWO)  would have added valuable assets and income to UWMC. Now the prize is going for cash to privately held CrossCountry, one of the more aggressive platforms in the industry and a rare mortgage business focused on the retail channel. Among public mortgage firms, UWMC has a lot of company when it comes to tolerating operating losses to preserve capacity in the hope of future profits. The best performing and also most volatile stock in the sector is loanDepot (LDI) , which has been reporting net losses for years. The low dollar price of LDI makes it an easy vehicle for speculating on moves in the housing sector. The table below shows the summary statement of cash flows for LDI from the 2025 10-K (Pg F-76) . Note that in 2022, coming out of COVID, LDI actually generated significant positive operating cash flows. loanDepot | 2025 10-K The fact of higher mortgage rates in March of 2026 means that volumes are likely to be quite weak in Q2 2026. This sad circumstance is going to give even more advantage to the top three to five mortgage firms that have large servicing books and have also maintained operational discipline, and thus operating profits.  Consider some of the recent M&A deals in the mortgage sector over the past year: Last year hyper-efficient  Guild Mortgage  was acquired by privately held industry leader Bayview Asset Management  (“ Bayview Acquires Guild Mortgage ”). We have written positively about Guild over the years because of the firm's intense focus on maintaining profitability. Bayview's mortgage business is financed primarily by large institutional investors. Also last year, Mortgage Cadence  was acquired by PartnerOne from Accenture . Mortgage Cadence was a prominent, award-winning financial software company, but mortgage software has no more value today than in other tech sectors. Everybody in the mortgage industry has software, but when you buy a mortgage company, only assets with cash flow matter. As already noted, Two Harbors was acquired last month by CrossCountry Mortgage, taking an important transaction away from industry volume leader UWMC.  With the Two Harbors deal, CrossCountry gets a servicer and $200 billion in additional unpaid principal balance (UPB) of servicing assets. CrossCountry has been an aggressive buyer of MSRs, according to Inside Mortgage Finance .   Seneca Mortgage Servicing  was acquired from EJF Capital by Freedom Mortgage in March, adding further heft to Freedom’s already dominant market position in government mortgages and servicing. “This deal signals Freedom’s shift toward becoming an investor-facing platform as much as a retail lender,” notes Jennifer McGuinness-Lubbert , “a move echoing what you are seeing from Pennymac and Rocket Mortgage to stay competitive in a lower-volume market.” As we've noted for some time, successful IMBs must have asset management capabilities to survive. Direct Mortgage  was  acquired by non-QM issuer Lendermac . The target was reported to be experiencing significant operational, technological, and financial distress, including a proprietary software suite. In the mortgage industry, software is an expense, period.  The PHH unit of Onity Group (ONIT)  sold its Liberty HECM portfolio to Finance of America (FOA) , an issuer that specializes is reverse mortgages. As the table below from the company’s 10-K illustrates, FOA has had an operating cash deficit for the past two years, as shown in the table below from the firm's 2025 10-K. Finance of America | 2025 10-K As we noted earlier (“ The Wrap: The Flight from AI; PennyMac + Cenlar FSB = Strike Two ”), PennyMac Financial (PFSI)  announced the purchase of Cenlar FSB earlier this year. We see the PFSI deal for Cenlar as a value destroyer in an industry that is already bleeding red ink. Why? Because we expect most of the legacy Cenlar servicing business to move to another provider.   “The acquirer's financial services company will pay $172.5 million upfront for Cenlar's portfolio and operations with a $85 million contingent consideration,” according to Bonnie Sinnock  at National Mortgage News . “Cenlar will surrender its bank charter and Pennymac will operate without one,” she adds. The fact that PennyMac did not have the vision to retain the federal thrift charter of Cenlar is very significant. After low lending volumes, the biggest pain point for mortgage lenders today is the compliance onslaught of state regulators. As a result, the most frequent inquiry from IMBs to legal counsel in Washington over the past year is about the potential of getting a national bank charter to escape state regulation. With the lobotomization of the Consumer Finance Protection Bureau by the Trump Administration, state regulators have intensified their focus on independent mortgage banks (IMBs), creating a regulatory environment what one CEO describes as “a nightmare.” But sad to say, few IMBs have the financial resources or the vision to actually navigate the process of acquiring or merging with a bank.  We have advised several IMBs on establishing or acquiring a depository in recent years, but none have come to fruition. Establishing or merging with a bank is not a trivial undertaking. Yet in the low-volume environment that confronts all IMBs, public or private, one of the most significant areas of potential cost reduction is funding. Merging a mortgage business with significant servicing assets into a bank is a strategy for long-term survival.  While the new Basel III proposal promises to reduce the regulatory capital cost of holding 1-4 family mortgages and mortgage servicing rights (MSRs), we doubt whether the change will encourage banks to re-enter mortgage lending and servicing in a serious way. After all, there are less than three dozen tiny US banks that currently are above the 10% cap on MSRs as a percentage of CET1 capital. Source: FDIC/BankRegData Can an IMB migrate to a bank business model without killing the unique entrepreneurial environment that makes mortgage firms far more efficient than banks? Maybe. Countrywide certainly did, but that story did not end well. IMBs are orders of magnitude more productive than depositories, both as lenders and servicers. But the bigger question may be whether mortgage lenders can survive without being a bank in an interest rate environment where loan coupons and also LT funding costs remain elevated. Basel III, QE & IMBs We have always believed that the interest rate and business environment after the GFC in 2008 that encouraged the growth of IMBs to acquire two-thirds market share in residential lending and servicing was an anomaly created by the Federal Open Market Committee.  During QE, when the Fed was a buyer of most new issue government and conventional MBS, loan rates were suppressed and with it the cost of debt capital for IMBs. COVID took this example to an extreme, as shown in the chart from FRED at the top of this comment. But when QE ended in 2021, IMB profitability plunged. The chart below shows the pretax profitability of IMBs since 2002 (h/t Garrett McAuley). Source: Mortgage Bankers Association When the Fed first started QE in November of 2008, it forced the profitability of mortgage lenders up dramatically. But QE also lowered mortgage rates and thus the risk-adjusted returns on 1-4 family loans to levels that were unattractive for banks to retain loans in portfolio. IMBs make and sell loans and, hopefully, retain the servicing asset. That is why the proportion of 1-4s vs total bank assets has been falling for two decades. Source: FDIC/WGA LLC As Chicago Booth Review  noted last year : “The Federal Reserve's quantitative easing (QE) programs functioned as a massive, sustained effort to lower long-term interest rates, essentially acting as a "subsidy" that reduced borrowing costs for households, businesses, and the U.S. government. By purchasing over $5.6 trillion in Treasurys between 2008 and 2023, the Fed pushed bond prices higher and yields (interest rates) lower.” Today, however, with the end of QE and now an intractable war in the Middle East, long-term interest rates have risen. The $40 trillion in public debt owed by the United States is a larger concern. Indeed, there is a growing suspicion among bond investors that long-term interest rates may remain elevated even after peace is achieved with Iran. Higher long-term interest rates are bad for mortgages, private credit and corporate issuers more generally. The strong possibility of higher mortgage interest rates is especially true if the federal debt continues to grow and a new Fed Chairman named Kevin Warsh pursues a smaller balance sheet at the central bank, effectively making the Fed a net seller of mortgages.  We wrote recently in National Mortgage News  (" What President Trump can do about mortgage rates ") about how Fannie Mae and Freddie Mac could push mortgage rates down by repurchasing COVID era securities. The same applies to Ginnie Mae, of note. But in the absence of QE, the bias in long-term interest rates must be higher.  Thus the astute mortgage banker with a decent-size servicing book must ask: How do I survive in a lower volume, higher mortgage rate environment for the foreseeable future?  The answer is to become either a non-bank depository or a full blown national bank, the latter of which gives you shelter from the partisan idiocy of state regulation via federal preemption. State-chartered, FDIC-insured banks give you some shelter from the partisan antics of state regulators. If Fed Vice Chairman Miki Bowman pushes through changes in capital requirements for whole-loans and MSRs, then the benefits of bank ownership for IMBs become compelling.  Commercial banks may not want to reenter the world of mortgage lending, especially third-part loan aggregation. And being a loan servicer is now a business that requires scale (> $500 billion in UPB). But IMBs that are able to combine with a depository while preserving the flexibility and operating efficiency of an IMB could be the long-term survivors in the world of residential lending. There is a strong argument for IMBs to migrate into a bank charter, creating a new generation of mortgage specialization institutions that have the profitability and liquidity to survive the new normal of higher interest rates. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap with Chris Whalen” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  April 10, 2026  | Updated | The financial markets were whipsawed again this week as the situation between Israel, the US, Iran and Lebanon dominated the headlines. Gold futures prices for June delivery have bounced off of the lows of several weeks ago, the S&P 500 is moving sideways and bitcoin remains down for the past year. Rather inexplicably, the Trump Administration agreed to a two week cease fire and “talks” with the Iranian government, but the Strait of Hormuz remains closed, as John Dizard noted in a conversation with The IRA earlier this week. The latest turn of events in Washington has left the Saudis and Israelis profoundly annoyed. The US kicked over the hornets nest in Iran, but now Washington is seeking peace even as the Iranians continue to attack the Gulf states. A few ships carrying LPG for Pakistan have been allowed through the Strait after paying Tehran the extortionate sum of $1 per barrel, payable either in Chinese yuan or bitcoin.  The US seems to be a big loser in this latest change in policy, with President Trump vacillating from threatening to destroy all evidence of Iranian civilization to total capitulation in the face of growing domestic political controversy. Pakistan has presented itself as a possible intermediary for peace talks, but Dizard suggests that the Chinese are standing behind the silk curtain in Islamabad. And long-time American clients like Saudi Arabia and Israel are furious that Washington is not destroying Tehran. Since we once represented the government of General Muhammad Zia-ul-Haq (1924–1988), the idea of a Chinese hand in Pakistan is most amusing. Pakistan as client state migrates from the British to the Americans to the Chinese in a single century? Wonderful. The Pakistani intelligence service engineered the crash of General Zia's C-130 in 1988 during the American involvement in Afghanistan. The big question facing President Trump, of course, is what happens if the Strait of Hormuz is not reopened in two weeks. If the Strait is not opened in two weeks, will the US military resume attacks? Will American forces attack civilian targets in Iran as President Trump has threatened? Meanwhile, the Chinese are the beneficiaries of Trump's bluster. Even if Iran ended any attacks on shipping today, it would take months to restore flows of energy and by-products. As Dizard reminded us, the ships needed to carry the fuel and by-products are all in the wrong places. As a result, energy prices are likely to remain elevated and will push up inflation, lowering the likelihood of a Fed interest rate cut.  Home Prices Stagnant As the very real economic impacts of the Iran war come into sharper focus (“ John Dizard: Watch for Rationing of Oil, Gas & By-Products ”), particularly the idea that the FOMC may not reduce short-term interest rates this year, one of the key questions in the minds of our readers is what is going to happen to home prices?  The answer is nada to lower. We were in Washington this week to participate in the Executive Roundtable for Mortgage Finance . The general consensus in the industry is that mortgage interest rates are going to stagnate and this will pull new loan volumes down. While some mortgage lenders were keeping excess capacity live to be ready for lower interest rates, getting the 10-year Treasury down to 4% and mortgage rates down to 6% is presently a distant dream.  Look for more industry consolidation.  10-Year US Treasury Source: dataQollab We heard several senior officials of HUD reject the notion that Ginnie Mae MBS or Treasury debt is somehow out of favor with global investors. The popular narrative currently says that China is a seller of Treasury debt, a story that is not inconsistent with the spoiler role now being played by Beijing in the Middle East. The more accurate assessment is likely that China’s state agencies have simply traded securities for cash deposits in banks.  The Chinese have lots of dollars, you understand. Yet the dollar-collapsing narrative persists: “The US’s war with Iran has put a potentially irreversible strain on the global trading system, with gold reserves having eclipsed central bank holdings of valuation-adjusted dollar assets for the first time in several decades,” writes Simon White of Bloomberg . The outlook for home prices is basically unchanged to down this year, depending on the market. Venues like Houston, TX, and Clearwater, FL, are seeing serious prices erosion. But the good news, of sorts, is that a lack of supply is likely to keep home prices stagnant in 2026. Was Q1 2026 the near-term peak for home prices? Probably, but inflation continues to push up replacement value for all homes. The misery on the 8s that our friend Stan Middleman of Freedom Mortgage predicted in our 2024 book, “ Seeing Around Corners, ” may be a prolonged period of low or no price appreciation. After years of steady home price appreciation, US home prices may be going sideways for years.  The Mortgage Bankers Association projects that U.S. home price growth will be nearly flat in 2026, with an expected increase of 0.6%. This represents a significant cooling in price appreciation, characterized by stagnation or slight declines in some markets, rather than sharp national drops. Yesterday for our discussion at the Executive Roundtable with Stan Middleman and Chris Abate , CEO of Redwood Trust (RWT) , we prepared a couple of slides. The first two slides show the declining proportion of 1-4s and MBS on the balance sheets of the US banking industry. The third slide shows all US banks sorted by MSRs/CET1 bank capital. There are a lot of smaller US banks that have chosen to go above the 25% cap on intangibles which is set in stone in US regulation. The question is why. You can download the presentation using the link below. Recent Posts Who's The Best Consumer Lender? ALLY, AXP, AX, COF, SOFI, LC, SYF https://www.theinstitutionalriskanalyst.com/post/theira831 John Dizard: Watch for Rationing of Oil, Gas & By-Products https://www.theinstitutionalriskanalyst.com/post/theira828 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.