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Sleepy Hollow | In this issue of The Institutional Risk Analyst , we take stock of the state of things now several weeks since the political transition in Washington. Despite some dire predictions, the world has not ended and, indeed, the Federal Reserve Board is continuing to buy over a hundred billion in securities – that is, duration – out of the market every month. The fact of quantitative easing (QE) forever has not only inflated stocks such as Tesla (NASDAQ:TSLA) but has caused its colorful CEO, Elon Musk , to “invest” $1.5 billion of his shareholders’ money, the treasury funds of the company, in bitcoin. Not only has the fact of QE forever lifted stocks, but it has also changed the behavior of investors. Passive and crypto are in, fundamentals and short-selling are out, when the central bank is overtly depriving private investors of returns to the financial benefit of the US Treasury. There was a fascinating conversation on CNBC yesterday with Carson Block of Muddy Waters Research , a shop that offers diligence based investing. The guest made the case that the fact of passive investing has caused a decrease is short selling, a logical conclusion in our book. But more than this, by targeting the Fed funds rate as a policy tool, the FOMC has forced investors to give up on short-selling strategies in all but the most extreme cases like GameStop (NYSE:GME) . CNBC anchor Becky Quick asked Block whether the rise of passive investing was not the result of the democratization of investing, a lovely sentiment. But no, there is nothing democratic about the members of the FOMC manipulating asset prices to support the political goal of full employment. Thou shall be long forever, is the message from the FOMC, meaning that we shall take long-term value from investors to boost short-term employment for those who do not invest. This was the Faustian bargain struck 50 years ago in Washington via the Humphrey Hawkins law, full employment instead of guaranteed employment. The imperative of full employment has led to the economic endpoint of zero or negative interest rates. Those investment managers and lenders who ignore this imperative to full employment do so at their peril. Of course, nothing lasts forever, especially when the equity market’s emotional center is still governed by the bond market. No less a person than Mohamed El-Erian warns that the bubble shall continue unless and until the FOMC “loses control over long-term bond yields.” But has the Fed ever really been in control of long-term yields? Or is that merely a convenient illusion? Our view, informed by long chats with Ralph , is that the offshore bid is the key factor in the analysis. Equity managers don’t generally understand the world of fixed income or currencies, but they do understand that rising Treasury bond yields are bad for client returns and commissions. The bond market seemed content to tolerate massive US deficits when a Republican was in the White House and that party controlled a majority in the Senate. With the Democrats apparently in control, that calculus may not hold true in the face of tens of trillions in new debt during the four years of the Biden Administration. To us, the imponderable question looking us all in the face is the fact that the FOMC may not be able to further expand QE from current levels. Or put another way, with reference to the chart from FRED above, volatility may continue to grow and long-bond yields could continue to creep higher, especially if Democrats in Congress begin to act unilaterally. Once the FOMC does visibly lose control of the long end of the curve, then the proverbial game may be up. Treasury Secretary Janet Yellen told CNN on Sunday that: “There's absolutely no reason why we should suffer through a long, slow recovery." Such is the hubris of Washington in February 2021, but that may not be the case in the future. Doubling down on more "stimulus" spending after four years of runaway fiscal deficits under President Donald Trump may finally provoke the bond market. “ Inflation is not dead. It is not gone. It has not been tamed,” writes Brian Wesbury, Chief Economist at FT Advisors . “We can see the impact of this affecting markets. The 10-year Treasury yield has risen from roughly 0.6% in May 2020 to 1.2% today. The gap between the yield on the normal 10-year Treasury Note and the inflation-adjusted 10-year Treasury Note suggests investors expect an annual average increase of 2.2% in the consumer price index (CPI) in the next ten years, and those expectations are rising.” One of the key factors that the FOMC considers in its monetary policy deliberations is expectations, particularly about future prices. Based upon our work in the world of housing finance, it is pretty clear that the Fed has succeeded in convincing people that home prices are going to rise for the next several years. In the nuclear winter created by the FOMC, home price affordability is a bad joke – at least so long as the FOMC is buying $60 billion per month in mortgage securities. Remember when Fed Chair Yellen expressed surprise that more young people were not buying homes? The joke's even funnier now, Madam Secretary, as home prices gallop along at double digit annual rates thanks to QE. Yet as we noted in our comment on MSRs last week (“ Update: Commercial & Residential Real Estate, MSRs ”), once the Fed buying of Treasury bills and agency MBS stops, the prices of assets with both positive and negative duration will quickly normalize.

New York | In this issue of The Institutional Risk Analyst , we assign a positive risk rating to Bank OZK (NYSE:OZK) , f/k/a Bank of the Ozarks . We interviewed OZK founder George Gleason back in 2017 . OZK is rightly seen as a bellwether for national commercial real estate (CRE) and also one of the best performing banks in the country. Significantly, Gleason predicts net runoff in CRE loan volumes in the US during 2021. The $23 billion total asset regional lender is one of the more aggressive and better managed CRE players. They eat their own cooking in terms of retaining loans in portfolio. OZK dissolved its bank holding company in 2017 and is now a unitary state-chartered, non-member bank based in Little Rock, AK. This means the bank's sole federal regulator is the Federal Deposit Insurance Corp. Thus OZK does not appear in Peer Group 1, where it could easily figure in the top 10% of large banks about $10 billion in assets. As the chart below illustrates, the bank has seen its price/book value multiple swing wildly in the past year, like much of the rest of the industry. The bank now trades at about 1.1x book vs around 1.8x for commercial lending exemplars such as JPMorgan (NYSE:JPM) and U.S. Bancorp (NYSE:USB) . Back in January of 2019, we wrote: “Long one of the performance darlings in the US banking industry, OZK was known for being a well-run regional bank from Little Rock that had a big footprint in CRE lending nationwide. The common is off 50% over the past year, a reflection of some credit write downs that were not well handled with investors and an expensive name change and corporate name change and restructuring effort that leaves many puzzled.” Financials Group: ALLY, AXP, BAC, BK, C, COF, DB, DFS, FRC, GS, HSBA, JPM, MS, OZK, PNC, PYPL, SCHW, SQ, TD, TFC, USB, WFC Over the past two years, the bank’s stock has certainly taken a beating with equity investors, resulting in an average market volatility or “beta” of 2 vs the broad market average of 1. But Gleason and his team remained entirely focused on lending and managing credit, and to good effect. Indeed, while many banks in the US have seen net interest margin (NIM) fall steadily due to QE, OZK has actually grown its gross loan spread and its NIM, placing them in a tiny minority of best performing banks led by American Express (NYSE:AXP) . Part of the reason for OZK’s strong performance in terms of NIM was the result of credit loss recoveries from charge-offs taken in earlier periods. But even excluding these one-time returns of capital in Q4 2020, OZK still managed to expand its gross loan spread even as the bank also managed credit losses well below industry averages. And it has basically done this for the past 20 years with great consistency. “Our net interest income for the fourth quarter of 2020 increased for the third consecutive quarter and was a quarterly record $237.6 million, an increase of 10.5% from net interest income of $215.0 million for the fourth quarter of 2019,” the bank noted in its Q4 supplement. “Improvements during the quarter in our core spread and net interest margin, which increased from the previous quarter by 30 and 19 basis points (“bps”), respectively, were important factors in achieving this record net interest income.” In Q4 2020, OZK’s gross loan spread on non-purchased CRE loans was 4.75% vs a cost of funds of 70bp. By comparison, JPM had a gross spread on all loans of 4.49% and the average for Peer Group 1 was 4.35%, as shown below. Source: FFIEC More important, however, is the insight that Gleason provided to investors regarding the outlook for bank lending in 2021 during his investor conference call. He noted during the OZK investor call: “Well of course 2016 and 2017 were really large origination years which you know created a lot of pay-off headwinds in 2019 sort of you know two to three years after a lot of those big time originations and then we had you know got it last year that we expect that a lot of payouts in 2020, the slowing of completion of construction projects because of shelter-in-place orders and the slowing of the transition sort of financing, the bridge financing, permanent financing that takes us out clearly reduced payoffs and in the second quarters and third quarters of last year and pushed those out, we began to see quite a bit of that come back to the table in Q4 and will very likely have a record level of payoffs in 2021 in part because a bunch of payoffs pushed from 2020 to 2021.” Reading between the lines, not only is OZK's Gleason expecting net runoff on its own commercial loan book in 2021, but we would also expect to see mid-single digit declines in all US bank commercial lending more generally this year. Given the current aggressive posture of the Federal Open Market Committee, we suspect that this will come as an unpleasant surprise to many people in Washington and especially at the Federal Reserve Board. Although many banks saw the all-important operating efficiency erode in Q4, OZK instead improved efficiency and reported an efficiency ratio of just 38% at year end, more than 20% lower than JPM and the industry average of 61%. “Our efficiency ratio was 38.6%, and for the full year of 2020, it was 41.4%,” notes OZK. “Our efficiency ratio remains among the best in the industry, having now been among the top decile of the industry for 19 consecutive years.” As with operating efficiency, OZK’s credit performance is also excellent and the bank has managed to outperform its own moderate scenario modeled forecasts for defaults and recoveries. OZK has also outperformed the Peer Group 1 and industry average by a wide margin, as shown in the chart below from the OZK Q4 2020 supplement. By comparison, the net charge-offs for JPM in Q4 2020 were 55bp vs 28bp for Peer Group 1, thus OZK is running well-below these levels of net loss. The bank’s strong credit and recovery function have turned in consistently excellent performance year after year, a fact that ought to impress more investors and risk managers. It certainly impresses the savvy group that hold the bank's debt and equity securities. The chart below from the OZK supplement shows credit performance going back to 2009. OZK notes that “in the Real Estate Specialties Group’s (RESG) 17+ year history, we have incurred losses on only a small number of credits, resulting in a weighted average annual net charge-off ratio (including OREO write-downs) for the RESG portfolio of 11 bps.” Consistency means a lot. OZK has the capital, liquidity and earnings to continue to outperform larger banks. Our only question is whether OZK and all banks with a loan concentration in CRE are going to be able to manage the next 18-24 months, particularly in the market for underutilized urban commercial real estate. It's not about OZK or other banks mind you; it's rather about the excessive price volatility -- aka "inflation" -- injected into real estate markets by the FOMC and QE. Assessment We assign a positive risk rating to OZK because of the bank’s strong operating and credit performance over the past two decades. There was a time when OZK traded at a premium to the larger banks such as JPM and USB. True the stock is up 20% YTD, but that just means that JPM is trading close to 2x book vs OZK's 1.3x book as of today. But then again, nonbank mortgage issuer PennyMac Financial Services (NASDAQ:PFSI) is trading at 1.5x book today. We always thought the name change to "Bank OZK" was a profoundly bad idea. But stylistic points aside, even though OZK did stumble in 2018 and thereby did damage to investor confidence, the bank continued to perform well despite the volatility in the stock. At some point, investors in US banks are going to take notice of this exemplary business and credit performance and reward Gleason and his team accordingly. Be well George. The IRA Bank Profile is published by Whalen Global Advisors LLC and is provided for general informational purposes. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The IRA Bank Profile. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The IRA Bank Profile are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The IRA Bank Profile represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The IRA Bank Profile is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The IRA Bank Profile 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 IRA Bank Profile. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

New York | In this issue of The Institutional Risk Analyst, we speak with Chris Abate , CEO of Redwood Trust (NYSE:RWT) . Mortgage finance professionals know RWT as one of the pioneers of non-agency, non “QM” or qualified residential mortgage production, an important market that exists outside of the heavily regulated world of Fannie Mae, Freddie Mac and Ginnie Mae. The non-QM mortgage market is also adjacent to the $2.9 trillion market for bank-owned 1-4 family mortgages and HELOCs held in portfolio, making RWT an important macro market bellwether for investors and regulators alike. The IRA: You have seen an interesting 12 months at RWT. We started 2020 going gangbusters, then the money markets essentially melted down in mid-March. The Federal Open Market Committee responded with “shock and awe” and bought trillions of dollars in Treasury debt and agency MBS. Walk us through the past three quarters for you, both as an investor and as an issuer of private label MBS. Abate: Interesting is one way to describe it! When the markets started to seize in March, we were in a very similar position to most in the industry. But soon the Fed stepped in and started buying Agency MBS en masse . You saw the bid for conforming loans skyrocket. Jumbos and other non-agency products were left unsupported. Ironically, the jumbo loans were higher quality and ultimately have fared better in terms of credit, but no one seemed to care at the time. The IRA: Yes, we’ve often wondered why the Fed does not get the connection between prime non-QM loans and the bank portfolio market for residential jumbos. Kind of seems like an obvious area for Fed support in times of liquidity stress, but the economists don't seem to get it. The chart below shows the market for 1-4s and HELOCs as of Q3 2020. Abate: We talked about it at the time. But no matter, we pounded our way out of the crisis without any government stimulus and did so without needing any outside dilutive capital. Industry volumes today have been hovering at record levels, something hard to imagine at the depths of the crisis. The IRA: Send a thank you note to Fed Chairman Jerome Powell . But how was April of last year different from say April 2019 and the end of December 2018? Or even 2008? Abate: When people ask what made this crisis in 2020 different than the Great Financial Crisis, we believe it was the ideological misfires by the Fannie/Freddie regulator. The major Wall Street banks, unlike the last crisis, never really wavered and supported mortgage market liquidity. But the GSE regulator appeared to approach the crisis opportunistically, as a way to prioritize GSE profitability over their role in stabilizing the housing sector, presumably in pursuit of their exiting conservatorship. The IRA: Agreed. There is definitely a conflict of visions at work at the Federal Housing Finance Agency (FHFA). When you look at the totality of the rules and decisions taken by FHFA Director Mark Calabria , they really make no sense. We are going to take the GSEs out of conservatorship, on the one hand; but no, we are going to constrain profits and liquidity, on the other. How did you view Calabria’s moves in the middle of last year? Abate: The decisions made in favor of the GSEs and in opposition to supporting market liquidity blindsided most of the industry. We expected the GSEs to be a countercyclical and calming presence rather than inciting panic. The FHFA response was especially bewildering when every other facet of government was working in close coordination to stave off the crisis. For our friends in banking, imagine if the Fed started margin calling the big banks in response to the market selloff rather than supporting the system! That’s how it felt to industry participants, and the trickle-down effects to the non-bank servicers and non-agency sector were unforced errors in my view. The IRA: Well, the GSEs own the $6 trillion in conventional loans and the servicing, so you'd think that they would support their market. But let's talk a bit about the calculus used by the Fed between pushing down funding costs and the inevitable compression of yields. Where do you see yields and the Treasury yield curve over the next 12-18 months? Abate: The Fed faced twin dilemmas when the panic over COVID-19 first erupted early last year. The first was that financial markets froze and stopped functioning. The Fed used the monetary bazooka to release an unprecedented amount of liquidity into the financial markets to stabilize things. With record low benchmarks, investors realized they needed to go further out the risk curve to earn a real return on their capital. Fear of missing out, or “FOMO,” soon became the dominant market psychology and drove financial asset prices to new highs. At this point, it seems like every class of investor has moved down the credit curve in some fashion. The IRA: That is the idea. Twist the risk curve till it bleeds. But do continue with the Fed point. Abate: The second dilemma was that the Main Street economy experienced a sudden and dramatic contraction and the Fed wanted some of the newly-injected liquidity to make its way to the real economy instead. So, they dusted off their Great Financial Crisis playbook and started buying agency MBS. This provided aid directly to homeowners by driving down interest rates and creating a refi boom. We could argue about the effects QE has had on the repo markets and credit, but the Agency purchases have a populist appeal that other Fed actions simply can’t replicate. The IRA: So where do you think the Treasury yield curve goes given the policy mix and QE purchase schedule the FOMC has articulated? Abate: We believe the curve has more room to steepen due to supply of issuance that is required to fund the increased fiscal deficits. That seems like the consensus view and those expectations are priced into the market and traders are likely positioned for that. However, widespread consensus always gives us pause. The long end is likely to be more volatile as 10-year Treasuries trade within a range of perhaps 1.50% to 0.50%. With delays in vaccination rollouts, and real economic devastation to small businesses and certain sectors of the economy (including travel, leisure, and retail), we see some real headwinds to the recovery. Right now, the market is optimistic that large scale fiscal stimulus will have a positive and lasting effect on the economy. A change in expectations could cause the curve to flatten with longer rates rallying back to the middle or lower end of the range I just mentioned. The IRA: Well, seeing 1.5% yields on Treasury 10-year notes will likely get Treasury Secretary Janet Yellen in a tantrum. In a related point, talk about your legacy private label MBS and how that body of assets has fared in terms of credit and prepayments? Abate: Unlike the Great Financial Crisis, where housing led to an economic collapse, housing fundamentals and credit were on solid footing before the COVID-19 crisis. Delinquencies and/or forbearance on our traditional prime jumbo loans increased in the spring and peaked at 3% in early summer. Since then, we have seen a significant decline in delinquencies, and as of the end of 2020, the rate of new delinquencies is currently similar to what it was pre-COVID. The IRA: Your results are good for private label. Net defaults on bank owned 1-4s are still hovering around zero net charge-offs on portfolio loans because home prices and thus post-default recoveries are so strong. Source: FDIC Abate: We’re proud of how our loans have performed relative to the rest of the prime jumbo market. Total delinquencies on our private label MBS program have generally been lower than the market. We think this speaks well to our loan acquisition process, surveillance, and loss mitigation. The IRA: Your experience fits with the narrative coming from the banks, namely that consumer credit is not that bad despite COVID, but volumes of new credit creation did weaken a bit in Q4. How do you think forward delinquencies will look as loans roll off forbearance? Abate: Given the economic uncertainty, we expect industry-wide delinquencies will remain above their pre-COVID levels for quite some time as there are some borrowers who are facing significant financial hardships. Fortunately, home prices have re-accelerated due to the factors we mentioned. This means that while some hard-hit borrowers will struggle to make their monthly payments, home equity is increasing and ultimately should lead to a lower level of losses than just looking at the delinquencies in isolation. The IRA: The big question in the world of mortgage finance is prepayments. As and when refinance volumes fall, we expect to see prepays also slow and asset values for servicing assets to rise accordingly. What is your view on servicing and prepays more generally? Abate: Prepayments have increased for the entire market, and it’s difficult to draw conclusions on our program when you consider that nearly every jumbo borrower has a large incentive to refi. The performance and investor-friendly features of our private label MBS program allow us to execute consistently in the market. We issued new transactions in the market soon after the liquidity crisis passed and have been off to the races since then. The IRA: There are growing signs of life in certain parts of PLS. Banks are again buying third party jumbo production after a six month hiatus. Talk a bit about how the market managed through 2020 and what you expect to see going forward. We hear a lot of traders complaining how tough it is to source new collateral for agency and private issuance. Is the secondary market tight along with the MBS markets more generally? Abate: Because PLS markets were not supported by last spring’s substantial stimulus efforts, there was an immediate pause in issuance activity that caused issuers to seek alternative financing for loan pools that were prepped for securitization. Beginning in the late spring, with yields compressing significantly in areas supported by the government, we began to see the markets open back up as investors needed to put money to work. With substantial cash still on the sidelines, the market continued to strengthen through Q3 and Q4; in the fourth quarter alone we completed four securitizations across our jumbo and single-family rental platforms backed by loans originated since the pandemic began. Our recent deals achieved better execution than our early 2020 transactions, prior to the market dislocation. The IRA: So the general bull market in 1-4s c/o the Powell FOMC will extend across the credit spectrum? Abate: Given the housing market’s tailwinds, including low borrowing costs and investor demand for housing credit, we expect 2021 to be a record year for PLS issuance. As you note, a potential headwind for issuers may be the ability to consistently source collateral – essentially, the difference between a robust flow purchase program such as ours, versus reliance on the bulk market. The depth of our seller base and our discipline of being in the market every day with reliable flow pricing is an important competitive advantage for us. This is especially true now, given increased demand from traditional balance-sheet lenders trying to grow net interest margin while replenishing record amounts of runoff. And as a direct lender to investors in single-family real estate through our CoreVest platform, we can craft our products to fit borrower needs and drive higher client retention rates. The IRA: So feast to famine and back to even bigger feast in just 12 months? What does the product mix at RWT look like in 2021? Abate: The vast majority of our jumbo volume since mid-2020 has been traditional prime jumbo (Redwood Select), however we’ve begun to see increased engagement from sellers on our expanded prime and non-QM program, Redwood Choice. More broadly, the expanded credit sector remains a niche part of the market. Given capacity constraints at originators, the market’s been challenged to source these higher-yielding credits. This will likely evolve further in 2021 – particularly given the revised QM rule, which we expect to survive in the Biden Administration. We still aren’t convinced the rule change is the right one, but it will definitely push more non-QM loans to QM safe harbor. That will help the banks and hurt the predominant non-QM originators. The IRA: Looking ahead over the year, how does the scene look next January for the hybrid REITs and particularly the PLS issuers? Abate: By January 2022, the hybrid REITs will likely diverge between more traditional, passive investors, and those with more focused mortgage banking activities. For now, many remain busy securitizing pre-pandemic collateral and cleaning up their balance sheets. But with the current yield environment, investing in third party assets will become progressively more difficult as more capital piles into the sector. We saw an auction in early January for newly-issued subordinate RMBS bonds in which 25 bidders participated. A year ago, you would have been lucky to see 5-10 bidders. In my view, it’s going to put the focus on accessing the loan “raw material” at the originator level to be able to procure investments and deploy significant sums of capital. That said, we’ve seen what a difference a year can make in this business. The IRA: That is an understatement. And we agree, the crowd around the hoop for all of these secured mortgage assets and derivatives is growing thanks to QE. We'll see what happens as and when the Fed tries to taper. Be well Chris.

New York | Earlier in the week, we wrote to our clients and colleagues in the secondary mortgage market about the growing dichotomy between urban and suburban commercial real estate exposures, and similar residential housing assets. We noted an important article in National Geographic that clearly lays out the long-term situation faced with COVID. Basically, we are years or even decades away from a solution that will restore full function to urban real estate assets: “As COVID-19 continues to run its course, the likeliest long-term outcome is that the virus SARS-CoV-2 becomes endemic in large swaths of the world, constantly circulating among the human population but causing fewer cases of severe disease. Eventually—years or even decades in the future—COVID-19 could transition into a mild childhood illness, like the four endemic human coronaviruses that contribute to the common cold.” In our view, there are two takeaways from the growing body of scientific opinion regarding COVID and the long-term nature of this global health challenge: First, it supports the bull case for suburban 1-4s, home prices and, importantly, residential mortgage servicing rights (MSRs) and eventually residential mortgage backed securities (MBS). As prepayment rates moderate, these option laden assets will appreciate. Suburban commercial assets are also likely to benefit from an extended challenge from the COVID pandemic. Second, it weakens the case for urban residential and multifamily assets, and further weakens the already distressed case for urban commercial real estate (CRE). Commercial buildings in NYC, for example, must eventually be repriced to reflect lower utilization levels. Lack of tourism as well as local use is a huge and as yet undisclosed problem for many CRE assets located in major cities. And the prospect of downward appraisals is a serious problem for the cities as well. Commercial Real Estate At year end, delinquency levels across most commercial real estate (CRE) exposures improved, with the number of properties reported in special servicing actually declining. As we noted in our comment on bank earnings, the fact of COVID forbearance such as the Cares Act and state moratoria are understating default and delinquency rates. Overall delinquency rates remain elevated, 10x pre-COVID levels, and the rate of loans rolling into delinquency also remains high. New issue levels for commercial mortgage-backed securities (CMBS) remain below 2019 levels, but the pace is accelerating. Most of the mortgage-related series is residential, but also includes CMBS. Note that the new issue market for asset backed securities in 2020 remained well-below levels of 2019, as the chart below from SIFMA suggests. Source: SIFMA While there has been short-term improvement in CMBS delinquency rates, it is important for readers to remember that commercial real estate is a chopped salad; all of the assets, locations and financing structures are different. Unlike residential 1-4s, you cannot generalize about commercial real estate or CMBS vintages. And since much of the world of office buildings and hotels is privately owned and financed, the restructuring process is also obscured from view until a major loss event occurs. Suffice to say that despite the huge rally in stocks since last April, commercial REITs were still down 15% over the past year as the markets closed last week, according to KBW. The book value multiple for commercial REITs was averaging just one times book equity. Names like KKR Real Estate Finance (NASDAQ:KREF) at 1x and Starwood Property Trust (NASDAQ:STWD) at 1.2x book are typical. TCW noted recently that single family rental (SFR) bonds actually jumped to 2.58% delinquency in December after never have seen significant delinquency previous to COVID. They also report a growing tide of CRE, SFR and multifamily loans that have received appraisal reductions. For us, 2021 will be a year of revelation and reappraisal in commercial real estate. We expect accelerating repricing and restructuring of CRE assets, particularly those located in major urban areas that have seen cap rates blown out. Yet again, remember the chopped salad metaphor because not all properties are distressed. TCW notes, for example, that hotel financials have skewed the average loan-to-value (LTV) in CMBS to 139% compared to the median of 42% for all loans sold into ABS. Likewise, Fitch Ratings found that the U.S. CMBS delinquency rate fell four bps to 4.69% in December 2020 from 4.73% in November due to strong new issuance volume. This is the second consecutive month of decline, but it is important to note that the CMBS delinquency rate was just 1.45% at the end of 2019. Although US banks were able to release loan loss reserves from consumer loan portfolios in Q4 2020, C&I loans continue to see a reserve build. The credit dynamic at work here is illustrated by the fact the delinquency in real-estate-owned (REO) in CMBS conduits was 0.5% in January of 2020 but rose to 4.5% in December. Perhaps more important, despite the high rates of delinquency, annualized default rates in CMBS and bank CRE portfolios remain very low by historical standards. Whether and to what extent more delinquencies migrate to default will be a key issue in 2021 and beyond. But the fact of a wall of money looking for assets is likely to be depressing reported default rates. New York City Spending the past year in New York City, we watched the collapse of the local, street-level economy in areas that are dependent upon business, commuters, tourism, entertainment and hospitality. Most of midtown Manhattan’s offices and other structures are unused. Commuter volumes are 10% of pre-COVID levels. We estimate that the overall utilization rate for commercial assets located between 34th Street and 59th Street is perhaps 10-15%. Manhattan streets are empty at night and there is little local pedestrian or vehicle traffic. By day, once busy areas such as Central Park South are quiet with no tourists or a large number of former residents. Open spaces provide refuge for the few remaining residents who cannot gather indoors. By evening, the midtown area is largely empty and increasingly dangerous as the streets are left to the homeless and bands of young people on motorcycles . Residential neighborhoods in NYC have fared far better, but the business ecosystem that made the city possible is now gone. In its place we have a survival economy, where prices for goods and services have doubled or trebled. Manhattan restaurants, for example, now erect huts in the street because of the ban on indoor dining and raised prices to absurd levels. Quality Meats on 58th Street We see older cities such as NYC facing a particularly difficult and protracted adjustment. The pricing of all real estate in the five boroughs was built upon a level of utilization and services that is unlikely to be restored anytime soon. Offices, theaters, restaurants and other public venues from the smallest building to Lincoln Center are predicated on a level of utilization and density that may never be restored. This suggests that much of the Manhattan real estate market needs to be repriced downward and perhaps even redeveloped for other uses. While many of the commercial and residential assets in New York are owned privately, by REITs and in CMBS, the direct and indirect economic impact of this adjustment will be substantial. In the near term, the value of both commercial and residential assets in urban areas may be significantly reduced to make financing a reality. And as the new valuation for commercial and multifamily assets in NYC is reached, the City and State of New York will see adjustments in revenues for sales, property and other taxes. Residential Real Estate In contrast with the generally negative situation with respect to urban commercial and residential assets, in the wider world of single-family and multifamily residential properties the outlook remains quite upbeat. Indeed, thanks to the continued purchases of MBS by the FOMC, home prices rose at nearly a 10% annualized rate in December. The fact of rising average loan amounts in 1-4s suggests that a large asset bubble is in formation. We suspect that this situation will persist so long as the FOMC is buying $100 billion plus per month in Treasury debt and agency MBS. Federal Reserve Board Chairman Jerome Powell stressed that a QE taper is not anywhere close. Of note, former New York Fed President William Dudley warns that the longer QE continues, the more difficult will be the taper. Ditto. The FOMC statement confirmed that the central bank will continue to increase its holdings of “agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” But a big effect of QE is asset price inflation and the positive impact on loss-given default. Rising asset prices are largely eliminating credit risk for the secured residential mortgage asset class, a situation we expect to persist until 2024 or 2025. The chart below shows loss given default for bank-owned 1-4s including jumbos and non-QM loans held in portfolio. Source: FDIC/WGA LLC In addition, the fact that the large banks led by JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) have once again started to buy third-party production in the jumbo market for 1-4s suggests that the damage done in April of last year is being somewhat reversed. Issuers such as Redwood Trust (NYSE:RWT) and New Residential (NYSE:NRZ) also have resumed originating non-QM loans for sale into private MBS, of note. The good news is that we expect to see at least $3.5 trillion in new 1-4 family mortgages originated in 2021, a bull market volume indicator. As a large portion of the borrowers that were on some type of forbearance programs cure and then refinance, we expect to see delinquency rates fall. This is not to suggest that the industry does not face a problem with delinquency, but the positive environment for home prices is likely to continue due to a shortage of supply in existing homes. There continues to be a strong pipeline for IPOs by independent mortgage banks (IMBs), but our view is that the window is continuing to close along with secondary mortgage spreads. The fact that strong issuers such as Amerihome , Caliber and loanDepot , for example, were reportedly forced to delay or downsize offerings illustrates the difficulty in obtaining support from investors. The chart below shows the MBA numbers for net profitability for IMBs (H/T to Joe Garrett ). Source: MBA While 2020 will clearly be a record year in terms of IMB profits (commercial banks are generally missing this opportunity), we expect to see the secondary market spreads continue to shrink under the weight of competition and a dwindling supply of refinance opportunities. Notice the swing in profits from 2018, when much of the industry was losing money, to 2020. Another measure of IMB profits is gain on sale, which is shown in the table below from the MBA. Source: MBA In addition to MBS, another area that is also being distorted by the FOMC's QE open market purchases is mortgage servicing rights (MSRs), a naturally occurring negative duration asset that is presently changing hands near decade lows in terms of pricing. Many investors are rightly shy of buying MSRs given high rates of prepayments, but when fear rules is when negative duration assets like MSRs are cheap. We note, however, that capitalization rates on conventional 3% coupons were rising last month, according to SitusAMC. Capitalization rates were up for the third month in a row in fact as the Fed of New York focused QE purchases on 2.5s and 2s for the most part. Ponder that. As and when prepayment rates start to slow, in part because of the industry burning through the easy loans, we believe that MSRs and also MBS could outperform other fixed income assets. Residential MBS is currently offering investors negative returns due to early loan payoffs, but could see an increase in value as prepayments slow. Any "taper" by the FOMC will only accelerate that process. Looking at the valuation multiples for new production conventional 4% MBS rising since September, which is roughly when the Fed stopped buying those coupons as part of QE, certainly makes us wonder about the unremarked optionality embedded within MSRs as well as agency MBS.

In this issue of The Institutional Risk Analyst, we feature a comment by Jim Parrott of Urban Institute in Washington. You can download the full paper with footnotes on Jim's page at www.urban.org. As you read Mr. Parrott's concise description of the latest Preferred Stock Purchase Agreement (PSPA) with the US Treasury, ponder whether the new terms make it more or less likely that the GSEs will be released -- or instead put into receivership. Parrott writes: "By increasing the capital levels again and allowing the GSEs to pay yet more of their dividend in senior preferred shares, the taxpayer appears to come out on the short end of the stick." We noted last week the GSEs will never be worth more than about $250 billion (H/T DL) regardless of how much additional taxpayer money is contributed to the capital of Fannie Mae and Freddie Mac . As Parrott told The IRA, "The real question is whether this ultimately puts them into the hands of private shareholders or those of the government." The Trump Administration Plays Its Last Cards on Fannie Mae and Freddie Mac Jim Parrott Urban Institute January 15, 2021 On Thursday evening, January 14, the US Treasury and the Federal Housing Finance Agency (FHFA) took the last steps on housing finance reform we will see from the Trump administration, an effort they committed to early and mapped out in a 2019 white paper. In this brief, I summarize how the administration modestly increases momentum for the eventual release from conservatorship of Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) but largely leaves their fate to the incoming administration. The Trump Administration’s Final Push on Reform Treasury and FHFA have changed the contracts by which Treasury supports Fannie Mae and Freddie Mac (the senior preferred stock purchase agreements, or PSPAs), in a manner designed to create momentum for the GSEs’ eventual release from conservatorship and constrain their activities well after their release. Creating Momentum for the GSEs’ Release Treasury and FHFA have amended the PSPAs to allow the GSEs to build the level of capital required under FHFA’s recently released capital requirements (see Parrott, Ryan, and Zandi 2020), or $283 billion. This is a sixfold increase in the current capital limits of $25 billion for Fannie Mae and $20 billion for Freddie Mac. The GSEs will still owe taxpayers a quarterly dividend on their senior preferred shares equal to the entirety of the GSEs’ quarterly profits, as they have since 2013, but the GSEs will be able to pay that dividend through dollar-for-dollar increases in the taxpayers’ senior preferred position rather than cash, allowing them to use their profits to build capital until they meet their required capital levels. Once they hit these capital levels, they will again pay their dividend in cash, but the dividend amount owed will instead be the lesser of either their quarterly profits or 10 percent of the taxpayers’ senior preferred position. Unless the taxpayers’ senior preferred position is written down significantly, the 10 percent option will never be the lesser of the two options. To reach the $283 billion capital requirement, the GSEs will need to build another $248 billion above what they have today and, in doing so, compensate taxpayers with a $248 billion increase in the taxpayers’ senior preferred position. This will bring the taxpayers’ total senior preferred position to an astounding $477 billion, putting a 10 percent dividend well beyond the GSEs’ means. Once the GSEs reach their required capital levels and the cash dividend kicks back in, they will thus once again pay Treasury all their quarterly earnings. Treasury and FHFA also agree that FHFA may release the GSEs from conservatorship once the litigation related to the conservatorship is resolved and the GSEs have built equity capital equal to percent of the GSEs’ total assets (see section 5.3(b) as amended). This authority is limited indirectly by a separate provision prohibiting the GSEs from raising additional equity capital until the litigation is resolved and Treasury has exercised its warrants on 79.9 percent of the GSEs’ common equity. Constraining the GSEs’ Activities after Conservatorship In addition to putting the GSEs on a clearer path out of conservatorship, Treasury and FHFA are amending the PSPAs to constrain the GSEs’ business practices upon their release from conservatorship. The PSPAs now reduce the caps on the GSEs’ investment portfolios from $250 billion to $225 billion, giving the GSEs enough room to manage nonperforming loans that need to be pulled from pools but not enough room to take the investment risk they did in the run-up to the crisis. Treasury and FHFA also codify in the PSPAs the small lender protections that FHFA has put into place by directive during the conservatorship. The GSEs will be prohibited from offering volume-based pricing discounts or more favorable treatment for pools of loans than loans sold through the cash window, and they will also be required to limit the volume of loans that any one lender can sell through their cash window. These steps are intended to level the playing field in the GSE channel between the large and small lenders. The final way that Treasury and FHFA amend the PSPAs to constrain the GSEs’ practices is by imposing limits on the support the GSEs can provide for various products, limits intended to capture roughly the levels of support they are providing in these markets today. The PSPAs now limit support of multifamily lending to $80 billion a year, half of which must be mission-driven as defined by FHFA. They limit the GSEs’ purchase of “high-risk” single-family loans to 6 percent of their purchase money mortgages and 3 percent of their refinancing mortgages. These are defined as loans with at least two of the following characteristics: the loan is more than 90 percent of the home’s value, the borrower’s debt is more than 45 percent of their income, or the borrower has a credit score below 680. They limit support of second homes and investor properties to 7 percent of their acquisitions. And they limit GSE acquisitions to loans deemed qualified mortgages under the ability to pay rule, with a few modest exceptions. The GSEs appear to be inside of these caps already, so while the new limits will impede an expansion of access to credit, they should not contract it. A Quick Take on the Implications While it will take time to digest the full import of these changes, there are a few implications worth noting. First, while it might appear that the agreement has put the GSEs’ release from conservatorship out of the Treasury’s control, it has not. Second, the modifications to the dividend will mean that in the end, taxpayers are likely to either go unpaid for a large share of its investment or in effect take over the GSEs. And third, the move to lock in the GSEs’ current risk profile is likely more optics than substance. Treasury Still Has Significant Control over Whether and How the GSEs Are Released While the PSPAs now allow FHFA to release the GSEs once the litigation is resolved and they have hit 3 percent equity capital, Treasury still retains significant control over their fate for several reasons. As noted, under the agreements the GSEs cannot raise the equity capital it will need to exit conservatorship until and unless Treasury exercises its warrants on 79.9 percent of their common equity. Second, as a party to most of the litigation at issue, Treasury will have some control over when and how it is resolved. And third, Treasury’s consent will be required to make the PSPA changes needed for the GSEs to meet the 3 percent threshold within a reasonable time frame. The last of these sources of control is worth additional explanation. As of June 30, 2020, the GSEs had $6.6 trillion in combined adjusted total assets. To hold capital equal to 3 percent of those assets, they would need to build about $200 billion. They will likely want to maintain a buffer of at least 10 percent above that minimum, bringing the threshold up to $220 billion. Beginning from the $35 billion in combined capital they have today, they would thus need to build another $185 billion to get to the capital level needed for their release. Their earnings over the past two quarters imply a combined annual return of about $22 billion. That number will decline given the new capital rule and other steps that the FHFA has taken to decrease the GSEs’ risk, but even at that level, it would take the GSEs more than eight years to hit 3 percent using retained earnings alone. For the GSEs to meet that level in a more reasonable time frame by raising capital in the capital markets, Treasury and FHFA would have to amend the PSPAs again to restructure the government’s overwhelming ownership interest. This ensures that Treasury will retain a critical role in when and how their path out of conservatorship would play out. Taxpayers Are Likely to Either Get Stiffed or Walk Away Owning the GSEs The PSPAs provide two forms of compensation to taxpayers, one backward-looking and one forward-looking. Taxpayers are supposed to receive a dividend for their investment to date and a commitment fee for the backstop they provide going forward. The latter has never been applied because the GSEs have never been able to afford it given their dividend obligations. Once they can afford both, however, Treasury and FHFA are obligated to set the level of the commitment fee and begin charging the GSEs for the backstop. The dividend was first set at 10 percent of the senior preferred position. Once it became clear in 2012 that the GSEs could not afford it, it was converted to whatever they could pay, meaning their profits from one quarter to the next. In 2017, Treasury and FHFA allowed the GSEs to begin using their quarterly profits to build up their capital levels to $3 billion each, paying the economic equivalent owed under the dividend through increases in the taxpayers’ senior preferred position until they hit the new limits, after which the GSEs went back to paying their dividend in cash. They repeated the move in 2019, allowing Fannie Mae to build up to $25 billion and Freddie Mac to build up to $20 billion. This latest move pushes the level up once again, to the $283 billion they need to meet their requirements under the new capital rule, after which the dividend will shift to the lesser of their quarterly profits or 10 percent of the taxpayers’ senior preferred position. By increasing the capital levels again and allowing the GSEs to pay yet more of their dividend in senior preferred shares, the taxpayer appears to come out on the short end of the stick. FHFA and Treasury will have to write down the taxpayer position well below where it is today for the GSEs to attract new private capital. Thus, the additional dividend payments that taxpayers are to receive under the new terms are not going to be worth anything. And because taxpayers are not getting a commitment fee either, they are in effect no longer being paid for their support of two of the world’s largest financial institutions. The profits that the GSEs are making today and in the days ahead will benefit whoever ultimately owns the institutions, not the taxpayers to whom they are actually owed, amounting to a remarkable transfer of wealth. Unless, that is, all this winds up being a path to government ownership rather than private ownership. After all, at the end of this, taxpayers will wind up with an interest in the GSEs equal to close to half a trillion dollars and warrants on 79.9 percent of their common equity. That is a good deal closer to government ownership than private ownership, so the next administration could decide that it is easier, and better policy, to simply convert the well-capitalized GSEs into government-owned utilities. And this is indeed what several of us have proposed as the best course of policy (Parrott et al. 2016). The Moves on Risk May Not Mean Much Finally, the steps taken to lock in the GSEs’ current risk profile will simply codify in contract risk measures that the current FHFA would have maintained anyway through rule and directive. And just as policies in place by rule or directive will be changed by a new FHFA director where they do not fit the new director’s vision for what the GSEs should be doing, presumably a new director will also work with the new Treasury to change PSPA terms that do the same. So, it is unclear how the moves to embed these policies in the PSPAs will change the GSEs’ behavior, either during the tenure of Director Calabria or after. Conclusion The steps that Treasury and FHFA have taken amount to a legacy statement on how they think Fannie Mae and Freddie Mac reform should proceed in the years to come. While they increase momentum down their preferred path, whether the GSEs continue down that path or change course entirely has been left largely to the incoming administration.

New York | Across the financial world, readers of The Institutional Risk Analyst know very well, there seems to be a growing incidence of fraud and chicanery, this as the rate of interest paid on securities falls. The “bezzle,” what John Kenneth Galbraith described as the “inventory of undiscovered embezzlement,” is contracting along with the cash flow from financial assets. The European Central Bank is threatening to place limits on leveraged loans even as interest rates in Europe sink further negative. Do you think anyone at the Fed or ECB understands the connection between low interest rates and financial fraud? More than merely shifting risk preferences, low or negative interest rates create a seller's market for bad securities and, worse, nothing at all. The shrinkage in available plunder causes those living on the edge of propriety to develop ever more devious and complex games. Technology enables this wastage as do the pressing needs of the criminal world. And the ability of policy makers and regulators to keep pace with the new scammers is similar to the situation facing online security vendors. The perpetrators are just a little faster and certainly better motivated. Bitcoin: Money for Nothin' Our favorite game in recent years has been bitcoin, the first and only “independent” crypto token that also is a technologically enabled fraud. People exchange legal tender dollars or other currencies for, well, the equivalent of a bus token or lottery ticket. The value of bitcoin is based entirely upon the existence of a greater fool who will give you a thing of value in the future in exchange for this token. But not all bitcoin is bought for value, as we discuss below. Proponents of bitcoin point out that the exchange of tokens is independent of a biased political issuer like the Federal Reserve System or Bank of Japan . Yet the fact that other tokens issued by various entities around the world, particularly the shadowy Tether , can be used to buy bitcoin renders the market susceptible to manipulation. Tether is under investigation by the New York State attorney general’s office . In a must read post on Crypto Anonymous (H/T Dick Hardy), the enormous scale of the role of Tether in bitcoin price movements was described (“ The Bit Short: Inside Crypto’s Doomsday Machine ”). As the author stated: “The upshot: over two-thirds of all Bitcoin — $10 billion worth of it — that was bought in the previous 24 hours, was being purchased with Tethers. What’s more, this pattern wasn’t unique to Bitcoin. I saw the same thing for all the other popular cryptocurrencies. It seemed I’d been wrong to dismiss Tether. Tether wasn’t just in the crypto markets — Tether was the crypto markets.” The graphic above illustrates several groups of fraud victims, but the group to the right of the bitcoin market seem to be the most leveraged. At the very least, Tether seems to be the single largest source of liquidity flowing into bitcoin and other currencies. But what is Tether? Many of the users of bitcoin may believe that their market is protected from manipulation because of the use of blockchain and algorithms, yet this post suggests that both bitcoin and the other, downstream cryptos are being manipulated via Tether. And offshore, the author suggests, leverage as high as 100:1 is available on some crypto markets and with zero KYC. This makes Tether and other "issuer" cryptos perfect vehicles for money laundering. This apparent manipulation of bitcoin by Tether is significant, in our view, because US regulators have differentiated between “independent” markets such as bitcoin and other cryptos such as Tether, which to us look like issuers of securities, securities that are being issued and trade in apparent violation of US law. The technological differences of bitcoin vs other crypto tokens seem to lack any meaningful distinction in light of the role of Tether, de facto , in setting bitcoin prices. Tether reportedly accounts for some 70% of flows into crypto. This suggests perhaps that the SEC and FINRA ought to have another look at the entire bitcoin/crypto ecosystem. Maybe our pals in the financial media who have become advocates for bitcoin ought to look again as well. Q: Is the Tether/bitcoin/crypto chain the biggest fraud in recent human history? Maybe. But hold that thought. Recapitalizing the GSEs There are, of course, many types of games. Some are concealed by technological complexity as with bitcoin and Tether, but others are hidden in plain sight, under the warm blanket of public policy and legal arguments that are unfamiliar to professional managers and analysts much less individual retail investors. Consider the case of Fannie Mae and Freddie Mac , two companies that were once thought to be private but in fact never left government control. An “incomplete sale” imputes fraud conclusively, according to the US Supreme Court almost a century ago. The shareholders of the GSEs are the victims of an ancient fraud committed half a century ago by members of Congress during President Lyndon Johnson's Administration. But more recently, the long-suffering shareholders of the GSEs were victims of a new deception, this perpetrated by Wall Street funds and investment houses. These well-informed professionals floated the twin theory that 1) the US Treasury would magically forgive the more than $200 billion taxpayers have invested in the GSEs and 2) that Treasury Secretary Steven Mnuchin would then release Fannie and Freddie from government control. Neither of these statements were ever really true, but a number of individuals and firms made repeated written and verbal declarations that the GSEs would be returned to shareholder control. These false statements to investors were reported extensively in the financial media, but were rarely challenged by journalists or regulators. Federal Housing Finance Agency Director Mark Calabria participated in this grotesque act of manipulation of retail investors. In fact, neither Secretary Mnuchin nor Director Calabria ever had the authority to forgive this $230 billion in money owed to the taxpayer. As with General Motors (NYSE:GM) , Citigroup (NYSE:C) and American International Group (NYSE:AIG) , the Treasury must be repaid for moneys advanced to any private entity. Veteran Washington analyst Isaac Boltansky at CompassPoint put the situation in concise perspective for his clients last week: “At the highest level, the agreement allows GSE capital retention up to the regulatory minimum capital, including buffers, outlined in the recently released GSE capital rule. Under that rule, as of 2Q20 the GSEs in aggregate would have been required to hold $283B in adjusted total capital. In return for allowing GSE capital retention, the liquidation preference of the Treasury Department’s senior preferred will increase on a dollar-for-dollar basis until the minimum capital requirements are met. As a matter of context, the liquidation preference of the UST's aggregate senior preferred position already stands at $228.7B.” In the latest agreement with the Treasury, the GSEs will be allowed to retain more than $200 billion in capital, but the existing private shareholders are diluted further as the Treasury’s preferred equity stake grows towards a nominal half a trillion dollars. Of course, the GSEs will never be worth more than about $200 billion, so the new transfers to the GSEs engineered by Mnuchin and Calabria represent a future loss to the Treasury. The change in the capital retention of the GSEs is an act of fraud on the taxpayer. The Treasury is no longer paid for the credit support provided to the GSEs. The fact of more capital retained by the GSEs will not affect the “AAA” credit standing, which is entirely a function of government ownership. As funds are transferred to the GSEs, the government gets more preferred shares -- but no additional value for the taxpayer. “Treasury officials said Thursday they were unwilling to significantly restructure the government’s senior stakes in the firms, now valued at roughly $230 billion, saying the issue should be subject to further study,” reports Andrew Ackerman of The Wall Street Journal . “That move effectively means it will be up to a Biden-led Treasury Department to tackle the question. Reducing the stakes was a longtime goal of private shareholders that would put the companies on a path to exit government control eventually.” Not only was the promise of wiping out the GSE debt to US taxpayers never a real possibility, the idea of “releasing” Fannie Mae and Freddie Mac to private ownership was likewise never practical or possible. In the post-Basle III and Dodd-Frank world, without direct credit support from the US Treasury, the GSEs would be downgraded by the major credit rating agencies and quickly collapse. Without a “AAA” credit rating, the GSEs have no reason to exist. Of course, the retail investors in GSE common and preferred shares have no more understanding of federal finance than do policy wonks and professional investors. But the question we have is why has the SEC taken no notice of the erroneous puffery regarding GSE stocks? Retail investors who purchased GSE common and preferred shares reliant upon the numerous false statements made regarding repayment to the Treasury and/or release from conservatorship may have a cause of action – and perhaps a better legal case going after the Wall Street actors than suing the federal government. The moral of the story is that as easy ways to invest prudently dry up, investors are forced to look ever harder for acceptable returns – and may be more vulnerable to frauds like crypto currencies and promoters of penny stocks like the GSEs. As investors load up on more and more low-cost leverage on less and less real assets, it seems appropriate to ask how this will all end. Perhaps the situation was summed up best by our friend Jim Rickards in “The New Great Depression,” his timely book about the post-COVID world. “The veneer of civilization is paper-thin, and the paper is now torn,” he writes. Winter Sale on Now!

New York | Last week, JPMorganChase (NYSE:JPM) , Citigroup (NYSE:C) and Wells Fargo & Co (NYSE:WFC) reported Q4 2020 earnings. As the folks at KBW told The Wall Street Journal last week, it was a messy quarter, both for what was disclosed to investors and what was not disclosed. The major themes of fourth quarter results are 1) declining estimates for bank credit costs, partly due to the Cares Act and other consumer and business debt moratoria, and 2) weaker interest income and revenue for banks going into 2021. Financials Group: ALLY, AXP, BAC, BK, C, COF, DB, DFS, FRC, GS, HSBA, JPM, MS, OZK, PNC, PYPL, SCHW, SQ, TD, TFC, USB, WFC JPMorgan For JPM, the bank’s net income was down 20% for the year vs 2019, a fact that did not prevent investors from driving bank shares up to pre-COVID levels. JPM closed on Friday at 1.7x book, a fairly rich valuation given the bank’s modest earnings prospects for the coming year. The Street analyst consensus has revenue at JPM falling mid-single digits in 2021. The fact of an almost 30bp decline in JPM’s interest rate spread, this even as deposits rose by more than 1/3rd, illustrates the negative impact of QE on bank earnings. The big “surprise” in JPM’s earnings was the $1.9 billion release of loss provisions back into income, a signal that on the consumer side, at least, the credit picture is relatively benign despite the damage being done to many sectors. Simply stated, the people who are suffering the most from COVID do not seem to be big users of consumer credit. Credit losses remain moderate, yet other factors pushed consumer & retail net income at JPM down 50% YOY. In commercial credit, however, the story is different. Net income for the corporate and investment bank was up 40% YOY. While JPM did release some loan loss provisions from C&I loans, the reserves for commercial loan loss exposures remain up tenfold vs the end of 2019. The big banks are not done dealing with the credit fallout from COVID in commercial exposures, we are simply pausing the credit build. We expect that JPM will maintain the current levels of provisions until the bank has greater visibility on actual commercial losses going forward. Loss provisions overall were up over 215% in 2020 after the Q4 reserve release, suggesting significant credit costs lie ahead. Net charge-offs were up 151% for 2020, but still tiny in absolute dollar terms at 0.76% of total loans vs 0.46% for Peer Group One. Citigroup Like JPM, Citi also saw a decline in net income during 2020. But Citi is trading at less than half of the book value multiple of JPM, just 0.75x book as of Friday’s close. Of greater concern, however, was the slide in operating efficiency in Q4, going from the mid-50s to almost 65% efficiency at year end. Perhaps the increase in operating costs was associated with the 5% surge in headcount? Total assets grew 16% in 2020 while tangible book value rose just 5%. While interest expense fell 61% over the course of 2020, interest income fell 30%, illustrating the wasting effect of current FOMC policy on bank margins. Net interest revenue fell 13% in 2020 while net revenue was down 10% Q4 2019 to Q4 2020. Most important, net credit losses at Citi fell 24% or $500 million in Q4, again illustrating the impact of the Cares Act and state debt moratoria on the apparent credit standing of major banks. We expect these numbers to go up as moratoria expire, but we also see a generally good credit situation vs the fears we voiced back in March and April. The imponderable is employment and the potential for a sustained dip in 2021, something that could again elevate concerns about credit. Citi released $1.8 billion from loss provisions back into earnings in Q4, leaving total reserves just shy of $16 billion vs $8 billion at the end of 2019. Even with that positive, however, Citi’s net income was down 41% vs full year 2019. If you bought the stock in 2020, you are paying 2019 prices for half the revenue. This is why we own the Citi preferred rather than the common, of note. Like JPM, Citi saw its global consumer banking segment decline broadly on the revenue line and almost reported negative earnings for the year. The institutional clients group, however, saw revenue rise almost 30% on strong North America activity but missed on earnings. Ironically, overall net revenue for C was virtually unchanged from 2019. Wells Fargo & Co After an awful year, WFC did better on earnings in Q4 2020, but that did not prevent the bank from delivering a down 90% result on the net income line for the full year. The bank’s common shares closed Friday at 0.8x book value or half the book value multiple of JPM. WFC managed a reserve release that was 1/10th the size of JPM. Even with the modest release, WFC’s loss provisions ended 2020 at $14.1 billion, up 426% for 2020. WFC shrunk in terms of revenue and operations, particularly with the announcement of the closure of the bank’s offshore advisory business. We expect to see a further charge for the shut-down of the WFC non-US advisory business, which apparently had such a large proportion of clients from Venezuela that the business was judged to be unsalable. Of note, WFC’s mortgage servicing business continues to shrink. The fair value of the WFC mortgage servicing rights declined 43% over the past year. Mortgage banking revenue was up in 2020 as you might expect given the huge boom in residential lending, but the fact remains that WFC’s once 1/3 market share in residential mortgage servicing is running off rapidly. Meanwhile, WFC loaded up on derivatives, which grew 80% YOY, and saw large gains on trading securities, up more than 500% YOY. Net interest income for WFC, however, fell 16% through Q4 2020. We expect to see depressed revenue and operating margins for much of 2021, both due to the economic malaise caused by COVID and the growing negative impact on bank earnings due to QE. Unless and until the FOMC relents and eases up on its massive purchases of Treasury securities and MBS, bank earnings are likely to decline further. The long-term damage to banks and the rest of the US financial system from the Fed's radical policies is incalculable. The IRA Bank Profile is published by Whalen Global Advisors LLC and is provided for general informational purposes. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The IRA Bank Profile. 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New York | Whenever interest rates rise, the amen chorus on Wall Street starts to warble about the benefits to banks and bank earnings. Stock prices rise But readers of The Institutional Risk Analyst know that it is credit spreads and not market benchmark rates that actually determine bank net interest income. The chart below from our latest Premium Service profile of Bank of America (NYSE:BAC) illustrates the fact that gross spreads on bank loans and leases have been falling during the latest period of massive Fed bond purchases (aka “QE”). Also, asset returns generally at banks are in a downward spiral thanks to QE. Source: FFIEC Investment managers, however, are not the only ones confused about interest rates. Philadelphia Fed President Patrick Harker , for example, seven days ago declared that the U.S. central bank may begin paring back its bond-buying program as soon as the end of this year. Later in the day Harker, whose appointment to that post came as a surprise to many, corrected his earlier outburst, but the damage was done. The damage of the Harker Tantrum = 20bp yield move in the 10-year Treasury note in a week. Thanks so much Patrick. Suffice to say that the cash MBS outperformed the Treasury hedge by a lot. Unhappy TBA traders abound. Not to be outdone, a couple days later, Dallas Federal Reserve President Robert Kaplan said he expects broad vaccine distribution to unleash strong economic growth later this year, allowing the U.S. central bank to begin to pull back on some of its extraordinary monetary support, Reuters reports. These two bits of squawking by members of the FOMC caused markets to positively tremble. The 10-year Treasury note backed up nearly 20% in yield in a matter of days, causing many market commentators to questions whether the FOMC is actually in control of monetary policy. Note in the chart from FRED below how the Japanese yen weakens as the 10-year note rises in yield. That’s a hint. H/T Ralph. Yesterday the Board of Governors rolled out Vice Chairman Richard Clarida , who now says Fed bond purchases will keep pace through the rest of the year. Clarida said he expects the central bank to maintain the pace of its asset purchases through the rest of 2021, CNBC reports. Yet back in November, Clarida had hinted at possible changes in the Fed's bond-buying program. Were Harker and Kaplan merely parroting his earlier comments? Even after these corrections and amplifications, the confidence protection team at the Fed’s Board of Governors sent Vice Chairman Clarida out yet again, now stating emphatically that the central bank would not change policy until inflation had been at 2% for a least a year. Just to make investors feel even more confident, the Board then unleashed Fed Governor Lael Brainard , the furthest left Fed Governor on the political scale. The former bank regulator from MD declared for all to see that the U.S. economy remains “far away” from the U.S. central bank’s goals of a healthy labor market and stable inflation. As a result, says Governor Brainard, the Federal Reserve will likely continue its bond-buying program for “quite some time.” What all of this confusion illustrates is that having Fed governors and Reserve Bank Presidents airing their personal views to the market is not helpful. This is especially true when the course of US monetary policy as determined by all of the members of the FOMC is unlikely to change. Call us old fashioned, but we think that former Federal Reserve Board Chairman Alan Greenspan had it right. The Chairman of the FOMC, Jerome Powell , should comment publicly on US monetary policy and other members of the FOMC should be silent. The internal deliberations of the FOMC are confidential. Having Patrick Harker, Robert Kaplan or other Reserve Bank Presidents grandstanding for the media is inappropriate, causes confusion among investors as to Fed policy, and should result in disciplinary action by the Chairman. Likewise, Governor Brainard’s public musings are not particularly helpful either since her socialist views are unlikely to win a consensus on the FOMC. The irony of this situation is that the Fed’s massive purchases of Treasury debt and mortgage-backed securities is actually tightening credit. While yes, QE does force down bond yields, it also removes collateral from the credit markets, inhibiting the functioning of the mortgage markets and other secured financing. Today the Street is awash in cash liquidity, but collateral is scarce. One day, we hope all of the PhD economists at the Fed will realize that cash and collateral are two sides of the same coin. Even as the Harker Tantrum caused bond yields to rise significantly, this in clear opposition to the policy set by the FOMC, interest rates on MBS continue to fall under the weight of the Fed’s aggressive open market operations. The FOMC bought $1.5 trillion in MBS since the explosion of COVID from a lab in Wuhan, China . As the chart below suggests, yields on 30-year MBS were unaffected by President Harker’s erroneous comments of a week ago. Indeed, as Q4 2020 earnings begin, we expect to see net interest margins under continued pressure at US banks. Although the Fed can force funding costs lower via QE, the impact on spreads for all types of bank assets is decidedly negative. This is why, dear friends, the yield on earning assets for all US banks is continuing to fall. Indeed, coupon spreads on MBS are at record all-time lows. But do you think anyone on the FOMC understands what this signifies? Source: WGA LLC So ask not, dear friends, whether Harker, Kaplan, Brainard or anyone else at the Fed have a clue about the direction of interest rates or markets. Ask instead whether all of the members of the FOMC will end QE and normalize interest rate policy before the central bank does serious damage to US banks and other investors, such as leveraged funds and REITs. And remember, when it comes to asset returns for banks, it's all about spreads, not benchmark interest rates.

New York | One of the hot areas to watch in terms of risk and return in the coming year is the steady migration of “fintech” companies into a commercial banking model, in some cases combined with public ownership. We view this trend as a positive development and believe it confirms our view that “fintech” is merely a marketing term and insured depository institutions have a monopoly on payments in the US. Back in January of 2020, The Institutional Risk Analyst published a comment (“ Is it FinTech or OldTech? ”) that asked the basic question, namely is there anything really “new” in the fintech model or are these just new age nonbank financial companies. Remembering that nonbank firms, are by definition, more nimble than commercial banks, but dependent upon depositories for access to the payments system, the answer seems to be that fintech is an overlay on the traditional bank model controlled by the Federal Reserve System. Once the fintech “challengers,” as the media likes to call them, outgrow the pretense of cooperating with banks, then they must become banks themselves. Our experience has been and continues to be that the term “fintech” is mostly media hype, an inflated description for technology enabled finance companies that all must eventually become, well, commercial banks. And once these fintech platforms become established and their once innovative products become commonplace, then the equity market valuations will tend to fall into line with the comps. In this regard, the evolution of fintech companies into regulated banks has implications for public market valuations. We owned PayPal (NASDAQ:PYPL) and Square Inc (NYSE:SQ) in the early days, but took the triple digit gains off the table in 2018. In retrospect that may have been a poor tactical trade, but to paraphrase Jim Cramer on CNBC , in this Fed-manipulated market it is never bad to take profits. We have added PYPL and SQ to our financials surveillance group. Financials Group: ALLY, AXP, BAC, BK, C, COF, DB, DFS, FRC, GS, HSBA, JPM, MS, OZK, PNC, PYPL, SCHW, SQ, TD, TFC, USB, WFC Square as Bank In December, the Federal Deposit Insurance Corporation (FDIC) issued a final rule setting forth standards to apply to controlling shareholders of industrial banks that are not subject to consolidated supervision by the Federal Reserve System. The final rule will take effect April 1, 2021. On the same day that it announced the proposed rule last year, the FDIC approved preliminary applications for deposit insurance submitted by SQ and Nelnet, Inc . This action paved the way for the two companies to establish the first de novo industrial banks in over a decade in 2021. A diagram of the current SQ business model is shown below from the company’s September 2020 investor presentation. This year Square is aiming to launch an industrial bank called Square Financial Services . The non-bank will originate commercial loans to merchants that process card transactions through Square's payments system. Square Financial Services, Inc. will operate from a main office located in the Salt Lake City, UT. The bank will not take demand deposits in order to avoid being classified as a commercial bank and will be supervised by the FDIC and the Utah Department of Financial Institutions. The FDIC approval for SQ and Nelnet followed shortly after an application by Great America Financial Services , a nationwide commercial equipment leasing firm, seeking an industrial bank charter application. The Edward Jones financial advisory firm filed an industrial bank charter application with Utah in July 2020; Rakuten (OTC:RKUNY) filed an industrial bank charter application with Utah DFS in July 2020; and General Motors (NYSE:GM) filed an industrial bank charter application with Utah DFS in December. Most of these applications seek to create nonbank lenders that make loans and have access to the Fed’s payment system, thus the requirement for FDIC insurance. Even if the industrial bank does not intend to take demand deposits and thereby become a commercial bank as defined by federal statute, the fact of FDIC insurance (and regulation) allows the industrial bank to access the payments system and maintain a master account at a Federal Reserve Bank. Valuation Looking at the recent performance of SQ, the stock has risen sharply since the start of the COVID pandemic. Even the most jaded of observers, however, have begun to ask if the valuation of SQ at 52x book value is a bit excessive. Even payments market leader PYPL, for example, trades at “only” 14x book, up 100% over the past year. As SQ matures as a company, we suspect that such comparisons will become more relevant. The wave of demand due to COVID fueled SQ’s triple digit annualized revenue growth, almost 400% in Q4 2020. If this torrid growth is at an end, what does that say about this year? For 2021, the analyst consensus for revenue growth is just 30% for the year. Will the 40% five-year CAGR SQ has posted in terms of gross revenue expansion continue over the next five years? Looking at SQ as a payments company, in the first nine months of 2020, it generated an $80 million net loss. Transaction and loan losses doubled along with revenue. Note that in Q3 2020, for example, SQ basically broke even on its dealings in bitcoin. In the nine months ended September 2020, SQ generated $260 million in cash from operations, invested $530 million back into the business and raised $1.3 billion, mostly from the issuance of $980 million in senior debt and $100 million in equity warrants. Another $400 million in cash came from “proceeds from PPP Liquidity Facility advances.” Written presentations say a lot. The company led by Twitter ( NASDAQ:TWTR ) CEO Jack Dorsey has fintech approach to investor disclosure, with pages of discussion of gross profits and market prospects, but little discussion of eventual net profitability. The slide below is taken from the September 2020 SQ investor presentation and shows SQ’s version of EBITDA. In is interesting to note that one of the requirements in the preliminary FDIC Order approving SQ’s bank application is to adopt and maintain an accrual accounting system. Of note, SQ reported $1.3 billion in shareholder equity at the end of September 2020. If we treat SQ as a bank holding company and subtract the $300 million in goodwill on the firm’s books, that leaves $1 billion in Tier One capital to support the new bank. Any capital SQ invests in the new industrial bank subsidiary will be segregated from the parent company and subject to Reg W, which governs transactions with affiliates. We assume that SQ will be required to raise substantial additional equity to satisfy the FDIC’s capital requirements . Given the above comments about growth and capital, does SQ really deserve to trade at 50x book value and over $100 billion in market cap, roughly the same as Citigroup (NYSE:C) ? In this regard, we have two questions about SQ: First, is SQ really a revolutionary model or merely an early starter as a provider of payments software able to adapt better to serve customers with new technology. Just as SQ stole the march on the big banks by breaking the model for small vendor accounts, are they now prey for the larger, better financed portals and tech names? Second and more important, will SQ lose that highly valued “fintech” edge once it and other finance companies become industrial banks subject to the prudential oversight of the FDIC. The FDIC’s Order approving the SQ application for federal deposit insurance may be found here . Some of the requirements are pro forma , but others are quite serious and imply major changes in the way that SQ conducts business. For example, like a commercial bank, SQ must now maintain and manage to a written business plan for the industrial bank, as stated in the FDIC’s order, and also accept regulation of the parent company. The FDIC will also want to see a coherent, five-year business plan from Dorsey as to the management of SQ. The FDIC Order is excerpted below: “That the Bank shall operate within the parameters of the Business Plan submitted as part of the application for Federal deposit insurance and as updated. Annually, the Bank shall submit an updated Business Plan to the Regional Director of the San Francisco Regional Office for consideration by the FDIC. The Business Plan, as updated, shall be based on prudent operating policies, include current and three years of pro forma financial statements and other relevant exhibits, prescribe adequate capital maintenance standards relative to the Bank’s risk profile, and incorporate reasonable risk limits with respect to adversely classified assets, liquidity levels, and other relevant risk factors.” The FDIC final rule requires a "covered parent company" such as SQ to enter into written agreements with the FDIC and the industrial bank to: (i) address the company's relationship with the industrial bank; (ii) require capital and liquidity support from the parent company to the industrial bank; and (iii) establish appropriate recordkeeping and reporting requirements. Through the final rule on industrial banks, the FDIC seeks to accomplish two important goals: First, ensure that the parent of and industrial bank approved for deposit insurance serves as the source of for the industrial bank; and Second, provide transparency to future applicants and the broader public as to what the FDIC requires of parents of industrial banks. Specifically, the Final Rule for covered companies that own industrial banks requires that they agree to a minimum of eight commitments, which, for the most part, the FDIC has previously required as a condition of granting deposit insurance to industrial banks. These include: (i) providing a list of all parent company subsidiaries annually; (ii) consenting to examinations of the parent company and its subsidiaries; (iii) submitting to annual independent audits; (iv) maintaining necessary records; (v) limiting the parent company’s representation on the industrial bank’s board to 25 percent; (vi) maintaining the industrial bank’s capital and liquidity requirements “at such levels deemed appropriate” for safety and soundness; (vii) entering into tax allocation agreements; and (viii) implementing contingency plans “for recovery actions and the orderly disposition of the industrial bank without the need for a receiver or conservator. Conclusion We like SQ’s aggressive strategy for going to market and have long advocated that finance companies ought to consider a bank charter, yet the challenges of doing so are substantial and growing. Taking the flat, entrepreneurial management culture of a SQ and transforming it into a pyramidal management model required for the holding company of an FDIC insured depository is not an easy task and one that has discouraged many applicants in the past. This is the main reason why the FDIC lays out all of the responsibilities for owning an industrial bank in its Final Rule. Can SQ and others offer their products and services on a national basis, using the first in class the technology, algorithms, and marketing savvy they have honed, but as a bank? If SQ is successful in gaining final approval from the FDIC and UT Department of Finance to actually launch its industrial bank this year, look for some significant changes in how the company operates and also how it reports its financial information to investors. First and foremost, SQ is going to need to find a way to achieve profitability and thereby satisfy the key regulatory consideration for bank ownership, namely being able to serve as a source of financial and managerial strength to its subsidiary bank. The FDIC is not the Fed, but it will in fact serve as the prudential regulator of the parent of any federally insured industrial bank. As SQ chases growth in an increasingly crowded market, we believe that the company will encounter greater difficulty as competitors from Alphabet (NASDAQ:GOOG) to Apple (NASDAQ:AAPL) roll out payments solutions for business. Indeed, it is interesting to note while looking at SQ that payments market leader PYPL shows no inclination yet to actually become a bank. As more and more fintech companies migrate to a bank model, we suspect that investors will see more reasonable valuations. The upward skew in market valuations caused by COVID in 2020 is likely to moderate as we move through 2021 and the banks and nonbank players in the payments space intensify the competition for the new revenue that SQ seems to take for granted. Take advantage of our Winter 2021 Sale! New Copies Signed by the Author just $24.99!

New York | Many of the readers of The Institutional Risk Analyst probably hoped to see a more peaceful year in 2021. Sadly the first week in January is feeling pretty much like the last week of December. But we’re happy to note the publication of our latest bank profile in our Premium Service, with a “neutral” risk rating on that sadly under-levered institution known as Bank of America (NYSE:BAC) . We write: "The bank’s funding base and liquidity are strong and credit expenses likewise are well under control, but our concern is that BAC does not seem to have the earnings potential commensurate with its size. The second largest US bank is a low-risk counterparty but also a mediocre equity investment. Given the risk averse nature of Mr. Moynihan and his board, BAC is unlikely to take the sort of tough decisions that would restore sustained profitability, including reducing the size of the bank and asset sales.” Source: FFIEC Americans await the start of a new and hopefully more steady government under President-elect Joe Biden , but the assumption of market stability is not a given. The obvious good news is that the markets worked through the year-end without any major mishaps. Stocks generally ended 2020 on or near 52-week highs, making for a heady start of the year, while corporate credit spreads continue to dance sideways. But even as stocks move higher and benchmark bonds slip, the credit markets remain very short of collateral, a fact that may cause the next “taper tantrum,” albeit this time due to the shedding of Treasury cash balances. The 10-year Treasury note has risen in yield above 1% for the first time since March of 2020. Buy high yield spreads have still not recovered to pre-COVID levels. Rising long term rates is not the end of the world by any means, but it does mean that the Fed-fueled boom of 2020 is ending as the Democrats take control in Washington. This perhaps augurs a return to more traditional market correlations? Does Janet Yellen demand the same respect from global markets as deal guy Steven Mnuchin ? Like Alan Greenspan , Chair Yellen may be tested very soon in her tenure. Meanwhile, the short end of the yield curve is getting forced down by the unrelenting global demand for Treasury collateral and dollar credit, which is basically at zero offshore. Can the incoming Biden Administration authorize and spend another $1 trillion in the next 90 days? The answer to that question holds the attention of bond investors (See “ Wag the Fed: Will the TGA force Rates Negative? ”). Our pal @Stimpyz1 maintains that real interest rates remain “WAY too high. The Fed's own models show it. R* is negative. Shadow funds are 0%, and they were NEGATIVE 4% in 2014--when things were not NEARLY as bad then as now…” Looking at the collateral markets, he’s probably right. Of note, the FOMC minutes show the central bank remains committed to continuing QE “at least at the current pace.” While members of the FOMC openly discuss allowing inflation to go as high as 3% before taking action to stay within the second part of the Humphrey-Hawkins dual mandate, namely price stability, the central bank’s own models suggest that even today's monetary policy remains too restrictive. The prospect of the Treasury returning hundreds of billions in cash to the Street over the next quarter, may actually drive market yields down toward the Fed’s theoretical R*. Meanwhile in the mortgage sector, there is mounting evidence that the interest rate party is ending early – at least in terms of heady equity market valuations. KBW published a decidedly bearish note on Rocket Companies (NYSE:RKT) , predicting that refinance volumes are likely to fall dramatically in 2021. (See our earlier comment, “ Nonbank Update: Rocket Companies. ”) The folks at KBW are good analysts, but many people on Wall Street don't seem to recognize that the Mortgage Bankers Association (MBA's) estimates are very conservative and subject to upward revision as we go. For years we have started the year with the baseline estimates in the model, only to see open market bond purchases by the Federal Open Market Committee render the model pretty much useless as a predictive tool. Wall Street is now writing equity market research dependent upon these decidedly conservative estimates. Specifically, the MBA tends to equally weight the chance of rising rates in their forward lending volume model. Even if the 10-year note yield rises, the secondary spread for mortgages may and probably will continue to contract due to 1) competitive pressures and 2) the fact of rising FOMC purchases of 2% and 1.5% coupons in conventional and agency MBS. The most heavily purchased MBS coupon yesterday (1/6/21) was the 30-year UMBS 2% for February settle, with $1.6 billion taken, Bloomberg reports. You can expect to hear growing numbers of investors and media pick up on this bearish, falling mortgage volume narrative, but the actual results for 2021 in terms of volumes may be significantly higher than the estimates from the MBA and the GSEs. Note: We’re a buyer at $3 trillion for 2021 volumes. Could be closer to $4 trillion. And remember, the FOMC does not set secondary market spreads, lenders do. We’re not communists yet. It is interesting to hear the recent comments of former Fed governor Kevin Warsh with respect to markets and the dollar , noting the radical and bipartisan shift in the consensus regarding US monetary policy during the Trump years may not find ready market acceptance under a Democrat administration. But as we know, Wall Street can get comfortable with just about anything given sufficient yield to commission. While much of the conventional wisdom in the media believes that Biden now effectively controls the Senate, the politics of spending and regulation, for example, will put a great deal of pressure on the Democratic coalition. Indeed, as COVID becomes the exclusive problem of Joe Biden and Kamala Harris, we fully expect to see some strange alliances take shape on the floor of the Senate. Once the distraction of Donald Trump is removed from our collective misery, politics as usual will resume. Remember, the political agenda of the Democratic Party is well to the left of most Americans regardless of what you hear in the mainstream press. Without Trump pissing in the political well, as was made clear in Georgia and Washington this week, we see the potential for significant Republican gains in 2022. Meanwhile, due to the arithmetic fact of 50/50 split in the Senate, we also see the possible formation of a “tyranny of the center,” comprising members of both political parties. Discrete alliances may exercise effective control of the Senate and outside the leadership of both parties. One single vote can change policy, especially if it is the last vote purchased. In the event, the tyranny of the center might be at least one positive outcome from four painful years of President Trump, but the bond markets may think otherwise. The assumption of a stable financial and economic transition in the US during 2021 is perhaps the greatest risk facing the global markets. In Georgia, President-elect Biden promised to send every American a check for $2,000 funded entirely with debt. Really, Mr. President? Really?

“So nearly $5 billion in earnings, solid, very strong capital, very strong liquidity, continuing our responsible growth management.” Brian Moynihan President & CEO New York | In this issue of The Institutional Risk Analyst , we assign a “neutral” risk rating to Bank of America (NYSE:BAC) for the reasons discussed below. At $2.7 trillion in assets, BAC is the second largest bank holding company in Peer Group 1 after JPMorgan Chase (NYSE:JPM) and arguably has the weakest management among the top five . BAC has two bank subsidiaries, a couple of large broker dealers and many hundreds of nonbank affiliates. WGA LLC Risk Ratings Bank Group: ALLY, AXP, BAC, BK, C, COF, DB, DFS, FRC, GS, HSBA, JPM, MS, OZK, PNC, SCHW, TD, TFC, USB, WFC Quantitative Factors The common equity of BAC closed at just over 1x book value at the end of Q4 2020, while the bank’s credit default swaps (CDS) ended the year below 50bp. Both indicators remain depressed compared with a year ago, this despite the fact of quantitative easing (QE) by the Federal Open Market Committee. Compared with JPM at 1.6x book and U.S. Bancorp (NYSE:USB) at 1.5x, BAC is clearly an underperformer among the top 10 largest US banks by deposits and banking assets. For Q3 2020, net income was down 21% YOY. Suffice to say that even in and era of Fed-engineered asset scarcity, BAC common shares trade at par as this report is published. The first performance metric to consider is net credit losses, where BAC is actually lower than better performing names such as USB and JPM. Under President & CEO Brian Moynihan , BAC consistently avoided risk – and shed revenue -- compared with its asset peers. Going back more than a decade ago to the decision to shutter the Countrywide correspondent lending and securitization business, Moynihan never misses an opportunity to avoid risk, often at the expense of revenue and shareholder returns. The lower net loss metrics for BAC are well-above that of Peer Group 1, but still lower than those of other large banks. Notice that BAC trails both USB and BAC by a significant margin in terms of net loss, but above Wells Fargo & Co (NYSE:WFC). As we’ll see below, this lack of credit risk ultimately results in lower income in absolute terms and relative to the size of the bank. Source: FFIEC The next metric to consider is the bank’s gross spread on loans and leases, what it earns on average for all of its extensions of credit before expense for interest, sales and administration. As the FOMC has forced down interest rates it also forces the return on earning assets lower, resulting in a lower gross spread on earnings assets for all banks. The gross spread tells you about a bank's internal default rate target and thus the business model. Notice that both WFC and BAC languish with gross spreads below the average for Peer Group 1. The subprime credit card and individual loan portfolio of Citigroup (NYSE:C) , on the other hand, pushes up the gross spread on that bank’s loans & leases almost two percentage points above its less aggressive peers. Source: FFIEC In the chart above, we see that BAC has lower pricing on its credit products than its peers. In fact, BAC is in the bottom decile of Peer Group 1 when it comes to the gross yield on loans & leases. Part of this is a conscious decision to target a certain customer default profile, part the competitive dynamics in the marketplace. But BAC's loan pricing is part of a larger approach to balance sheet management that has to date produced poor results. After considering the yield on the bank’s loans, the next factor to examine is funding costs, an area where the deposit heavy BAC should and does excel. Indeed, as of the third quarter of 2020, BAC had the lowest funding costs among the top banks and was even below the peer group average for the 130 largest US banks above $10 billion in assets. The chart below shows interest expense as a % of average assets for the selected banks and Peer Group 1. Notice how much the cost of funds has fallen for market-facing institutions such as Citi and JPM. Notice too how low interest rates have fallen for the banking industry in absolute terms. Source: FFIEC Although BAC has lower funding costs than its large bank peers, the results do not make it down to the pre-tax line because of the bank’s relatively poor operating efficiency. As of Q3 2020, BAC had an efficiency ratio of 64.7 vs 62 for Peer Group 1, only 58 for JPM, 59 for Citi and an astounding 80 for WFC. The lower the efficiency ratio, the better the bank is at generating earnings vs expenses. Excepting the unusual case of WFC and of course Citi, which we assigned a negative risk rating, BAC is just tracking above Peer Group 1 in terms of net income, as shown in the chart below. Source: FFIEC In 2016, the BAC common began to run up sharply in value due to the reduction in operating expenses that resulted when the bank settled most of its legacy claims left over from the 2008 financial crisis. Annual operating expenses fell from over $70 billion in 2014 to less than $40 billion in 2019, generating a nice windfall for long-suffering BAC shareholders. Yet since 2015, BAC has seen its interest income and non-interest income lines fall precipitously. The former is down 20% since 2015. More alarming, non-interest income is down by a third from $42 billion in 2015 to $32 billion in Q3 2020. Just about every major line item in non-interest income has seen a significant decline since 2017. During this same period, the bank has grown in asset size. More assets and less income is not a formula for generating value for shareholders. While his traditional strength in cost-cutting is apparent, CEO Brian Moynihan has been singularly unsuccessful in retaining or generating new revenue. Indeed, as mentioned above, he has instead taken revenue and risk out of the business at Bank of America. The result is an equity market valuation that remains 1/3 below of pre-2008 peak above $50 per share. One of the fascinating metrics for investors and risk managers to consider when assessing BAC is share repurchases. Under CEO Moynihan, BAC has recently spent more on share buybacks than have other large banks, but has seen little benefit in terms of the stock price. The table below shows total treasury stock repurchases for BAC and other large bank holding companies. Notice the relatively small share buybacks of USB, which trades at a 50% equity market premium to BAC. Source: FFIEC As is so often the case, the financial results from BAC tell the story when it comes to the mediocre performance of the stock. BAC has relatively low credit costs, lower funding costs than the broad group of large banks, but unexceptional pricing on earning assets and poor operating efficiency. The result is a sub-par performance that we attribute to the risk-averse strategy followed under Brian Moynihan. No wonder that the Street estimates for revenue growth at BAC are negative for this year and all of 2021. Qualitative Factors One specific qualitative measure of a bank’s management is operating efficiency, an area we have already identified as being weak at BAC. But the larger problem at BAC under Moynihan has been to use cost cutting as a panacea for deeper structural problems that management refuses to address. The human resources centric mindset that Moynihan brought to the bank a decade ago provides little in the way of vision for moving the business forward. Like Citi, we are concerned about the lack of a long-term plan for the business. When Moynihan talks about “responsible growth,” this seems to be a catch phrase for failure and really avoiding opportunities to better lever the business. The obsession with avoiding credit risk and the poor operational performance, illustrate the fact that BAC is not taking enough risk to drive revenue and is doing a poor job managing efficiency. This shortcoming is magnified in the present interest rate environment. Robert Armstrong wrote in The Financial Times in October: “Falling interest rates took a painful toll on third-quarter profits at Bank of America and Wells Fargo, continuing to compress lending margins, overshadowing falling credit costs and improved results from the banks’ fee-based businesses.” Aside from the particulars of BAC, the entire US banking industry faces a grave threat from the policy mix now embraced by the FOMC. Over the past half century, the chief tool of US monetary policy has been to lower interest rates to stimulate employment and aggregate demand, but at the expense of savers and capital. While the Fed aggressively seeks to fulfill the full employment mandate of the Humphrey Hawkins legislation, it does so by pretending that inflation is not a problem. This unequal distribution of the cost of fulfilling the Fed’s dual mandate, between savers and creditors on the one hand and bank equity holders and the US Treasury on the other, illustrates the concept of financial repression in the US banking sector. Source: WGA LLC Banks benefit from lower interest rates, but are also hurt by lower asset returns due to QE. In the case of mortgage-backed securities (MBS), the Fed is now imposing capital losses on banks and investors due to high prepayment rates. For BAC, the message from the Fed and the credit market is clear: run faster when it comes to generating revenue, but this is one notable area of weakness of the Moynihan regime. We are talking about a bank that keeps most of its securities portfolio in held to maturity rather than available for sale, the polar opposite of the practice at most banks, a symbolic as well as practical example of the risk-averse strategy at BAC. Frankly, the expense driven bounce in the common equity after 2015, when legacy legal expenditures from the 2008 financial crisis began to fall, may be the only real positive for Bank America in the past decade. We always argued that a quick restructuring of the festering Bank of America/Countrywide estate would have been cheaper and quicker, but instead BAC equity holders suffered through years of misery. Management made ever more clever excuses for basic under-performance and massive remediation expenses related to mortgage servicing errors. Brian Moynihan may have been the right person to clean up the mess left by his mentor Ken Lewis . And true to his background as a lawyer and personnel officer, Moynihan has de-risked and de-populated the bank to the point where it does not generate sufficient revenue for its size and compared to its peers. The average cost per employee at BAC fell from over $150k annually in 2017 to $117k in Q3 2020. Even as headcount and assets per employee grew, expenses declined, illustrating how Moynihan has achieved short-term earnings. After a decade riding the tiger, Moynihan might want to take an example from Michael Corbat at Citi, declare victory and hand off the ball. The basic question that BAC must answer, however, is how it intends to manage its balance sheet and business mix in the age of QE forever. Today the mix between BAC’s net interest income and non-interest income is evenly split in the $65 billion in pretax income that BAC reported in the third quarter of 2020. Yet somehow BAC still manages to produce less in the way of earnings than its peers. We note above that the aggregate funding cost of BAC is extremely low, a fact that comes from the $1.5 trillion in core deposits held by the bank. Matched against this funding base is a loan portfolio that is 35% real estate, 30% commercial and industrial exposures, 10% credit cards and the rest in various miscellaneous loan categories. The average real estate exposure for the 130 banks in Peer Group 1 is 50% of total loans, of note. Trouble is, the asset mix currently chosen by Moynihan does not get the job done in terms of putting BAC in the top quartile of the peer group and close to JPM and USB, to be specific, in terms of asset returns. Instead, BAC is closer to Citi in terms of key bank performance benchmarks and thus market value. Compare, for example, how JPM has created a powerful origination and sale operation for agency, government and private-label residential mortgages. At BAC, sales of 1-4s are down 66% over the past five years. More, the bank's mortgage servicing business remains unprofitable. In just the past year, Moynihan and the board of BAC have left billions of dollars on the table by withdrawing the bank and its $1.5 trillion in core deposits from conventional and government correspondent lending. If you want to know one big reason why banks like JPM and USB outperform BAC: Better asset turns. Likewise, compare how JPM has managed its interest rate exposures over the past several years compared with the “responsible growth” of Brian Moynihan. The bank bet on rising rates after 2019, when rates were clearly going lower. BAC missed on revenue in Q3 2020 by $500 million. More, Q3 saw rising expenses for that old evil, litigation “with respect to some older matters.” The more things seem to improve at BAC, the more they also seem to remind us with great frequency of the bad old days that are not yet truly gone. Assessment We assign a “neutral” risk rating to Bank of America. The bank’s funding base and liquidity are strong and credit expenses likewise are well under control, but our concern is that BAC does not seem to have the earnings potential commensurate with its size. The second largest US bank is a low-risk counterparty but also a mediocre equity investment. Given the risk averse nature of Mr. Moynihan and his board, BAC is unlikely to take the sort of tough decisions that would restore sustained profitability, including reducing the size of the bank and asset sales. We think that a strong case can be made that to enhance shareholder value, Moynihan and the BAC board ought to spin-off Merrill Lynch as a competitor to Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) . Then BAC could split into two separate commercial banks around $750 billion in assets, making two new super regionals to compete with USB, PNC Financial (NYSE:PNC) and Truist Financial (NYSE:TFC). The growth and competitive energy released by such a transaction, IOHO, would accrue to the great benefit of BAC shareholders. The IRA Bank Profile is published by Whalen Global Advisors LLC and is provided for general informational purposes. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The IRA Bank Profile. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The IRA Bank Profile are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The IRA Bank Profile represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The IRA Bank Profile is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The IRA Bank Profile 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 IRA Bank Profile. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

Central Park South December 2020 New York | As we begin 2021 after a decidedly forgettable 2020, many of the challenges and opportunities that characterized the past nine months will continue, albeit with the caveat that this economic recession is very different from 2008 in terms of the risk hot spots and, most important, the fiscal posture of the US Treasury. Whereas a decade ago private label securities backed by home mortgages were the source of market contagion, this time around the problem lies in now moribund private commercial assets mostly owned by REITs and bond and ABS investors. There is a huge opportunity in acquiring and restructuring distressed commercial assets, but few investors are able to participate directly in this institutional process. The secondary impact of restructuring trillions in commercial real estate over the next decade will be enormous and is largely ignored by mainstream economists. The conventional view of the US economy expressed by many analysts remains largely focused on domestic, consumer-focused economic factors. These assessments overlook a number of significant systemic changes, in particular 1) the size of the Treasury’s huge debt pile, 2) the impending markdown of trillions in commercial property, and 3) the deliberate asset scarcity engineered by the Federal Open Market Committee. A quarter of the Fed's balance sheet is now financing Treasury cash balances, which are part of the exploding US fiscal deficit. The chart below shows three-month LIBOR for dollars, yen and euro from FRED. Notice that euro LIBOR is half a point negative, but offshore demand for dollars has supported dollar LIBOR through year-end. This tranquil picture may not carry through the first quarter of 2021, however, depending on whether Congress agrees on a substantial spending package. Financials & Earnings With authorities in the US and EU lifting limits on quarterly share repurchases by banks, the signal coming from regulators is that commercial lenders have sufficient capital and loss reserves to handle the cost of remediating COVID related credit expenses -- at least for now. These signals confirm the positive Q3 2020 guidance from several banks and suggest that the worst-case scenarios for consumer portfolios have not been realized. Even as regulators allow the resumption of share repurchases by banks, we still expect to see higher net charge-offs in Q4 due to troubled commercial exposures. New loan loss reserves should continue to be well below peak levels seen in Q2 2020. This will drive a rebound in earnings across the industry, although perhaps not quite to 2019 levels. It is important to note that we may not see bank dividends restored to normal levels for several more quarters since bank income is falling under the pressure of FOMC policies. Source: FDIC Stronger lenders such as Truist Financial (NYSE:TFC) have already set new share repurchase programs for 2021. Look for a wave to positive share repurchase announcements to goose interest in financials. Most of the market leaders in our bank surveillance group already trade well-above par in terms of equity market valuations and at five-year lows in terms of debt spreads and credit default swaps (CDS). With Charles Schwab (NASDAQ:SCHW) trading at 2.5x book and below 50bp in five-year CDS, it is hard to get terribly constructive on the name based upon fundamentals like value or earnings. But we do believe that the scarcity of investable assets and the growing pile of low-quality offerings in the IPO market will drive investor interest further into high-quality financials regardless of the current yield. Consistent with the theme of asset scarcity, we expect to see another record year in 1-4 family mortgages, with shrinking secondary market spreads and gain-on-sale profits. We are now well-into the FOMC interest rate cycle, thus this is not the time to be increasing exposure to mortgage lenders or hybrid REITs. With 30-year conventional mortgage rates closing in on 2.5% APR and the FOMC buying 1.5% MBS coupons as part of quantitative easing, this is a good time to take cash off the table in IMBs and REITs, and go buy a well-located residential home. We own Annaly (NYSE:NLY) at 0.6x book value. It now trades just shy of 1x book. Tempting to sell it, but we wonder whether the periodic volatility tantrums will afford us another opportunity to buy a leveraged pile of agency MBS at half of par. Of note, despite the strong push from the FOMC, we do not expect to see the remaining nonbank mortgage IPOs pending to come to market in 2021. Home price appreciation will be driven by the bottle-neck in terms of new housing construction, which lags badly behind population growth and obsolescence of existing housing stocks. This means that net-loss rates on bank owned and conventional 1-4s are likely to remain depressed for several more years, but double-digit delinquency rates on FHA loans are a source of future concern. The tale of credit losses due to COVID is a barbell, with some asset classes impaired and others rising in value on a cushion of FOMC credit. As we noted in our earlier reports (“ Nonbank Update: PennyMac Financial Services ”), the funding overhang in government mortgage servicing is a particular worry as 2021 begins. So long as low interest rates drive mortgage lending volumes, the situation will be manageable. Once volumes begin to fall, however, then the funding situation with respect to Cares Act forbearance will become critical very quickly as bank lines are drawn. The top independent mortgage banks (IMBs) are offering conventional 30-year mortgages at 2.625% this week, while high-priced jumbos are just inside 3%. This is powerful economic stimulus that will propel mortgage debt issuance in 2021, but this is a banquet that will benefit nonbanks primarily even as commercial banks continue to back away from consumer exposures. Look for JPMorgan Chase (NYSE:JPM) to repeat good performance in terms of mortgage banking in Q4. The numbers could be much higher if JPM and other large banks were still buying third party production. Once large banks have better visibility on credit in 2021, we may see JPM, Wells Fargo & Co (NYSE:WFC) and other money centers jump back into the mortgage market. The lion’s share of the profits in 1-4s this cycle, however, have already been gathered by the likes of PennyMac (NASDAQ: PFSI) , Rocket Companies (NYSE:RKT) , AmeriHome and Freedom. Credit Markets The size of the $900 billion spending package signed last night by President Donald Trump eliminates much of the uncertainty behind our earlier warning regarding the possibility of a taper or outright cessation of T-bill issuance by the US Treasury. (“ Wag the Fed: Will the TGA force Rates Negative? ”). Ralph Delguidice at Pavilion Global Markets described the situation last week: “ There are dynamics in the US money market complex pushing short rates down to (and perhaps through) the zero bound. The response of the Fed and the U.S. Treasury will likely flatten the curve once again, but not in the way, most investors are prepared for. ” Most economists and even many bond market strategists do not consider the financial relationship between the Federal Reserve and Treasury, a duality that has changed radically with the increase in the US budget deficit. We expect to see rates move steadily lower due to the FOMC’s policy mix of massive asset purchases and other measures, but the action or inaction of the Treasury is decisive. How quickly Treasury is able to spend its cash cushion will determine any market impact in terms of changes in new debt issuance. The chart below shows issuance data from the Securities Industry and Financial Markets Association (SIFMA) suggesting that mortgage issuance is slowing while Treasury issuance surged through November as the cash hoard in the TGA neared $2 trillion. The first obvious observation to make about the SIFMA data is that while mortgage debt issuance was still running $400 billion per month in November or a $4 trillion annual run rate, volumes are starting to slow. Although the immediate impact of the TGA issue may be to force the yield curve negative, the response that PavilionGM refers to in terms of an eventual yield curve flattener to rescue the money market funds may be a negative factor for financials. Second and more significantly, new issue volumes in all of the major securities asset classes other than Treasury debt are trending lower as 2021 begins. This is an ominous sign since a large part of the demand for equities has been driven by corporate debt issuance and related share repurchase activity. Issuance of asset backed and agency securities is also slowing, again suggesting another datapoint that the US economy will underperform in at least the first half of 2021. Here are several imponderables to consider in the next year: Will the desire of equity managers to own large cap bank stocks outweigh the negative impact of a flat yield curve on all financials, banks, REITs and also nonbanks? Will the shrinking net interest income of major banks due to the impact of QE dissuade investors from increasing exposures? If the FOMC is forced to put an artificial floor under short-term interest rates to rescue MM funds from disaster, will this force the FDIC to seek a similar subsidy for banks? Readers of The IRA will recall that when the Treasury extended a credit guarantee to MM funds in September of 2008, the FDIC responded and extended emergency federal deposit insurance coverage to non-interest-bearing bank transaction accounts. If the Fed rides to the rescue of MM funds in Q1 2021 (many of which are sponsored by banks, BTW) will the FDIC seek a quid pro quo to protect banks from the negative impact of NIRP? In terms of the price of risk, the markets seem so compelled by the Fed to accept inferior risk/return opportunities that the question of short-term pricing seems to be answered as asked. We fully expect to see the markets take financial debt and equity up in price in the near term, but we again think that a flattening yield curve could well spook some of the more simplistic perspectives in the bank credit market. Seeing Goldman Sachs Group (NYSE:GS) equity trading above book value and the bank's five-year CDS inside of 90bp, we think that risk is not accurately or adequately compensated – but that it precisely what the financial engineers on the FOMC want us to think. The better part of valor may be to surf the asset inflation wave, the very same wave of ersatz credit that is causing 1-4 family loan volumes to go ballistic. The fact that monthly mortgage issuance volumes hit $600 billion in October illustrates the magnitude of FOMC market manipulation. The chart below from FRED shows corporate bond spreads for the past year. While corporate default rates are rising, the spread relationships in the new issue market have barely moved. In this sense, at least, we can say that FOMC policy of massive open market purchases of securities perhaps kept corporate credit spreads from widening. The only problem with this thesis, of course, is that falling new issue volumes addressed earlier may suggest that these carefully curated risk benchmarks shown above may be wrong. Investors may not be willing to take on exposures at these apparently benign credit spreads. After all, it takes a market. Happy New Year. Mortgage Group: ACGL, AGNC, AI, BKI, BXMT, CIM, CLGX, COOP, ESNT, FAF, FBC, FMCC, FNF, FNMA, IMH, LADR, MFA, NLY, NRZ, NYMT, OCN, PFSI, PMT, RKT, RWT, STWD, TWO Bank Group: ALLY, AXP, BAC, BK, C, COF, DB, DFS, FRC, GS, HSBA, JPM, MS, OZK, PNC, SCHW, TD, TFC, USB, WFC The Institutional Risk Analyst is published by Whalen Global Advisors LLC and is provided for general informational purposes. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.