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March 24, 2026  | In this edition of The Institutional Risk Analyst , we ponder the world of interest rates in the wake of the undeclared war with Iran and the considerable confusion in the markets about what happens next. Unlike 2025, when a bull narrative governed market perceptions, 2026 has been a year of risk-off in terms of market exposures and concerns about rising interest rates. The selloff in the Treasury market illustrates the present concern, but notice that the two-year Treasury minus 10s bounced last week. Is the bear flattener trade already done? The first question that needs attention is what happens when the term of Jerome Powell as chairman of the Federal Open Market Committee ends? Powell served as chair pro tempore from February 5 to May 23, 2022, following his renomination by President Joe Biden and before his subsequent confirmation by the Senate. But what happens when President Trump inevitably nominates another sitting governor to be acting Fed chairman? Economist Komal Sri-Kumar noted on Substack: “Rather than a clean handoff to [Kevin] Warsh, the United States may now face a scenario in which the incumbent chairman refuses to leave, the designated successor cannot be confirmed, and the legal process surrounding the investigation drags on indefinitely… Complicating matters further is the possibility — reported in The Washington Post —that the White House could attempt to designate a sitting governor as temporary chairman if Warsh is not confirmed. One name mentioned is Stephen Miran, a current governor and Economic Advisor to the President, who has consistently dissented at the FOMC in favor of lower interest rates.” Adding to the monetary mess, Stephen Miran's term as a Federal Reserve Governor was initially scheduled to end on January 31, 2026, as he was filling the remainder of a term. However, as of February 2026, he is on holdover status, allowing him to remain in his post until the replacement – Kevin Warsh – is confirmed by the Senate.  Thus there are now two holdovers on the FOMC. While the conflicted message emanating from the central bank is not helping the financial markets, we think that our readers should look through the present noise to the likely direction of Fed policy later this year, namely lower interest rates. As with Liberation Day on April 2, 2025, we suspect that the current political mess surrounding the central bank is creating another opportunity for investors with strong constitutions. Is the concern about the Fed and inflation a another head fake c/o the financial media? We believe that the risk-off mainstream narrative that has caused private credit sponsors like Apollo (APO) , Ares (ARES) and Blackrock (BLK) to crater in the past two months, and has also caused the bond market to back up, is about to end. Notice that the common equity all of these public credit sponsors bottomed earlier this month. Is this a buying opportunity? We picked up some BLK at the opening yesterday as a wee flutter. On Monday, President Donald Trump called off further strikes on Iran’s crumbling economic infrastructure and claimed (falsely, we suspect) that the US is talking to Iran’s leadership. The markets have responded immediately and positively, but is this another Trumpian head fake? IOHO, yes it is. We think that trading the US stock and interest rate markets based on the poorly considered outbursts from President Trump is a really bad idea. The Threat of Global Recession Trump’s earlier threat to attack Iran’s infrastructure was yet another gratuitous comment by the commander-in-chief. More, we doubt that Iran has any intention of talking to the US or ceasing military attacks on the Persian Gulf states. For Iran's radical leadership, there is no upside to peace. Thus the grim reality of economic dislocation caused by the war remains. How do we position for a world where key economic inputs are going to be in scarce supply? As we noted in an earlier missive, the backwardation of forward pricing for oil continues to suggest that the interruption to crude oil supplies will be limited in duration. The more profound question, however, is how to replace the various other products made from oil, including liquefied natural gas (LNG) and key chemical flows that are a crucial input to half of the economies in the world, starting with the EU, India and China.  While some analysts are worried about members of the FOMC raising interest rates to forestall inflation due to high oil prices, we think that an eventual cessation of hostilities in the Persian Gulf -- either through negotiation or military means -- will quickly refocus the Fed and other global central banks on the negative growth shock caused by the war. The damage to productive capacity to produce LNG, fertilizer inputs such as ammonia, phosphate, and sulfur, and other chemicals produced in the Gulf will take months or years to resolve. We'll be addressing the issue of long-term economic dislocation next week in a special interview in The Institutional Risk Analyst . Within a couple of months, the supplies of crucial petrochemical inputs currently on the water will be delivered and there will be nothing in the delivery pipeline after that point in time. Refined products are a far greater concern than oil. Kuwait, for example, produces a lot of aviation fuel for the EU. The Saudis are now shipping phosphates by truck to Yanbu, but this is not even a modest replacement for the disrupted supply chain in the Gulf. What does this mean? To us, it means that the FOMC is going to quickly pivot from worries about inflation caused by a short-term hike in oil prices to a policy mixture that is focused on preventing an economic slump in the US caused by the medium-term effects of the war and the considerable damage done to Gulf oil and, in particular, chemical production capacity. While the US is a net-exporter of oil, we import many crucial chemicals from the Middle East.   We agree with Michael Green , Chief Strategist and Portfolio Manager at Simplify Asset Management, who wrote over the weekend: “The Fed will be forced to cut. The markets may not recognize this for another 25 bps, although I am skeptical it will go that far, but they will be forced to cut… And cut with vigour… For investors who understand market structure and the U.S. structural advantage, the current despair is the setup for one of the most powerful policy-pivot rallies in years. The market is bleeding from a self-inflicted VaR wound, blinded to a bifurcated macro reality. Stay sharp. The window is wide open — but it won’t stay open forever.” The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

In this week’s edition of “The Wrap,” we feature our view of the top-ten key events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap with Chris Whalen” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  March 20, 2026 | Gold and silver prices continued to pare gains from the past 90 days, even as deliverable supplies of both metals are shrinking rapidly in the Far East. Selling of gold accelerated yesterday as the Gulf States sought to raise cash in the face of continued attacks on oil and gas facilities. One point we repeat to readers and clients alike is that the market prices for metals in the US and London markets, where prices are reckoned in fiat currencies, are diverging from prices in Asia, where physical delivery is expected and required. The war with Iran is likely to keep downward pressure on metals prices in the near term, but this may be another buying opportunity a la Liberation Day last year . At one point silver prices were up 70% in 2026, confirming our view that the metals complex was going to remain volatile. But given the burgeoning federal debt and the outlook for inflation in the US, we like the precious metals component of our portfolio more and more.  As we told a viewer of “The Wrap” this week, investing in precious metals is about preserving value, but you must also maximize yield on fiat assets. That’s why we like residential mortgage REITs as a haven for cash and limit holdings of low-return T-bills.  Powell Stays on the Fed The Federal Open Market Committee made no change in the target for short-term interest rates on Wednesday. Most officials maintained earlier projections for at least one quarter-point reduction in borrowing costs this year. The members of the FOMC continue to pretend that they can control inflation.  As expected, Governor Stephen I. Miran issued his fifth straight dissent and voted for a quarter-point cut. This was the second FOMC meeting in which a majority of voting members kept rate guidance unchanged at a range of 3.5 percent to 3.75 percent.  “The FOMC surprised no one when it voted to hold the funds rate steady in the range of 3.5%-3.75% by a vote of 11-1,” notes John Ryding of Brean. “Governor Waller returned to the fold and recognized the reality of the inflation data.  The Fed continued to signal that one cut this year and one next year is the central case for the median committee member but the forecasts for growth and inflation were lifted.”  It is pretty clear from the latest FOMC meeting this week that Chairman Jerome Powell is going to remain on the Federal Reserve Board after May as we have long predicted. Despite growing calls from conservatives for Trump to end his legal campaign against Powell, the White House seems to be incapable of adjusting strategy.  In fact, Powell has indicated he intends to remain as Fed Chair until his successor is confirmed by the Senate, and Senate Republicans will not confirm Kevin Warsh until President Trump ends the legal campaign against Powell.  President Trump has repeatedly criticized Powell’s management of the Fed’s renovations and he is right to do so, but there are far better ways to make the point about the Fed’s operational chaos.  Will President Trump appoint an "acting chair" in May? A couple of quick questions about US monetary policy for our growing audience: Why is inflation stubbornly above the FOMC’s target range? Because of the federal debt.  Why did investors pour $2 trillion into unsuitable private equity and credit schemes? Because of the inflation caused by the federal debt.  Why did banks lend and commit almost $4 trillion more to unsuitable private investment and credit schemes?  Because of the balance sheet inflation caused by quantitative easing and the federal debt.  Why is affordable housing increasingly beyond the reach of millions of Americans? Because of the inflation caused by the federal debt.  Take an example: Rental inventory in New York City fell 5.5% YoY to 25,989 units in February as median rent rose 8.2% to $3,950,” CRE Daily  reports. “Manhattan led declines (−3.5%), marking a record 24-month slide, with rents up 6.9% to $4,700; Brooklyn and Queens also posted solid gains.” So why doesn’t anybody talk about the federal debt in Washington? Good question. This week the Federal Housing Finance Agency headed by Bill Pulte dropped replacement‑cost value (RCV) insurance rules for conventional mortgages underwritten by Fannie Mae and Freddie Mac, reverting to cheaper pre‑2024 standards.  One reader of The IRA noted on X: " RCV was always the GSE requirement. FHFA wasn’t solving for a real problem, but was instead chasing headlines to produce a deliverable on climate" during the Biden Administration. The rollback sidelines climate‑risk protections amid broader federal retreat from tracking weather impacts, but may not be accepted by the insurance industry. “The move offers optics, not solutions, showing FHFA’s reactive approach to housing costs,” notes Jonathan Miller of Miller Samuel.  Back on March 12th (“ Countrywide II: UWMC + TWO = ? Loan Depot Flops, Again ”) we predicted that the proposed merger between United Wholesale Mortgage (UWMC)  and Two Harbors (TWO)  would fail to get the support from a majority of TWO shareholders. That’s precisely what happened. TWO is now working to get support for the deal, but the sagging stock price of UWMC is not helping. This week, of note, TWO disclosed that a cash offer reportedly had emerged. The competing bid includes covering a $25 million termination fee, Housing Wire reports. The Two Harbors' board is evaluating the unsolicited offer as a potential superior proposal. Private Credit Festers On Wall Street, the run away from private equity and credit continues to widen, with pressure now being felt by funds that specialize in consumer credit. “ Stone Ridge Asset Management told clients in the fund last week that recent redemption requests were so high that it would honor only 11% of the amount investors wanted back,” according to The Wall Street Journal .   Stone Ridge purchases consumer and small-business loans made by companies including Affirm (AFRM) , Block (XYZ)  and Lending Club (LC) , the latter of which was one of the best performing bank stocks in 2H 2025.  Of note, the major Wall Street investment banks led by Goldman Sachs (GS) are now offering clients strategies to short the public equity of the major sponsors of private credit strategies. We told Tom Keene  on Bloomberg Radio  this week that the inclusion of retail investors in private credit funds was a fundamental error in judgement by the sponsors that made a run inevitable.  Why did the sponsors of private credit like Apollo (APO) , Ares (ARES) , Brookfield (BRK)  include retail investors? Greed and stupidity. Welcome to Wall Street. As we’ve noted this past week (“ Risk Concealed: Private Credit, PIK and the Banks ”), many banks have been shedding credit risk to the sponsors of private credit schemes, but some banks are smarter than others.  Even when a bank sells a loan to a credit sponsor, the risk may not be eliminated. “How can the regulatory-capital arbitrage break down and ‘boomerang’ counterparty/credit risk for a bank?” asks veteran risk manager Victor Hong  in an email to The IRA . “When the non-recourse bank financing of a private credit loan for its owner might arguably leave the bank FULLY exposed to that sold loan.” Despite the inflationary bias, the US economy is showing growing signs of weakening, according to Morningstar. Key factors include rising unemployment, declining consumer confidence, reduced consumer spending, falling corporate profits, and a slowdown in manufacturing. Other indicators also include an inverted yield curve, declining GDP growth, and increased credit delinquencies in areas such as mortgages and credit cards. One indicator of the K-shaped economy is hotels, where luxury properties are showing rising profitability but other venues are not (h/t Accounting Solutions ). Revenue per available room (RevPAR) in the luxury category for daily rates in excess of $500 was up by 9% during a recent week in mid-February versus the same period in 2025, according to data provider STR.  RevPAR fell for economy hotels, however, a category with an average room rate around $67. More significant, foreign visitors, who spend multiples of what domestic travelers do on food and lodging, have been scarce, according to the International Trade Administration.  In January, European and Asian visitor numbers were down 3.4% and 11.7%, respectively, compared with a year earlier. Visits by Canadians, for whom only November data is available, were 16.7% lower than a year ago.  The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

March 16, 2026  | In this edition of The Institutional Risk Analyst , we take our readers on a deep dive into the world of banking and private credit. As we’ve noted on X, there are two key attributes to bank lending to private equity/credit firms. First, the loans are generally made to or via a special purpose entity (SPE). Second, the loans are non-recourse, meaning that the bank cannot pursue repayment from the private credit or private equity sponsor. A third component seems to be that investment bankers think that they can create and sell these dodgy "opportunities" to clients without any legal or financial consequences. Can a banker really deflect any risk from allegations of securities fraud by standing behind private contractual terms and non-disclosure agreements? As we discuss below, the episode in 2007 involving several large banks and the collapse of Auction Rate Securities suggests that this assumption is fallacious. An upbeat note published by Vanguard describes the intersection of private credit and insured depository institutions: “Private credit is now embedded in portfolio construction decisions. Banks have become increasingly involved, not as originators of middle‑market loans but as providers of financing to private credit managers. Ample dry powder provides flexibility but also affects pricing, structures, and documentation, particularly later in the credit cycle.” The availability of bank credit has allowed the world of private credit to swell to more than $2 trillion in assets. Another aspect of bank involvement in private credit, however, is a tolerance for default, mirroring the forbearance practices used by banks in other markets such a commercial real estate and consumer finance.  Since 2022, as loan to non-depository financial institutions (NDFIs) have grown by double digit annual rates, banks loans where interest has been accrued but not collected have soared. Is this a coincidence? No, because the rest of the bank balance sheet excluding loans to NDFIs is barely growing. If loans to NDFIs are growing 5-10% a year on average, then the backlog in collections below is likely from NDFI loans. And $100 billion is 2x quarterly earnings for the whole industry. Source: FDIC According to KBW, nearly 9% of private investment income is now being paid via payment-in-kind or “PIK,” a stunning level of default that equates to a “B” bond rating for the entire $2 trillion portfolio. Can banks count a PIK payment as payment on a loan? Yes they can. Lenders treat Payment-in-Kind (PIK) interest as a valid, non-cash payment that increases the loan principal, allowing borrowers to defer cash payments. This is what veteran risk manager Victor Hong calls "Principal on original Principal" or "POOP." But the loan is in default, PIK or no.  Dubious practices such as accepting PIK as a valid payment on a loan make bank balance sheets illiquid and ultimately conceal credit losses from investors and regulators. The hidden credit risk on the books of US banks created by PIK is cause for concern since it increases the uncollected principal due to the bank. Banks that accept PIK payments without declaring the loan in default are essentially zombies. As soon as a bank receives a PIK payment, the full amount of the loan should be charged off. But more than the mounting arrearages represented by PIK loans., it is the reputational risk that faces banks and investment firms that may be the biggest hazard when it comes to private lending. Western Alliance, Jeffries Financial & Reputation Risk The litigation involving Jeffries Financial Group (JEF)  and Western Alliance Bank (WAL)  provides a good illustration of the structural issues involved in many private credit defaults. WAL is suing JEF for over $126 million, alleging breach of contract and fraud after Jefferies-affiliated SPE Point Bonita Capital  stopped payments on a loan secured by worthless First Brands Group receivables.  WAL claims Jefferies' fraud induced them into financing these "sham" receivables; Jefferies contends the loan was non-recourse and resulted from an extensive, independent fraud by First Brands leadership, Reuters  reports. Of note, WAL did receive more than half of its exposure in loan repayments on the Point Bonita Capital loan, even though other lenders received nothing.  "In my entire banking career, I have never ​witnessed a breach of contract that so deliberately places the reputation and operating integrity of a counterparty at risk, forcing future banks, clients and counterparties to seriously reevaluate ​the dependability of that organization's commitment," Western Alliance CEO Kenneth Vecchione  told analysts. But the truth of the matter is that banks have been pursuing “opportunities” such as First Brands aggressively, often without understanding the full risk. The reason for the headlong rush into private credit is that the rest of bank balance sheets have barely been growing, while loans to non-depository financial institutions (NDFIs) have been growing at close to double digit rates.  In a remarkable March 9, 2026 press release  and letter, JEF fired back at WAL and in doing so illustrated why private credit is going to be a mess for the banking industry. Memo to Miki: Reputation Risk. JEF stated: For over four years, Western Alliance made non-recourse loans in steadily increasing amounts to borrowers named LAM Trade Finance Group LLC and LAM TFG I SPV LLC, with no guarantee or credit support from Jefferies or other affiliates. The borrowers to which Western Alliance made loans are special purpose entities owned by the Point Bonita master fund, and their assets consisted solely of First Brands receivables and related proceeds. The Loan Agreement was clear that Western Alliance had no recourse beyond the assets of LAM TFG I SPV LLC. Western Alliance had no guarantee or other right of payment from Jefferies or the Point Bonita master fund. Shortly before First Brands’ bankruptcy filing in September 2025, when Western Alliance was considering a forbearance arrangement, Western Alliance asked the Point Bonita master fund and Jefferies to guarantee the Western Alliance loan to LAM TFG I SPV LLC. Those requests were denied. When Western Alliance agreed to forbear in any event, Western Alliance was well aware that its counterparties were limited to LAM Trade Finance Group LLC and LAM TFG I SPV LLC, and that it had no rights to assets other than First Brands receivables. The letter also addresses Jefferies’ exposure to UK mortgage lender Market Financial Solutions (“MFS”) , which we discussed in an earlier comment  to Daniela Cambone . One of Jefferies’ European subsidiaries loaned MFS £103 million under a warehouse facility secured by certain of MFS’s bridge loans to residential borrowers, property investors and landlords. Jefferies states in the letter the net impact to net earnings over time from the facility with MFS is likely to be less than $20 million. We’ll see.

March 12, 2026  | In this   edition of The Institutional Risk Analyst , we look at the world of housing finance as the collapse of UK mortgage lender MFS continues to unwind. Then we ponder the American mortgage finance scene as Q4 2025 earnings finally end here in the second week of March 2026. Barclays Plc (BCS)  and Castlelake LP, a unit of Brookfield Asset Management (BAM) , have alleged fraud in a UK court on the part of MFS CEO Paresh Raja , Bloomberg  reports . The Times of London describes the tawdry scene: "The case will increase questions over MFS and the due diligence of those who worked with it. Wall Street and City institutions and private investors are caught up in the failure of the bridging and buy-to-let property lender, which was placed into administration this month after a judge said insolvency practitioners needed to investigate separate 'very serious' claims of fraud." The MFS debacle is notable because some of the smartest people in mortgage finance were apparently taken to the cleaners. As we discussed earlier, the Atlas SP unit of Apollo Management (APO) was previously owned by Credit Suisse and literally recreated the market for financing private loans and mortgage servicing rights (MSRs) from the ashes of 2008. Credit Suisse owned the last significant servicer of non-agency loans. Yet somehow the crowd at MFS got the better of them. Of course, there is fraud and then there is fraud in the City of London. We'll never forget when around 1986 a certain Managing Director at Bear, Stearns & Co., a retired Marine colonel who was usually on his second Cuban cigar at 8AM, returned to his posh London residence only to find the entire house emptied of all his possessions. Everything, gone. Meanwhile in the US, mortgage bankers have spent the past several weeks trying to explain to institutional investors why their firms are not like PennyMac Financial (PFSI) . As we noted last month (“ The Wrap: Pulte Crushes PennyMac; Kevin Warsh's Conflict of Visions ”), PFSI missed Q4 earnings and other key metrics such as loan recapture, causing the entire sector to crater in the debt and equity markets. Leading residential mortgage firms typically recapture two-thirds of loan prepayments, but PFSI was reportedly below 30% in Q4, according to several industry observers with sharp pencils. Does UWMC + TWO = < 2? Also under scrutiny is United Wholesale Mortgage Corp (UWMC) , which announced the acquisition of Two Harbors (TWO)  in December and has since seen its stock sink to a five-year low. UWMC released OK earnings for Q4, but then spooked investors by not taking any questions from Street analysts. CEO Mat Ishbia touted UWM’s Q4 2025 results as a dominant finish to an "amazing year," highlighting a $164.5 million net income and $49.6 billion in originations. He emphasized that 2025 solidified UWM as the top overall and wholesale lender for the fourth consecutive year, with strong momentum for 2026 driven by in-house servicing, the Bilt partnership, and the Two Harbors acquisition. UWMC has since revised earnings guidance for Q1, and done a live call with investors sponsored by their loyal investment bankers, but the highly leveraged mortgage lender is struggling to gain shareholder approval for the TWO acquisition in a vote scheduled for this Monday March 16th. Will an upward revision in Q1 earnings guidance be sufficient? “What might be driving this announcement is how UWM's stock price has declined since the deal was announced on Dec. 17,” writes Brad Finklestein  of National Mortgage News . “The previous day, UWM closed at $5.12 per share. After the deal was publicized, UWM fell to $4.81. Its consideration is a fixed exchange ratio of 2.33 times Two Harbors shares for each share of UWM.” The fixed exchange ratio offered by UWMC implies a significant discount to the book value of TWO. Since peaking at $13.66 in mid-January, the valuation of TWO has collapsed along with the share price of UWMC, closing yesterday below $10 per share or a market cap of about $1 billion. Once again, the management of TWO seems to have managed to destroy shareholder value in great bloody chunks. Given that the mortgage servicing rights of TWO had a book value of $2.4 billion at the end of Q4, it seems fair to ask whether the best trade for TWO shareholders is to vote against the merger with UWMC and simply sell the MSR.  If this wretched transaction goes ahead, we suspect that the management of TWO may face some new litigation from aggrieved shareholders. Sell the MSR and keep the REIT, right? What are we missing? Try as we may, it is difficult to understand the motivation of TWO to proceed with a transaction that seems to badly prejudice its long suffering shareholders, again. You can bet that the trial lawyers are cheering! We do not have a position in UWMC or TWO. Countrywide II In terms of the business model and risk profile, we like to think of UWMC as the spiritual heir to Countrywide Financial. The big issue with the all-stock offer from UWMC is that the acquisition currency has not been performing very well over the past year and more. The aggressive business model pursued by UWMC enables them to claim mortgage market leadership in terms of loan purchase volumes, but with very aggressive pricing on its loans and MSRs, and continued consumption of operating cash ( See Page 70 of the 2025 10-K ). UWMC has also seen loans available for repurchase double in the past year, a troubling sign of poor asset quality. More, the Detroit-based company has considerably more non-funding debt liabilities than MSR. Why is the balance between MSR and non-funding debt mot used to finance new loan production important? Because the MSR represents an intangible representation of the net present value of future cash receipts . In a classical analysis used by bank, mortgage and insurance regulators, you exclude all intangible assets and subtract them against capital. What's left is the real business. This is why both Basel III and the Ginnie Mae risk-based capital rules require lenders to subtract the MSR from capital. When Fed Vice Chairman Michelle Bowman proposed to allow banks to stop subtracting excess MSRs from capital, that is a big deal as we wrote in National Mortgage News . Insurance regulators (and countries other than the US using IFRS) don't recognize intangibles at all, but this does not prevent US insurers from lending against MSRs on a secured basis. The current style of the rating agencies, of note, is to give one or more notches of credit uplift for "secured" MSR financings that are placed at the very top of the credit waterfall. In 2025, as in the previous year, UWMC sold $2.4 billion in MSRs for cash to offset operating losses. The high prices paid for loans in the broker channel flows into equally high valuations for UWMC’s MSRs. Looking at the 10-K for 2025, the reported capitalization of the UWMC MSRs appears to be north of 7x annual servicing income. Selling these valuable intangible assets at a lower price than cost to raise cash strikes us as a losing trade long-term. More, UWMC appears to be upside down on its debt, with the fair value of $4.1 billion of MSRs significantly below the total $2.5 million in combined MSR credit lines from Citigroup (C)  and Goldman Sachs (GS) , and the $2.9 billion in senior notes. UWMC cannot really accumulate servicing because of the need to sell assets to offset cash operating losses. UWMC says that the combination with TWO “has the potential to unlock substantial value, a stronger balance sheet, and streamlined operations,” but we think this deal could be a case where 1 + 1 = < 2. Both TWO and UWMC have lost significant amounts of value over the past five years, with UWMC down more than 50% and TWO down almost 70%. Are the largely retail, income-oriented shareholders of the TWO REIT going to be long-term holders of UWMC, a stock with no significant dividend?  Probably not. Loan Depot in Loss Again Going from the sublime to the ridiculous, we look at the year-end results for loanDepot (LDI) , one of the better performing and volatile mortgage stocks, but also one of the worst operations among large mortgage lenders. Net loss of $108 million was down 47% in 2025, compared with net loss of $202 million in the prior year, primarily a result of higher revenue. What this means is that LDI still has not reduced enough operating cost from the COVID years to be profitable. “In the fourth quarter we originated the most volume since 2022, gained share in an expanding market and achieved a 71% recapture rate from our in-house servicing platform,” said Founder and Chief Executive Officer Anthony Hsieh . “These results reflect progress in our return to the core competencies that enabled the scaling to become the 2 largest retail lender nationally during our first decade." OK Anthony, but why aren't you profitable?? As we’ve noted in the past, LDI is under water on its debt, with more non-funding debt liabilities ($2.1 billion) than MSR ($1.6 billion).  LDI also has over $1 billion in loans eligible for repurchase, which are defaulted loans in GSE, Ginnie Mae and private label MBS pools. As with UWMC, this line item is likely to increase as the year goes on and delinquency rates rise.   The LDI bonds due 2028 have widened 300bp in recent weeks to yield 12.5%, a striking indication of how investors have reacted to the earnings volatility that began with PFSI. Bottom line on LDI is that the low stock price makes it an ideal plaything for retail investors. To quote Eric Hagen at BTIG on LDI: “It's an inexpensive way to position for higher refinance volume in the retail channel without paying as much of an earnings premium to be in Rocket (RKT, Buy, $25 PT) , although we're also prepared for LDI's stock valuation to take on a wider range when interest rate volatility picks up.” The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

This week, “The Wrap” features our view of the key events in Washington and on Wall Street over the past week. Don’t forget to watch “The Wrap” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  March 13, 2026 | What were the top events of the past week? First is the continued unwind of private credit and also private equity, with JPMorgan (JPM) saying that it is market down private loans and pulling back on credit available to these clients. We published a recap of our thinking on private equity in The Daily Reckoning , which was picked up in Zero Hedge .  "Private credit has expanded significantly over the past decade and forged linkages with traditional financial institutions, the Office of Financial Research reported this week . "While vulnerabilities within this sector appear contained, counterparty exposures between banks and private credit funds are the main channel for risk transmission. This channel merits close monitoring given the industry’s rapid growth." In DC, the Senate passed a housing bill that reads like the agenda of Senator Elizabeth Warren (D-MA) . The House is going to make a lot of changes, but President Donald Trump  is not really paying attention to housing. Foreign policy and bombing Iran is a lot more fun. As things stand today, the Senate-passed housing legislation could easily die in the House. "There is an incredible amount to like in this bill, from the modernized treatment of manufactured housing to the focus on small-dollar mortgages,” said Isaac Boltansky , Head of Public Policy at PennyMac (PFSI) . “Nevertheless, there is clearly room for improvement in both certain technical matters and the SFR section. To truly move the needle, we should ensure the final language doesn't create unintended headwinds for supply, consumers, or lenders." We wrote a long comment on housing finance in our last issue (“ Countrywide II: UWMC + TWO = ? Loan Depot Flops, Again ”). Thirdly Fed Vice Chair for Supervision Michelle Bowman  outlined bank-friendly Basel III endgame and GSIB surcharge proposals, reports Ian Katz at CapitalAlpha in Washington. Bowman say the proposal will be released in a week. Overall, the changes will result in a small decrease in capital requirements for the largest banks and more significant changes for smaller institutions. We’ll be responding to the request for comment on Basel III.  Gold and silver prices continued to move sideways, but oil prices remained just below $100 or roughly double prices that prevailed most of the past year. We expect oil prices to remain elevated unless and until the Straight of Hormuz is reopened. Iran is basically seeking a cessation to airstrikes in return for negotiating an end to attacks on merchant ships in the Persian Gulf. Gold vs Silver Futures Data on the U.S. labor market unexpectedly deteriorated, with a net loss of 92,000 jobs in February, contradicting forecasts that predicted a gain of 50,000. This marked a significant, unexpected setback, compounded by downward revisions to employment figures for the previous two months.  The poor jobs data led to increased concern in some quarters about a potential economic "hard landing," but higher oil prices may constrain the Fed and other central banks from easing. In fact, central banks ought not to factor the oil price change into the calculous because the rise of energy costs comes from a non-monetary factor, namely war. Higher oil prices must lead to higher inflation.  “An oil price shock...has some dampening effect on growth and raises total headline inflation for a time, but doesn’t really pass through much to core inflation,” former Cleveland Fed President Loretta Mester told Kathleen Hays on Central Bank Central . “They’re not going to really know how long the oil prices will stay at elevated levels, so they’ll use the models to sort of work through that.” As for the coming Fed policy meeting, Mester recommends that officials take a cautious approach. “They’d be wise to leave things where they are...until they get more evidence on how things are going to evolve in both employment and inflation.” And US Treasury Secretary Scott Bessent stated that the Federal Reserve is a long way from returning to quantitative easing. Indeed, we suspect that once Kevin Warsh is confirmed as the next Fed Chairman, the Fed is going to make changes to the bank liquidity rules that will allow another $1 trillion reduction in the size of the Fed's balance sheet. We'll be writing about this in a future comment. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

To read our post in The American Conservative on the growing bitcoin fraud, see the link at the end of this issue. Happy holidays! December 19, 2017 | The US housing market is completing another year of rising home prices in many – but not all – parts of the country. We’ve been in a sellers market for single family homes since 2012, fueled first by low prices, then by low interest rates, then lower FHA premiums, and also the relative dearth of new home construction. So with interest rates slowly normalizing and significant changes to the tax code, what does the future hold in store for housing finance? For the past eight years, the FOMC has been boosting housing with low interest rates and purchases of MBS. More, for the past half century, public policy in the US has encouraged home ownership with a variety of subsidies and tax breaks. Now, however, Congress is turning the thrust of public policy away from encouraging home ownership in a way that could have serious negative implications for an important part of the US economy. Chart 1 below shows the Case-Shiller home price index since 2007. As the tax legislation takes effect, a number of observers are predicting that high-cost markets on the east and west coasts could see prices fall by double digits – this despite the continued squeeze on supply. Over the longer term, notes Jonathan Miller of Miller Samuel, the loss of deductions for state taxes and mortgage interest will put downward pressure on prices in high cost markets. Think Scarsdale NY. Elimination of mortgage deductions for second homes and home equity lines also will negatively impact affluent destination markets around the US. The impending tax reform legislation in Washington could not only mark a significant change in the price dynamic for home prices, but it may also signal a negative credit trend for investors in 1-4 family mortgages. As households are forced to pay out more cash for federal taxes and mortgage payments, there will be less remaining cash flow in these households overall. Price compression will also affect perceived wealth and also aspirational pricing. But the big question is how the tax bill will impact overall volumes for home purchases and new mortgages. The latest data from The Mortgage Bankers Association shown in Chart 2 shows a slight uptick in mortgage lending volumes for Q3 and Q4 2017, a welcome bit of good news for the industry after the single-digit profitability seen in the first half. Even today, lending profitability spreads are running a tad under a quarter of 2007 levels, putting intense pressure on non-bank lenders especially. Source: MBA The good news is that the MBA estimates show total mortgage debt volumes growing 10% to $11 trillion by 2019, this due to expectations of rising interest rates and lengthening durations on mortgage-backed securities (MBS). Purchase mortgages are expected to grow steadily while refinance transactions are flat-lined at around $100 billion per quarter in the MBA estimates. More than a little of that increase in total mortgage debt, however, comes in the form of rising home prices and mortgage balances. Of the 1.7 million loans originated in Q4 2016, the average of the $461 billion in originations was about $275,000 per loan. Of note, the average size of purchases mortgages is now around $310,000 vs $260,000 for a mortgage refinancing, as shown in Chart 3. Source: MBA The big question near-term is whether all of the talk about higher interest rates will actually result in higher yields for the benchmark 10-year Treasury bond. In the wake of the latest rate hike by the Federal Open Market Committee, spreads actually tightened. We continue to believe that the size of central bank portfolios globally means low volatility and no significant selling pressure on long-dated government debt in 2018. Even if the FOMC were to take our advice and start selling MBS outright, we don’t believe that long rates would rise very much if at all. As we noted last week in our conversation with Bob Eisenbeis of Cumberland Advisors , the FOMC is more worried about losing money on the Fed’s portfolio than it is about the impact of QE on the bond markets. The result will be a flat yield curve and spread compression for leveraged investors such as banks and REITs. But the forward Treasury issuance calendar suggests at least some upward pressure on rates in the medium terms, as mortgage finance maven Rob Chrisman opines: “Foreign central banks that use Treasuries to manage currency exchange rates are not facing the market forces that would require a return to the amount of accumulation seen over the last decade. As a result, the private domestic and foreign sectors would be left as a principle buyer of Treasuries. Baring another financial crisis, it is unlikely that a significant increase in demand for safe-haven assets is on the horizon. If demand for Treasury debt does not keep up with the expected increase in supply, yields will need to rise.” We think that the supply/demand scenario in US Treasury bonds becomes an issue, ironically, when the Fed accelerates its planned asset reduction and thereby allows volatility and volume to return to the trading markets. The FOMC ought to be concerned with restoring something like normal function in the bond markets after years of induced monetary coma, even if it means taking a loss on the system portfolio. It will be interesting to see how Chairman Powell deals with this sticky political issue of losses on the Fed’s huge securities book, particularly in an environment where the FOMC continues to raise short-term rates. Historically, the 10-year Treasury has floated about 2% above inflation, but as Jim Glassman at JPMorgan ("JPM") noted in June: “The slump in Treasury yields is almost entirely due to quantitative easing distorting the ‘real’ component of interest rates.” Ditto. The FOMC currently has Fed funds targeted at 1.5% and hopes to move this benchmark rate to 2.75% over the next couple of years. With statistical measures of inflation still at or below the 2% target for prices, this suggests a 10-year bond closer to 3% than to 4% -- at least in normal circumstances. But with global central banks still sitting on $20 trillion in securities and still buying, market conditions are hardly normal. Central bank positions in US Treasury and MBS suppress both volatility and trading volumes, reducing upward pressure on long-term yields. We believe that one of the better trades for 2018 may be a long position in the 10-year Treasury with a short on the 2-year Treasury note! Looking at estimates from the MBA and other economic estimates, the consensus seems to have the Fed funds rate hitting 2 ½% by 2019 and the 10-year over 3%. We wonder, however, if the continued purchases by the ECB and Bank of Japan, and the go-slow policy of crawling normalization adopted by the Fed, won’t keep an effective cap on long-term interest rates. We see the possibility of a rally in the 10-year in 2018 with tighter spreads and an inverted yield curve, a turnabout that could have an interesting impact on housing finance. The tight spread regime engineered by the Fed and other central banks has negatively impacted all manner of consumer lenders, with effective loan pricing near all-time lows. Large banks fight for jumbo prime mortgages at pricing that makes no sense – but they simply want the assets. The same pricing logic governs credit spreads in auto paper or commercial real estate and other types of business lending. The fact that most of the major investment banks have guided down, again, on trading revenues reflects the fact that QE and low rates have sucked the life out of the private financial markets. With most global asset classes still largely correlated, predicting what happens out beyond 2019 becomes real guesswork. Until the Fed and other central banks agree to stop accumulating securities, the private markets measured by volatility or volume or trading profits will suffer accordingly. How is this helpful? Final thought on housing. One other impact of the tax reform legislation is that the reduction in corporate tax rates will cause a proportional reduction in the value of tax loss assets to shelter future revenue. Citigroup ("C") will reportedly write-down $16 billion alone, but will still have plenty of accumulated losses to shelter income for years to come. And the erstwhile GSEs, Fannie Mae and Freddie Mac, will likewise need to write down capital to reduce the value of tax loss assets. In the event, both GSEs are likely to need additional capital draws from the US Treasury. We wonder if the Trump Administration will use the fact of the additional advances to the GSEs as a legal pretext to put both of the entities into receivership. Without new legislation, the only way to end the conservatorship of the GSEs is to put them through a formal receivership process. While for many in the housing industry restructuring the GSEs is truly thinking the unthinkable to borrow the title of Herman Kahn’s classic book, “On Thermonuclear War”, receivership has been discussed as a policy option at the White House and would be supported by many Republicans. In the event President Donald Trump decides that housing finance may provide some political leverage, all of the comfortable assumptions about mortgage production or credit spreads or even interest rates will fall by the wayside. Next year is an election year, after all, and tax cuts and reforming the GSEs makes for good conservative political fodder. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

December 10, 2017 | In this issue of The Institutional Risk Analyst , let’s first ponder last week’s revelations that the European Central Bank is taking a loss on its purchase of bonds issued by Steinhoff International , the high flying (and highly levered) South African-based home retailer that was struck down by an accounting fraud scandal. This event illustrates how central banks have distorted the credit markets and allowed inferior borrowers access credit at investment grade spreads. This notion of central bankers booking trading losses on their extraordinary open market intervention over the past decade is important because it provides context to understand their decision making. For example, based on our conversation last week with Bob Eisenbeis , Cumberland Advisors’ Vice Chairman and Chief Monetary Economist, we’re pretty certain that the Federal Open Market Committee will further flatten or even invert the Treasury yield curve in 2018 and for reasons that will astound and amaze many investors. Going back as early as 2010 (“ MBS – WHEN WILL THE PURCHASES END AND WHAT WILL HAPPEN TO MORTGAGE RATES? ”), Bob has been writing timely analysis for Cumberland describing the dynamics of the Fed’s large scale asset purchases, euphemistically known as “quantitative easing,” and what would happen to the bond markets once QE ended. Now that the end of QE is in sight, we ask Bob if the return to normal will be as “beautiful” as Mohamed A. El-Erian suggests in his effusive Bloomberg commentary . The IRA: Thanks for speaking with us Bob. We wanted to talk a bit about your recent comment on Marvin Goodfriend’s nomination to the Fed Board but also talk about your broader view of the normalization process. You may have seen Mohamed A. El-Erian’s fulsome public praise for the FOMC’s policy direction. We’ve always been of the view that the Fed should have stopped after QE1. How do you see it? Eisenbeis: When you look at the research on QE, the opinions are all over the map both inside and outside of the Fed. I think there is a consensus that there were diminishing returns in the additional QEs that were engaged in after QE1. Then it’s a question of what are the costs and benefits of getting out of the program. Those who suggest that QE has been a huge success are premature in my view. You don’t really know until we are completely out. It looks to me like we are going to be OK on balance, but what really bothers me is this constant drum beat inside the Fed and by some outsiders about the huge “profit” earned from QE. They have the accounting all wrong. The IRA: Well, the board is aligning itself with the idiocy on Capitol Hill, where the interest earned by the Fed is viewed as “income” for budget purposes. Most members have not read your 2016 testimony on the Fed's fiscal relationship with Treasury . But Bob, really, is it possible that PhD economists don’t understand the financial relationship between the Treasury and the central bank? We always like to remind people that the US Treasury issued the original $150 million in greenbacks directly into the market to help Abraham Lincoln fund the Civil War. The Fed is the Treasury’s alter ego and is an expense to the government, which is subtracted from the earnings on the portfolio and then returned to the Treasury. Eisenbeis: Correct. The Fed almost by definition cannot make a profit. It baffles me how people inside the system can fail to see the accounting reality here. The Fed issues short term liabilities to buy Treasuries taking duration out of the market. The Treasury makes interest payments to the Fed who takes out its operating costs, including interest payments on reserves and returns the remainder to the Treasury. If this intra governmental transfer were settled on a net basis like interest rate swaps, there would always be a net payment from the Treasury to the Fed. It is too obvious, yet I am not privy to the sidebar conversations on this issue. But back to the point on QE, if the Committee can run off the portfolio through attrition, then they’ll probably escape any need for additional action barring some unforeseen change in the economy. The current path for growth and employment in the third quarter seems pretty positive. The IRA: Does the FOMC understand how their actions and the actions of the ECB, Bank of Japan, etc has not only pushed down the price of credit, but has suppressed volatility since these positions are not hedged? Just as with the Volcker Rule and bank investment portfolios, there is no trading around Treasury and mortgage backed securities (MBS) positions held by central banks. As we told CNBC , " Financial sector on fundamental basis is considerably overvalued ," it's no surprise to see Citigroup (C) and other banks guiding the Street lower on trading results for the year. The dearth of duration and trading volumes is a direct result of QE, correct? Eisenbeis: The volatility impact of QE is not something that was on anybody’s radar screen at the time to my knowledge. The bigger concern was that the longer you keep rates low, you start to get dislocations that take place in various markets. Everybody is looking for a bubble here or a bubble there, but the only place you can really argue a bubble exists is in the stock market. But that is really the concern, not the volatility issue or the impact on the markets. The IRA: That suggests a remarkably linear view of the bond market on the part of the Fed. In the $1.7 trillion MBS portfolio, the Fed has sequestered a huge amount of duration extension risk. If prepayments fall due to rising rates, the effective maturity of the security extends and the price of MBS can fall faster than that for benchmark Treasuries. But nobody is hedging the Fed or ECB or BOJ or Bank of China holdings of MBS. As a result, we seem to be headed for a flat or even inverted yield curve environment and with flatlined volatility. Do the folks at the Board understand what the combination of passive central bank portfolios and falling trading volumes is having on large bank earnings? Eisenbeis: If you would see anybody in the system focused on this question it would be the Fed of New York. You mentioned the May 2014 FRBNY blog post on convexity of MBS in your comment earlier . I haven’t seen anything in the FOMC minutes suggesting that Bill Dudley raised the volatility issue during his tenure. But I think the Fed is going to go very cautiously on rates for reasons you suggest. With a new Chairman and governors, you might think there would be room for some change, but in fact they are going to go very slowly. The Fed staff is going to describe to the new governors why certain things were done and under what circumstances. The IRA: So you don’t see a lot of change in policy under Chairman Powell? Eisenbeis: Not a chance. He and the new governors are going to move slowly in terms of any change in direction. They are looking for a community banker for the Board and that person will also tend to be cautious. And the appointment process in the Senate is likely to be slow and contentious. Marvin Goodfriend is too experienced to come onto the FOMC and start rocking the boat. The four bank presidents who are economists and voting on policy in 2018– Bostic, Dudley, Mester and Williams -- are all very solid and experienced, so I’d look for a pretty slow and steady process from the Fed. Some of the governors (Powell and Quarles) and presidents, who will be FOMC participants this year, are not economists, which has a big impact on the policy process from a research perspective. The IRA: Well, back to the market, the folks at the Fed who brag about making money on QE are about to let the markets take the risk on a bunch of FNMA 3s and 3.5s that contain a lot of duration extension risk. As this paper is held by private investors, the positions will be hedged and volumes and volatility should be restored or not? Eisenbeis: What that will do is essentially put upward pressure on rates. This would moderate the need to make policy changes. We published a comment on the runoff of the Fed’s portfolio and when it would come into “equilibrium” so to speak in terms of size. There is no coincidence that MBS on the System Account are paying down about $20 billion per month and the Fed has chosen $20 billion threshold number for monthly portfolio reductions. We estimate that according to the Fed’s plan, the portfolio necessary to restore the currency-to-GDP ratio to its pre-crisis level, would be about $1.9 trillion and normal runoff would achieve this objective in the fall of 2023. Just from a runoff perspective, though, the impact on the markets is not going to depend so much on the Fed as on the Treasury as their issuance needs increase. The Fed is going to reinvest portfolio maturities across the yield curve in proportion to the Treasury issuance. The IRA: Well, precisely. This goes back to the earlier point about profitability. The Fed and the Treasury are one and the same. Different faces of a Hindu deity. Eisenbeis: But this is precisely why these MBS cannot be sold. The IRA: Is this an institutional issue for the Fed? Are they avoiding sales of MBS to avoid taking a loss on the portfolio and thereby eroding the need for chest thumping about the profitability of QE? Eisenbeis: I think that is a good bit of it. If you recall, the Treasury robbed the Fed’s capital a few years back to fund spending for a highway bill. There’s a cap now on Fed equity at $40 billion. And the Fed cut a deal with Treasury that if the Fed takes a loss on the sale of assets they don’t have to write it off against capital. They create a “negative asset” account. What is that? You can do the math and see that the bank’s net worth may be negative. The IRA: It’s like a net operating loss for a central banker. But Bob are you suggesting that the Fed is more worried about the possibility of embarrassment over taking a loss on the sale of MBS than they are about the impact of policy on the financial markets? Even to the extent of seeing a negative yield curve in the Treasury market? How can we do three hikes in 2018 and not have an inverted curve? Eisenbeis: Substantively as we’ve discussed, it is the Treasury that backs everything up. But it’s the optics that matter. The optics of the Fed losing money or being insolvent are bad, both in Washington or around the world. Thus they will run off the MBS naturally via prepayments to the extent possible and avoid losses on sales. More important, though, it is very clear that we will have a flat yield curve both on the long end with continued demand and on the short end with the Fed raising benchmark rates. But all of this means that the Fed will go slow. The IRA: Thanks Bob The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

December 4, 2017 | We think 2017 will be remembered as the Year of the Bubbles. Everywhere you look, whether its stocks or real estate or even overt acts of fraud like bitcoin, the value of fiat paper dollars measured in prices for other “assets” is falling. Crypto currencies, to be clear, are more a class of felony than investable assets, but the crypto games provide supply for demand in an age of scarcity engineered by the central banks. During a visit to the Atlanta Fed last week, we had a fascinating dinner with a group of institutional investors. Like many metros around the US, Atlanta real estate is booming after years of post-crisis lethargy and ample amounts of monetary gasoline from the FOMC. Our friend Dick Hardy organized the dinner. He noted, going back to crypto, that bitcoin is really about a shrinking float of available tokens, an ingenious aspect of the bitcoin scheme. But in the world of bank credit, scarcity and abundance exist simultaneously. Bank earnings in 2018 are likely to continue to rise with asset returns, and expenses are likely to fall as regulatory changes ripple through the world of banks and non-banks alike. The big wild cards are an inverted yield curve in the US and an economic slowdown in China, as we discussed in our interview with Lee Miller of China Beige Book . But in terms of valuations for financials, current equity and asset returns for US banks remain significantly below pre-crisis levels. Chart 1 below shows asset and equity returns for all US banks. Source: FDIC For the past five years, there has been a bull market in residential and commercial real estate, albeit for properties that are decidedly up-market. With the increased cost of regulation, the minimum threshold for a residential mortgage that somebody actually wants to service has risen proportionately. If the mortgage has a unpaid principal balance of say $300k or less, it is just marginally profitable for many servicers – especially those located in CA. We note in this regard that Walter Investment Corp (WAC) just filed for bankruptcy court protection. Other non-bank players in the residential mortgage space are struggling. During our discussion last week in Atlanta, MBA chief economist Mike Fratantoni reported that non-bank lenders managed to get profit margins back up to about 40bp in Q3 ‘17 from single digits in the first half of the year, but depositories fared far worse in the MBA survey. A decade ago, residential lending returns were over 2%. Consider high-touch First Republic Bank (FRC), the San Francisco based lender that focuses on managing assets for high-income clientele and making jumbo mortgages for same. As of Q3 ’17, the gross spread on all of the bank’s real estate loans – which is 80% of FRC’s loan book – was just over 3%. The overall 3.1% yield for FRC’s entire loan book is half a standard deviation below its peers, according to the TBS bank Monitor. Chart 2 below shows FRC’s gross loan spread vs its asset peers. Source: FDIC/TBS Bank Monitor FRC has never particularly focused on smaller mortgages, preferring the well-bid world of jumbo loans, which the bank sells into securitizations managed by the likes of Redwood Trust (RWT) with servicing retained. Most other banks large and small have fled the low end of the residential mortgage market and focus primarily on tri-coastal jumbos over $1 million. Chase, Wells Fargo (WFC) and Bank America (BAC) are super competitive on jumbos over $1 million in urban markets. The larger institutions win business by offering APRs and other terms that are well-below that of conforming loans half that size – and barely make money. They typically keep prime jumbo loans in portfolio. Having escaped the below-prime world of FHA mortgages, overall bank loan credit in 1-4 family mortgages is pristine. The net charge-off rate in Q3 ’17 was just 0.04%, largely because home prices are rising so fast thanks to the Yellen Inflation that banks are having a hard time losing money when that rare mortgage default event occurs. In Chart 3 below, note that past due 1-4 family loans remain stubbornly high at 2.6% in Q3 ’17, this due to the backlog of foreclosures that remain in the judicial states of the Northeast. The glacial pace of foreclosures in judicial states, which often exceeds 1,000 days from default to resolution, is just one aspect of the cost of “consumer protection” for MBS investors. Source: FDIC The positive impact of rising home prices on bank credit is shown in Chart 4. In Q3 ’17, loss-given default (LGD) in 1-4s reach a new low of just 24%, the lowest observation for this metric since at least 1990. The 30-year average LGD for 1-4s is 66%, a fact that will perhaps be of note to our friends at the Board of Governors in Washington. The plummeting LGD for residential mortgages owned by banks illustrate very graphically how the actions of the Fed have boosted home prices and greatly advantaged home sellers. Source: FDIC Since banks avoid the bottom third of the US mortgage market in terms of credit quality, the credit outlook for banks is quite positive – but we still expect to see defaults slowly rise from the current low levels. Seeing a 24% LGD is a skew, an outlier. Because of the sharp supply shortage of 1-4 family homes as well as affordable apartments in many markets, we do not expect to see prices decline appreciably as the Fed ends QE. But as we told the audience in Atlanta on Friday, we don’t expect to see mortgage interest rates rising because of the dearth of duration in the bond market. Last week in The Institutional Risk Analyst , we talked about how the fact of the Fed’s ownership of $4 trillion in Treasury paper and MBS has taken away upward pressure on bond yields. Since none of the global central banks that collectively own $20 trillion plus in debt and equity hedge their positions, there is no selling pressure to push bond prices lower and yields higher. Banks and other fixed income investors are trapped in the world of “lower for longer” so long as the central banks retain their bloated securities holdings. Indeed, as we predicted during the discussion at the FRB Atlanta, we expect to see an inverted yield curve in Q1 ’18. Last week, Peter Cecchini , chief market strategist at Cantor Fitzgerald, called the flattening yield curve “the most important thing to have a clear idea about now.” This is especially true for banks and other financials, which have surged past the S&P 500 and other equity market benchmarks in the collective madness surrounding stocks in the runup to the tax cutting legislation. Sure, net-interest margins have been rising for banks, however we believe that the prospect of a flat or inverted yield curve will give investors and FOMC members reason for pause. Chart 5 illustrates the recent upturn in bank interest income even as interest expenses have risen far more slowly. So far, banks seem to have managed to keep hungry depositors at bay as yields have risen from 2015 lows, but the Fed is still effectively transferring $80 billion per quarter from depositors to banks. Note how wide the net interest margin grew in 2009 when the Fed slashed rates but yields on earning assets were still relatively high compared with today. Source: FDIC As we’ve noted in previous missives, bank returns on the $16 trillion or so in earning assets are still quite subdued at just shy of 80bps. And the market for new bank loans in sectors such as C&I and commercial real estate remain extremely competitive for larger banks, putting an effective cap on loan yields. So unless bond spreads expand and loan yields actually rise from current levels – something we think is unlikely – the bullish improvement in bank interest earnings may slow. More, if as we suspect the yield curve inverts next year, the FOMC may need to rethink its schedule for benchmark rate increases. Bank credit metrics look quite good at present – too good really. Negative net loss rates for multifamily loans and construction & development exposures remind us that the FOMC has greatly skewed the world of credit – in some cases by several ratings notches. This anomaly will eventually be reversed, revealing tens of billions worth of mispriced exposures on the books of US banks. As Chart 6 below suggests, the cost of credit for construction and development loans in the US remains badly skewed and has been negative since 2015. The degree of downward deviation from the 30-year average LGD of 60% suggests that the adjustment could be far more severe than the 2007 financial crisis – if and when a more general deflation of asset prices occurs. But it remains to be seen whether asset prices can adjust in the near term. Source: FDIC So the good news is that bank earnings likely will to continue to improve with relatively low credit costs, but a flat Treasury yield curve may change that trend. Asset and equity returns for US banks remain 1/3 below pre-2008 levels. Loan growth will probably continue to decelerate from the torrid levels of 2015 and 2016. Whether or not anyone on the FOMC gets the joke in the near term and starts to sell MBS and long-dated Treasury bonds is perhaps the most important question facing bank investors as 2017 comes to a close. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

"Gold is money. Everything else is credit" J.P. Morgan 1912 March 10, 2026  | In this   Premium Service  edition of The Institutional Risk Analyst , we update our readers on the   WGA Precious Metals Top 25  in the wake of the war with Iran and various other developments in the world of risk. The good news is that the US bond market has largely run in place and most major sectors outside of credit and energy are stable. Could it be that the world is eventually going to shrug off the US-Israeli military onslaught against Iran?   When we saw the vicious backwardation in oil prices this week, and the equally steep slope down in the price of oil going into the out months, we were struck by this dichotomy.  Likewise the relative stability in the US Treasury market, with the ten-year note still confined to that 4.10-4.20% range that has prevailed all year and long-before the new conflict with Iran, suggests that the current kerfuffle in the media is overdone. Equity markets closed up yesterday, oil prices were down 24% and the key 10-year Treasury note fell in yield. Source: dataCollab That said, the price of oil has basically doubled in a few weeks and is likely to remain elevated for weeks or months more unless and until the US Navy and the militaries of other nations can re-open the Strait of Hormuz. Higher oil prices may be a fact of life for months ahead, a result that is unlikely to be helpful to the Trump Administration in the approaching midterm elections. Shanaka Anslem Perera   wrote in an excellent post on Substack :  “At midnight Greenwich Mean Time on 5 March 2026, seven of the twelve International Group Protection and Indemnity clubs that collectively insure roughly 90% of the world’s ocean-going tonnage executed identical cancellation notices for war-risk coverage across the Persian Gulf, the Gulf of Oman, and Iranian territorial waters… This is not a geopolitical risk overlay. This is the first live demonstration of Actuarial Warfare: a paradigm in which private reinsurance desks, operating under regulatory capital constraints, exercise de facto sovereignty over the planet’s most critical maritime chokepoint more durably than navies, missiles, or executive orders.” In simple terms, the global insurance coverage for oil shipments must be restored before energy and chemicals will move and oil prices will come down. But so far the forward oil market is suggesting that prices will fall in a matter of weeks or months. In comments to CBS News  Monday afternoon, President Donald Trump said the war in Iran is "very complete, pretty much," and that the US is "very far" ahead of the timelines the military had projected. Notice that like banks, Perera notes, the global risk insurers are also laboring under regulatory capital constraints that change their behavior in the markets. Watch oil prices for delivery later this year for a good measure of how that process of re-opening Hormuz is proceeding. In the meantime, will the oil price spike and/or the collapse of private credit take down the rest of the global financial market? We think not. Symbolizing the pervasive Street pessimism, Wall Street icon Ed Yardeni  raised the probability of a market meltdown to 35% for the rest of the year, up from 20% previously,   Yahoo Finance reports . “At the same time, he slashed the odds of a meltup — a rally driven more by investor enthusiasm than underlying fundamentals — to just 5% from 20%,” Yahoo Finance  opined. But looking at the broad market including banks and large financials, the picture is placid. Meltup is pretty much been the characteristic of the US markets for the past several years. That said, the difference in performance between the leading banks represented by JPMorgan (JPM) , BlackRock (BLK)  and private credit giant ARES Management (ARES)  is striking. JPM is still up double digits over the past year, BLK is barely down and ARES is down double digits. But these particular performance trends were already established  before the Iran conflict began as shown in the chart below. Are the gyrations of the major credit shops a systemic risk to the markets? In our view, no. The non-depository financial institutions that we track in our finance group are tiny. Indeed, outside of insurance, most nonbank finance companies in all industry sectors are tiny. This is not to suggest that they don’t matter to the markets or the economy, but the typical nonbank like Apollo or Areas is not nearly systemic. Indeed, the entire private credit sector could collapse tomorrow and the major result would be losses to credulous investors and a great deal of litigation.   Meanwhile, the patterns impacting the metals markets also remain strong. We have warned previously that metals will be volatile because they are the ultimate macro assets. Gold and silver combine the long-term attraction of a monetary asset with the industrial demand of technology, two reasons why we follow the physical markets in metals as well as oil to figure out what is really happening. Premium Service subscribers to The IRA may login to review the latest results for   The WGA Precious Metals Top 25 and also download the entire 36-name test group. Some thoughts on the performance of the Precious Metals Top 25 group follow below.

This week, “The Wrap” features our view of the key events in Washington and on Wall Street over the past week. We also include a special review of market opportunities for our Premium Service subscribers. On Monday we’ll be updating the WGA Precious Metals Top 25  rankings. Don’t forget to watch “The Wrap” on The Julia LaRoche Show  every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing.  Private Credit: Repricing Lazy Leverage March 6, 2026 | This week is one of those classic risk-off periods that financial professionals will painfully remember for many years. Through much of last year, the accumulation of leverage behind all manner of assets, good and bad, seemed to have no cost, but this was never true. QE drove asset prices up and apparent credit expense and market risk down, but only for awhile. As we noted in 2017 in one of our first comments for The Institutional Risk Analyst  (“ Trump and the Age of Magical Thinking ”):  “Anyone taken as an individual is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead.” Friedreich von Schiller Quoted by Bernard Baruch  The year 2025 was another year of magical thinking ℅ Donald Trump , a man whose mere presence in the room causes everyone else to descend to their most base level. Trump came to Washington as a president who spurned convention and embraced crypto currencies. He rejected New Deal regulation and shamelessly encouraging greed and self-interest in a way not seen since the years following WWI. The impact on financial markets is profound and may continue for some time.  The credit shops are getting shellacked in the equity markets, as we predicted months ago, but that is the price of 1) being public and 2) selling credit crapola to retail investors. The Iran conflict serves nicely as an accelerant for contagion, both for shorting the stock of credit managers and the affiliated funds. Risk arb traders dream of days like the past week. But as discussed below, market contagion ℅ President Donald Trump also creates opportunities. When Apollo (APO)  CEO Marc Rowan  said that this past week is "a shake out," we hope he is not talking about himself. APO unit Atlas SP got rolled in the MFS default in the UK, where the bankrupt firm doubled pledged collateral a la First Brands.  The successor to the storied real estate finance group of Credit Suisse , Atlas seemingly committed a total failure of risk management with respect to this UK mortgage issuer. Yet MFS is just the latest omission in a lengthening list of financial disasters in the post COVID years. APO is down 20% in the past 90 days. Is it a buy?  BlackRock TCP Capital Corp (TCPC) , a public business development company (BDC) managed by BlackRock (BLK) , reported a nearly 20% decline in net asset value in January 2026. The stock price of TCPC has been cut in half in 2026, hitting record lows. BDCs have relatively low leverage, but they are vulnerable to credit losses. The entire BDC universe is trading at a 30-40 point discount to par today. The drop in TCPC was largely attributed to a few bad investments, including exposure to e-commerce aggregators and the bankrupt Renovo Home Partners.  BLK is down only single digits over the past 90 days, but new revelations about losses in its credit portfolio may force the stock lower.  How can anyone believe a word from BLK officials when these revelations keep trickling out? Like many private equity schemes, Revco suddenly f iled for Chapter 7 bankruptcy liquidation in Delaware on November 3, 2025. This move followed an abrupt cessation of operations in October, 2025, which left thousands of customers with unfinished projects and employees without notice or pay. BLK has no offered to make the creditors of Revco whole. BlackRock’s Scott Kapnick , who leads the firm’s private credit business, said at a Bloomberg event that the biggest players will capitalize on the current industry turmoil while some of its smaller lenders may get left behind. “Most of the big managers are very good at managing risk, and the scaled players are going to continue to benefit from this period,” Kapnick opined.  Only days later, BLK was forced to declare another loan valued at 100 cents on the dollar in December, a $25 million advance to Infinite Commerce Holdings, as having zero value today. The investment was a second-lien loan. The company reportedly had been using a payment-in-kind (PIK) mechanism, allowing them to defer interest payments on debt. We hear that some BDC’s, asset managers, insurers, or hedge funds have pressed banks to expand non-recourse financing transactions for private credit loans which they own---but cannot sell or monetize. Fund sponsors lack sale liquidity and portfolio cashflows to meet rising investor redemption demands, as loans increasingly are moving to payment-in-kind (PIK) and Principal Onto Original Principal (“ POOP”) , which accretes in lieu of defaulted interest/principal cashflows . (H/T Victor Hong) As we noted in The IRA Bank Book Q1 2026 , major banks are already well above their eyeballs with private credit non-recourse financing transactions and regulators are watching.  Just as private credit managers had to see a run on funds when retail investors became involved, non-recourse bank loans to busted private equity companies must end up in total loss.  The selloff in the financial markets was accelerated by the widening war between Iran and the US and Israel. A number of pundits have asked about the “endgame” in the US decision to launch attacks on Iran, but the truth is that there is nobody to negotiate with in Iran as long as the revolutionary leadership remains in place. The US and Israel are simply degrading Iran’s military capabilities with brute force.  There is no endgame. In Washington, another Republican legislator has announced retirement. “Sen. Steve Daines  (R-Mont.), the 63-year-old former NRSC chair, announced late Wednesday that he won’t seek a third term in the Senate,” Punchbowl News reports . “Daines withdrew from the November ballot just minutes before the 5 p.m. filing deadline. That was around the same time that Kurt Alme — the U.S. attorney for Montana — filed to run for the seat.” As of early March 2026, 32 Republican representatives have announced they will retire from the House after this year, according to a report in The Washington Post . A dozen members of the Senate have announced their retirement, mostly Republicans. Including both House and Senate, this represents a historically high rate of turnover by members of both parties. Trumpian Analogs   It is worth reminding our readers that the Teapot Dome scandal (1921–1924), which involved the secret leasing of federal oil reserves to private companies by Interior Secretary Albert Fall , was one of the precursors to the Great Crash of 1929. Like Donald Trump, President Warren Harding (1921-1923) promised a “return to normalcy” after years of inflation and economic recession following WWI.  Trump ran against "the endless wars" of Joe Biden, but now has made common cause with Israeli leader Benjamin Netanyahu in attacking Iran .

“I'd say on Sarbanes ... [it's] probably been the best thing that's happened to our business [as a private-equity firm] and one of the worst things that's happened to America.... I find corporate managers more or less quite defeated by Sarbanes. I think it's taken a lot of the entrepreneurial zeal out of a lot of corporate managers, and as a result of that, when we talk to them about going private, they're really quite excited about it.” Stephen Schwarzman Chairman, CEO, and Co-founder The Blackstone Group LP to Charlie Rose, May 2006 March 9, 2026  | When people ask us how the world of private equity and credit grew into the trillions of dollars, the short answer is the Sarbanes-Oxley legislation of a quarter century ago. Combined with the equally prescriptive Basel Accord a decade later, the Sarbanes-Oxley Act of 2002 attempted to legislatively prohibit securities fraud. When you squeeze the proverbial investment sausage via excessive regulation, the piquant filling simply squirts out elsewhere. As we all know, fraud is only possible in a free society.    SOX, as the Sarbanes-Oxley law is known, drove the world of finance out of the light of public ownership and markets, creating a dank private cesspool of conflict and chicanery that has done enormous damage to the US economy. Combined with later acts of legislative hubris such as the 2010 Dodd-Frank law, SOX forced the investment bankers to take refuge behind opaque private markets and non-disclosure agreements in order to earn their expected 20% annual fees. Whole firms arose to pursue the noble goal of adding value in private schemes that were always inferior to public investments.  Today the world of private equity and credit is a rancid pool of conflicts and illegality that cannot possibly be seen as superior to public markets. Private equity executives even enjoy special tax provisions from Congress for "carried interest" to reward them for their efforts in soaking investors. Advocates of private schemes like crypto tokens, which are explicitly not considered securities, buy and sell Members of Congress like chattel. While PE firms are subject to SEC oversight, including the Investment Advisers Act of 1940, they are exempt from many of the disclosure and compliance requirements that protect public market investors. Our friend Victor Hong describes the hideous mess created for investors in a post last week on LinkedIn :  “Institutions which are diversified across many Private Equity funds AND Private Credit funds now find that portfolio companies in the former often are identical to (or affiliated with) borrowers in the latter.  So, as Fund LP’s, they own entirely BOTH the equity and debt of the same distressed company.  In that case, why are the Private Equity and Private Credit fund managers charging any base or performance fees to the LP’s, and for what value-added services (like a chauffeur charging for my bus ride)?  Worse yet, in cases where the portfolio company has defaulted on its debt, the Private Equity and Private Credit fund managers have hired their own SEPARATE legal teams to battle out OPPOSING restructuring/bankruptcy plans.  Peter fighting Paul is senseless when Peter IS Paul.  This amounts to a Zero-Sum Game for the LP’s which own both its debt and equity.  Peter cannot beat Paul; or vice versa. After ensuing (intended pun) extraordinary fees paid to both the Private Equity and Private Credit fund managers plus their respective lawyers, the LP’s are contractually forced to play a Negative-Sum Game. Cutting a pizza into seventeen even slices, rather than eight, leaves only less for eating but more crumbs for COCKROACHES.” Chuck Bowsher & Sarbanes Oxley One of the key fathers of the Sarbanes-Oxley legislation was our old friend Charles A. Bowsher , the former partner of Arthur Andersen who became a giant figure in the world of accounting and public policy in the 1980s. Bowsher was a close friend and contemporary of Richard J. Whalen , who at the time was the sous chef  in the Reagan kitchen cabinet. Appointed in 1981 by President Ronald Reagan to a fifteen-year term as Comptroller General of the United States, Bowsher aggressively pursued the mandate of the GAO and increased the visibility and effectiveness for the agency.  And he would later use the Enron crisis as a vehicle for imposing tough new restrictions on public companies and markets. The catalyst for SOX was the collapse of Arthur Andersen in 2002 following the firm’s conviction for obstruction of justice regarding the destruction of documents related to the Enron scandal . The firm was found guilty on June 15, 2002 , and subsequently surrendered its licenses to practice as a CPA firm, effectively ceasing operations by August 2002.  In January of that fateful year, Bowsher and four other members of the Public Oversight Board (POB) had resigned in protest of an SEC proposal by Chairman Harvey Pitt  to create a new oversight body for accounting firms in the wake of the massive Enron and WorldCom frauds. Bowsher stated that the SEC proposal sponsored by Pitt was a "sham" designed to give the auditing industry more power to discipline itself, rather than submitting to true independent scrutiny. Pitt himself left the SEC in November 2002. By publicly resigning from the POB, Bowsher made the existing self-regulatory system untenable, forcing Congress to adopt stricter, independent oversight mechanisms. The initial sponsors of the Sarbanes-Oxley Act of 2002 were Senator Paul Sarbanes (D-MD)  and Representative Michael G. Oxley (R-OH) . Title I of the Sarbanes-Oxley Act created the Public Company Accounting Oversight Board or “PCAOB.” Of course, the securities industry continued under a self-regulation model.  Bowsher used the painful experience of Enron and the collapse of Arthur Andersen to force Congress to adopt tough new rules for public companies .  He provided crucial expert testimony to the Senate Banking, Housing and Urban Affairs Committee regarding the need for independent oversight of the accounting profession  in the wake of the Enron (2001) and WorldCom (2002) debacles.  The collapse of Enron and WorldCom cost investors billions of dollars and revealed widespread, systemic corruption and inadequate auditing. The examination function of the PCAOB was initially headed by a former Marine helicopter pilot and SEC veteran, George Henry Diacont , who worked to instill a “regulatory attitude” in the former auditors who became PCAOB inspectors. The new PCAOB imposed a high level of scrutiny on public accounting firms and public companies that, over the intervening 24 years, encouraged the expansion of the private equity and credit markets.  When the US economy cratered in 2008, half of the residential mortgage market was private and the bid for private loans quickly fell to zero. Bowsher resigned as chairman of the Federal Home Loan Bank system's Office of Finance in 2009  because he was uncomfortable with the way banks were valuing their mortgage securities, according to the Wall Street Journal . Bowsher said, "I decided I didn't have confidence in the financial statements," confirming remarks he made previously to Bloomberg News . In the intervening years, banks have left the residential mortgage market due to punitive Basel III risk weights on residential housing assets adopted in 2012 . Most housing loans today are fully documented and carry agency or government guarantees. Nonbank firms now dominate much of the world of secured housing finance, but a growing share of equity finance is also controlled by nonbanks and is now deliberately based upon private rather than public markets. And in these ersatz private "markets," investors have no rights. Private Markets Predominate The private equity market has expanded dramatically since 2008, with global Assets Under Management (AUM) growing from approximately $2 trillion in 2008 to over $13.7 trillion by 2023, reports S&P Global. Private equity increased nearly 600%, driven by massive capital inflows into private markets, which now often exceed public market fundraising. But the private markets of today are little different than the rigged equity markets which prevailed prior to the Great Depression. Over the past century, markets have come full circle back to the opaque and deceptive financial offerings that proliferated prior to the 1929 crash and the passage of financial reform legislation in the 1930s. Examples of financial fraud in the 1920s included Ponzi schemes, stock market manipulation, investment trusts, fictitious oil company investments, sales of fractional shares of real estate in FL, and fraudulent public utility holding companies.  In the late 1920s, Goldman Sachs (GS) publicly launched several entirely opaque closed-end investment trusts, most notably the Goldman Sachs Trading Corporation launched in December 1928 under Goldman partner Waddill Catchings . Goldman also listed the Shenandoah Corporation and the Blue Ridge Corporation in 1929, two highly leveraged closed-end vehicles that failed spectacularly following the great market crash. In his 1955 book The Great Crash, 1929 , economist John Kenneth Galbraith  famously used the Goldman Sachs Trading Corporation as the ultimate example of the speculative madness and "financial insanity" that defined the period leading up to the 1929 market crash. Catchings' aggressive actions nearly caused the failure of Goldman Sachs and he was eventually forced to leave the firm in disgrace. Echoing the claims today made about the superiority of private markets, Galbraith highlighted Catchings as a prominent businessman and author (co-author of Profits and Business Without a Buyer ) who argued that the economy had entered a "new era" where traditional economic rules did not apply. If this sounds like the public statements of Marc Rowan , CEO of Apollo (APO) , you are right. Galbraith portrayed Catchings as a leading example of the dangerous overconfidence and flawed economic thinking that fueled the 1929 stock market bubble. The same sort of dangerous thinking is visible in the leaders of major private equity and credit sponsors such as Apollo, Black Rock (BLK) and Ares Management (ARES) . Back to the Future The private equity and credit markets of the 2020s are much the same thing as the financial markets a century ago, but are protected by private contracts and non-disclosure agreements. Investors in the 1920s were targeted by scams promising high returns, often fueled by illegal "boiler room" tactics and mail fraud. Today private sponsors openly offer private credit strategies to retail investors with no fear of legal or regulatory sanction. Purveyors of private credit investments and crypto token schemes play the same role as the bad actors of the 1920s, but with no interference from the SEC and other agencies. Private investment schemes are often deceptive, especially in performance reporting, and they don't consistently beat simple index funds after fees, liquidity and other risks are considered. Not only are the private markets now big enough to threaten the stability of public markets, but the messy action of the past week in private credit suggests that a major correction is inevitable. The fact that Black Rock had to suspend redemptions on a fund takes us back to June 2007, when Bear Stearns allowed two unlisted funds invested in private-label mortgage securities to fail. The resulting contagion eventually led to the sale of Bear Stearns to JPMorgan (JPM) in March 2008 at a 90% discount to the firm’s price the day earlier. By raising the cost of public ownership, SOX made "going private" a more attractive option, driving a surge in takeovers by private equity firms,” wrote Robert P. Bartlett (2009) of the University of Georgia , and noted that the cost of SOX disproportionately burdened smaller firms. Bartlett predicted correctly “that going-private transactions should migrate away from high-yield debt financing after 2002 given the costs of SOX compliance and the abundance of other forms of "SOX-free" debt financing.” Needless to say, we have told readers of our Premium Service that we are not taking on new exposures in banks or other financials at the present time. Like the sage of Omaha, Warren Buffett  at Berkshire Hathaway (BRK) , we’ve been raising cash and also allocating more assets to income producing assets, and gold and silver exposures. No crypto please. As we told our friend Daniela Cambone last week , the collapse of private equity and credit could be one of the biggest busts we've ever seen on Wall Street. Why? Because the world of private equity and credit is entirely illiquid, something that retail and even institutional investors cannot tolerate in times of market stress. Apollo or Ares or Blackrock can suspend redemptions on a fund, but you cannot stop a run on reputation. In our next issue of The Institutional Risk Analyst, we'll update our WGA Precious Metals Top 25 rankings. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

November 30, 2017 | Is a conundrum worse than a dilemma? One of the more important and least discussed factors affecting the financial markets is how the policies of the Federal Open Market Committee have affected the dynamic between interest rates and asset prices. The Yellen Put, as we discussed in our last post for The Institutional Risk Analyst , has distorted asset prices in many different markets, but it has also changed how markets are behaving even as the FOMC attempts to normalize policy. One of the largest asset classes impacted by “quantitative easing” is the world of housing finance. Both the $10 trillion of residential mortgages and the “too be announced” or TBA market for hedging future interest rate risk rank among the largest asset classes in the world after US Treasury debt. Normally, when interest rates start to rise, investors and lenders hedge their rate exposure to mortgages and mortgage-backed securities (MBS) by selling Treasury paper and fixed rate swaps, thereby pushing bond yields higher. An essay on this very subject was published by Malz, Schaumburg et al in a blog post for the Federal Reserve Bank of New York in March 2014 ( “Convexity Event Risks in a Rising Interest Rate Environment” ). Since then, the size of the Fed’s portfolio has grown a bit, and volatility has dropped steadily. The key characteristic to note is that the Fed owns most of the recent vintage, lower coupon MBS that would normally be hedged by private investors and banks. For those of you who follow our work, this argument tracks that of our colleague Alan Boyce, who has long warned about the hidden duration risk in the bond market since the start of QE. The FRBNY post summarizes the situation nicely: “When interest rates increase, the price of an MBS tends to fall at an increasing rate and much faster than a comparable Treasury security due to duration extension, a feature known as the negative convexity of MBS. Managing the interest rate risk exposure of MBS relative to Treasury securities requires dynamic hedging to maintain a desired exposure of the position to movements in yields, as the duration of the MBS changes with changes in the yield curve. This practice is known as duration hedging. The amount and required frequency of hedging depends on the degree of convexity of the MBS, the volatility of rates, and investors’ objectives and risk tolerances.” Since the Fed and other sovereign holders of MBS do not hedge their positions against duration risk, the selling pressure that would normally push up yields on mortgage paper and longer-dated Treasury bonds has been muted. Thus the Treasury yield curve is flattening as the FOMC pushes short-term rates higher because longer-dated Treasury paper, interest rate swaps or TBA contracts are not being sold, either in terms of cash sales by the FOMC or hedging activity. Chart 1 shows 2s to 10s in the Treasury bond market from FRED. Source: FRED More, the volatility normally associated with a rising interest rate environment has also been constrained because the Fed’s $4 trillion plus portfolio of Treasuries and MBS is entirely passive. As the FOMC ends purchases of Treasuries and MBS, and indeed begin to sell down the portfolio, presumably the need to hedge by private investors and financial institutions will push long-term rates up and with it volatility. As Malz notes, “the biggest change [between 2005 and 2013] is the increase in Federal Reserve holdings, partly offset by a large reduction in the actively hedged GSE portfolio.” Yet since the modest selloff in 2013, volatility in the Treasury market has continued to fall. While it is clear that some smart people at the FRBNY understand the duration dilemma, it is not clear that the Fed staff in Washington and particularly the members of the Board of Governors get the joke. Unless you believe that the FOMC is intentionally pursuing a flat yield curve as a matter of policy, it seems reasonable to assume that the folks in Washington do not understand that reducing the size of the System portfolio is a necessary condition for normalizing the price of credit. George Selgin at Cato Institute wrote an important post this week talking about Chair Janet Yellen’s defense of paying interest on excess reserves (IOER) held by banks at the Fed (“ Yellen's Defense of Interest on Reserves ”). Selgin’s analysis raises a couple of important issues. The fact that Yellen and the FOMC will not manage IOER at or below the market rate for Fed Funds is quite telling, particularly since doing so would address many of the key criticisms of the policy. This suggests two things, first that there really is no "free" trading in Fed Funds anyway and the Fed is the market. Second that the FOMC somehow thinks that it must push higher the bottom of the band -- this despite the huge net short duration position of the street and the $4 trillion passive Fed portfolio. The more urgent question is Yellen's view of a trade off between QE/open market operations and IOER that Selgin illustrates very nicely. The FOMC seems to think that merely not growing the portfolio or slowly selling is an option while they raise benchmark rates like IOER and Fed Funds. In fact, reducing the portfolio always was the first task, before changing benchmark rates. Especially if one is cognizant of current market conditions. Unless the FOMC changes its approach to managing its $4 trillion securities portfolio, either through outright sales or active hedging, it seems likely that the Treasury yield curve will invert by Q1 ’18. The Fed could sell the entire system portfolio and the street would probably still be short duration due to low rates and continued QE purchases by ECB, BOJ, etc. And to repeat once again, the agency mortgage securities market is down 30% on issuance YOY. Again, the FOMC does not seem to appreciate that the yield curve must invert, unless the bond trading desk at the FRBNY is actively selling and/or hedging all of the MBS and even longer dated Treasury paper. Some analysts such as Ed Hyman ( Barron’s , “ A Smooth Exit Seen for Mortgage Securities, ” 11/20/17) believe that banks will increase purchases of agency paper as the Fed unwinds QE. We beg to differ. Bank holdings of MBS as a percentage of total assets has barely moved in years. But more to the point, one has to wonder if Yellen and other members of the FOMC appreciate the trap that has been created for holders of late vintage MBS. The Fed has suppressed both interest rates and volatility via QE, as shown in Chart 2 below: Source: Bloomberg As and when the balance between buyers and sellers in the MBS market slips into net supply, volatility will explode on the upside and the considerable duration extension risk hidden inside current coupon Fannie, Freddie and Ginnie Mae MBS could prove problematic for the banking industry. “The duration extension risk goes turbo if we see rates up, volatility up and a curve steepening,” notes Boyce. Or as Malz noted succinctly in 2014: “When interest rates increase, the price of an MBS tends to fall at an increasing rate and much faster than a comparable Treasury security due to duration extension, a feature known as the negative convexity of MBS. Managing the interest rate risk exposure of MBS relative to Treasury securities requires dynamic hedging to maintain a desired exposure of the position to movements in yields, as the duration of the MBS changes with changes in the yield curve. This practice is known as duration hedging. The amount and required frequency of hedging depends on the degree of convexity of the MBS, the volatility of rates, and investors’ objectives and risk tolerances.” The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. 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