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April 1, 2026 | In this edition of The Institutional Risk Analyst , we feature a special conversation with John Dizard , a veteran financial journalist and columnist known for his in-depth analysis of global macro investing, commodities, and currency markets, most notably for his 21-year tenure at the Financial Times. When we want to know what is happening in the world of energy, John is our first call. His views on the approaching economic collapse due to the US-Israeli war against Iran are disturbing but also suggest some investment themes that we address at the end of the discussion for our Premium Service subscribers.   The IRA: John, thank you for taking the time to speak with us today. We’ll dive right into the mess created by the Israeli-US attack on Iran. Where are we now, what, week three of the war? And the world still does not even begin to appreciate the true economic consequences.   Dizard: We're only finishing up week four, and the damage is already rapidly metastasizing. This is not a war that's going to be ending quickly. For one thing, the Iranians are not in a negotiating state. They're in an extortion state. And the impacts are already bad and are getting worse.   The IRA: We noticed that Iran is already extorting payments from ships seeking safe passage through the Strait of Hormuz. The damage to production, refining and chemical capacity in the Persian Gulf is severe and growing. This seems like quite a high price to pay for keeping Israeli Prime Minister Benjamin "Bibi" Netanyahu out of prison . How bad is the physical and economic damage from the war?   Dizard:  Let's start with jet fuel and diesel. Those are the most immediate and hardest-hit product streams. But when they started this war, I think that the White House or the planning team was looking solely at oil flows. They may have looked at the U. S.'s relatively good supply balance, but they didn't look at products. They didn't look at the US requirement to import sulfur, for example. For the U. S. to produce phosphate fertilizer, it has to process its own phosphate rock with sulfuric acid.   The IRA: The Trump Administration is not strong on advanced planning, in part because the team around President Trump never knows what he is going to say or do next. The US dependence on imported sulfur for a wide range of industrial processes probably did not come up in the pre-attack discussions at the White House. After all, the primary source of market data at the Trump White House is Newsmax .   Dizard: 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. The US may think that they have secure sources of mineral supply from allies, like, say, Australia. The trouble is, to mine things in Australia, you need diesel. The Australians went through a period of shutting down refineries, and they do not produce enough refined products themselves. Problem. The IRA: Sounds like our friends in California. After we spoke last week, we started to ponder how this ill-advised adventure in Iran by the Trump Administration is going to hobble the global economy. But it is also going to sideline any pretentions about the environment and sustainability. Continue with your point about Australia. Dizard: Australia imports diesel from either Asian refineries or Gulf refineries. The Asian suppliers, such as Korea, have shut off exports of diesel. California also imports their fuel and refined products or oil from Asia. Now, California has the same problem as Australia. They could import some from the US Gulf Coast, though that’s complicated by California’s unique gasoline blending requirements. There's going to be a serious supply crunch in California because of their refinery closures. I don't know how they're going to deal with this. It’s expensive to get gasoline and jet fuel in California and those products, as well as diesel, are about to become even more expensive and less available. Essentially, California will have to overturn their green regulatory framework and start to re-open refineries.   The IRA: That is an amusing thought. Watching California Governor Gavin Newsom deconstruct the green project before 2028 would be fun. But Australia and the rest of Asia is a more immediate and serious problem. What does the Iran war mean for Australia?   Dizard: The Australians don't have the diesel to mine the minerals that we are hoping to buy to become free of the Chinese supply chain. You could ration jet fuel as a luxury product for distant vacations or unnecessary business meetings. But diesel is the working-class fuel. You need it to farm. You need it to mine. You need it for backup power. You need it for everything. And if there was a price to keep one's eye on, it wouldn't be so much the gasoline price as the diesel price. Which is, of course, above gasoline. And this is affecting Asia first.   The IRA: Who is most impacted by the latest colonial confrontation with Iran? The US support for the Shah of Iran was just the most recent debacle. Baku was part of various Iranian empires for centuries before being ceded to the Russian Empire in 1813 The Russians annexed vast Persian territories in the Caucasus, in a series of wars during the 19th century. But of course nobody knows the history.   Dizard: It's already affected prices in Europe. Unless there's some miracle within the next few days, we're heading towards diesel rationing in Europe, jet fuel rationing, serious shortages. And, also, lower fertilizer application this year, which means lower food production next year. But it's the fuel products, I think, that are going to cause the most immediate severe shortages.   The IRA: The thing you said to me the other day, which you've already got into quite a lot, is the fact that it is the refined product and by products coming out of the Persian Gulf that really matter.   Dizard: Right. I think there was this misconception in Mar-a-Lago that the Gulf states just have these big, giant taps that crude oil somehow comes out of, and then it gets shipped on tankers. But it's also a vast industrial complex. Very, very large fertilizer producers, for example, who serve the needs of the entire world. Saudi Arabia exports a very large amount of phosphate fertilizer. The Gulf “oil” producers also export critical fertilizer products such as urea and ammonia, which are also used to reduce pollution from diesel engines. They export a lot of other key industrial input products, such as aluminum and naphtha.   The IRA: That is an impressive list. There are certain chemicals that an industrial society needs to function.   Dizard: Not to mention helium. Helium is exported from Qatar. It's a byproduct of gas production. Without helium, you can't produce semiconductors. You can't do MRIs. There are all kinds of things you can't do. And Qatar can't bring on helium production without bringing on its LNG production trains, which have already been damaged by Iranian strikes. Let's say the war is settled later today. It'll take a minimum of four weeks to get the undamaged trains back up to speed. More likely, this is going to go on for at least a couple of months longer. I think that's a best-case scenario. The industrial production impact of this conflict is going to be severe.   The IRA: What about India and the Far East?   Dizard: Taiwan, for example, has a, about a 10-day supply of LNG on hand. Those are their working supplies. There is no strategic reserve. They depend on a continuing stream of LNG tankers coming through their ports. That produced half of their electricity. How are they going to produce semiconductors with electric power and the helium? I mean, this isn't just a matter of the crude price going up or gasoline for Memorial Day driving. It's an industrial catastrophe for key products.   The IRA: Again, it sounds like a very expensive way of keeping Bibi Netanyahu out of jail. Very, very expensive. He needed a war to stay in office and avoid prosecution. President Trump has spoken about the investigation.   Dizard: Wars start for what people think are policy reasons, but war has a momentum of its own. That's true for the Iranians, and it's true for the U.S.  I don't know how much you remember of how long we hung around Vietnam, so we wouldn't be, you know, forced into a humiliating withdrawal, which eventually we were. Or Afghanistan for the same reason with the same outcome. This is going to go on a lot longer than even the people in power think it should.   The IRA: Given the appearances versus the realities that are driving a lot of this, John, can you see the U. S. putting boots on the ground in the Strait of Hormuz just to make everybody think they're addressing the problem when they really aren't? You know, obviously, that's not going to stop the attacks. Where do you, where do you put someone on the ground?   Dizard: Let's say they put them on the ground around the export terminal in Kharg Island, which has occupied a prominent place in President Trump's mind for 40 years or more. Let's say we put our boots on the ground there. Presumably, that cuts off Iranian exports. And they're still exporting about two and a half, 2.8 million barrels a day of crude and product. If that flow goes away, the Indians will be without propane to cook their food. You'll have an even worse supply shortfall in crude. It would be a disaster even before the Iranian attacks on the US occupying force.   The IRA: Well, yeah, and that's why Trump took the sanctions off the Russians, was to rebalance that supply equation, right?   Dizard: Well, yeah, and that hasn't worked perfectly well. I mean, on the one hand, the Russians can make more money, double their money per barrel, roughly, from what they were getting before the crisis. On the other hand they're also unable to solve the oil and products supply problem because they can't export as much as they were due to Ukrainian attacks on their export terminals and refineries. However they have managed to get the U.S. to back off from sanctions, which was an enormous strategic win. I think even with the cutbacks in crude exports, the Russians have done well out of this.   The IRA: It’s interesting to see the limits of great power.   Dizard: They've also diverted supplies of defense material away from Ukraine and to the Gulf. They've won on several points. Beyond the effects on Russia’s great-power aspirations, this war has the potential, if it goes on for six months, of turning from something that will accelerate a recession that may have already been brewing into a depression. It's a disaster from the point of view of the world's economy.   The IRA: It's funny, you know, I totally agree with you. I was talking to Komal Sri-Komar , the economist, this morning, and he's anxious to hear our discussion, by the way. And I said to him, 'How do we raise rates to fight inflation?' when the damage isn't just to oil production but to chemicals, which puts the whole world into an economic depression. And you have starvation, you have a lot of other privation around the world, especially in Africa and Asia. How do you ignore that and raise interest rates in the name of fighting inflation?   Dizard: Well, there is the idea of raising interest rates to create demand destruction by reducing credit use through price increases. But while I don't think the increase in oil prices will go away quickly, there are other areas of demand that are also going to be seriously impacted. The degree of U. S. dependency on products that come directly or indirectly from the Gulf is far larger than American leaders realize. Again, we can't make phosphate fertilizer without sulfuric acid, which you can't make without sulfur. And there isn't enough sulfur. Diesel, we need to import mined products from the rest of the world in order to make stuff and deliver it to US consumers. And “demand destruction” is not a winning campaign slogan.   The IRA: So you are talking about the type of shortages we have not seen since the 1970s?   Dizard: We're already talking about physical shortages of diesel and jet fuel. That'll affect the US as well as the rest of the world. For the moment there are significant product stockpiles in, for example, Japan, Korea and Europe. The supplies in Europe are probably leaky enough so that some of it could be re-exported. Even so, demand will bid up the price of diesel, which will come back to hit American farmers. So what, $10 a gallon for diesel? The U.S is a product exporter, but the world price feeds back to the U.S.   The IRA: That is a pretty grim prognosis. Is this about supply or price?   Dizard: Sulfuric acid is not just a price thing. What about helium? Not just a price thing. I don't think that the consequences— of this or of boots on the ground action— are being discussed in these terms in the White House.   The IRA: When do you think this reality comes to the people who make the decisions. When do you think this reality starts to arrive in Washington? You think anybody's talking to them?   Dizard: Weeks. Not months, weeks. For diesel supplies there'll be serious shortages within weeks. Jet fuel, it's already a problem flying to Asia. The US exports a lot of aircraft to Asia. Can Asian customers continue to take those deliveries if they cannot fly? What about the formerly fast-expanding Gulf carriers? If you fly to a long distance, you want to be sure that you're going to be able to refuel the plane when you get there. The IRA: How about heavy oil for ships, John? Is this also impacting them?   Dizard: Well, yes, and most countries and operators subscribe to the IMO guidelines on clean maritime fuel. Now, the price of diesel also affects maritime fuel. Most shipping is done in diesel-fueled ships. So, yes, that is a problem. Heavy, high sulfur fuel it doesn't work so well with engines that are tuned, you know, to accept cleaner fuel. However, I noticed that the EPA in the U.S. is already reducing requirements for urea and ammonia additives that are used to reduce particulate emissions from diesel. I think it's because they see the shortages in ammonia and in urea. So already little things like that are happening. So there's likely to be a deterioration in air quality everywhere.   The IRA: For China, how do you see that now? You've been digesting all this for the past week.   Dizard: There’s a lot the Chinese can do to reduce the domestic impact of the Gulf war. They can reduce their LNG dependence by switching to coal-fired power plants. They're already doing that. They have substantial strategic reserves of crude and of products. So they can insulate their domestic economy for a long time. However, they also are very dependent on manufactured exports in order to keep the economy ticking over. And what they don't want is to see their customers either imploding economically or starving because they can't get enough fuel and fertilizer. I think that will motivate the Chinese to act as intermediaries to end the crisis. I don't know when that can happen. The Iranians think they're winning. And in some respects they are winning. They're having their military severely degraded and their country's a mess and people are being killed, including the leadership. But Iran has increased their apparent leverage over the world economy through their control of the Strait of Hormuz.   The IRA: The Iranians are prepared to wait. They can deny transit of the straits and they're not going to give that up because of a simple demand by the U. S. So, they're willing to live at a very low level. You know, the Revolutionary Guards, they're willing to let most citizens live at a very low level. But how do you think things look by, say, Election Day this year?   Dizard: Very bad. Very bad. I mean, let's be optimistic and say it's settled in a month. Let's say it's settled the beginning of May. At best, assuming the remaining production facilities and loading facilities and power facilities are undamaged in the region, it would take another month to get them back more or less on stream. Then it would take longer to get the ships repositioned to where they should be. And then you have at least six months to a year of restocking, because a lot of reserves and stocks of refined product and crude have been run down. They'll be restocked at a higher level. So, if we have a cease fire tomorrow, it could easily be a year before prices get down to where they were, even with the demand destruction.   The IRA: Thanks John. We should do another discussion later in the year. Trading Points

April 9, 2026  | How is the US consumer faring as the war with Iran enters the second month? President Donald Trump  has started a war in the Middle East to escape a darkening domestic scene at home. Spending remains strong, but consumer sentiment slipped to a three-month low in March due to geopolitical tensions driving up oil prices and rising inflation fears. Affordability remains the top concern of consumers as Q1 2026 comes to an end and bank earnings start next week.  The midterm elections are eight months away. Consumer loan defaults continue to trend lower after peaking a year ago in Q1 2025. We've noted for a while that delinquency in the bottom quartile of consumers has been rising, but the picture in terms of the overall portfolio of bank loans remains positive. The rising levels of defaults visible in commercial exposures captured by private credit have not yet crossed over into consumer credit exposures. Pockets of credit weakness remain, particularly in commercial real estate (CRE) and lower-income consumer credit, yet overall credit quality has proven more resilient than expected, notes S&P.  “As household debt levels grow modestly, mortgage delinquencies continue to increase,” said Wilbert van der Klaauw , Economic Research Advisor at the New York Fed  said in February. “Delinquency rates for mortgages are near historically normal levels, but the deterioration is concentrated in lower-income areas and in areas with declining home prices.” “Aggregate delinquency worsened in Q4 2025, with 4.8% of outstanding debt in some stage of delinquency,” the Fed report . “Transitions into early delinquency were mixed with mortgages and student loans increasing, while all other debt types held steady. Transitions into serious delinquency ticked up for credit card balances, mortgages, and student loans while auto loans and HELOC decreased slightly.” The Consumer Lenders: ALLY, AXP, AX, BCS, COF, LC, SOFI, SYF  As Q1 2026 earnings begin next week, let’s review the consumer lending group to update readers on performance and other developments. Although the FRBNY noted higher levels of delinquency in lower income households, overall banks are reporting lower credit losses across the entire spectrum of loans.  Losses for the eight banks in our consumer loan group reflect this trend, as shown below in the chart using data from the FFIEC . Source: FFIEC

February 12, 2018 | In this issue of The Institutional Risk Analyst , we turn our attention to the auto sector. Kevin Tynan is the Senior Automotive Analyst at Bloomberg Intelligence and has been covering the industry for decades. We first met Kevin during the research for " Ford Men: From Inspiration to Enterprise " and value his insights on the automakers and the macro trends that impact this particularly American industry sector. We spoke to Kevin last week at his office in Princeton. The IRA: Ford just reported lackluster earnings, making more money per unit on lower sales. How do you assess the situation facing the US automakers? Is this a case of the industry shrinking or is there a more nuanced explanation for the competitive situation is facing the US automakers? Tynan: Those issues are really Ford specific. They are caught between this smallish product portfolio that is very dependent upon one nameplate, namely the F-series pickup truck, and the lack of other products. Lincoln only did sales of about 100,000 units last year. The market in the US is just about to touch 70 percent trucks overall and Ford is about 76%. But Fiat-Chrysler was 90 percent trucks in January or nine out of ten units sold were some form of truck. GM was about 80% trucks and SUVs in January, but they have a much broader portfolio. They have GMC which is only trucks and Silverado under the Chevrolet brand and all the trucks in Buick and even Escalade in Cadillac. The IRA: Wow. It gives us a feeling of déjà vu when you describe the industry. Nothing has really changed, has it? For much of the 20th Century Ford was only ever compared to Chevrolet because it was so much smaller that the colossus of General Motors built by Alfred Sloan. Ford never had a move-up offering for its customers from the basic Ford models and now is dependent upon a premium truck line. Tynan: Just looking at the statistics it may seem so, but under the surface it is really different. If you go back to pre-bankruptcy days for GM and Chrysler, one thing that is different is the definition of a truck. When gas was $4.50 per gallon you really saw the consumer shop on the car side of the dealership. You don’t see that today. A decade ago most SUVs were being built on a truck platform, but that is not the case at all today. These were full frame vehicles. Today there are very few SUVs that are built on the same platform as the pickups. The IRA: What we call trucks in the data are really passenger cars, is that the point? Tynan: Yes. Fuel efficiency has improved so dramatically compared with 2008 that the price of gasoline is no longer an issue for consumers. Even if there was a spike in gasoline prices, consumers would be buying smaller trucks not go back to the car side. The IRA: So is it really fair to say that the industry is 80% trucks or has the definition of a truck now become blended with a passenger car into the now ubiquitous crossover? Tynan: It is just a different type of truck. Look at the Ford Explorer, which was really the first mass produced SUV and was built on a truck chassis. Now the Explorer is built on the same platform as the Taurus. Nissan Pathfinder shares a platform with the Altima. There are a lot of crossovers out there that look like trucks but are built on passenger car platforms. They have the driving dynamics and efficiency of cars. There are a couple of automakers who are really too car heavy and they are scrambling to move to trucks. VW, BMW and Tesla are all upside down in terms of the focus on cars. Tesla is valued as a tech company, but as a car maker they are in precisely the wrong place in terms of consumer who want a higher ride and other attributes of a truck or crossover. The IRA: Don’t get us started on Tesla. It’s a toy. Tesla is a beautiful model slot car built by a guy who thinks he’s Tony Stark. Elon Musk is clearly a genius, but he should stick to building rockets. He just spent a couple of billion dollars to put a Tesla into orbit on the Falcon Heavy rocket. Maybe Tesla could build a flying car to cut the commute to JFK? Tynan: Well, Tesla could at least build a car that consumers want. The IRA: We spent a couple of weeks in Uruguay over the holiday and there were a number of brand new Maserati SUVs in Punta del Este. With the taxes that is a very expensive car, but the ladies love them. My spouse has a passion for the Porsche Cayenne – not a 911. She wants the SUV, but then again, she also thinks the new F-250 Super Duty is pretty cool. Tynan: What you are seeing with the premium brands – Jaguar, Lamborghini, Porsche and BMW – are lower, wider SUV crossovers. I was joking with somebody the other day that we may eventually see the return of wagons for people who don’t want that high, floating feeling and want to sit low but want the utility of a truck. The wave of the future may be a return to wagons in the guise of a crossover. The IRA: I drove a Lexus LX 300 for many years. That was the first round, stylish SUV that really appealed to women. It was dependable and great on gas. But most men seem to prefer sedans. Look at the Audi A-3 mini wagon, which unfortunately became a sedan. Tynan: Have a look at the Volvo V-90, absolutely gorgeous wagon. It is beautifully designed and they just came out with the Cross Country version which is a legitimate wagon you can take off road. All wheel drive, all you need. The IRA: Let’s talk about mobility. Has the panic over mobility subsided or are all of the automakers still chasing this threat/opportunity? Tynan: There is a lot of capital being wasted on mobility. It feels strange. Automakers are trying to reinvent themselves by getting into things they have never done before. The automakers are chasing relevance. There is a lot of money being spent with no ROI attached to it, but what is interesting is that this is what is driving valuations in the market right now. The IRA: Yes, it's called the Amazon model. Go out and spend as much as possible and grab market share and pretend that you are Jeff Bezos. Or look at Uber, a car service with Internet enablement that has no comparative advantage long term. Uber is burning capital to subsidize a car service for urban millennials who may never own a car. There seems to be a massive misallocation of capital in the mobility space on an almost Chinese scale. Is this too harsh? Tynan: The fascinating thing about Uber is the idea of level five self-driving. If you take the cost of the driver out of the equation, let’s say its mid-five figures, that becomes interesting. You can amortize the cost over five years for a car that runs 24x7. Can we ever get to level five? Will the government ever support the investment required? I don’t know. Robo taxis everywhere. If the current model does not make money, then you take out the most expensive part of the model which is the driver, then maybe you have a shot at profitability. The IRA: Well, we see it in the movies so it must be true. The 1973 Woody Allen film “Sleeper” is the first self-driving car we can recall. That is going to take some time. New highways with the guidance systems embedded in the pavement. But more to the point, who is going to insure the operation of these passenger vehicles? Tynan: Correct. We are legitimately at level two now and some manufacturers with large corporate parents will maybe get to level three in a few years, but nobody ever talks about the cost. It is challenging today to put $1,800 options in passenger vehicles. The cost of a driverless car is going to be enormous compared with the price of today’s vehicles. Frankly, the auto industry is not going to get to level five for consumers anytime soon. The IRA: To that point, doesn’t it make more sense for the first autonomous vehicles to be trucks or busses? Issues like safety and liability almost force the first roll-out of driverless vehicles to come in use cases other than passenger cars. Tynan: Think about congestion. There are valid applications for cars to operate autonomously and, say, drop you off at work and then carry other passengers while you are at work. But I am not sure that this really addresses congestion in urban areas. The IRA: More to the point, think about the current trends in housing. Less affluent populations are being forced out of the center cities into the suburbs. These people are going to need transportation to get to work, to school, to shop, etc. The demographics are compelling. Tynan: I’d be happy if we could fix the potholes. I have an eight mile commute on Route 206 towards Princeton in the morning and the roads are a mess. We don’t invest enough in infrastructure. The idea that we are going to wire the entire country or wireless the entire country so that autonomous vehicles can drive at 80 mph eight inches from each other seems a bit of a stretch. The IRA: Sounds like the sales pitch for Blockchain. So talk about the auto sector going forward. The auto sector went from death and destruction in 2010 to an amazing rebound through 2016. What should we expect over the next decade in terms of auto sales? Tynan: We hear a lot of analysts talking about “peak auto.” In 2016 we saw a record at 17.5 million units and then sales fell a bit in 2017. In fact, 2014 was “peak car” but on the truck side of the business demand is still increasing. Hard as it may be to believe, approaching 70% trucks for the industry as a whole is still not yet a peak. Those two categories – compact car and midsize car – really dwindled as crossovers and compact crossovers specifically surged. Compact crossover is the largest segment in the industry now. But as sales volumes for smaller car segments fell, trucks and SUVs simply could not grow fast enough to meet demand. Investors look at US auto sales and say “they’ve peaked, they’re plateauing.” But in fact car sales have fallen so fast that truck sales are struggling to keep up – but making a valiant effort at it. The IRA: So what should investors be focused on with the automakers? Tynan: The profits from truck sales are so much better than cars - automakers are actively deemphasizing their car offerings or at least the smart manufacturers are doing so. The IRA: Tastes have clearly changed. Going back to the Model T Ford, the car was essentially a wagon with a gasoline engine. Then we evolved large, enclosed passenger cars and trucks were really meant for commercial use. It took years for engineers at Ford to convince Henry Ford to make a Model T truck. And even then, you had to buy most of the parts for your Model T from the Sears catalog. But now consumers seem to embrace the crossover as the ideal design. Based on your comments, it sounds like the crossover is the design archetype for the future. Tynan: The higher ride height is clearly in favor, especially as more and more people buy SUVs. The fact that you can seat six people is also a big attraction. The utility of a truck and the ride dynamics and gas mileage of a car is a very compelling combination. There is no way back to the pre-2008 days, even if gas prices spike. On the luxury side of the business, big sedans are no longer the sweet spot for consumers. The IRA: What percentage of F-150 owners are women? Do you have any idea? Tynan: I’m not sure about that, but the percentage of people who drive a truck and never use it for work is soaring. The new pickups are very nicely appointed and can compete in terms of features and comfort with any passenger car. The mid-size trucks are nice too, Ford is getting back into smaller trucks with the new Ranger. The IRA: What in the world happened with Ford? How did they ever decide that people did not want a small truck? They left the entire mid-size segment in the US to the Japanese. Bill Ford is all twisted in a knot over mobility, but then Ford abandoned an important product segment in a category they should dominate. Tynan: They were printing money with the F-150. I’ve spoke to Ford a number of times about this decision. They’re feeling was that the smaller truck would have to be 25 percent more fuel efficient and be 25 percent cheaper to not cannibalize F-150 sales. When GM got back into the segment with Canyon and Colorado, they took market share but not from Toyota Tacoma or other manufacturers. The whole segment just grew. That small truck segment that was 300,000 units a few years ago was almost half a million units last year, but growth has also slowed. Ford and Fiat-Chrysler with the Jeep pickup missed the opportunity. I think that horse has left the barn. Today the Toyota Tacoma is half the segment, while GM is about a third. And the thing is that Ford sells Ranger all over the world. They just weren’t bringing it here. The IRA: As you said Kevin, trucks have not peaked. The Toyota Tacoma is a beautiful vehicle. Tynan: While the US automakers dominate the large truck segment, until GM got back into smaller trucks Toyota owned that segment almost entirely. So it's not about brand loyalty as much as it is about producing a product that consumer want to buy. Some people want to have a pickup that can fit into their garage. They don’t need a full size pickup. So there is roughly half a million buyers for that size vehicle. The IRA: So last question, let’s bring it back to Ford. What is your assessment of Bill Ford and the situation with “his” company in the wake of Alan Mulally and the departure of Mark Fields last year? Bill Ford periodically feels the need to demonstrate his “leadership” with new ideas, but had to retreat entirely a decade ago and was rescued by Mulally. Tynan: The message from Ford has been tough to decipher. Analysts are wondering if Ford is really about cars and trucks or is it about mobility and smart cities? They have been talking about things that have nothing to do with the basic business of making cars and trucks. The message coming from Ford is not as clear as say GM, which is all about making vehicles even while working on new technologies. Mark Fields had been with the company for 25 years, but then was let go after three years as CEO. It seemed a little bit strange to have Fields in the organization for that long and to be that wrong about his leadership ability. The IRA: Tales of Henry the Deuce. Thanks Kevin. 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“Across the globe, investors have one thing in mind. How far will interest rates rise and is the great bull market in bonds finally over?” Lawrence MacDonald Henry Ford's missing punch bowl February 4, 2018 | The proverbial punch bowl has been spilled all over the floor. Not surprisingly, the departure of Janet Yellen as Chair of the Board of Governors of the Federal Reserve System is bad news in many quarters. The speculative policies that helped gun assets prices around the world are now ending – at least for now. An eight year bull market in bonds is also seemingly at a conclusion. Quantitative easing or “QE” went on for years longer than necessary, thus Yellen’s successor, Chairman Jerome Powell, must clean up a particularly large mess. Cleaning up other people’s messes is, of course, the key job requirement for being Fed Chairman and, particularly, President of the Federal Reserve Bank of New York. Names like Volcker and Corrigan return to front of mind, but the past three Fed chairs have not deigned to dirty their hands with mere banking . The mess cleaning task of the Fed is similar to the role played so wonderfully by Sally Hawkins and Octavia Spencer in The Shape of Water , our vote for the Oscar this year BTW. Besides conveying dying broker dealers and insurance companies into new hands, the merger of dying zombie banks with the living, and most important, preserving the Treasury’s access to the debt markets, the Fed is now tasked with cleaning up a mess in Washington. This last responsibility is about to become particularly difficult as we rocket into the future with a Republican Congress that refuses to raise revenue out of fear of losing the next election. Before Chair Yellen actually walked out the door, the Fed’s Supervision & Regulation function announced supposed sanctions against Wells Fargo & Co (WFC) . The bank engaged in widespread acts of fraud against customers, apparently for years. The sanctions are an embarrassment and amount to a single gentle slap on the backside by the Fed. For starts, by telling a $2 trillion asset zombie bank and the largest loan servicer in the industry that they cannot get bigger, you are doing the CFO a favor. After all, it's about equity returns. The Fed has the power but not the will to act. For example, replace the CSUITE of WFC and force the bank to sell 50% of its assets. Then the Fed would be doing its job, as it would do without hesitation with a smaller institution. But by slamming dying zombies into healthy banks for fear of damaging confidence, the Fed created the governance problems at WFC. And the US central bank dares not challenge the bank monstrosities it has created over the years, in part because they are all primary dealers in US government bonds. None are more surprised about the market's turn of affairs than the inhabitants of Wall Street, both the perpetrators themselves and their loyal scribes in the world of financial journalism. The idea that markets for stocks, bonds and real estate might need to correct a bit after galloping along for five years at multiples of the official inflation statistics is a revelation to many -- but certainly not all. We still have “positive fundamentals,” you understand. Most of the senior pundits in the financial press have asked the right questions at one time or another, but as former Citigroup Chairman Chuck Prince lamented, on Wall Street you dance until the music stops. Or as they used to tell teary eyed fans at the end of his concerts, “Elvis has left the building.” No, Chair Yellen will not be playing an encore. And the timing of Chair Yellen’s departure is particularly unfortunate for the overbought and overheated financial markets. Washington has just done a reprise of sorts, repeating the market movements seen after the 2016 election. The yield on the 10-year bond is rising towards a five-year high, attracting cash from absurdly over-stretched equity markets. The chart below shows the 10-year Treasury bond and the S&P 500 Index. The arrow indicates the November election and subsequent discontinuity that included a surge in interest rates and stock prices. Was the post-election uptick in stock prices supported by “good fundamentals” or the proverbial animal spirits? Our friend and The IRA reader Dick Hardy down in Atlanta worries that the ratio of the 10-year Treasury bond and the SPX are nearing a worrying divergence. “Note the head and shoulders pattern developing, and note that if one draws a trend line off the 09 low and 14 low the trend has been broken. A break below 90 (the approximate head and shoulder neckline) would be an ominous sign. Might want to put this one on your watch list,” he writes. With most markets fully correlated, we may all be staring into the eye of a perfect storm in formation. First, Congress has just passed tax reductions that promise to greatly increase Treasury funding needs in the near term. Indeed, the position taken by Secretary Stephen Mnuchin and his predecessors about the US Treasury issuing primarily short-term debt seems to be evolving with each passing day. Look for those 10s and 30s to be reopened more frequently in coming months as the reality of Argentine style fiscal policy in Washington collides square on into a receding bond market and a weak dollar. Of particular interest is the decision by the Chinese government to reduce outflows of yuan and how this political shift will impact foreign asset prices. Press reports suggest that epitomes of leveraged growth such as HNA Group seem headed for default, although we still don’t know who actually owns the company! Speaking of AML violations, let's ponder the fact that global regulators and counterparties have no idea as to the overship of HNA, the largest shareholder of Deutsche Bank AG . Reports that HNA and other Chinese investors may be forced by Communist Party leader Xi Jinping Beijing to lighten up on foreign real estate certainly provides food for thought. Will the forced assets sales by some of the more egregious examples of excessive leverage in China cause a general liquidation of the Yellen bubbles in stocks and bonds? As one New York real estate publication The Real Deal warned, "Brace yourself for a yard sale." The unwind of large bubbles does not necessarily happen quickly. The Great Crash of 1929 was actually the final crescendo of a period of financial boom and bust that began to end with the collapse of the FL real estate market in the mid-1920s. John Kenneth Galbraith, writing in his classic 1954 book “The Great Crash, 1929,” describes how parcels of land in Florida were divided into building lots and sold for a mere 10% down payment. In effect, Americans of the early 1920s were trading fractional options on FL real estate. Charles Ponzi, the great American fraudster and namesake of the financial pyramid scheme, was actively involved in selling parcels of land in Florida in the 1920s. He leveraged a steadily growing flow of investors until 1927, when the tide of new investors peaked and the FL property market began to crack. Sound familiar? Bitcoin is merely the modern day extension of the alluring logic of Charles Ponzi, albeit enabled by the Internet. The Great Crash of the stock markets in 1929 was not the final act, however, and would lead to the catastrophe of the banking crisis of 1933. As recalled in Ford Men: From Inspiration to Enterprise , a decidedly selfish Henry Ford helped to crater the US banking system by threatening to withdraw his cash from Detroit's banks. From early 1933, financial institutions from Chicago to New York closed for months and even years -- all thanks to Henry Ford’s enmity for his former business partner, Senator James Couzens, and most people generally. Scores of private banks and businesses failed in the forced deflation from early 1933 onward. When President Franklin Delano Roosevelt made his famous March 1933 inauguration day utterance about Americans having “nothing to fear but fear itself,” every bank in New York was closed. Millions of Americans were quite literally standing in the streets of major US cities. The terrible year 1933 was quite a bit worse than the crisis of 2008. Out of the experiences of the Great Depression and World War II, the Fed and Washington generally have evolved a progressive attitude towards “pump priming” consumer demand that has led us to the current juncture of zero rates and infinite duration. Most of the industrialized world, including China, is drowning in bad debt, but this fact goes unremarked. Several years ago, the big idea coming from Chair Yellen and her comrades on the Federal Open Market Committee and other global central banks was to lever up the economy with even more debt. This increase in global leverage included the purchase of trillions of dollars in stock funded with record amounts of corporate debt. Just to add some spice, the Yellen Fed purchased two trillion dollars worth of mortgage paper -- bonds that will sit on the Fed’s books for many years to come. Indeed, should we start to see mortgage agency bond issuance with 4 and even 5 percent coupons not so far down the road, the duration of the Fed’s MBS position will explode -- even as the nominal principal amount very slowly runs off. But at least holders of mortgage servicing rights (MSRs) can look forward to big positive marks in Q1 2018. The pressing question facing investors is whether interest rates will follow the pattern seen a year ago, when Treasury yields feel as the market retraced the increase in yields seen after the election of Donald Trump. The key market benchmark flirted with 2% yields in September last year. With each uptick in interest rates, the massive amounts of investor cash sitting on the sidelines returns, acting to counterbalance the market’s bearish tendencies. The difference between last year and 2018, however, is that now the Treasury is seeking to fund trillions of dollars in red ink to fund a badly advised peacetime pump priming effort. Don’t get us wrong. Structural tax reform is great. But the US badly needs to raise some revenue pronto or will run the risk of looking ridiculous to the entire world. The danger here stems not from the colorful occupant of 1600 Pennsylvania Avenue but from the fact that the larger building down the street that sits atop Capitol Hill appears to be empty -- of courage or even practical perspective. Market prognostications aside, the lack of political will among America’s leaders when it comes to matters of money is the biggest risk facing the world in 2018. 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. #Yellen #PunchBowl #HenryFord #FordMen #duration

Richard Cordray and Mick Mulvaney January 30, 2018 | It’s a strange time in the housing market. Home price increases have been running above the posted inflation rate for more than five years, yet lending volumes are expected to fall again in 2018 for the third year in a row. The end of the Progressive Inquisition at the Consumer Finance Protection Bureau is in sight, yet the housing industry continues to reel from the massive increase in the cost of regulation, which has seen productivity in the world of mortgage finance cut by two thirds since 2012. News reports suggest that thousands of jobs could be lost in mortgage finance this year due to rising interest rates and falling lending volumes. This is primarily due to slack demand for mortgage refinancing as a result of rising long-term interest rates. Chart 1 below shows the 12-month average price change from CoreLogic for all US homes going back to the 1970s. Source: CoreLogic Note the upward surge in average home prices during 2012-2014, which was due to the work-out of distressed mortgages. Closing the gap between the deeply discounted value of foreclosed homes and normal sales accounted for a lot of the price gains reported during this period. The more subdued average home price action in many coastal markets since 2014, however, is still a multiple of the official inflation statistics coming from Washington. Despite policies from the Federal Housing Administration and Federal Open Market Committee meant to boost house finance, regulation and extremely tight secondary market terms are hurting profitability and employment in the mortgage industry. Most of the credit flowing from Washington is going to consumers buying larger homes rather than first time home buyers. Meanwhile, prices for mortgage servicing rights (MSRs) are still trading at a discount to the underlying collateral, as the FT’s John Dizard reports . Mortgage industry maven Rob Chrisman wrote recently of colleagues working “in a business where many are experiencing contracting volumes and contracting margins. Bank of the Ozarks of Little Rock will stop originating home loans for resale on the secondary market, a line of business that had ‘operated at essentially break-even’… Every company is taking a hard look at the continued high cost of originating loans, regardless of channel, and evaluating profitability. Watch for plenty of changes in 2018.” With Mel Watt, head of the Federal Housing Finance Administration, leaving office in less than a year, speculation about the chances for reform of the housing enterprises, particularly Fannie Mae and Freddie Mac, has grown. So much so, in fact, that somebody decided to leak a letter from Watt to members of the Senate Banking Committee regarding his views of GSE reform. “Watt said that once they are returned to the private sector, Fannie and Freddie would be the first two ‘secondary market entities’ able to issue government-guaranteed mortgaged backed securities as a common security that has a mandated rate of return set by a regulator,” American Banker reports . If, as Watt suggests, the idea is to have two “private” utilities with a government backstop for catastrophic risks, then that is what we have today. The two enterprises have government ownership with private capital standing in front in the form of risk sharing transactions. The key flaw in both Watt’s plan and the Senate proposal for GSE reform is the role assigned for private equity capital in the “privatized” Fannie Mae and Freddie Mac. If Congress wants to privatize the GSEs, then they should go right ahead. But please note that private mortgage companies are trading well below book value at present. You see, there is no utility in providing two more independent mortgage banks to an industry with profitability issues. If true privatization is the object of GSE reform, then the last thing the mortgage sector needs right now is Fannie Mae and Freddie Mac in drag, pretending to be private finance companies. All ties between the federal government and the GSEs must be severed to make “privatization” a reality. Instead of continuing the strange pretense of the “private” GSEs, better to simply liquidate the two enterprises and focus the distribution of all government housing subsidies on the FHA and Ginnie Mae, as suggested in several alternative plans floating around the House of Representatives. The US government through FHA would offer insurance on eligible loans held by any issuer without providing a backstop for the corporation. The private bank or non-bank would then sell the mortgage backed securities to investors, with either GNMA cover, private insurance or no insurance at all. As today, higher quality mortgages such as prime jumbos would not require any government insurance cover whatsoever, but the real opportunity is to privatize the 60% of the market now served by the GSEs. If you think of the mortgage market today, 25% of all mortgage loans are held by banks in portfolio with no cover, about 50% (mostly prime loans) are guaranteed by Fannie Mae and Freddie Mac, and the rest of the market (including below prime loans) are covered by the FHA and GNMA. Private investors could easily accept uninsured prime mortgage securities now covered by the GSEs and do so at a lower cost to consumers. Some three quarters of all loans today have FICO scores above 720, quality loans that private investors would readily accept. The pricing for Fannie Mae’s risk transfer deals calculated by Well Fargo suggests that virtually all of the default risk from GSE mortgage exposures could be underwritten by the private sector and at a cost that is a fraction of the guarantee fees charged today by the GSEs. Meanwhile, across town, acting Consumer Finance Protection Bureau director Mick Mulvaney also leaked a memo outlining how the agency will operate in future. The head of the Office of Management and Budget made clear that the bad old days of the CFPB extracting settlements from mortgage companies and banks is over. He wrote: "We are government employees. We don’t just work for the government, we work for the people. And that means everyone: those who use credit cards, and those who provide those cards; those who take loans, and those who make them; those who buy cars, and those who sell them. All of those people are part of what makes this country great. And all of them deserve to be treated fairly by their government. There is a reason that Lady Justice wears a blindfold and carries a balance, along with her sword." More significantly, Mulvaney confirmed that the CFPB will no longer regulate through enforcement actions and that fines and penalties will only by imposed when there is actual harm to consumers . This changes the inquisitorial approach of former director Richard Cordray, who extracted billions in wrongful settlements from private banks and mortgage companies during his reign of terror. Cordray is now seeking the OH governorship with a war chest filled to overflowing with contributions from the trial bar. Mulvaney stated in his memo: “So, what does all of this mean, in terms of how we will operate at the Bureau? Simply put, we will be reviewing everything that we do, from investigations to lawsuits and everything in between. When it comes to enforcement, we will be focusing on quantifiable and unavoidable harm to the consumer. If we find that it exists, you can count on us to vigorously pursue the appropriate remedies. If it doesn’t, we won’t go looking for excuses to bring lawsuits…. On regulation, it seems that the people we regulate should have the right to know what the rules are before being charged with breaking them. This means more formal rulemaking on which financial institutions can rely, and less regulation by enforcement.” Under the tyranny of Richard Cordray at the CFPB, the cost of servicing a performing mortgage rose three fold in the US, one reason why many smaller independent mortgage banks have shut their doors. Larger firms are under pressure as well, which is why half of the top ten independent mortgage banks are in bankruptcy or for sale. It is fair to say that there will be a significant number of business closures and acquisitions in the mortgage sector during 2018. Even with the welcome regulatory changes in Washington, it will take years for the mortgage finance industry to recover to something like a reasonable cost structure. In the meantime, millions of Americans could lose their businesses and their jobs in 2018 – not primarily due to rising interest rates, but because of the abuse of power in Washington by ambitious progressives seeking higher office. While the changes at the CFPB are welcome in the mortgage finance sector, the fact remains that 2018 is going to be a very tough year. The entire mortgage banking and REIT sector has been selling off since the end of December, reflecting investor concerns about rising interest rates and a flat yield curve. Regulatory changes in Washington are welcome and long overdue, but for the mortgage finance industry, it is still the depths of winter. 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.

“To exactly solve the problem of corruption, we must hit both flies and tigers” Xi Jinping January 15, 2018 | In December this past year, Chinese lender Citic Bancorp warned that the high-flying HNA Group was having trouble paying its considerable short-term debts. After building a $40 billion pile of investments around the world largely funded with debt, HNA seems to have reached the end of its ability to grow further, both in financial and political terms. Thus western investors and banks began 2018 wondering whether the Chinese government will come to the rescue. HNA symbolizes China’s schizophrenic approach to economic growth, an on again, off again roller coaster which reflects the changing political priorities of the country’s communist leaders. Whereas in 2016 China’s leaders allowed and even encouraged Chinese investments offshore, both by companies and individuals, since last summer the situation has changed. Paramount leader Xi Jinping is reasserting the government’s control over the economy. And perhaps the highest priority for China’s rulers is reining in the overheated financial sector symbolized by firms like HNA. Think of HNA Group as a Chinese version of Softbank, but with considerably less transparency and more debt leverage. The firm exploded onto the global financial scene several years ago, acquiring New Zealand’s largest financial services firm, and stakes in companies such as Hilton and Deutsche Bank. It ostentatiously hung its name on office buildings in major world financial centers. HNA created its own aircraft leasing company, Avolon, to compete with global banks in this lucrative financial market. Incredibly, it even acquired SkyBridge Capital from hedge fund manager Anthony Scaramucci before he briefly joined the Trump Administration last summer. The public face of HNA is Adam Tan, who is identified as chief executive officer and co-founder. The company’s ownership and corporate structure remains shrouded in mystery, however, causing investors increasing disquiet. To fuel its growth, HNA aggressively leveraged existing assets to fund the purchase of new ones, the Financial Times reported last summer, a process known in Chinese as “a snake swallowing an elephant”. Rating agency S&P has cut the company’s debt rating deep into junk territory, causing some analysts to predict that the firm will eventually default. There has been talk of asset sales to deleverage and pay down debt. But the key question is whether the founders of HNA, which started off as a regional airline, have lost the political support of China’s leaders. “There has been a lot of commentary focusing on the notion that China is deleveraging,” notes Leland Miller, CEO of China Beige Book . “China is not deleveraging right now, at least in terms of where it really counts, the corporate sector. What is happening is a crackdown on certain shadow products across the financial sector. The government is clamping down on instruments it thinks are running amok, such as wealth management products, trust products, negotiable certificates of deposits, and others.” Miller notes that he expects there to be some high profile defaults in China during the coming months. It is critical that Beijing sends the message that people can and will lose money when they invest blindly into the shadow banking system, he notes: “They have to eviscerate the idea that the Great Chinese Government Backstop continues to remain in place.” Many foreign investors and corporate managers find it convenient to believe that firms like HNA are private companies that are similar to their western counterparts, but in fact all businesses in China are ultimately subordinate to the Chinese Communist Party (CCP) and Xi Jinping. Last summer, Chinese regulators began restricting liquidity to acquisitive Chinese firms, Reuters reports, ordering a group of lenders to assess exposure to some of the more aggressive dealmakers, including HNA, the property-to-film conglomerate Dalian Wanda and Anbang Insurance Group. Foreigners also like to believe that the party will support companies such as HNA when they get into financial trouble, but in fact the decision of whether to bail out an insolvent bank or company is ultimately political. HNA’s roots are also political, as a June 2017 feature article in the Financial Times makes clear, but this could ultimately lead to the firm’s undoing. When Xi Jinping ascended to become the unquestioned leader of the CCP and co-equal with Mao last year, his coronation marked the conclusion of a “anti-corruption” campaign to systematically destroy any potential rivals in the party apparat . Insecurity drives Xi’s relentless focus on abolishing alternative sources of economic and political power. His father Xi Zhongxun was persecuted during the Cultural Revolution, and Xi was for many years shunned because he was deemed “not suitable” to be a member of the party. Now firmly in charge of both the CCP and the Chinese military and police, however, Xi now appears intent upon remaking China’s economy in his own image and deemphasizing foreign influence via increased party control over “private” companies. When Xi proposed his ‘Thought on Socialism with Chinese Characteristics for a New Era’ – the opening phrase of his report to the CCP congress last year, he was starting a process of economic and political reform that is ultimately designed to focus power into his hands indefinitely. And this new stage of the “reform” process will be focused on domestic firms such as HNA as well as foreign companies with roots in China. “The [anti-corruption] campaign was aimed at the public sector; it cleaned out a rotten bureaucracy and helped Xi to wrest power from China’s provincial barons and powerful figures in the military,” writes Qi Gua in The London Review of Books . “It looks as though the next five years will see it extend to the private sector, and the first task will be to bring the tech giants to heel.” He continues: “The government is now proposing to increase its stake in our big tech monsters, Alibaba, Tencent and Baidu. According to Bloomberg, it already has holdings in Tencent (0.8 per cent) and Alibaba (1.3), but wants to acquire another 1 per cent in each: an approach they’ll find hard to refuse, even though the objective is to penetrate the two companies and oversee every key decision they make. Mao called this steady infiltration ‘mixing the sand into the hardened soil’.” As Xi prepared to take control of the CCP, China began to tighten capital outflows in the second half of last year. This change in the official tolerance for foreign investments has slowed the hectic pace of deal-making by domestic companies looking to scoop up overseas assets. The imponderable question for foreign investors, banks and companies with exposure to HNA is whether China’s leadership views the Hainan-based conglomerate as an ally or a threat. The same analysis must be done with respect to other Chinese companies with significant foreign participation. So long as China’s banks are willing to work with HNA to restructure its debt and sell off assets, then the company is likely to survive. But any such analysis must recognize that more than ever under Xi Jinping, it is the CCP representative that ultimately validates the decision by the bank’s management. If Xi Jinping finds the continued existence of HNA to support his political objectives, particularly the renewed focus on investment in China, then it is likely that China’s state-controlled banks will continue to be constructive when it comes to unwinding HNA’s massive pile of debt. If not, then HNA may be pushed into a forced restructuring that will mark a further confirmation that China’s leadership has changed the way in which views foreign investments by corporate “tigers.” This article was previously published in The National Interest and is reproduced with permission. Further reading: Cutting Through the Fed’s Orwellian Doublethink: Will the new chairman continue to say one thing and do another? The American Conservative January 12, 2018 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.

Justice Louis D. Brandeis Time Magazine, July 7, 1930 January 2, 2018 | This week in The Institutional Risk Analyst , we feature a blog post by Christopher Whalen originally published by The National Interest that tries to explain the false narrative about lower corporate taxes resulting in the repatriation of trillions in offshore cash. Many economists have spent months waxing ecstatic about the potential investment surge that will result, but sad to say it ain't so. We'll be following up with a more technical discussion of variable interest entities (VIEs) and tax fraud in a future post for The IRA. Till then, as you enjoy this week's comment, ponder the fact that not all VIEs are used for tax avoidance, but no VIE can really ever be a "true sale" that meets the draconian test established in 1925 by the U.S. Supreme Court. As Justice Louis Brandeis wrote in Benedict v. Ratner, an incomplete sale "imputes fraud conclusively." Suffice to say that the Internal Revenue Service gets the joke. Punta del Este | When the founders of the United States framed the US Constitution, one of the concerns that guided their work was the knowledge that popular democracy would eventually become an entirely commercial proposition. This fear is clearly illustrated by the tax “reform” legislation just passed by the Republican majority in Congress. It seeks to buy votes next November with reductions in federal tax revenue that must ultimately be funded with ever larger amounts of public debt. Of course, all of us hope that the various provisions of the tax bill will in fact lead to more investment, higher productivity and increased economic growth. Yet if we examine the narrative that helped to win passage of the legislation, many of the assertions made by politicians and their allies in the world of economics make little sense. In particular, the notion that lower corporate tax rates will lead to repatriation of corporate cash stashed offshore, thereby funding increased investment and productivity, and ultimately crating more jobs in the US is, upon reflection, a complete nonsense. First and foremost, corporate investment decisions are based upon the cost of capital and the prospective equity returns that new investment can generate, not the availability of cash. In a world where corporate bond yields are at all time lows and equity market valuations are at all-time highs, the effective cost of capital for many multinational companies is arguably negative. The problem is not funding new investments, but finding new endeavors in which to deploy cheap and plentiful capital. The economists who largely control the major central banks in the industrialized nations may be able to manipulate markets and cancel excessive debt through open market operations, but they cannot manufacture attractive investments. Indeed, the low interest rate regime put in place by the Federal Reserve, European Central Bank and Bank of Japan arguably retards new productive investments by driving cash into real estate, commodities and speculative whimsies such as crypto currencies. One of the most outrageous fallacies put forward by economists over the past year is that lower US corporate tax rates will cause the repatriation of offshore cash balances. This view, which is widely endorsed by many analysts, fails to reflect the true nature of offshore tax schemes and how problematic it will be to reverse these complex transactions. In 2016, Karen C. Burke and Grayson M.P. McCouch the University of Florida published an article entitled “Sham Partnerships and Equivocal Transactions” for the American Bar Association’s journal Tax Lawyer . The understated article provides an in-depth look at how US corporations have stashed literally trillions of dollars in offshore venues since the 1990s to avoid domestic taxes. The authors state: “Corporate tax shelters proliferated during the 1990s, exploiting the flexible partnership tax rules of Subchapter K to defer or eliminate tax on hundreds of billions of dollars of corporate income. The corporate tax shelters were typically structured as a financing transaction in which a U.S. corporation leased its own assets back from a partnership, generating a stream of deductible business expenses while shifting taxable income to a tax-indifferent party such as a foreign bank. Since the transaction allowed the U.S. corporation to raise capital in a tax-advantaged manner in connection with its regular business operations, it was assumed that the transaction had economic substance. Nevertheless, in scrutinizing these shelters, courts have invoked a sham partnership doctrine, derived from the longstanding Culbertson intent test, which disregards a partnership that lacks a bona fide purpose (or, alternatively, a purported partner whose interest does not constitute a bona fide equity participation).” The Internal Revenue Service is on to these fraudulent scams for which, of note, there is no statute of limitations. Significantly, in January of 2017, the US Supreme Court declined to hear an appeal involving an adverse tax decision by the IRS against an affiliate of Dow Chemical known as Chemtech. The hundreds of corporations that have used offshore transactions to hide revenue knew that Dow’s appeal was their last hope to avoid sanctions by the IRS. General Electric is another example of a US corporation that has been forced by the IRS to reverse a bogus offshore “asset sale” transactions. The IRS process of disallowing sham offshore transactions can be catastrophic. Consider the 2012 bankruptcy of tanker operator Overseas Shipholding Group (OSG). When the IRS disallowed half a billion dollars in offshore “asset sale” transactions, the company was forced to file bankruptcy and restate years of financial statements. A torrent of litigation ensued. Violations of US tax laws can lead to both civil fines and criminal prosecution for the corporate managers and their legal counsel who designed these schemes. In the case of OSG, the company’s tax counsel was sued for negligence in the bankruptcy. OSG’s tax lawyers then sued OSG’s senior executives. The competing claims were eventually settled, but none of this has created any value for OSG’s shareholders much less any new jobs. The 2017 tax law begins a new regime for future corporate taxes, but it may also compel recognition of huge past-due tax liabilities. All previous offshore corporate tax avoidance scams will now be exposed to IRS review. Dow and General Electric were required to pay back taxes, interest and penalties (up to 60% in Dow’s case). Dow and General Electric, however, escaped the criminal prosecution other corporate managers (and their legal counsel who designed these schemes) have faced. The process of reconciling offshore revenues is going to be exceeding painful for corporate managers and investors alike. Fessing up to past acts of tax avoidance is hardly likely to result in a wave of new corporate investments that increase productivity and economic growth. Indeed, while the process of coming to Jesus in the world of offshore financial partnership may generate a lot of revenue for the US Treasury, it is unlikely to boost corporate investments or even result in the actual return of cash to the US. Some investors are already anticipating that the tax legislation will result in a bonanza of stock repurchases that will boost share prices above current levels, but in fact the opposite may be the case. With an appropriate level of enforcement by the IRS, the notion that a lower tax rate on future revenue will lead to increased levels of cash for US corporations that are compelled to come forward and confess their sins with respect to past tax returns and financial disclosure seems fanciful. Many economists will be surprised to learn that the new tax bill does not actually require repatriation of offshore cash. Treasury is instead employing "deemed repatriation," which means the IRS taxes you on your unrepatriated foreign earnings whether you bring the cash back to the US or not. Taxes will be applied over eight years in an end-weighted formula which means you make your biggest payment, roughly 25% of taxes due, in year eight. The tax rates reportedly will be 15.5% on cash balances and 8% on non-cash balances. Just imagine what a compliance nightmare this creates. What is the definition of "cash"? More astute corporate managers and legal counsel who have participated in past tax avoidance transactions may approach the IRS and try to cut a deal. We could even see a formal tax amnesty proposed by the Trump Administration, but Washington insiders give such an idea long odds in the near term. “Treasury would consider offering an amnesty only if corporations evinced a real fear that they were about to be caught up in its maw,” notes one respected tax analyst in Washington. “I’m not 100% sure we are there yet. We did this with Swiss bank accounts only when we had them dead to rights.” Treasury is already working on the implementing regulations for this “virtual repatriation.” Another veteran Washington observer says that earnings return provisions of the tax bill are the highest priority item, followed by the anti-base erosion provisions, and then the worldwide regime on Global Intangible Low Tax Income--with a great acronym, “GILTI.” In theory, Treasury is going to put in place the deemed repatriation rule to raise the roughly $200 billion over ten years they need to move to a system which excludes most foreign-sourced active business income from U.S. taxation. This is the aptly named “participation-exemption system” that the US business community has been lobbying to get for years. But of course none of this is likely to result in a wave of new investments or job creation – unless you are a tax lawyer or consultant. One way or another, Treasury is going to collect its money. Perhaps that’s how House Speaker Paul Ryan plans to cover the increased deficits intentionally implemented by the new tax legislation. And for all of you economists and hedge fund moguls who think that the new tax legislation will result in a cash repatriation bonanza that will benefit stock prices or the economy, better think again. 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 6, 2026  | A number of readers of The Institutional Risk Analyst  have asked us whether the large Wall Street banks are good value at these levels. We currently own only some bank preferred and one common share, Flagstar Bank, NA (FLG) , which we bought much below current levels. Subscribers to our Premium Service can see the answer to that question at the bottom of this comment.

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 3, 2026  | The past week has been a decidedly volatile period, with spreads widening in response to growing concern about the US fiscal trainwreck ℅ the US Congress and President Donald Trump . Even the possible intervention of the Federal Reserve Board does not seem to impress a market about to see the largest IPO ever in Elon Musk’s SpaceX . This is a timely liquidity event for cash-poor Musk given the performance of Tesla (TSLA) , which was off 5% in the past week and down 17% in the past six months. As of early April 2026, bitcoin tokens are trading around $66,000–$67,000, experiencing a challenging start to the year with a notable decline from early 2026 highs, falling roughly 19% over the past 12 months. After breaking below $84K support in late January, the ersatz market has seen increased selling pressure as a growing number of whales head for the exit. The silence on Wall Street regarding all manner of coins is remarkable. President Trump continued to punish the financial markets with his erratic and unpredictable behavior regarding the war with Iran, pushing oil to the highest levels since 2008 near $150 per barrel and stocks lower. U.S. stocks fell this week with major indexes suffering from intensified selling pressure due to rising oil prices and geopolitical tensions. The S&P 500 is down for the 10th consecutive week in a row. The Nasdaq, S&P 500, and Dow all declined again this week, with the Nasdaq going deeper into a correction phase. As of early April 2026, in contrast, the U.S. dollar has experienced a notable rebound, gaining approximately 1.6% in the first quarter, marking its best performance since late 2024. We keep thinking of Treasury Secretary Scott Bessent  saying we’re nowhere near returning to QE, but the market reaction to the Iran war is decidedly negative. A shrinking spread (flattening curve) between the 2-year and 10-year Treasury yields indicates that investors are becoming less confident in future economic growth and expect lower interest rates or a recession. When short-term rates are rising toward (or exceeding) long-term rates, this often signals a future recession. One big worry, ironically, comes from the nonbank mortgage sector, where one of the biggest buyers of residential mortgages -- United Wholesale Mortgage Corp (UWMC)  -- is under growing criticism on several fronts following the failure of its acquisition of Two Harbors (TWO)  last week. A remarkable post on LinkedIn this week  alleges that the company is busted. We are impressed and also a bit worried that analysts will publicly challenge the famously litigious CEO, Mat Ishbia,  in such a bold fashion. Speaking of pump & dump, hedge fund mogul again Bill Ackman  significantly boosted GSE stocks (Fannie Mae and Freddie Mac) in late March 2026 by publicly calling them “stupidly cheap” with 10X potential in a social media post. His comments reportedly sparked a 30% to over 50% surge in share prices on Monday, March 30, 2026, as investors reacted to his bullish outlook. Mortgage rates, meanwhile, are well above 6% and rising. Of course there is zero evidence that either GSE is leaving conservatorship, but you never know with Trump. He just replaced Attorney General Pam Pondi  after threatening to hit Iran “very hard,” sending the markets tanking. Bondi’s goose was cooked in the Jeffrey Epstein  storm on Capitol Hill, but meanwhile new revelations about the business partners of this global pedophile continue to emerge .  Gold and silver prices fell sharply this week, with gold dropping over 3% to roughly an ounce and silver plunging nearly 5-7% to April 2, 2026. News reports said the decline was driven by a surging US dollar, rising oil prices, and reduced expectations for interest rate cuts following intensified geopolitical conflict in Iran.  While financial markets in the US and Europe have pushed gold and silver prices down from recent highs, a massive supply deficit in Asia for both metals is fueling bullish sentiment. In fact, a lot of selling in both precious metals and Treasury paper came from global investors raising cash. "Of course, these sales are interpreted as an erosion of confidence in the dollar-based system. So, here we go again…!" writes Alexandru-Stefan Goghie on Substack . He continues: "This interpretation misreads both the reserve management and the structural role of Treasuries in the global financial system. What appears as “selling” is (or could) be better understood as liquidity mobilization under stress. And the key to understanding these flows lies in the interaction between global dollar funding needs and the pricing of energy." As we noted in our interview with John Dizard  this week (“ Watch for Rationing of Oil, Gas & By-Products ”) a number of nations and companies have a sudden need to raise substantial liquidity. As the  damage to oil, gas and chemical assets in the gulf grows, the cost of the war also surges. Dizard predicts shortages and even rationing of fuels and oil by-products due to Trump's war with Iran. And finally in the big news this week, Italy failed to qualify for three straight World Cups, something no other World Cup winning nation has ever done. As co-hosts along with Canada and Mexico, the U.S. automatically qualified for the 48-team tournament, which runs from June 11 to July 19, 2026, with the final taking place at MetLife Stadium in New Jersey.    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 30, 2026  | The big question facing bank investors in Q1 2026 is how much credit risk faces large institutions from the meltdown in private equity and credit. In an earlier missive in The Institutional Risk Analyst , we backed into the unused credit exposure facing US banks to non-depository financial institutions (NDFIs), nearly $3 trillion in potential exposure at default (EAD). The chart below shows our estimate of the nearly $3 trillion in bank commitments to NDFIs as of the end of 2025. Significantly, virtually all of the growth in "All Other Loans" comes from loan commitments to NDFIs. Source: FDIC/WGA LLC The chart below of drawn exposures to NDFIs is certainly one of the more popular charts in social media over the past quarter. The chart shows $1.4 trillion in actual exposures to all US banks as of year-end 2025. On top of the existing loans to NDFIs, astute risk managers must add exposure at default, a Basel I concept that measures the additional risk that banks face if their customers draw upon unused lines and immediately default. The rapid growth of loans and commitments to NDFIs, growing at "only" 5x other loan categories, is the reason for mounting uncertainty regarding the financial stability of US banks. Source: FDIC/WGA LLC The mad rush of investors and lenders into the murky world of private credit is one of the more remarkably examples of stupidity and greed in the past century, going all the way back to the Roaring Twenties. The fact that the “all other loans” category for JPMorgan (JPM) increased by 24% in the past year and 73% in the past five years describes the investment mania around private strategies. Source: FDIC/WGA LLC In early March, financial news outlets reported that JPMorgan was marking down the value of certain loans to private credit players, which reduces their borrowing capacity and limits JPMorgan's future exposure. These steps mirror actions by other lenders in the industry and may explain why the Federal Reserve Board’s remarkably inept data function sat on the Q4 2025 disclosure for large banks until the end of last week. Last week, Moody's Ratings downgraded the private credit fund FS KKR Capital Corp (FSK)  to junk status (Ba1 from Baa3), CNBC  reports, citing worsening asset quality and high non-accrual loans. This proactive downgrade of this $14 billion asset business development company highlights rising distress in the sector. This latest setback comes even as NDFIs are desperately seeking new bank loans to fund investors redemptions. If a bank lends to a private equity portfolio company that is paying-in-kind (PIK), will the bank ever be repaid?    It is significant that the Federal Reserve Board and other regulators have so far refused to release the specific data attributable for loans to NDFIs other than the aggregate loan amount included in the balance sheet portion of the FDIC’s Quarterly Banking Profile in Q4 2025. When "All Other Loans" get to be 15% of total assets, that is the signal to break out the components. The Board of Governors led by Vice Chairman Michele Bowman and other agencies should get ahead of this situation before investors start to run on bank stocks. Specifically, the Fed ought to provide the full disclosure for the banking industry with the Q1 2026 FDIC Quarterly Banking Profile data and also add the NDFI line item to the Y-9s for large banks. The selectively reported loss rates in GAAP disclosure are low, so why not disclose all of the data? And it would be ever so nice if the Fed and FFIEC could release the Y-9s on Day 75 after the quarter close if not sooner. Below for subscribers to The IRA Premium Service , we consider what the Q4 2025 disclosure tells us about bank risk and earnings.  NDFIs & Large Bank Earnings Setup Even though JPMorgan has a loan book that is half the size of most banks compared to the total assets of the parent holding company, the bank’s $500 billion “other loans and leases” category is almost 12% of total assets vs 6% for the average for Peer Group 1.  We infer the size of the NDFI portfolio of individual banks by subtracting the aggregate NDFI series of the FDIC from Other Loans & Leases. In 2010 when the FDIC first started gathering the data on nonbank financial firms, NDFI loans were less than a quarter of the “other loans and leases” (OLL) category, but today they are 60% of OLL and growing fast.  As shown below, JPM is the only large bank that has provided disclosure about private credit exposures in its GAAP presentations. JPMorganChase | Q4 2025 The “other loans and leases” (OLL) category at JPM is 32% of total loans vs 11% for the 128 banks in Peer Group 1, according to the FFIEC. The OLL portfolio represents 150% of JPM’s total capital vs an average of 65% for all large banks. JPM claims that its total exposure to NDFIs is $160 billion. Clearly as a percentage of total assets and loans, the exposure of JPM to NDFIs appear to be far larger than that of other large banks, but the credit losses disclosed to date by JPM are very small. Will the publicly disclosed level of loss attributable to NDFIs at JPM and other large banks rise in Q1 2026? Our guess is that the answer to that question is yes. Another large lender to NDFIs is PNC Financial Services Group (PNC) , which had $90 billion in OLL vs $333 billion in total loans. PNC has 15% of total assets in OLL, making us wonder why the FDIC et al have not broken out NDFI loans before this time. How big would “other” need to be before the FDIC tells us the components? Once again, the prudential regulators are well behind the curve. OLLs are 27% of PNC’s total loans and represent 150% of tier one capital. OLLs have grown 95% since 2024 and 150% over the past five years. This suggests to us that PNC was late to the NDFI party. Net losses reported at year-end 2025 were only 13bps vs an average of 16bp for Peer Group 1. The average for all banks was 10bp for OLLs. Of note, PNC securitized $1.1 billion in OLL in 2025. The bank provides significant disclosure about its own private equity investments in its year-end 10-K, but says not a word about loans to private equity sponsors. Another significant player is Wells Fargo (WFC) , a $2 trillion depository that has exited residential and commercial real estate lending, but now seems intent upon becoming a larger, more messy version of Goldman Sachs (GS) by focusing on Wall Street. We liked mortgages better. The OLL portfolio at WFC is the size of the entire loan book at PNC. OLL grew 40% YOY and a mere 75% over the past five years. WFC has 187% of Tier One capital in OLLs. WFC does not break out exposure to NDFIs in its GAAP reporting, but has a partnership with Centerbridge Partners to provide private credit solutions to commercial borrowers. Bank of America (BAC) , like WFC, has over $300 billion in OLLs, but the growth rate has been far lower than other banks. This suggests that BAC may have missed the NDFI party to some degree. BAC has 135% of Tier One capital in OLLs, but this is less than 10% of total assets. U.S. Bancorp (USB)  had 18% of its loan book in OLL at year-end 2025 equal to 106% of Tier One capital.  USB reported just 11bp of credit losses on OLL in Q4 2025. USB had almost 30% of total assets in OLL on balance sheet or in managed securitizations. Citigroup (C) , had just 7.8% of total assets in OLL in Q4 2025 or 28% of total loans. Citi’s exposure to OLL equaled 106% of Tier One capital at that date, but Citi also reported above-peer losses of 17bp vs the Peer 1 average of 16bp. Of note, Citi had securitized $4.6 billion in OLL exposures and has 30% of total assets in on balance sheet OLL exposures or managed securitizations.    Truist Financial (TFC)  had 13% of total assets and 23% of total loans in OLL at year-end 2025. The bank’s exposure to OLL equaled 130% of Tier One capital. TFC reported just 1bp of losses on OLL exposures and only 5bp of 30-89 days past due. Of note, TFC securitized $2.4 billion in OLL exposures in 2025.  What all of these data points above suggest is that the top-seven banks have substantial exposure to NDFIs and that the credit loss experience, so far, is quite muted, especially compared with the public reports about credit defaults in the private credit sector. We suspect that losses on loans to NDFIs are likely to rise in 2026 and that all large banks will be forced to increase their public disclosure about same. Bank Performance Charts In Q4 2025, the top seven banks by assets continued to report modest levels of default activity in line with the rest of the industry.  Net credit losses for Peer Group 1 averaged just a quarter of one percent and 0.63% for the entire industry, but most of the top seven banks were above Peer Group 1 levels of loss in Q4 2025. Citigroup, as usual was an order of magnitude above the rest of the top seven banks with a net loss rate of 1.23% in Q4. Source: FFIEC Falling interest rates in the fourth quarter of 2025 were reflected in falling spreads on loans and securities. The gross spread on total loans and leases fell to 6.16% vs 6.36% a year before. Again, Citi was the outlier because of the relatively high gross spread on its consumer loan book. You could argue that Citi ought to be compared with consumer lenders like CapitalOne (COF) , which is now over $600 billion in assets and larger than Truist. But COF’s business model is still primarily credit cards and unsecured consumer loans, which is why we do not include it in the top seven banks.  Source: FFIEC The yield on securities for the group, another key source of income for a bank after the loan yield, was stable in 2025 with JPM and Citi leading the group, followed by WFC and Peer Group 1. USB, TFC and PNC are next with Bank America at the bottom of the group with a ghastly securities yield below 3%.  The yield on a bank’s securities portfolio, like the efficiency ratio, is a direct indication of whether a bank’s management is paying attention. The chart below shows efficiency ratios for the top seven banks. A lower efficiency ratio means more of revenue drops down to the bottom line. Note that JPM is the lowest of the group with an efficiency ratio of 52%. Source: FFIEC In terms of the yield on securities, JPM went from the bottom of the group in 2021, when during COVID the bank had reduced the duration of its portfolio, to being the top performer in the group last year. The fact that BAC and PNC have been unwilling to restructure their securities portfolios speaks volumes about the competency of management. Source: FFIEC After credit results and the yield on loans and securities, we next move to funding costs, one of the most important components of any bank balance sheet. Citi naturally has the highest cost of funds at 3.24% because of the bank’s limited deposit base. Non-core funding makes up $1.4 trillion of Citi’s $2.4 trillion in total liabilities. Citi has only $640 billion in domestic core deposits and $690 billion in uninsured offshore deposits. Bloomberg  previously reported that senior leaders were weighing a regional bank acquisition in a move to boost US core deposits, but Citibank officially refuted this report and stated its sole focus is on organic growth and its ongoing transformation. Next after Citi in terms of funding costs is BAC at 2.3%, again illustrating the ineptitude of the management team of CEO Brian Moynihan and the lingering effects of the post-COVID period, when the bank was forced to take on substantial high-cost funding. By rights, BAC should have the lowest funding costs in the top-seven banks. Instead, PNC financial at 1.9% and Truist at 1.8% are the lowest. Source: FFIEC One of the key ways to measure the overall effectiveness of management is the return on earning assets (ROEA). Note in the chart below that Citi is the only member of the top-seven banks that has an ROEA above the average for Peer Group 1. Next comes USB, PNC and Truist, followed by WFC. JPM is next and BAC of course is at the bottom of the group because of the bank’s poor asset returns and high funding costs.  Source: FFIEC Finally we look at the net income of the bank holding companies, which includes both interest and non-interest income vs total assets. Top of the group is JPM, which benefits from having substantial non-interest income. Next is PNC, which also has substantial non-interest income but mediocre net-interest income. Then comes USB, followed by WFC and Truist. Next in terms of asset returns is Bank of America with Citigroup at the bottom with an ROA of 0.54%. If you want one chart that explains the poor performance of Citigroup stock, this is it. Source: FFIEC In terms of the markets, the price-to-book value multiples of the top-five money center banks are shown below. Are these large banks cheap? Based upon the results of 2025, today the shares are down modestly but hardly a bargain. JPM, for example, has retreated from almost 3x book to closer to 2x as Q1 2026 ends. Citi at around 1x book is very fully valued. While 2025 was an extraordinary year for banks, we are not currently a buyer of bank stocks because we suspect that the entire bank complex is going to get cheaper as the year progresses.   Source: Yahoo Finance 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.  "The dollar is our currency, but it's your problem" Treasury Secretary John Connally (1971) March 27, 2026 | The top news this week is obviously the Iran war with the US and Israel and how this conflict will impact financial markets and the global economy. But this 21st Century conflict is also a religious war with roots which stretch back centuries. While Iran was never formally colonized, the fall of the Shah of Iran in 1979 and the rise of radical Islam marked an end to centuries of struggle against foreign influence and colonial schemes by Russia, the European powers and the United States. President Donald Trump has decided to put his signature on US currency, yet a surreal atmosphere prevails in the Capital. None of the news reports this week seem yet to be focused on the long-term damage done to the global economy or to millions of people, issues we’ll be discussing next week in an exclusive interview in The IRA with John Dizard . Advisors and analysts have been reluctant to base recommendations on the long-term consequences of the conflict, but as time goes on the economic damage from the war will become impossible to ignore.   Beyond the news from the Middle East, investors are continuing to raise cash as a risk-off trade is predominating among markets and demands for redemption of private credit funds grow. Even Lloyd Blankfein , the former chairman and CEO of Goldman Sachs (GS) , remains wary of systemic "kindling" due to the unwind of private credit which we discussed earlier this week (“ Mortgage Market Notes; A Lehman Moment for Apollo Management? ”).  This week Ares Management (ARES)  and Apollo Global Management (APO)  blocked investors from withdrawing all requested funds, with Ares capping redemptions at 5% after requests surged to 11.6% in its Strategic Income Fund. The actions by ARES and APO to suspend redemptions follow similar actions by Blue Owl Capital (OWL) and Cliffwater in recent weeks. Concerns are also escalating regarding loan quality, with defaults in direct lending expected to rise from 5.6% to 8%, according to Morgan Stanley (MS). The reputation risk to the private credit sponsors is of equal concern, but does reputation matter on Wall Street any longer? The mad rush for assets and returns have largely eviscerated traditional investment rules. Global prices for crude oil have repeatedly moved above $100 per barrel as markets react to supply disruption risks and related inflationary concerns. These dynamics have also pushed Treasury yields higher and widened the term structure of interest rates as markets price in greater inflation risk going forward. Mortgage rates in the US, for example, rose for the fourth straight week and new loan coupons are approaching 6.5%.   The concern about the economic impact of the war and the need for Middle East investors to raise cash has pushed down prices for gold and silver, while oil and other commodities have benefitted. Gold and silver are still up double digits for the last year and over the past six months, but have significantly paired gains from earlier in 2026.  The key comment to make about the markets this week is that it is difficult to allocate capital to new strategies when investors are dealing with inadequate information. The pause by the Federal Open Market Committee and the continued selloff in tech stocks is another important part of this week’s narrative. Will the FOMC be forced to cut ST rates in April to get ahead of the sustained economic shock of higher oil prices?  We think the answer is yes. We also believe that the relative stability of the past decade in terms of risk and the rapid change in events following the Iran war have caught markets by surprise, making it difficult for investors to select investment choices other than moving to cash. The fact that the US fiscal situation has caused the term structure of interest rates to expand is a great argument for precious metals and other hard assets. Term Structure of Interest Rates Expands The term structure of interest rates is heavily influenced by rising inflation fears, geopolitical tensions in the Middle East, and a shifting Federal Reserve policy outlook. Bond market experts are noting a sharp increase in Treasury yields, particularly at the short end. Fifteen years after 2008 and the related actions by the Fed, interest rates are starting to reflect fiscal pressures. For instance, economist Steve Hanke  pointed out this week that the March 2026 US Treasury 2-year yield hit 3.93%, marking a significant rise from 3.45% in the previous month. But, again, the shift in the term structure of interest rates, shown below in the widening of corporate bond spreads in the chart from Fred below, is particularly worrisome. As Katie Martin of the Financial Times wrote today, corporate bonds are the new stocks. “What really matters for free enterprise, we know (since Smith wrote his 1776 book), is the impact of rising base rates and credit spreads to depress the PV of future cash flows (shifting more than the minimum cost to finance leverage for growth from owners of equity to creditors),” notes our friend and co-author Fred Feldkamp . “Since the start of the Iran war, base rates are up 48 bps and spreads (the six rates I use) are up 80 bps, for a total impact of 128 bps.  The impact on EBITDA to support equity is roughly $5 billion per bp.  At an EBITDA multiple of 8-1, each bp reduces equity valuations by $40 billion.  SIMPLY STATED, the “cost” of the war now stands at $5.12 trillion in reduced “fair value” of US investments. ARE WE HAVING FUN YET?” The diminution of value in the financial markets is the corollary to the shift in terms structure of interest rates. “A world where the expected long-term rate is closer to 4% than 2% fundamentally changes the term structure of interest rates, cost of capital, expected returns,” notes Bob Elliott , CEO and CIO of Unlimited Funds. He continues: “Many folks looking at today's long-rates are just assuming a return to the "normal" of the last 15yrs.”  As we’ve noted to readers of The IRA , 2025 was an extraordinary year in many respects, but 2026 may be the opposite in many ways. In an interview this week with Kitco News , Nitesh Shah , head of commodities and macroeconomic research at WisdomTree, said the recent selloff — which has seen gold prices drop more than $1,000 from peak levels — appears largely disconnected from macroeconomic fundamentals and instead reflects a combination of positioning shifts and forced liquidations. Shah continued: “People have been asking me for years, ‘I like gold but I’m looking for an entry point.’… This is probably what they were waiting for,” he said. “If you’re not going to buy at this time, you’re never going to buy in your life.” Reader Questions This week a reader asked about a frequently mentioned issuer, Annaly Capital Management (NLY) , given the move in interest rates since the start of the Iran war. We have a long-term position in NLY and may add to the position if the stock weakens. The key point to remember about NLY and other mortgage REITs is that they profit from spreads between long and short-term interest rates rather than the absolute interest rate at a given time. REITs raise capital in the equity markets via common and preferred stock, then access leverage in the repo, swaps and forward mortgage markets. The mortgage securities owned by REITs tend to trade off of longer-term Treasury securities such as the 10-year Treasury note. Unlike property REITs that invest in commercial property, mortgage REITs typically are not issuers of LT debt. So while short-term interest rates like the two-year Treasury note have risen in the past week, longer-term Treasury maturities have also backed up. A key relationship to watch if you own NLY is the spread between 2s and 10s in the Treasury market, as shown in the chart below from FRED. Notice that two-year Treasury notes were above 10s in yield for an extended period of time during 2023 and 2024. The Wrap with Chris Whalen The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. 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March 26, 2026  | The Institutional Risk Analyst  is in Tampa this week for the annual event sponsored by Fay Servicing , this year at the Gathering Room within the Armature Works. We kinda miss the events at John Barleycorn Bar down the street from Wrigley Field, but next year we'll drive to the Fay event. No airport, no TSA lines. Just cruise up the I-75. Now that's a concept. We’ll be speaking about developments in and around the markets and in Washington that affect the mortgage industry later today with our friend Tim Rood , CEO of Impact Capital. Some notes in that regard follow below. Impact Capital is developing leading edge AI business solutions for the real estate and mortgage industries. Is Private Credit Systemic? First a quiz.  Q: Who was one of the top two borrowers from the Federal Home Loan Banks ("FHLBs") in 2025? A: Apollo Global Management's (APO) Athene insurance unit. Apollo/Athene didn't even appear on the top 10 advances list until year-end 2024, and has gone from 2.1% of total advances then to 3.4% as of year-end 2025.  Only Truist Financial (TFC) is larger than Athene in terms of advances, but the total exposure of the FHLBs to Apollo is far bigger, as discussed below. The FHLB annual report is available here .   JPMorgan (JPM) , Wells Fargo (WFC) , U.S. Bancorp (USB) and MetLife are all above 2% of total advances. Also notable on the top-ten borrower list is private Midland Financial , parent of MidFirst Bank and the largest buyer of early buyouts (EBOs) from Ginnie Mae MBS. MidFirst appeared as an FHLB borrower for the first time at year-end 2025, with 1.9% of total advances. If the $40 billion asset MidFirst Bank ceased buying defaulted EBOs from Ginnie Mae issuers, it is not clear who would pick up the slack. Notice that the FHLBs are indirectly, through MidFirst Bank, financing delinquent loans from nonbanks. Notice too in the chart below that the 90+ delinquent category has been rising since Q3 2025, when the Trump Administration ended COVID-era loan forbearance. Source: FDIC Does the forced liquidation of private credit strategies threaten the thinly capitalized FHLBs? Are Apollo and other sponsors of private credit strategies facing a Lehman moment in slow motion? Yet for all of the social media fuss about investors demanding early redemption from private credit funds, APO and other sponsors continue to raise new money. Certainly this is a striking comment on the state of the US financial markets.  Private equity/credit sponsors can hide liquidity problems in portfolios from investors and regulators by secretly arranging bank loans to hide insolvency. "Private Credit originators may now creatively 'staple' an iron-clad line of credit to an ostensibly “non-PIK-able” private credit loan," notes Victor Hong in a LinkedIn post . "The loan owner books this inseparable line of credit, as a distinct funding commitment TO the loan obligor—-but without describing its practical role as a hidden PIK option, and hence can report 'zero' PIK-able loans in portfolio. The loan obligor can elect to 'pay' any loan interest or principal cash flows due, by simultaneously drawing the equivalent cash amount from the Line of Credit AGAINST that very same loan owner (lender), as exact offset. Of course, the economic result is still PIK and advancing more principal on existing principal (" P.O.O.P")." Earlier this week we spoke with Charles Payne at Fox Business about the unwind of the private credit trade, something that had to happen once retail investors were allowed to participate in what is a completely illiquid investment strategy. ( See the rest of our comment on Private Credit below. ) Mortgage Market Notes The US Treasury market has backed up almost half a point since the start of the Iran war with the US and Israel. More important, this week's U.S. Treasury auctions showed weak demand, with the $69 billion 2-year note auction on Tuesday, March 24, 2026, described as poor, according to the Wall Street Journal .  Two year yields surged to 3.936%, the highest since July, reflecting investor unease. The subsequent 5-year note auction on Wednesday also saw underwhelming demand, following rising geopolitical tensions. The 10-year Treasury note closed yesterday on a yield of 4.35%. Not surprisingly, conforming mortgage rates have risen to 6.30%, even though some online retail lenders are still offering teaser rates down near 6%. As we never tire of reminding readers, mortgage lenders set loan coupons, markets determine bond yields. Mortgage applications fell 10.5% last week, led by a 14.6% drop in the refi index and a 5.4% decline in purchase applications, notes Scott Buchta at Brean. Primary rates rose 13bps last week, according to the MBA. We are now approaching the all-important 6.5% mortgage rate threshold, Brean notes, where lending volumes can decline significantly. As we note in our latest column in National Mortgage News  (“ Pulte got the condo insurance call right ”), on March 13th, the Trump Administration issued an executive order to roll back a number of rules and regulations that were put in place after the 2010 Dodd Frank law to encourage more availability of credit for housing from banks.  Many of the proposed changes are beneficial to the industry, but difficult market conditions are likely to force more market consolidation. We still don't know, for example, who is the winner of the sale of Two Harbors (TWO) . Eric Hagen at BTIG writes: "TWO's ad hoc committee determined the unsolicited all-cash offer from CrossCountry Mortgage (CCM, Private) at $10.70/share is considered superior to United Wholesale's (UWMC, Buy, $10 PT) existing stock-for-stock offer of 2.3328 shares of UWMC for each share of TWO. An additional unsolicited bid came in over the weekend from another unnamed bidder at $10.75/share. We see the potential for a bidding war, but we'd be surprised if it fetched more than a 20% premium to NAV, which we currently peg around $11/share net of the quarterly dividend." Meanwhile, on March 16, 2026, Freedom Mortgage Corporation announced, that its indirect parent company, Freedom Superior LLC, agreed to acquire Seneca Mortgage Servicing LLC (Seneca) and related entities from EJF Capital LP. The deal expands Freedom's top-five mortgage servicing rights (MSR) portfolio and enhances its operational capabilities. To us, it is notable that EJF founder and CIO Emanuel "Manny" J. Friedman , who has successfully focused on regulatory, event-driven investing in real estate and financial services for decades, decided to exit the mortgage servicing business.  The GSEs, Fannie Mae and Freddie Mac, have been busily buying MBS, but mortgage market scribe Rob Chrisman reminds us that “lenders and LOs know that we’re in a global economy, and decisions made overseas can impact our mortgage rates.”   The GSEs were the top performing mortgage stocks of 2024-2025, but have been dead money since the MBS purchases were ordered by President Trump earlier this year. Both stocks have fallen dramatically since the start of the Iran war, as shown in the chart below. The two big question with the GSEs, of course, are 1) are the stocks attractive at this stage and 2) whether or not they are hedging their portfolios effectively. We had a profitable short-term position in the GSEs last year, but would not be inclined to own them now. Simply stated, there is no catalyst. Part of our hesitation is that in order to have an impact on mortgage rates, the GSEs would not hedge their growing MBS portfolio. But the backup in mortgage rates that has occurred since the start of the Iran war could cause one or both GSEs to incur substantial market losses sans hedge .   The fact is that the GSEs are not the Federal Reserve and cannot buy trillions worth of MBS, unless of course FHFA Director Bill Pulte gets more creative. As we’ve noted in previous missives, Fannie Mae and Freddie Mac should buy back low coupon MBS at a discount, then sell the "AAA" rated paper into collateralized mortgage obligations (CMOs), and make money doing so. Treasury could do the same with low coupon T-notes.  If this is not clear, Director Pulte, please do give us a call. One of the more important issues affecting housing in Washington is the implementation of a partial claim process at the Veterans Administration. Last year Congress passed the VA Home Loan Program Reform Act (H.R. 1815), which was signed into law on July 30, 2025, establishing a new five-year partial claim program. This legislation allows the VA to pay lenders for delinquent payments (up to 25% of the loan amount), helping veterans avoid foreclosure by deferring payments to the end of the loan.    This new statutory authority replaces the temporary VA Servicing Purchase (VASP) program that ended in April 2025.  Since the passage of the legislation, the VA and members of Congress have been negotiating the details. While the law is in effect, specific lender procedures and amendments to the servicer handbook are currently in the “implementation phase.” The hope is to have a permanent program for VA that mirrors the partial claim process of the GSEs. Finally, the Real Deal  reports  that a federal judge in the Eastern District of Texas struck down the 2024 Financial Crimes Enforcement Network regulation that forced nationwide disclosure of all-cash residential homebuyers. U.S. District Judge Jeremy Kernodle ruled the agency overstepped its authority by failing to justify why all-cash residential transactions should be broadly treated as suspicious. The decision means federal oversight of illicit capital flows in real estate reverts to FinCEN's prior, narrower geographic targeting orders. Is Apollo Facing a Lehman Moment? Are the growing demands from investors for early depemption of private equity/credit funds a liquidity threat to Apollo and, indirectly, the FHLBs? Athene Holding Ltd. (ATH) was delisted from the New York Stock Exchange (NYSE) in January 2022. The delisting was due to a momentus merger with Apollo Global Management, which was completed simultaneously.