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July 25, 2022 | Premium Service | As the meeting of the Federal Open Market Approaches this week and, more important, Camp Kotok begins next week, we have more than a few questions for Chairman Jerome Powell and his colleagues. A careful reading of the Fed’s research provides some insights about future Fed policy. Since the May 2022 statement regarding the management of the system open market account or SOMA, there have been a couple of important pieces of research that are suggestive regarding future policy. H/T to Bill Nelson at Bank Policy Institute. Two research reports by the Fed of New York have illuminated both the history of the Fed’s SOMA portfolio and then project forward the likely losses by the Fed as the portfolio gradually shrinks. More, the second paper by Alyssa Anderson , Philippa Marks, Dave Na, Bernd Schlusche , and Zeynep Senyuz , sets some disturbing markers for the future size of the SOMA portfolio and the realized and unrealized losses that are likely to accumulate. Totto Ramen East (2019) In the second FEDS Notes paper, the authors explain how the Fed is likely to start to generate actual, realized losses because of the interest rate mismatch on the Fed portfolio. This is more than a little amusing and also terrible to behold. The FRBNY paper essentially highlights one of the biggest downside risks created by quantitative easing or “QE,” namely a gigantic interest rate mismatch across the market for banks, non-banks and other financial intermediaries including the GSEs. Thus in the final paragraph, the Fed drops a bomb: “While the expansion of the Fed's balance sheet in response to the pandemic may have increased the risk of the Fed's net income turning negative temporarily in a rising interest-rate environment, the Fed's mandate is neither to make profits nor to avoid losses. In all its actions, the Fed seeks to achieve its congressional mandate of maximum employment and stable prices. If the Fed had not taken these actions, the risk of experiencing a period in which net income turns negative would be lower than it is at present, but the economic position of households, businesses, the U.S. government, and taxpayers would be far worse off.” Of course, the Fed has the luxury of ignoring losses because, as a creature of the US Treasury, it’s resources are assured. But private financial intermediaries and banks don’t have this luxury. As this edition of The Institutional Risk Analyst went to press, there were literally hundreds of billions in unrealized losses on the books of private investors, banks, all three GSEs and money market funds, underwater paper that will likely be retained through to maturity, reducing bank net interest margins. Apparently this is precisely what the Fed intends to do, namely keep all of the low coupon paper in the SOMA until it matures, in some cases decades from now. Thus the FRBNY paper projects likely realized losses from the difference between what the Fed earns on its portfolio and what it pays out to reserve holders and participants in the Reverse Repurchase (RRP) facility reaching $180 billion in a stressed scenario. Importantly, the paper assumes that the Fed will not realize any market losses on the SOMA. This suggests that there will be no outright sales of either mortgage-backed securities or Treasury paper in the SOMA. Is this now Fed policy? Somebody should ask Chairman Powell. The other big takeaway from the FRBNY paper is that the portfolio is going to be allowed to decline to about $6 trillion by 2025 and then start to grow again back to $8 trillion by 2030. This suggests a vast increase in the Fed’s monetization of debt service costs for the Treasury as rates increase. The enormous magnitude of losses on the Fed’s interest rate mismatch may prevent the central bank from making any remittances to the Treasury for several years. We can look forward to the eventual reduction of the RRP facility by raising the rate paid on reserves but not the rate for reverse RPs. Later this year, as short term rates rise, the Fed will force banks, money market funds and other investors out of RRPs. Media note: Somebody ask Chairman Powell about the timing of the “tapering” of the RRP facility, now $2.2 trillion. Think of the SOMA and RRPs as the asset side of the Fed’s ledger, while total bank reserves are the increasingly costly source of funding. The interest rate mismatch on the Fed’s balance sheet will give economists something to talk about at Camp Kotok, but for private lenders and investors, the legacy of QE may be capital losses and bankruptcy. Importantly, Bill Nelson notes that the elevated capital requirements for banks via the Supplementary Leverage Ratio (SLR) have had the unintended consequence of driving banks into the RRP facility. He wrote last week: “Eventually, prior to reserve balances declining further than the Fed wants, the Fed will need to widen the spread between the IORB rate and the ON RRP rate to drain the facility. Seems unlikely that the Fed will take that step at the July meeting, though. Money market rates have been low relative to the target range, so raising the ON RRP by only 70 basis points Wednesday could leave them below the target range. Raising the IORB rate 80 basis points could shine a brighter light on the expense of such a big balance sheet. Better to just wait a bit longer.” These most recent posts from the FRBNY research staff have clarified earlier Fed statements about the impact of unrealized losses on the SOMA. The authors of the FRBNY paper conclude: “While an unrealized gain or loss position on the SOMA portfolio does not directly affect the Fed's net income, if a higher expected policy rate path causes an unrealized loss position, this would be indicative of higher future interest expense. [fn] A higher policy rate path means that the Fed will have to pay more on its liabilities such as reserves held by banking system and the ON RRP facility.” Of note, Bill Nelson and Andy Levin of Dartmouth will be presenting our a new paper (“Quantifying the Costs and Benefits of QE”) at a Hoover workshop Wednesday July 27. He notes that whether the Fed loses money on asset sales or interest rate mismatch, the losses will occur: “As I explained in a blast email in May here ), the correspondence between unrealized losses and expected future remittances is, in fact, pretty tight. In particular, a change in unrealized gains/losses over an interval resulting from a change in the expected policy path is approximately equal to the change in the expected present value of future remittances.” Or to put it another way, past Fed statements have made it seem that outright sales of securities were being contemplated, which in turn would result in realized losses to the Fed and massive disruption to the secondary loan market for mortgages. Instead, this most recent missive seems to confirm that there will be no outright sales of securities from the SOMA , but the Fed will realize actual losses due to the asset/liability mismatch caused by rising interest rates. Final media note: Ask Chairman Powell how he and the members of the Committee think about the interaction between the swollen SOMA, large bank capital levels and the target for Fed funds. We suspect that merely asking that question will force Powell to reveal his true thinking regarding inflation. But do any of the journalists in the audience have the courage to ask? Specifically, after a modest reduction, the Fed plans to grow the SOMA and RRPs significantly to accommodate “reserve needs” (aka the federal deficit). The chart below comes from the FRBNY paper: Once upon the time, the Fed funds rate was a private market. Today it is a tool for public policy. As the Fed continues to expand its balance sheet, albeit after a modest adjustment, the only conclusion for reasonable people is that the central bank has embraced inflation as its primary tool to finance federal deficits. The Fed will, if necessary, destroy and subsume the private financial markets in order to keep the market for new Treasury debt open and functioning. The pursuit of the 50-year old dual mandate has become a threat to the stability of the US markets and the economy, a fact illustrated by the Fed’s actions over the past decade. Each time the Fed changes policy, greater volatility is seen in markets and throughout American society, as illustrated by housing. When Congress passed the Humphrey-Hawkins law half a century ago, the America’s public debt was tiny and had little impact on Fed policy. Today, managing the Treasury’s debt is the Fed’s primary though unspoken task and explains the vast growth in the Fed's balance sheet. There has never been a better time for Congress to repeal the Humphrey-Hawkins law and refocus the Fed entirely on price stability.

July 21, 2022 | A while back our friend and mentor Alex Pollock wrote an important comment in Housing Finance International , “ The government triangle at the heart of U.S. housing finance ,” which discussed the huge expansion of the role of the central bank in the US economy since 2008. He writes: “The U.S. central bank’s great 21st century monetization of residential mortgages, with $2.7 trillion of mortgage securities on the books of the Federal Reserve, is a fundamental expansion of the role of the government in the American housing finance system. In Economics in One Lesson (1946), Henry Hazlitt gave a classic description of those whose private interests are served by government policies carried out at the expense of everybody else. ‘The group that would benefit by such policies,’ Hazlitt wrote, ‘having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case,’ with ‘endless pleadings of self-interest.’” We tend to think that the early period of Fed manipulation of the mortgage markets in 2020 and 2021 was a good idea, if for no other reason than giving the mortgage industry the cash to help millions of Americans avoid default during the COVID lockdown. The alternative would have been a 1930s style debt deflation with millions of home foreclosures that would have made 2008 seem blissful by comparison. But whereas in 2020 and 2021 the mortgage industry originated trillions of dollars in new loans, in 2022 the industry will be lucky to break $800 billion in new issuance of agency and government mortgage backed securities (“MBS”). As existing home sales fall, the issuance of MBS will likewise plummet. Home mortgage rates are over 6% and headed higher. The decline in existing home sales carries several immediate implications, writes Glenn Schultz , head of agency MBS prepayment modeling and strategy at MUFG Securities . “Issuance volume, at this point we are confident 2022 issuance will reach the mid-point of our forecasted range of $600 to $800 billion. Looking into 2023 we believe issuance will decline balancing supply/demand fundamentals.” Schultz says that MBS turnover will continue to decline and prepayments will likewise moderate. He expects the rate of home price appreciation to continue at a double digit pace through 2022, however, only moderating in 2023 as supply and demand balances. Schultz says further that existing home sales will probably decline below five million units on an annualized basis due to demand destruction caused by higher mortgage rates and strong home price appreciation. So here is the obvious question in the minds of readers of The Institutional Risk Analyst : Why is the Fed continuing to reinvest prepayments and redemptions on its $2.7 trillion system open market account (SOMA) MBS portfolio? In hindsight, the Fed should have ended all purchases of MBS a year ago, when new issuance volumes started to drop. Yet the MBS purchases continue. We appreciate the comments from various people on our recent column in National Mortgage News , (“ Faulty bank stress tests are hurting the mortgage market ”), which highlights the continuing conflict between Fed monetary policy and the central bank’s regulation of large banks. Suffice to say that the latest Fed bank stress tests are so far off the mark that we cannot even construct a reasonable facsimile of the test results for JPMorgan (JPM) using the regulatory data from the FFIEC. We wrote: “The situation with respect to the Fed and bank stress test results is more than a bit ironic. The potential losses that the Fed’s fantastic stress tests envision are the direct result of the manipulation of the housing sector and global credit markets by the Federal Open Market Committee under ‘quantitative easing’ or QE.” So when the Fed finally stops reinvesting redemptions and prepayments from MBS, the large banks regulated by the central bank will also be selling residential mortgage exposures because of the skewed results of the bank stress tests. How is this helpful? Does the Fed’s Board of Governors really want to crater the market for housing finance by having both large banks and the SOMA as net sellers? Looking from the perspective of mortgage lenders, it sure looks that way. Leaving monetary considerations aside for a moment, why save mortgage lenders in 2020 but kill them now by hiking the Fed funds rate? Meanwhile, between July 15, 2022 and July 28, 2022, the FOMC is scheduled to buy $6 billion in MBS . If annual issuance of new MBS is only running at $600 to $700 billion or one quarter of 2020-2021 levels, then why is the FOMC still buying $10-15 billion per month in MBS for the system open market account? Is this meant to offset the impact of rate target increases? If so, then it's not working. Since nobody in the media thought to ask that question at the last FOMC press conference, we do not know the answer. Maybe next week. In our last edition, we noted that the 10-year Treasury note has rallied nearly 50bp in yield since the middle of June, driving the on-the-run contract in the forward market for residential mortgages back down to 4.5% coupons for Fannie Mae MBS. If you were too short on your TBA hedge, too bad. Meanwhile the net longs are filled with joy. And all of this because of the profound lack of sensitivity of the FOMC to that most mysterious of things, market forces. The time to taper MBS purchases for the SOMA is when market demand is high. Demand for risk-free assets such as agency and government MBS is very high at the moment, largely because issuance across the board is falling. This is bad. We applaud Fed Governor Christopher Waller for urging his colleagues to resist the temptation to hike rate targets 1% next week. The real message to the FOMC is this: hike another 75bp in July and then let the Fed funds target sit for a few meetings while you let the SOMA portfolio shrink, slowly. The 10-year Treasury is heading toward 2.5%, high yield spreads are tightening and the dollar is strong. Take the gift. One of the truths of American monetary policy is that the FOMC, being a creature of politics, always does too much. The FOMC bought too much Treasury debt and MBS since the 2008 crisis and, especially, since the outbreak of COVID. When you increase the money supply w/o a proportional increase in productivity, you get inflation. Now the Fed seeks to regain virtue by over-correcting on the anti-inflation medicine, but risks recession and market contagion in the process. Just as the Fed badly needs to consider the interaction between monetary policy and large bank capital rules, the central bank also needs to better understand and articulate the trade-offs between rate target increases and changes in the balance sheet. Chairman Powell, to his credit, has admitted that the FOMC does not understand how to calibrate changes in rate targets vs changes in the SOMA. Given this uncertainty, we think that the Fed should do less not more, with a view to reducing the level of volatility in the system introduced by the Fed’s very own “go big” tactics on QE in 2020 and 2021. Market rates have already moved hundreds of basis points since January. More important, issuance of new securities is headed into the floor, a serious red flag for policy makers that want to see the US economy continue to function and grow. Maybe now is the time for the FOMC and the financial community to admit that the solution to inflation may take time and also may be beyond the power of central banks to fix in the near term. That requires political courage; the courage to say “no” to the screaming mob in the political community and the media, just as former Chairman Paul Volcker had to ignore many loud critics half a century ago. Governor Waller is right. Slow down.

July 19, 2022 | Premium Service | We start this issue of The Institutional Risk Analyst by noting that the Fannie Mae 4.5% MBS for delivery in August is now above par, a measure of the impact of the bond market rally seen since the mid-June peak of 3.43% for the 10-year Treasury note. Today the 10-year T-note opened below 3% as the yield curve is now inverted from 2s through 10s. Many analysts have still not caught up to the fact that the bond market has been in rally mode for the past month. “We think in the short term spreads have the potential to go wider and only when the risk factors start to abate would we expect spreads to turn tighter,” Bank America (BAC) analysts Jeana Curro and Chris Flanagan wrote in a July 15 client note. “Over the long term we would expect mortgages to outperform, but the timing is of course tricky.” Tricky indeed. Meanwhile, BAC reported earnings this week and the results were decidedly mediocre, as we predicted in our earlier missive. First lien originations fell but home equity lines rose. Net interest income rose by $3.5 billion, but non-interest income fell by $2 billion in the first six months of 2022. A $1.5 billion tax bill and $500 million in provisions (both items were negative last year) and BAC’s net earnings were down $4 billion in the first six months of 2022. The summary from BAC’s earnings presentation are below. BAC is currently trading at book value, which given the outlook for the company is probably about right. With 8 billion shares outstanding, BAC is one of the most widely held stocks on Wall Street and, as a result, has an army of apologists among Buy Side managers and the media. They've all made the same mistake and spend enormous time in justification. Even though the bank continues to underperform its asset peers, CEO Brian Moynihan was praised in the financial media for a strong quarter. “Bank of America revenue tops expectations as lender benefits from higher interest rates,” CNBC declared on July 18th. But Moynihan continues to fall short in terms of his bank’s performance vs its peers. The good news for BAC and other banks is that there is a discernable lift underway on the yield of bank balance sheets, with the return on earning assets (ROEA) for BAC up to 2.23% in Q2 from 1.89% in Q1 2022 and 1.79% a year ago. The difficulty is getting BAC and other underperformers such as Well Fargo (WFC) to tighten up their operating efficiency while they also build capital to meet higher requirements from the Fed. “Management [at BAC] expects to build CET1 to 11.5% by the end of 2023 in response to increasing SCB & CSIB surcharges through a combination of organic capital generation and balance sheet optimization,” writes Jeffrey Harte at Piper Sandler. “While buyback activity is likely to be subdued in the near term, management sees an ability to continue repurchasing shares.” BAC, for example, dropped its efficiency ratio down to 66% in Q2 2022 vs 68% in Q1 and almost 70% a year ago. But the bank is still not in the right neighborhood with JPMorgan (JPM) and U.S. Bancorp (USB) in the mid-60s in terms of efficiency. The chart below shows efficiency ratios for the top-five banks. Source: FFIEC, EDGAR Citigroup (C) was the big winner in Q2 2022 in terms of results, not so much in terms of the size of the increase in revenue and earnings but rather the stability of the results. The sub-65% efficiency ratio is also good news. The six percent increase in net income contrasted with the sharply lower results of some asset peers. One of the ways that CEO Jane Fraser can rebuild support among investors is to deliver results with less volatility and more consistency than BAC or WFC, which continues to be badly wounded from its regulatory problems. WFC’s revenue fell $500 million in Q2 2022 and was down 11% in the first half of the year. The bank’s loyal following among managers is being tested by the deliberate downsizing of the bank, including a double digit runoff rate for residential mortgage exposures. With Tier 1 leverage sitting at 8%, we’d not be surprised to see further reductions in assets. The annualized ROEA for WFC was 2.7% at June 30, 2022, a good bit above BAC. Most of the banks reporting last week saw slippage in residential mortgage lending and servicing. WFC saw third-party servicing assets fall below $700 billion as the bank continued to shrink. It was not so long ago that WFC's assets serviced for others was measured in the trillions of dollars. “JPMorgan Chase, the second-largest depository home lender in the nation, originated $27.9 billion of first liens in the second quarter, a 7.6% sequential decline,” Inside Mortgage Finance reported. “Compared to the same quarter a year ago, loan production skidded an ugly 59.3%.” During last week’s earnings call for JPMorgan Chase (JPM) , CEO Jamie Dimon rebuked the Federal Reserve Board and other regulators for what the veteran operator described as “ridiculous” bank stress tests. He then went on to say that JPM and other banks will be forced to reduce 1-4 family mortgage exposures because of the Fed’s poorly conceived bank stress tests. “We don’t agree with the stress test,” Dimon said. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious [and] arbitrary. We do 100 [stress tests] a week. This is one. And I need to drive capital up and down by 80 basis points? So, we’ll work on it. We haven’t made definitive decisions. But I’ve already mentioned about how we dramatically reduced [risk weighted assets] RWA this quarter. We may do that again next quarter.” What is raising Jamie Dimon’s ire? Regulators recently determined that JPM could lose $44 billion in a highly stressed economic scenario, in large part on its $250 billion portfolio of 1-4 family mortgages. As a result, JPM is curtailing share repurchases until at least 2023. Read our analysis in National Mortgage News (" Faulty bank stress tests are hurting the mortgage market "). The other interesting notes so far in this earnings season was the rebound of Silvergate Financial (SI) , the small bank located in Southern CA that was trading 12x book value in March of 2021, but then collapsed with the crypto bubble. SI has been up over 30% in the past month but is still down almost 50% YTD. Another notable name from the world of crypto, Signature Bank (SBNY) had also rebounded strongly along with SI, but then got clobbered when strong earnings results were combined in a significant run off in crypto related deposits. SBNY is still down almost 50% and has given up all of its gains of the past month. Finally, a name we highlighted recently, Ally Financial (ALLY) , came in low on earnings and high on loan loss provisions, pushing the stock lower. The bank continues to originate auto paper and, indeed, beat analyst estimates by a wide margin. The good news is that the bank is “only” trading +270bp in five-year credit default swaps, but the ALLY 5 3/4s of 2025 and 4 3/4s of 2027 are trading +250bp in terms of the mid-market spread. Bottom line on banks earnings: Higher credit provisions and taxes, and lower revenue seem to be the basic picture. Rising rates are starting to reprice bank assets, a process that promises to increase asset and equity returns in the future. But balancing this bright prospect will be continuing worries about credit after several years of great moderation by the FOMC. The fact of rising credit provisions at banks suggests that the great normalization is well underway. Next in the Premium Service of The Institutional Risk Analyst, we’ll be looking at the Wall Street universal banks and advisors – GS, MS, SCHW, RJF. Our bank surveillance group is shown below. Please keep those questions and comments coming. Source: Bloomberg (7/18/2022) The Institutional Risk Analyst is published by Whalen Global Advisors LLC and is provided for general informational purposes. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

In this issue of The Institutional Risk Analyst, we feature a great comment by Brian S. Wesbury and Robert Stein of First Trust Advisors . We are often baffled by the frequency with which otherwise savvy observers predict the demise of the dollar as the global reserve currency. In fact as the authors confirm, the global usage of the dollar in commerce and finance is increasing as other nations of the world slide into war and economic malaise. Neither Russia nor China nor even the European Union have the combination of liquidity, free markets and the rule of law that could displace the dollar's leading role in the global economy. Dollar Remains World Reserve Currency By Brian Wesbury & Robert Stein July 14, 2022 How many times have you heard that the US dollar will collapse because of Fed and fiscal policy? According to the pessimists, this will bring the loss of reserve currency status, and possibly the rise of China. Replace China with Russia, and it sounds like the 1970s. Inflation is out of control, energy prices have surged, geopolitical tensions are rising, and Presidents (then Nixon, lately Trump) were replaced by widely perceived weak leaders from the opposite side of the aisle. Though all these pessimistic forecasts are related, there is one very important distinction. The dollar is not weakening, as it did in the 1970s, the dollar is surging. Yes, in absolute terms your dollars are worth less every day due to rising prices. However, when comparing the dollar to other major currencies (in other words looking at the relative value of the dollar) the story is the exact opposite. The dollar has soared over the past twelve months and currently sits at a 20-year high according to the Bloomberg US Dollar Index . The Euro just fell below parity with the US dollar for the first time since 2002. Sure, you may not be able to buy baby formula, but at least it’s a good time to start planning that European vacation. This is the opposite of what happened in years leading up to Paul Volcker’s tenure at the Federal Reserve. From the late 1960s to the early 1980s, the dollar was collapsing in international markets, falling roughly 30% peak to trough. The dollar was at risk of losing its reserve currency status. Why? The US Government decided to use the dollar’s strength to monetize the debt from Vietnam War spending and President Johnson’s huge expansion of the welfare state through the Great Society programs. (They called it “Guns and Butter”). These dollars started accumulating abroad, and the Europeans (and others) saw the writing on the wall and asked for gold. At the time, the global financial system still operated under a gold standard. This led President Nixon to close the gold window and devalue the dollar. And, voila, the fiat currency era was standardized. The bottom line is that this was terrible for the dollar’s reputation internationally, precipitating its collapse in foreign exchange markets and creating even more inflation. Inflation clearly played a role in the Volcker Fed’s decision to send short-term interest rates to a record high of nearly 20% in the early 80s. However, saving the US dollar’s reputation and reserve currency status was also a priority, even if it meant sacrificing the real economy to do it. Today, while the US is dealing with plenty of economic problems, bailing out the dollar’s reputation thankfully isn’t one of them. Moreover, there is no potential shock like the end of the gold standard that could happen today. You can only go to fiat once. So, why has the dollar performed so well recently? First, the US economic recovery has been stronger than pretty much anywhere else in the world, owing to the ability of states to manage much of the response to COVID which allowed certain regions to remain relatively open. Second, the war in Ukraine has caused a flight into US currency. We are the security umbrella for Europe and have the best defense companies in the world, a resource that now seems to be carrying a much bigger priority abroad. The US energy sector also looks set to displace Russia’s market share in Europe as well. Finally, the Federal Reserve is raising rates while our biggest competitors in the currency space, Japan and Europe, continue to be remarkably dovish despite the global nature of the inflation problem. While there is plenty of negative news to focus on, the collapse of the US dollar thankfully isn’t on that list. If anything, reserve currency status looks stronger than ever. Once again the US is coming out of a global crisis as the cleanest dirty shirt in the laundry.

July 13, 2022 | Premium Service | For the past several weeks, we have watched as credit default swap (CDS) spreads for Ally Financial (ALLY) have widened out, to the point where the implied CDS is close to 280bp over the curve. While many readers of The Institutional Risk Analyst have been watching crypto fiascos like Silvergate Financial (SI) and Signature Bank (SBNY) , the prospect of financial problems for the 23rd largest bank holding company (BHC) and a large ABS issuer is cause for concern. But have any of the US bank regulators noticed? Back in September 2020, we profiled ALLY (“ Bank Profile: Ally Financial Inc ”) and focused especially on the bank’s still high funding costs relative to its peers. We also noted that the yield on the loan portfolio is low vs the risk, especially given the large consumer exposures at ALLY. Since that time, ALLY has improved its financial performance and has evolved into a stand-alone consumer lender operating via an online (aka “wholesale”) funding platform. With earnings expected on July 19th of this month, the market action in the stock, options and related debt is decidedly bearish. Source: Bloomberg (07/13/22) The put/call ratio on ALLY is almost 10:1, Bloomberg reports. More, the bank’s debt is trading 250bp over the Treasury curve, roughly 3x the OAS spread for large banks. The 5-year CDS spreads for ALLY were trading 280bp over the swaps curve compared with 120bp for Citigroup (C) and 150bp for CapitalOne Financial (COF) . What gives? We suspect that the large (> 50%) consumer loan exposure of ALLY is the chief reason that the $180 billion bank is attracting the attention of short-sellers. The sharp upward skew in loss rates in Q1 2022, both for COF and ALLY, was not helpful. COF, let us recall, has a gross yield near 10% and a yield on its credit card portfolio in the mid-teens. Loans to individuals at ALLY accounted for almost 60% of total loans in Q1 2022, making for a decidedly bad position for the bank going into a recession. C&I loans accounted for 20% and real estate loans were just 20%. Indeed, ALLY’s exposure to individuals is among the highest in Peer Group 1, with the bank ranking in the 97th percentile. Source: FFIEC While ALLY has tracked the other large banks down in value since June, the change in spreads on the CDS and bonds caught our eye. Simply stated, ALLY is trading more like a nonbank finance company than a bank, a function of the fact that the bank has more loan exposure than its mainstream peers. Yet the funding profile of ALLY is quite solid, with better core deposits than when we looked at them in 2020. Over 90% of the bank’s debt has maturities over five years, among the best in Peer Group 1. But bottom line, ALLY has some of the most expensive funding among large banks even compared to Citi and COF. Source: FFIEC On the credit side, ALLY is well-reserved against credit loss, but its loss rate is 4x peer because of the nature of the bank’s consumer lending business. Likewise, part of the reason that ALLY has been able to grow core deposits is because the bank pays up for money, with interest expense at 0.91% of average assets vs 0.2% for Peer Group 1 and less for the money center banks. ALLY has far more large time deposits than do banks of similar size, a component of the funding equation that regulators view as a red flag. The bank also has lower capital than its peers, another fact that may weigh upon the credit in the context of a deep recession. The spike in the bank’s loss rate in Q1 2022 may have served as a catalyst for negative sentiment. Source: FFIEC ALLY had a gross loan yield of 5.7% vs less than 4% for Peer Group 1 and 5.32% for Citigroup. By achieving higher loan yields, ALLY has been able to push next interest income above 4% of average assets vs a bit below 3% for Peer Group 1, a reflection of the higher default rate target for the bank’s business model. The skew in ALLY’s loss rate in Q1 2022, however, suggests a degree of volatility and unpredictability in results that is an obvious concern since most other banks continue to show benign credit performance. In a recession, some investors clearly believe, the bank will likewise be subject to higher loss rates. We agree. ALLY has adequate but costly funding and liquidity, but too little spread on its loan book. We think that in a recession the bank will come under growing pressure in the equity markets and may need to be sold. As we've noted in past missives on ALLY and in our testimony before SIGTARP, the ALLY business model is not sufficiently subprime a la COF to generate enough income to offset potential credit losses in a deep recession. We suspect that is why the stock, debt and CDS of ALLY are under growing pressure. The Institutional Risk Analyst is published by Whalen Global Advisors LLC and is provided for general informational purposes. 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.

July 11, 2022 | A reader of The Institutional Risk Analyst shared this great tweet from @MacroAlf about the duration of reserve currencies over the centuries. As we noted in our 2010 book, " Inflated: How Money & Debt Built the American Dream ," the British Empire tossed the ball to the US after WWI. Notice that even in the Middle Ages, when China was a great empire, it’s currency was not exported abroad nor was it expansionist. China in the 1400s was largely self-sufficient and had no need of predatory trade tactics as today. Sometime in the mid-1400s, the Hongxi emperor ended symbolic trade with the west in order to save money and focus on internal threats. Immanuel Hsu wrote in his classic "Rise of Modern China": "The Chinese attitude towards foreign trade was an outgrowth of their tributary mentality. It postulated that a bountiful Middle Kingdom had no need for things foreign, but that the benevolent emperor allowed trade as a mark of favor to foreigners and as a means of retaining their gratitude." Six centuries later, little has changed in terms of Beijing's attitude to foreigners and domestic security. The country remains hobbled by an authoritarian government whose chief aim is continuance, making it economically vulnerable and socially unstable. As the Chinese Communist Party employs ever more harsh methods to retain power, the day of reckoning inevitably approaches. As in the 1400s, the chief concern of the occupants of Beijing is security from rising domestic social unrest. Most recently, the shift away from an outward-focused economic orientation in China came about because Xi Jinping , who has systematically eliminated political rivals, turned his attention to power centers in the business community. Along with a more general purge of “corrupt” cadres in corporate suites under the party’s “United Front” effort , Xi’s nation prison now features smart phone apps that can instantly downgrade a Chinese citizen's status or even cut off access to money, travel and health services. Party control over private business is increasing in China. Xi has sought to “integrate the Party’s leadership into all aspects of corporate governance” and “clarify” its legal status within the corporate governance of private companies. The aggressive reassertion of communist control over private enterprises in China is a problem for many western companies and for many reasons. The decision by the European Union to name China as a strategic threat is only the latest in a series of actions to highlight the predatory nature of the Chinese state. Many foreign companies have been forced to leave Vladimir Putin’s nation prison since the start of the Russian war with Ukraine. But there are a large number of foreign companies that are being quietly pressured by the US and other nations to relocate significant productive assets outside of Beijing’s sphere of control, this on the assumption that relations with China could deteriorate in a similar fashion to the break with Moscow. Major Taiwan semiconductor makers, for example, are building new production facilities in Japan, Europe and the US. One of the most visible foreign companies operating in China is Tesla Motors (TSLA) , creation of global business mogul Elon Musk . Like domestic Chinese business leaders, Musk has been forced to praise Beijing in his public comments , imitating the groveling seen by Alibaba (BABA) founder Jack Ma and other Chinese business leaders in response to Xi Jinping’s crackdown. As the mirage of globalization slowly fades and relations between the US and Beijing inevitably deteriorate, Musk will eventually be forced to make a decision about continuing to do business in China. If readers of The Institutional Risk Analyst take a moment to examine TSLA’s filings with the SEC, Musk is entirely silent about the risk of being forced to leave the Chinese market. While the latest TSLA 10-K details scores of loans provided by state-controlled Chinese lenders and tax breaks granted from the Chinese government, there is no hint in TSLA’s public disclosure that Musk may eventually be forced to abandon the China because of a political break between Beijing and Washington. Thus we come to Musk’s abortive takeover attempt for Twitter (TWTR) , a half-hearted effort that was never really possible financially or politically. The fact that Musk spent his credibility pretending to have an interest in acquiring TWTR illustrates how little he understands the precarious position he occupies between China and the US. Why do we say this? Because the US government would never actually allow Musk to control TWTR or any other US media company. “By dominating the supply of multiple components critical to the fortunes of Tesla, the Chinese government holds so much leverage over chief executive Elon Musk’s wealth that his planned acquisition of Twitter should concern national security leaders,” a dozen current and former officials involved in reviewing foreign investments told The Washington Post in June. As we noted last year (“ Update: New Residential Investment, Fortress & Softbank ”), if the US Committee for Foreign Investment in the US (CFIUS) would not allow SoftBank Group (SFTBY) to take full control over Fortress Investment Group , there is no way that Washington would allow the foreign-born Elon Musk to take operational control over TWTR or any US media property that has access to consumer data. Remember, in the world of global trade and investment, it’s all about the data. China’s financial participation in TSLA is so extensive that Musk arguably should register as an agent of the Chinese government. But the irony is that despite the sway that the Chinese Communist Party has over TSLA, the firm is still seen as an outsider in the Chinese market and a possible security threat because of fears of spying for the US! "There's a very strong incentive for us to be very confidential with any information," Musk told an influential Chinese business forum in 2021 . "If Tesla used cars to spy in China or anywhere, we will get shut down." His comments came in response to reports that China's military had banned TSLA cars from its facilities. Naturally, once the Chinese have stolen as much technology and know-how as possible from TSLA, the firm will be marginalized in favor of state-supported competitors in the world of electric vehicles. And as the pretense of globalization fades and the level of confrontation between China and the US grows, Elon musk will be forced to make a choice. Questions: When will Elon Musk inform his TSLA investors about the real and growing risk of being forced to exit China? Why did Elon Musk ever pretend that he was able to acquire TWTR, a transaction the US government would never allow? Today, Republican candidates are falling all over themselves to ingratiate themselves with Musk, but a military conflict with China over Taiwan will change that narrative very quickly. Will Musk's close ties to China's communist government eventually threaten his control over TSLA as well as SpaceX? Stay tuned.

July 7, 2022 | Premium Service | What are the best banks for investors seeking to weather the storm of consumer price inflation and equity deflation that currently grips global markets? For long-time readers of The Institutional Risk Analyst , this is a simple question to answer. In times of market volatility and suddenly ended delusions of easy money, the prudent path is to fly to quality . Below we take a look at how some of the best performing US banks did through the end of the first half of 2022 and what to expect next from some of the exemplars among the group. By far the best performer in 1H 2022 has been Raymond James Financial (RJF) , which is down roughly 10% so far this year. At 2x book value the regional bank and advisory business has managed to hold its ground better than its larger peers. With just $72 billion in total assets, RJF ranks 42nd in the US among bank holding companies (BHCs). The St Petersburg, FL, BHC, however, has $1.1 trillion in private client group assets, 56% of which are in fee-based accounts. RJF makes 4x as much profit and revenue from its advisory activities as it does from the bank. Notice that RJF has significantly out-performed Morgan Stanley (MS) in the first half of 2022, largely due to the larger organization's market exposures. Next on the list after RJF is Discover Financial (DFS) , the credit card issuer that is also the 37th largest BHC at $107 billion in total assets. DFS is down just 15% YTD and most of that in the past month. DFS is currently trading at 2.2x book while the larger monoline card issuer, CapitalOne Financial (COF) is trading at 0.8x book. What gives? Both are consumer lenders with gross loan spreads near or above double digits. The major difference between DFS and COF is profitability. DFS is twice as profitable as COF measured by net income vs average assets. DFS has a higher default rate and a higher gross loan yield than COF, and a higher cost of funds than its peers. Yet the management of DFS delivers significantly better financial performance quarter after quarter. One big reason: Asset turns. DFS manages its balance sheet far better, with over 100% of average assets deployed in earning assets. COF, by comparison, had just 91% or ten points below DFS deployed in earning assets. Readers of The Institutional Risk Analyst will recall that DFS for many years has been one of the best performing US BHCs in terms of asset and equity returns. It’s constant companion in this regards is American Express (AXP) , another high performing card issuer that reached 6.5x book value during the QE stock price inflation. Indeed, DFS and AXP frequently trade first place in terms of market value and overall financial performance. At almost $200 billion in assets, AXP is the 20th largest BHC in the US and often the top performer among large banks in financial terms. AXP reported net income of 4.5% vs average assets in Q1 2022 compared to 4.6% for DFS and just 1% for Peer Group 1. Now you know why few of the top-four US mega banks are highlighted in this report. The difference between AXP and DFS seems to be the greater consistency of the former in terms of earnings, which shows up in a 20% higher market multiple. Next on the list are two names our readers know when, Wells Fargo (WFC) and Toronto Dominion (TD) . Both names attract attention because they are large cap stocks and because they are relatively cheap compared to the group. We previously wrote about WFC (“ Bank Earnings Setup: JPM, USB, WFC, BAC & Citi ”) and TD (“ Profile: Toronto Dominion Bank ”). WFC is a down-on-its-luck story that some equity managers find attractive, much in the same way that some investors like underperformers such as Bank of America (BAC) . These larger names have poor equity and asset returns, and but offer the comfort of liquidity. TD is a large, mediocre asset manager and lender that has the same characteristics as BAC and WFC, but with little exposure to the global capital markets. The $520 billion asset US arm of TD is one of the worst performers financially in Peer Group 1. In Q1 2022, TD Group US Holdings reported net income to average assets of 0.71%, significantly below the Peer Group 1 average. Finally, we come to U.S. Bancorp (USB) , which at this writing was down 16% at the end of June 2022 but has outperformed JPM and the other large money centers. USB has above peer financial performance, a very large domestic payments business and little exposure to the capital markets. But the fact is that JPM has fallen twice as much as USB has in the first half of 2022. At 1.5x book, USB is not particularly cheap, but we own the preferred and may start nibbling on some of these better performers in coming weeks. Given the current rate of inflation, many stocks are cheap by definition. That said, all of the financials that we track could move significantly lower in coming months as the FOMC desperately tries to regain some measure of credibility when it comes to inflation. Banks are, after all, 100% correlated to interest rates. Disclosures: EFC, CVX, CMBS, NVDA, WMB, BACPRA, USBPRM, WFCPRZ, WFCPRQ, CPRN, WPLCF, NOVC The Institutional Risk Analyst is published by Whalen Global Advisors LLC and is provided for general informational purposes. 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.

July 4, 2022 | Today America celebrates its liberation from British tyranny two and a half centuries ago. Then as now, we face new threats at home and abroad, but these hazards spring largely from hubris. As the winner of WWII and the Cold War, American became entirely assured in all respects. Jeffrey Sachs describes the American surrogate war in Ukraine as a success for the neo-conservative movement going back decades, long before Presidents George W. Bush and Barack Obama : “The war in Ukraine is the culmination of a 30-year project of the American neoconservative movement. The Biden administration is packed with the same neocons who championed the U.S. wars of choice in Serbia (1999), Afghanistan (2001), Iraq (2003), Syria (2011), Libya (2011), and who did so much to provoke Russia’s invasion of Ukraine. The neocon track record is one of unmitigated disaster, yet Biden has staffed his team with neocons. As a result, Biden is steering Ukraine, the U.S. and the European Union towards yet another geopolitical debacle.” The Federal Reserve Board, for its part, pretended to be in control of the US economy up until the end of last year. With the shattering of the low-inflation illusion, however, the pretense of managed stability of markets that goes back 50 years also is discarded. The Fed now has seemingly set up the US markets for a very hard landing. Think of a hard landing for the US economy as the Fed deliberately inducing a recession sufficient to lower equity valuations and home prices 20%. For those not familiar, this is like an autorotation in a dead helicopter from about 5,000 feet. You shut the engine down and land using the rotor as a wing. The great video from YouTube provides step-by-step instructions. Please don’t try this at home. https://www.youtube.com/watch?v=X5vA3OqnVuc By manipulating the $12 trillion mortgage market via QE, the Fed not only disrupted the enormous housing sector, but has also clotheslined (h/t Tim Rood ) the entire financial community and bond market, and thereby caused corporate credit spreads to blow out. Leverage is now the enemy instead of your friend. The result is a growing list of distressed financial companies and investments. Banks are hoping for higher loan yields, but with the yield will come sharply higher credit defaults. Q: Do we all still believe that “QE” is a form of economic stimulus? The collapse of First Guaranty Mortgage last week probably was not a surprise to readers of The Institutional Risk Analyst . The PIMCO -controlled nonbank lender was mostly third-party origination, which in this market is an excuse to lose money in large chunks. But the rapid move in interest rates is what killed this independent mortgage bank and will kill many more. Lenders are often down cash when they close your mortgage loan, but losing money selling the loan into the bond market is fatal. When the on-the-run TBA contract is trading at a discount, that means that you lose money on the sale of the loan. The 400bp increase in US mortgage rates over the past six months is the proximate cause of the failure of FGMC and huge capital losses in the secondary loan market. The Friday-close screenshot from Bloomberg last week shows that the on-the-run contract for loans deliverable into a FNMA MBS for July is 5.5%, but the TBA 5s have rallied back to a premium in the past several weeks with the rebound of the 10-year Treasury note. In particular, notice that the 10-year Treasury moved 21bp in yield on just Friday, a direct result of volatility caused by the FOMC’s market manipulation. Source: Bloomberg The fault for the failure of FGMC lies directly with the Fed, so let’s all please dispense with the handwringing about the risk of nonbank finance. The Fed and its’ increasingly reckless open market intervention are the chief risks to all forms of financial intermediation. Indeed, the social phenomenon called crypto is the result of QE and, despite the happy talk from US officials led by Federal Reserve Chairman Jerome Powell , is a threat to the US financial markets. It takes one pebble to start an avalanche. Notice that the financial media finally has taken note of some infamous names very familiar to our readers (“ Profile: Silvergate Capital Corp (SI) ”). Signature Bank (SBNY) and Silvergate Capital (SI) are perhaps the most visible examples of real banks diving into the surreal world of crypto tokens – we won’t call them “currencies.” These FDIC-insured banks (as well as many others) got caught in the trap of “lending” on crypto as “collateral,” a clear act of idiocy that fully deserves federal prosecution. When you as the officer or director of a federally insured bank cause a capital loss by lending against nonexistent collateral, that is called bank fraud. And there are some very interesting names from Wall Street, sports and celebrity behind some of these bank crypto projects. Stay tuned. “Signature Bank uses an Ethereum based payments application to serve its customers,” noted Damian Mark on SeekingAlpha in February . “The bank is materially growing its crypto deposits and has been recognized by Forbes as a top 50 blockchain company (2021).” Obviously, this would not be a flattering description in July 2022. Q: Is Ethereum an asset or a receipt for cash? Both SNBY and SI have deep roots in the world of secured lending, but this legacy has not prevented the managers of these institutions from risking their depositories on what seems a pretty clear example of “unsafe and unsound” banking practices, to borrow the language from 12 CFR Part 337 . Few of the players in the world of crypto even know that transactions that disadvantage a bank can be construed as felonies under federal law. Fortunately for the crypto community, federal bank regulators are still largely clueless about the risks of crypto to US banks. It’s not the sheer size of the crypto Ponzi that matters, but instead the potential for surprise, that key ingredient for a systemic event. Like if SBF , founder of Alameda Research and Bahamian crypto exchange FTX , backed away from rescuing foundering crypto ventures. That would be a surprise for many, but not for all. Putting dollar leverage under crypto tokens – that is to say, under nothing – makes for infinite dollar risk. Yet as we noted on Twitter last week, there are actually some fools in the global bank regulatory community that think allowing banks to invest 1% of total assets in crypto is acceptable. After a few months of QT from Chairman Powell, people talking seriously about crypto will be laughed from the room. Meanwhile, the wreckage in the world of private equity is building into a mountain of disappointment that could easily rival the crypto bust. “Over 140 VC-backed companies that went public in the US since 2020 had market capitalizations as of mid-June that are less than the amount of venture funding they raised,” according to PitchBook News . Add some leverage to that analysis and the PE market is yet another surprise waiting to happen. When the Fed gunned the bond market in April 2020, they set in motion an upward shift in short-term credit ratings and a related move in the equity markets, perhaps best illustrated by the flourishing of the market for special purpose acquisition corps or SPACs. Since the duration of QE was obviously finite, the SPAC offered an accelerated pathway to the public markets. Or put another way, when SPACs are popular, FOMC members should worry. But of course, we’ve seen this movie before. If we harken back to January 2021 (“ A Tale of Two Frauds: Bitcoin & GSE Shares “), via QE the Fed increased the bezzel to gigantic size, allowing all manner of frauds like crypto tokens and NFTs to blossom in the name of full employment. In the 1920s, investors traded fractional shares in FL real estate. In 2020, they traded pretend real estate visualized on a screen. Go figure. Now with the threat of QT, the “bezzle,” what John Kenneth Galbraith described as the “inventory of undiscovered embezzlement ,” is contracting – this even as the cash flow from financial assets has been reduced via QE. It would be difficult to imagine a risk management situation in the global capital markets more likely to generate anomalies and surprises. Happy holiday. Next in the Premium Service of The Institutional Risk Analyst, we look at some of the top-performing banks in our surveillance group and position our subscribers for the upcoming Q2 2022 earnings reports for financials.

June 28, 2022 | Premium Service | As we approach the end of the second quarter of 2022, let’s set up the top-five commercial banks for readers of The Institutional Risk Analyst . JPMorgan (JPM) , Wells Fargo (WFC) , U.S. Bancorp (USB) , Citigroup (C) and Bank of America (BAC) remain the largest commercial lenders in the US, but the top ten US banks now include Charles Schwab (SCHW) , PNC Financial (PNC) and Truist (TRU) . BNN Bloomberg 06/28/2022 As you can see from the list below, the top US bank holding companies have changed significantly over the past decade, with several large asset managers now among the larger depositories. There are three groups with lots of overlap, including commercial banks, universal banks and advisory businesses. The big issue facing US banks in Q2 2022 is the collapse of operating earnings after the end of GAAP adjustments to income in 2021. First banks reserved $60 billion for COVID. Then the Fed took $40 billion per quarter in interest earnings out of the US banking system via quantitative easing or QE, pushing the return on earning assets below 3% for large banks vs almost 4.5% in 2019. The chart below shows return on earning assets for the top five commercial banks and Peer Group 1. Source: FFIEC In 2021, the banking industry took that $60 billion in loss provisions back into income, further distorting the sequential and YOY comparisons for revenue and earnings. Stocks soared last year on the artificial boost of bank operating income caused by these GAAP adjustments. Notice that Peer Group 1, which includes 134 banks above $10 billion in assets, considerably outperforms the larger banks, followed by USB. JPM has the worst ROEA of the top five for the second quarter in a row, largely due to the grotesque size of the bank’s $3.9 trillion balance sheet. Accounting adjustments aside, the decline in earnings power inside all US banks is a direct result of the market manipulation of QE implemented by the FOMC, both in terms of inflating the deposit base and reducing asset returns. QE essentially confiscated earnings on Treasury bonds and mortgage-backed securities (MBS) from bank shareholders and transferred the proceeds to the US Treasury. This is what the folks inside the Federal Reserve Board call “stimulus.” Source: FDIC Now that the FOMC is moving in the direction of QT, however, the benefit to the Treasury is ending and banks will see asset returns improve as they did in 2017-2019. The key questions in this regard are 1) the magnitude and 2) the duration of the upward move in interest rates. The longer interest rates are elevated, the more opportunity banks have to repair the damage done to their balance sheets by the successive efforts of the FOMC under Fed Chair Janet Yellen and Chairman Jerome Powell . It is unlikely that banks will recoup interest income back to 2018 levels, which are half again higher than Q1 2022 results as shown in the chart below. Source: FFIEC As with the chart above showing asset returns, JPM, Citi and WFC were the laggards in terms of net income vs average assets. USB actually outperformed all of the other banks and also Peer Group 1, in part because of the bank’s refusal to grow above present levels. Even as it digests the acquisition of MUFJ retail branches in the West, USB CEO Andy Cecere sounded a very positive note during a June 14th conference call: “Our deposit balances are still well above pre-COVID levels. Spend levels are strong. Our credit card spend is up 35% versus pre-COVID, 15% above last year. There is a little bit of a shift from discretionary and non-discretionary spend. And credit is really good. We are not seeing any early indicators of any weaknesses. So there is – if you look at the here and now, it’s very good. But while we all have a base case, I think the range around that base case is pretty wide and we are prepared with those scenarios because of the uncertainty given inflation and the war and COVID and all those things.” Disclosure | L: EFC, CMBS, CVX, NVDA, WMB, BACPRA, USBPRM, WFCPRZ, WFCPRQ, CPRN, WPLCF, NOVC We own the USB preferred but are not tempted by the common, much as we like Cesare and his management team. The Street has USB growing revenue 10% in 2022 and 15% in 2023, metrics we find plausible given the bank’s acquisition and overall financial performance through COVID. USB is down just 16% YTD vs -27% for BAC and -26% for JPM. And to remind our readers of one of our favorite asset managers, Raymond James Financial (RJF) is down less than 10% YTD. After profits, the next place to turn is credit expense, which remains very benign at present despite a lot of predictions about bad times to come. We remain concerned that one of the side effects of QE was to skew credit costs downward, a factor that now seems destined to reverse and to the same degree. As the chart below illustrates, credit costs have fallen along with asset returns, but the former is likely to rebound faster and to a larger degree. Source: FFIEC Even the modest swing in credit expense back into positive territory, this after seeing credits to earnings from reversals of loan loss provisions in 2021, has dampened investor enthusiasm for banks. Most of the banks in our surveillance group are down between 10% and 30% so far this year, but none of these are particularly cheap as yet. The artificially boosted earnings in 2021 were a pretext for sharply higher market valuations, but now that process has been reversed and then some. Analysts are showing basically no revenue growth for JPM in 2022, for example, and then mid-single digits in 2023. Another factor that comes into play now as a headwind instead of a tailwind is the cost of funding, which still remains near record low levels but is starting to rise with market rates. Interest expenses vs average assets was just 17bp in Q1 2022 compared with 19bp for all of Peer Group 1. Source: FFIEC As interest rates slowly rise, the big question facing the industry for the future is when we’ll see spread expansion for loans. Bond spreads have moved significantly in the past 90 days, implying that banks will find greater pricing power in the future. The industry did see some loan growth in Q1, a positive trend driven by the exodus of credits from the bond market. Actually generating net growth in terms of bank loan portfolios, net of annual redemptions, however, will require higher growth rates. New high yield issuance is running at a quarter of last years levels, good news for yield hungry banks marginalized during QE. Many PE firms are already complaining about tightening loan terms from major banks for leveraged buyouts. The chart below shows the gross yield on all loans and leases for the top five BHCs, with Citi obviously far about the pack and Peer Group 1 because of the higher default target rate and accompanying loan spread. Notice that in Q1 2022 Citi was already starting to evidence significant lift in terms of gross yield before its asset peers. Source: FFIEC BAC continues to track at the bottom of the group in terms of loan pricing, one reason why the bank is competing with WFC for last place among the top five banks in many instances. Next in terms of pricing is USB, then JPM and Peer Group 1. The smaller banks in Peer Group 1 have far better loan margins than larger peers, making the performance of JPM remarkable. Morgan Stanley (MS) , Goldman Sachs (GS) , BAC) and WFC hiked their dividends this week after the U.S. banks cleared their annual stress test exercise. JPM and Citi made no change. The increase in dividends is logical because the banks as a group have excess capital and are unable to originate loans sufficient to utilize their deposit base. They might was well return the excess capital to shareholders, either via dividends or share repurchases, but the latter category is likely to be muted compared with 2019 and 2021. The chart below shows share repurchases as reported to the Fed on form Y-9. Source: FFIEC One of the most important measures of bank performance is operating efficiency, which is defined as: Overhead expenses / Net Interest Income + Non-Interest Income. The lower the number, the better able the bank is to take revenue down to the income line. No surprise that smaller banks are more efficient than their larger brethren, but note that JPM is below the average for Peer Group 1, a testament to the strong operating rules inside the House of Morgan. Source: FFIEC BAC, Citi and WFC are well-above average, a basic indicator that management is not addressing the cost side of the equation. The Street, for example, has BAC growing revenue by single digits in 2022 and 2023, yet listening to CEO Brian Moynihan on the most recent conference call, you might think that BAC was leading the large bank group in terms of financial performance. Part of the reason for the poor performance is the low asset returns already mentioned, which translate into an elevated efficiency ratio. Moynihan bragged in the Q1 2022 earnings call: “We reported $7.1 billion in net income or $0.80 per diluted share. We grew revenue, we reduced costs, and we delivered our third straight quarter of operating leverage coming out of pandemic. Net interest income grew 13% and is expected to grow significantly from here. We saw a strong loan growth. We grew deposits. We saw a strong investment flows. We made trading profits every day during the quarter. We grew pretax pre-provision income by 8%. We had a return on tangible common equity of 15.5%.” One of the big ideas of Moynihan in recent months was to swap the bank’s $200 billion Treasury portfolio into floating rate, but BAC will need more aggressive ideas to move the needle on asset and equity returns. The bank’s held-to-maturity residential loan portfolio contains another $500 billion in low-yielding assets. CFO Alastair Borthwick noted recently that $15-20 billion in prepayments come off the book each year, meaning that the low-yielding assets created in 2020-2021 will be with BAC shareholders for years to come. With WFC, the situation illustrated by the high 70s efficiency ratio is relatively problematic. The bank needs to cut its overhead expenses by about 8-10% in order to get back into line with its peers. The Street analysts have WFC revenue falling by single digits in 2022 as the bank continues to shed businesses. We’d discount any estimates for WFC next year as entirely speculative. This bank has great potential, but WFC is now less than half the size of JPM and is likely to get even smaller in the near future. The Institutional Risk Analyst is published by Whalen Global Advisors LLC and is provided for general informational purposes. 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.

June 27, 2022 | For many readers of The Institutional Risk Analyst , the past few months have been a bundle of contradictions, with interest rates rising at the start of Q2 2022 and now falling as the quarter concludes. Note the widening gap between the 10-year Treasury note and 30-year residential mortgage rates. With this in mind, we come back to JPMorgan (JPM) , one of our favorite large banks but one that is never particularly cheap because of the bank’s massive institutional following. The Q1 results were probably the best for this year and featured numerous cautionary statements from CEO Jamie Dimon . The big question for the money center banks, which as a group tend to be at most 50% core deposits, is about how the eventual imposition of quantitative tightening or QT will effect bank deposits. At $19.9 trillion as of Q1 2022, US bank deposits are about $3-4 trillion above normal levels. Steven Chuback of Wolfe Research asked the key question during the JPM analyst call: “In the past, you've spoke about the linkage between Fed balance sheet reduction and deposit outflow expectation for yourselves and the industry. And with the Fed just outlining a more aggressive glide path for balance sheet reduction, how should we be thinking about deposit outflow risk?” CFO Jeremy Barnum proceeded to answer the question in a thoughtful but overlong fashion. He noted that “industry-wide loan growth outlook is quite robust and that should be a tailwind for system-wide deposit growth.” He then continued: “Then you just have to look at what's going to happen in the front end of the curve particularly in bills. So the Treasury has to make decisions about weighted average maturity and what makes sense there. There's obviously a little bit of shortage, of short-dated collateral in the market right now. So, that might argue for wanting more supply there. The Fed has to make decisions about portfolio management. They talked in the minutes about using bill maturities to fill in gaps and so on and so forth. And so those things are going to interact in various ways.” Dimon, who warned shareholders earlier this year that the market is underestimating the number of Fed hikes that might be needed to curb inflation, then clarified the issue of QT and bank deposit runoff. “So the answer is we don't know, okay. And you guys should read economists' reports, but the fact is initially it probably won't come out of deposits. Over time, it will come out of wholesale and then maybe consumer. We're prepared for that. It doesn't actually mean that much to us in the short run. And the beta effectively, we don't expect to be different from what it was in the past. There are a lot of pluses and minuses. You can argue a whole bunch of different ways, but the fact is it won't be that much different, at least the first 100 basis point increase.” So now here we are at the end of June and JPM and the rest of the industry have already seen a 100bp move in market rates, but the Fed has still not clarified its intentions with respect to the SOMA portfolio. So if you are Jamie Dimon or the head of any of the major banks, you are not exactly getting clear guidance from Fed Chairman Jay Powell and the FOMC. Dimon advises that liquidity will drain from the system starting with wholesale balances, but this is hardly glad tidings from the biggest repo counterparty in the market. Since the Fed has not yet been able to convince most banks to utilize the standing repo facility, JPM remains a significant chokepoint in the institutional market for funds. And, in fact, deposit growth in the US banking system is already starting to slow, as shown in the chart below. Source: FDIC While total deposits in the US banking system continued to grow in Q1 2022, the rate of increase was the lowest in several years. More important, Q1 2022 is probably the peak in US bank deposits for this cycle, suggesting that the runoff described by Jamie Dimon may be occurring sooner and more rapidly than was anticipated in early April of 2022. Source: FDIC We anticipate that over the course of the next year, total bank deposits could shrink by several trillion dollars as the Fed’s balance sheet begins to run off. As the chart above suggests, a "normal" level for US bank deposits would be closer to $15-16 trillion than $19.9 trillion today. And as the FOMC begins the process of shrinking the balance sheet, look for growing volatility in the funding markets.

June 20, 2022 | Q: Is the Federal Open Market Committee preparing to sell mortgage-backed securities (MBS) from the system open market account (SOMA) via that most notorious (and useful) of all products, the CMO or collateralized mortgage obligation? Is this a good idea? Yes it is, but hold that thought… During the most recent FOMC press conference on June 15, 2022, Federal Reserve Board Chairman Jerome Powell described the mounting carnage in the house industry with considerable detachment. Maybe the folks at the Fed’s Board of Governors in Washington think they are playing with a science experiment in high school and not an industry that impacts every American. Said Powell: “Recent indicators suggest that real GDP growth has picked up this quarter, with consumption spending remaining strong. In contrast, growth in business fixed investment appears to be slowing, and activity in the housing sector looks to be softening, in part reflecting higher mortgage rates. The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply.” Headline: The housing sector is in recession and accelerating down in terms of volume and headcount. Of course, it was the FOMC that encouraged an increase in supply of mortgage loans by dropping interest rates several hundred basis points in March of 2020. The industry increased headcount and operating expenses by 50% in response. Now in 2022, the residential mortgage industry is downsizing as falling revenue and operating expenses converged in Q1 2022. We described the unprecedented change in the secondary loan market last month in The Institutional Risk Analyst (“ FOMC vs TGA; PennyMac Financial & United Wholesale Mortgage ”). Message to Chairman Powell: How is this helpful? We also commented last week on some related matters in National Mortgage News (“ Mortgage industry liquidity risk returns ”). What should investors and risk professionals focused on the mortgage industry expect in coming months? Something like 2019, the worst year for secondary market profitability in a decade, only a bit worse in terms of the speed of change. Large issuers will survive, small issuers will become canon fodder for the Fed’s decidedly idiosyncratic policy machine. First, the latest up and down cycle in mortgages is more extreme than the 2002-2006 bubble, as shown by the historical data from the MBA. In 2020 and 2021, we saw larger lending volumes but fewer, bigger loans. Average loan size has grown more than a third since 2008 and this increase has accelerated over the past five years, but drew little notice from the FOMC or the Fed’s staff in Washington. Home prices are up more than 200% since 2008. Below are the MBA’s historical annual production number going back to 1990. Source: Mortgage Bankers Association Because of the magnitude of the Fed’s error in terms of running QE purchases too long and at too high a level, the mortgage market ran very hot in 2020 and 2021, leading to bigger peak lending volumes than in 2005. Again, in real, inflation adjusted terms, the 2002-2006 bubble is bigger and, significantly, was comprised 50% of private label loans. Today’s residential loan market is 99% government-insured and conventional loans. Another way to think about the problem created by the FOMC is home prices. The average purchase mortgage is now $450,000 today vs less than $300,000 a decade ago. The chart below from FRED shows the Case-Shiller Index going back to before the crisis. In nominal terms, the most recent skew upward is bigger, but adjusted for inflation it is actually about the same magnitude increase as the 2002-2006 housing bubble. The next question to ask is about profitability. There are many ways to show this, but the bottom line is that production profits in 2022 will be about a tenth of the peak rates seen in 2022-21. The weak profitability is a function of the fact that refinance loans will drop sharply. The two charts below tell the story. First is the MBA’s production profit and the second is the MBA’s forward production estimates. Below is MBA’s “Chart of the Week” . As you can see, production revenue is about equal to expenses. Many firms are losing money. Joe Garrett of Garrett McAuley in San Francisco said in a note: “2022 is about costs more than revenue. Put another way there’s a limit to what you can do about revenue. There’s a lot you can do about costs." The MBA’s Marina Walsh and Jenny Masoud put the surge in production costs in perspective: “While lower production revenue contributed to scant profit margins, the primary driver was cost. Total loan production expenses – commissions, compensation, occupancy, equipment and other production expenses and corporate allocations – increased to 345 basis points in the first quarter, from 315 basis points in the fourth quarter. On a per-loan basis, production expenses ballooned to a new study-high $10,637 per loan in the first quarter, up more than $1,000 per loan from the fourth quarter and more than $2,500 per loan from one year ago.” Again, the inflation of lending costs since 2008 speak to a secular inflation that ought to be of interest to the Fed and the research community. The MBA’s actuals and projections for 2022-2023 are shown below. The MBA has production cratering this year and bouncing in 2023 as capacity runs off and pricing power begins to be restored. Likely the FOMC will also be lowering interest rates in 2024 before the presidential election. Source: Mortgage Bankers Association At present, there are a number of marginal lenders making loans in competition with healthy companies. Just as thrifts doubled down in the 1980s, independent mortgage banks (IMBs) facing extinction will fight to the bitter end. The marginal lenders must exit the business before the healthy lenders can restore profitability. That is the harsh reality of the mortgage business, but amplified thanks to the FOMC and quantitative easing (QE). The dying among lenders will make loans until they are completely dead, preventing the industry from re-pricing efficiently until next year. In general, the annual loan coupon paid by a consumer is 1% higher than the debenture rate on the MBS that will eventually finance the loan. With the industry moving to 5% or 5.5% coupons for future MBS issuance, implying loans with at least 6-7% annual percentage rates, lenders that have been writing loans in the 5s will take losses when the loan is sold. The TBA swaps page from Bloomberg as of the close on Friday is shown below. Notice that the 4.5% contracts for Fannie Mae MBS for delivery in July are already trading three-quarters of a point below par. Source: Bloomberg Stronger lenders can lose money on a new mortgage loan at close and at the point of sale, but recoup by collecting servicing fees and the occasional refinance opportunity. IMBs without servicing portfolios are not long for this brave new world fashioned by the FOMC. The plummeting production levels due to higher interest rates and the spread compression caused by industry overcapacity will require a one-third reduction in lending capacity in 2022. Our view of home prices, which is informed by conversations with some of the smartest operators in the industry, is that sharply falling lending volumes are unlikely to affect home prices initially. Sticker shock will slow demand in some cases, but pent-up demand for homes remains powerful and yet to be even partially satiated. Home prices will plateau for a few years, then pop up again when the Fed drops interest rates ~ 2024, followed by a macro reset for the housing market a la 1988 and 2008 in 2026. Home price cycles tend to run about 20 years. That reset in 2026 could force down home prices to 2019 levels – but again inflation may change this calculous. Finally, both stock prices and bond yields for the mortgage industry suggest that the 1-4 sector is headed for a serious restructuring in 2H 2022. Mortgage issuers with term debt are trading at the widest spreads in years. We expect to see some forced sales and bankruptcy filings in the next several months. The big issue facing the IMBs and the mortgage industry as a whole in 2023 is loan delinquency, which we expect to rise significantly as the economy slows and dips into a recession. As usual, Chairman Powell saved his best comment on the housing sector for last: “[T]he supply of finished homes, inventory of finished homes that are for sale is incredibly low, historically low. So it's still a very tight market. So prices may keep going up for a while even in a world where rates are up, so it's a complicated situation. We watch it very carefully. I would say if you're a home buyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgages rates are low again so this will be a process whereby we ideally we do our work in a way that the housing market settles in a new place and housing availability and credit availability are at appropriate levels. So, thank you very much.” Listening to Powell, it’s as though we all live in Superman’s Bottle City of Kandor , which sits on a shelf at the Fed’s HQ on Constitution Avenue. Of note, Chairman Powell had nothing to say about providing liquidity to the market for government loans and Ginnie Mae MBS as the economy slides into recession. As we’ve noted several times in past comments, credit costs for 1-4s are likely to spike significantly higher as the economy slows. Neither was there any discussion in the press conference of sales of MBS from the Fed’s system open market account or SOMA and how this might further adversely impact the already reeling mortgage market. Nobody in the Big Media thought to ask Chairman Powell about the most important factor in US monetary policy, namely the SOMA portfolio. That omission, however, may be quite significant. The Federal Housing Finance Agency (FHFA) just announced what may seem a purely technical change to the pricing for collateralized mortgage obligations (CMOs) issued by Fannie Mae that contain Freddie Mac MBS and vice versa with Freddie Mac as the issuer: “Effective market-wide July 1, 2022, Fannie Mae will begin charging a new fixed upfront fee to create certain Supers® and real estate mortgage conduit (REMIC) securities that have Freddie Mac Uniform Mortgage-Backed Securities (UMBS) collateral underlying those Supers and REMIC securities. A fee of 50 basis points will apply solely to the portion of the Supers and REMICs that are Freddie Mac UMBS collateral. This fee is a one-time fee applying to Freddie Mac UMBS collateral that has never incurred such a commingling fee from Fannie Mae in the past.” In other words, if the FOMC wants to sell some of its low coupon MBS now in the SOMA via a comingled Super CMO containing Fannie Mae and/or Freddie Mac collateral, then the pricing is in place to cover the cost of the insurance and other expenses. Since both Fannie Mae and Freddie Mac are in runoff in terms of their own balance sheets, they are unlikely to be issuers of CMOs on their own account. And these could potentially be very large, investment grade deals. By allocating part of the duration risk among investors with progressively longer investment timeframes, the stand-alone CMO that we described in the book Financial Stability actually "kills" part of that duration risk. Issuing CMOs via the GSEs could help the FOMC out of its trading mess, but represents a monumental irony. By entering the CMO market in order to hide growing losses on low-coupon MBS, bonds acquired during the latest round of QE at 103-104 but now trade in the low-80s, the Fed will concede the reckless nature of its policies.

June 22, 2022 | Premium Service | In this issue of The Institutional Risk Analyst , we comment on the announcement last week by New Residential Investment (NRZ) that it is rebranding and, more significant, finally saying goodbye to Softbank affiliate Fortress Investment Group . We have long advocated putting a good bit of distance between NRZ and the notorious Japanese fund, so we view this as a big positive for shareholders. The big news is that NRZ is saying goodbye to Fortress and is migrating to an internally managed model. NRZ paid Fortress over $100 million annually in management fees. The surprise news, though, is that CEO Michael Nierenberg has decided to bid farewell to residential lending and turn the largest nonbank owner of mortgage servicing rights (MSRs) into a multi-asset manager. More, NRZ has also adopted a new name, Rithm Capital (RITM) , which will take affect August 1, 2022. Source: Google The company’s stock has fallen sharply since June 7, 2022, suggesting that news of the material announcement made on Friday was in the market at least two weeks before the release. Of note, the announcement comes on the heels of a number of analysts downgrading the stock because of poor visibility on future earnings. While many managers are circling the wagons in the residential market, Nierenberg has decided to harken back to the antecedents of NRZ such as Newcastle and take the firm in a new direction. When he says that NRZ “will evolve into a more diversified asset manager,” Nierenberg is telling you is that returns in 1-4s are likely to be under pressure or even negative for an extended period. Likewise, NRZ’s leader several times alluded to reducing the $800 million in capital inside the lender and diversifying elsewhere. But with the stock trading at 0.7x book value, buying back stock for a 30% plus return may be one of the best uses of cash at NRZ. NRZ must pay $400 million to Fortress to end the relationship with the external manager, a final act of squeezing NRZ shareholders after years of extracting very full fees from the externally managed REIT. Of note, when Kevin Barker at Piper Sandler asked Nierenberg how long the negotiations between NRZ and Fortress for the separation had been underway, NRZ’s CEO pled ignorance of the special committee process of each firm’s board. He subsequently told Barker that the process had been ongoing “for months.” The end of the relationship with Fortress will reportedly save NRZ $60-65 million in fees, net, a fact that highlights the timing of the change as the residential housing market sinks into a period of retrenchment. Nierenberg is always focused on driving returns for shareholders, thus we interpret these changes as being mostly defensive and focused on cost reduction. As we noted in our last comment, expenses are the only thing at the moment. Why is cost a factor? First, revenues are falling from lending. Second, NRZ has not yet integrated the several lenders within the company, meaning that operating costs will be difficult to manage lower in the near-term. Despite a lot of talk about “operating efficiencies,” NRZ reportedly has yet to begin the long as costly process of combining Caliber, Shellpoint and other lending operations. Achieving operating efficiency gains always seems to be a future project. Perhaps most surprising was Nierenberg’s assertion that there will be further expansion of the multiple on the firm’s MSR. “We pulled back from lending rather than simply deploy capital for the sake of doing that,” he told one analyst. “We have $630 billion [in UPB of MSR] so we don’t need any more.” Nierenberg confirmed that the current MSR mark is 4.86x annual cash flow and the weighted average coupon (WAC) is 3.68%. Of note, NRZ has reportedly migrated its financing for GNMA MSRs to Goldman Sachs (GS) , an interesting choice given that Goldman has “become the largest warehouse provider for random stuff,” in the words of one prominent analyst. Given that NRZ is explicitly guiding the Street to a higher MSR mark, the move to GS may be counterproductive since Goldman is known for being tough on credit haircuts. Given that the 10-year Treasury note has been rallying as the month of June ends, it may not be easy to deliver another sharp up valuation in MSR without breaking the bones of some third-party valuation providers. Nierenberg told analysts that book value per share will remain stable, meaning that the upcoming mark of the MSR in Q2 will be big enough to cover the cost of the internalization and a dividend. PiperSandler’s Barker wrote in a note earlier today: “We are also encouraged to see NRZ disclose book value will remain near $12.50 for the quarter as a large mark-up in the MSR offsets the $0.25 dividend and $0.75/share impact of the internalization. However, we still expect significant headwinds for GAAP earnings going forward due to origination gain on sale pressure. In addition, we see little additional room for the MSR to mark higher and, therefore, see greater downside risk for book value.” We think that the decision to separate from Fortress is a positive move for the company and for shareholders, and gives the Nierenberg and his team the freedom to manage the company. The move to a multi-asset strategy and the name change are, to us, mostly about repositioning the firm defensively to survive and grow in a world where residential lending is no longer an attractive use of capital. We continue to have concerns about NRZ and other residential lenders with heavy exposure to Ginnie Mae as the US economy heads into a Fed-induced recession. The Institutional Risk Analyst is published by Whalen Global Advisors LLC and is provided for general informational purposes. 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.