In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. And do watch “The Wrap with Chris Whalen” on The Julia LaRoche Show every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing. May 15, 2026 | This week featured a lot of important developments in Washington and on Wall Street. For example: President Donald Trump was in Beijing for talks with President Xi Jinping, with discussions covering tech, trade, and the Iran war. Xi hailed the US-China relationship as the world’s most consequential, telling President Donald Trump: “We must make it work and never mess it up.” The Dow Jones Industrial Average reached the 50,000 level, driven by intense investor demand for AI and technology stocks. Cisco (CSCO) and other technology shares surged following strong AI demand signals, but remember we are chasing the spend. Kevin Warsh was confirmed as Chairman of the Federal Reserve, but faces a complex environment because inflation is showing signs of staying high. Markets have been reacting to potential changes in monetary policy under his leadership. Reflecting market fears about inflation, the 30-year Treasury bond topped 5% for the first time since the Great Financial Crisis. We expect Chairman Warsh to slowly make changes in how the Fed operates and models the outlook for inflation and the economy. The inflation from the Iran war is caused by energy prices and a growing shortage of by-products. There is not much the Fed can do to address these sources of inflation. We expect to see rationing of key products like lubricants and sulfuric acid soon in the US. Warsh is likely going to pursue a smaller Fed balance sheet and try to use this "tightening" as a bargaining chip to get the FOMC to lower ST rates systemically. Warsh is a supply sider, so he fundamentally disagrees with the left/progressive perspective of Bernanke/Yellen/Powell, who all thought that the Fed could control the Treasury yield curve. His comments on the disaster of QE are quite clear. Warsh once called QE “reverse Robin Hood” because he thinks correctly that it favored those with more assets. He said that the Fed should be concerned with the distributional consequences of its policies. This week we published a comment about United Wholesale Mortgage (UWMC) and their failing campaign to acquire the REIT Two Harbors (TWO). This was easily the most widely read post on The IRA in the past year. Bottom line is that UWMC can’t afford to pay cash for the purchase, but the UWMC stock essentially has no value as an acquisition currency. In our latest column in National Mortgage News, we argue that restricting institutional investors deploying capital in single family homes is bad policy, but reforming 1031 exchanges and requiring public listings for HUD homes could boost affordability. We write: "The Trump Administration has been struggling to come up with practical policies to help address the surge in home prices caused by the errant policies of the Powell FOMC. One simple but powerful approach is to require HUD, the GSEs and any private issuers working in the conventional and government markets to expose single-family homes to the retail markets before institutional firms are allowed to bid. Problem solved." In the past five trading days, gold has moved sideways as some managers have been taking profits from last year. Silver futures rose by over 6%, driven by the steady flow of news reports about developments in the technology sector that will boost demand for the metal. China bought a record-breaking amount of silver in the first quarter (Q1) of 2026, driven by intense demand for solar manufacturing and retail investment. China imported approximately 1,536 to 1,626 tonnes of silver in the first quarter, confirming our view that silver is likely to continue to outperform gold significantly this year. Recent Posts Who is the Next Countrywide Financial? PennyMac, Rocket & UWMC https://www.theinstitutionalriskanalyst.com/post/theira843 Loan Think The real fix for housing: Reform 1031s and HUD sales https://www.nationalmortgagenews.com/opinion/the-real-fix-for-housing-reform-1031s-and-hud-sales The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

May 14, 2026 | One of the benefits of being a Premium Service subscriber to The Institutional Risk Analyst is that you get to ask us questions and suggest topics. Today we look at two interesting names that have performed well in the past several years, Ameriprise Financial (AMP) and Bread Financial Holdings (BFH). AMP is a $190 billion asset bank holding company headquartered in Minneapolis, MN, and BFH is a nonbank lender based in Columbus, OH. The bank unit of AMP is just 1/10 of the group's assets but has a return on assets that is 3x the industry average. AMP has been a stellar market and financial performer over the past five years, but in the last twelve months has suffered because of the continuous noise around AI. BFH is a $22 billion asset credit card issuer that is up ~ 55% in the past year, as shown in the chart below. Source: Yahoo Finance (5/13/26)

May 11, 2026 | Updated | This week The Institutional Risk Analyst looks at the nonbank mortgage sector as the prospect for lower interest rates is fading fast. On the one hand, a number of the larger issuers are continuing to thrive even in a difficult interest rate market. Second lien mortgages and non-agency jumbo loans are growing as a percentage of overall production volumes. On the other hand, the aggressive behavior of some issuers is distorting pricing for loans in the secondary market and may be creating the circumstances for the next systemic “surprise” in the nonbank sector. To us, Exhibit A in the category of a potential nonbank default event is United Wholesale Mortgage (UWMC), aka “Countrywide II.” (* We have no positions in any of the issuers discussed below.) Cross Country Wins Two Harbors If you were watching the auction for the crippled Two Harbors (TWO) REIT, you might feel both sad and concerned. Sad because TWO has a $2.1 billion mortgage servicing right (MSR) that is going to trade for half of that value due to the $1.3 billion negative net worth of the REIT. But we are more concerned because, as Rich Swerbinsky wrote on LinkedIn, UWMC seems to need this deal very badly, but clearly cannot afford it. Last week, leading retail lender Cross Country Mortgage (CCM) raised their cash bid for TWO to $12 per share, matching a revised offer from UWMC at $12 per share of TWO. But the UWMC offer seemed more like window dressing to us than a serious counter to the CCM all-cash proposal. “The CCM transaction delivers a fixed price all-cash consideration to every TWO stockholder — automatically and without election — with committed financing, no financing contingency, and a clear path to close in the shortest time frame,” Two Harbors CEO Bill Greenberg noted. “Our Board unanimously recommends that stockholders vote FOR the proposed merger with CCM.” Part of the problem is that UWMC’s stock is simply not attractive as an alternative to the cash offer from CCM. The default stock consideration under UWM’s offer was worth approximately $7.88 per TWO share based on UWMC’s May 7 closing price, TWO noted. All three of the largest mortgage issuers have sold off dramatically since the start of the year as expectations for lower interest rates have evaporated in the heat of the war with Iran. Source: Google Finance (05/08/2026) There are ~ 294 million UWMC shares out trading publicly below $4, which means the shares essentially have no collateral value and even less value as an acquisition currency. Insiders control 13% of the public float and institutional holders 66%. But insiders control another 1.3 billion shares "that may be issued to SFS Corp. or its transferees or assignees in connection with future Exchange Transactions," according to the 2025 UWMC 10-K. The Up-C structure of UWMC, which isolates the operating business from public shareholders in a partnership, is decidedly unattractive to investors from a credit perspective. To us, the public stock has no real value, especially when we consider the net debt of the issuer after excluding the mortgage servicing rights (MSR). As we've noted previously, when looking at an independent mortgage bank (IMB), unsecured debt and MSRs need to be roughly in balance. In an economic sense, the unsecured debt holders really own UWMC, yet the operating assets may be beyond reach of all public investors. But the problems with UWMC run far deeper than the current stock price and have to do with an unsustainable business model that is damaging the entire residential mortgage industry. United Wholesale Mortgage: Countrywide Redux The basic issue with the UWMC business model is they pay too much for loans in order to protect their dominant (40% plus) market share in wholesale lending. Rocket Companies (RKT) is second at less than 10% and PennyMac Financial (PFSI) is third around 5%, according to Inside Mortgage Finance. As a result, UWMC is the largest nonbank lender in the US. When mortgage rates were falling early in Q1, you would see “UWMC partners “ quoting way below market rates like 4.5%, rates not even visible in the pricing engines of most lenders. These brokers quote below market rates and hope the market gets there, but UWMC has been "buying down" loan coupon rates for years. For example, UWMC is currently offering free 1-0 lender-paid temporary rate buydowns on conventional and government purchase loans through June 30, 2026. This initiative, which reduces the borrower's interest rate by 1% for the first year, was launched to boost affordability for broker partners, but ensures a cash loss for UWMC. It is not uncommon for borrowers to receive unsolicited text messages after closing a loan offering to refinance a mortgage immediately at a lower rate. UWMC brokers also reportedly ignore legal prohibitions on contacting the customers of other lenders, saying: “I see you just refinanced, what is the rate you got?“ This is completely illegal without an opt in by the borrower. Two decades ago, another extremely aggressive lender, Countrywide Financial, utilized similar lending practices to boost volumes. Countrywide was a thrift that had meager core deposits and habitually overpaid for loans to hurt competitors, forcing down profits for the entire industry. Under CEO Angelo Mozilo, Countrywide aimed for massive market share, pushing risky private label loans and using a "race to the bottom" policy to match any competitor's offering – precisely the same modus operandi as UWMC. Due to these aggressive practices and subsequent legal fallout, Countrywide was forced into an involuntary sale to warehouse lender Bank of America (BAC) in 2008. As we noted in an earlier comment, none of the warehouse lender banks serving UWMC today would even think of buying the largest US nonbank lender. In terms of reported earnings, UWM reported a strong start to 2026 with $44.9 billion in 1Q 26 loan origination volume, a 9.5% dip from the $49.6 billion in 4Q25, but a significant 39% increase year-over-year from 1Q 2025. The quarter marked their second-best first quarter in company history on a GAAP basis, but beneath the surface the UWMC story is far more complicated. The willingness of UWMC to pay up for loans in order to gain market share has reportedly compressed gain-on-sale margins and profitability across the industry and saddled the company with excessive debt. Like Countrywide, we worry that UWMC is clearly overextended because of its aggressive business model and that this fact is hurting all of the public comps across the entire mortgage entire sector. Source: MBA Quarterly Performance Report Mat Ishbia, CEO of UWMC, said: “Q1 was an exceptional quarter for UWM and our second‑best first quarter of all time. The last time we delivered results of this magnitude, interest rates were nearly 50% lower, which underscores the strength, scale and resilience of our business. Our team and broker partners executed at the highest level, using UWM’s proprietary technology and AI‑powered tools like Mia to win more loans, more efficiently, every day.” Winning more loans means, in simple terms, that UWMC is bleeding more cash. UWMC reported $450 million in liquidity in Q1 2026, but this is not nearly enough for a firm of their size. How does UWMC make up both the cash deficit and also the ugly GAAP disclosure? By selling mortgage servicing rights below cost, increasing corporate debt and adjusting the valuation of the firm’s MSRs to increasing borrowing capacity. Creating conventional MSRs multiples above 6x cash flow, but selling them at or below 5x is not a great trade in our book. "In the past couple of years, they were also in the habit of selling long-duration low coupon MSR to fund the origination of low duration high coupon MSR," notes one industry insider maven. "My description of this was 'selling the gold to buy the lead' (and yes, a double-entendre on 'lead')." Under GAAP, changes in the modelled fair value of the MSR flow through income in the same quarter. Thus while UWMC reported a decline in the size or unpaid principal balance (UPB) of its servicing book in Q1 2026, the valuation of the MSR magically increased by double digits, as shown in the table below. United Wholesale Mortgage Again, the UPB of the UWMC servicing book fell in Q1, yet the value of the related servicing asset magically went up double digits. Specifically, as of Q1 2026, UWMC apparently valued their combined MSR book at over 5.5x annual cash flows, an adjustment that accounted for most of their GAAP earnings in Q1 2026. Looking at the data from the major MSR brokers, the true value of MSRs in the market today is closer to 4.8x on conventional servicing assets and 3.8x on Ginnie Mae MSRs. If UWMC were forced to sell their MSR, that would imply a ~ 50 bps write-down (over $1B) and could wipe out two-thirds of the company’s equity. If UWMC had more rational pricing, the production volumes would fall but secondary market profitability would probably increase – both for UWMC and the entire industry. But remember that the Countrywide model is to use loss leader pricing for loans to drive out competition. As one issuer told The IRA last week, if UWMC disappeared tomorrow, gain on sale margins in the industry would at least double. While Ishbia claims that the acquisition of TWO was about increasing the UWMC servicing book, in fact the motivation seems to be accessing a new source of liquidity to offset mounting operating losses. We find the hyper aggressive UWMC business model to be unstable, unsustainable and remarkably similar to pre-crisis Countrywide. The big difference between 2008 and 2026, of course, is that residential mortgage rates may not go down significantly for some time. PennyMac Financial This week saw several other important earnings announcements from the mortgage sector, including PennyMac Financial (PFSI) and Rocket Mortgage (RKT). Both saw better volumes in Q1 2026 and a mark down of mortgage servicing rights due to lower interest rates in the first two months of the quarter. Rebounding from the disastrous Q4 2025 earnings release, PFSI reported a mixed first quarter of 2026, with Q1 net income of $82.3 million ($1.53 per diluted share) missing analyst expectations. Adjusted EPS of $2.19 fell short of estimates, largely due to weaker servicing results and hedging losses. Strong production segment earnings, which hit a five-year high, helped offset these losses. PFSI pushed up volumes in the broker channel, where they are head to head with UWMC, as shown below. PennyMac Financial Source: PFSI (Q1 2026) PFSI’s servicing book was essentially flat in Q1. Production volume was more than offset by $26 billion in runoff from prepayments and the previously-announced sale of $24 billion in UPB of MSRs that transferred early in 1Q 2026. The fair value of the PFSI MSR was $10.1 billion at the end of Q1 2026, reflecting a change in the modelled valuation of less than 2%. Compare that to the double digit increase in the valuation of the UWMC MSRs noted above. The Rocket Companies Rocket Companies delivered strong first-quarter 2026 results, beating Wall Street expectations with $2.94 billion in total revenue and a GAAP net income of $297 million. The company saw significant growth compared to a net loss of $212 million in the same period last year, fueled by a 19% sequential increase in net rate lock volume to $49 billion. RKT ended the quarter with $19.3 billion in MSRs and $2.6 billion in cash. Rocket Companies | Q1 2026 The table above shows the dramatic impact of the merger with Mr. Cooper in Q3 last year, leading to a 3x growth in revenue and EBITDA. Today RKT has twice the MSRs of JPMorgan (JPM) and far better liquidity and profitability than any other nonbank issuer in the mortgage sector. The change in the fair value of the RKT MSR in Q1 2026 vs Q4 2025 was less than 1%. Of course the success of RKT is very much a joint effort, but we give a big hat tip to Jay Bray and the Mr. Cooper team. Rocket Companies | Q1 2026 While we don't own securities in any of the nonbank mortgage issuers because of our extensive work in the industry, we do think that RKT and PFSI offer some interesting value for investors after the sharp selloff in Q1 2026. But we do not expect to see short-term interest rates fall for most of this year due to the inflationary impact of the Iran war. That said, in the event that a lasting cessation of hostilities does occur between the US and Iran, we will likely see a sustained rally in longer-term interest rates. The demarcation point for an increase in mortgage lending volumes is a about 4.1% yield on the Treasury 10-year note, as shown in the chart below. Source: dataQollab The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. And do watch “The Wrap with Chris Whalen” on The Julia LaRoche Show every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing. Below for subscribers to our Premium Service we have instructions how to access a replay of last week's quarterly call. May 8, 2026 | As the week came to an end, reports of a possible peace deal with Iran pushed up gold prices and hurt the dollar. Is a peace deal for real? President Donald Trump has on numerous occasions indicated that a deal is near, Bloomberg reports, though none has materialized. What is under discussion as this week ends is a month-long cease fire -- maybe. As this issue of The Wrap was being posted, the US and Iran had resumed hostilities. We remain skeptical that the government of Iran will agree to a cessation of hostilities with Israel and the US, especially while the government of Benjamin Netanyahu continues its campaign of ethnic cleansing in Gaza and Lebanon. Even if the US somehow manages to craft a peace deal with Iran, Israel's increasingly authoritarian government must continue the policy of continuous war or lose its grip on power. Will Israel hold elections as scheduled this fall? Rumors of a deal in the Middle East eased inflation worries, at least for now, but the reality is the much of Asia, Europe and event the US are facing shortages of fuel and key industrial products as a result of the Iran war. But shortages are also good for prices. Easing tensions reduced the demand for the dollar as a safe-haven asset, allowing it to fall on both Wednesday and Thursday this week. Gold and Silver Surge In the past five trading days, gold has moved up almost 3% but silver has done even better. Physical supply constraints in India and Asia are pushing prices for gold and silver higher, illustrating the disconnect between the momentum driven financial markets in the US and Europe and the physical market in Asia. Source: Google Finance (5/7/26) Indian banks face an unprecedented five-week halt in gold and silver imports, causing domestic prices to surge and threatening shortages, reports The Economic Times. Administrative hurdles and tax uncertainties have stalled shipments since April 1st. “Roughly 70% of global silver comes as a byproduct of base‑metal mining,” writes Silver Academy, “making dedicated primary silver producers the cleanest way to capture upside from a tightening physical market.” We continue to add to our positions in both gold and silver. We have updated the WGA Precious Metals Top 25 list for subscribers to our Premium Service. The top performer of the group remains the ZKB Silver ETF (0VR6.L). We now have 47 funds and mining stocks in our Precious Metals group, which provides our subscribers with a broad range of ways to get exposure to the metals sector. Fed Balance Sheet Grows We’ve noted in past comment that Kevin Warsh, the nominee to become the next chairman of the Federal Reserve Board, wants to shrink the balance sheet of the central bank, but in fact the Fed’s balance sheet is growing. Some economists think that setting the level of reserves is a policy choice, but we believe instead that the size of the Fed’s balance sheet is linked to the growth in public debt. Our view is seasoned by years of working in Mexico. The Federal recently resumed growing its balance sheet, with total assets rising to approximately $6.63–$6.7 trillion as of early May 2026. After peaking near $9 trillion in 2022 and subsequently shrinking, the Fed began increasing holdings to add reserves, including a $42 billion rise in February 2026, comprised mostly of T-bills. Purchases of debt for the system open market account is inflationary since it increases the level of bank deposits and assets. Private credit continues to be a source of concern Black Rock’s (BLK) sponsored TCP Capital (TCPC) cut the value of its publicly-traded private credit fund by about 5%, due to troubled loans, markdowns and lower returns. And Apollo Global (APO) CEO Marc Rowan says that he plans to offer investors daily faux valuations for private credit funds by the end of September, a move that they hope will ease worries about the health of an opaque world of private lending. But do investors even care? Meanwhile, the AI sector in stocks has once again surged as earnings results for a variety of players have come in strongly. Our LT position in Advanced Micro Devices (AMD) is up 300% in the past year. Nvidia (NVDA) also continued its strong performance, but is “only” up 80% in the past year. Micron Technology (MU) and energy infrastructure platform Hut 8 Corp (HUT) also stand out as top-performing AI-related stocks over the past week. Subscribers to The IRA Premium Service may login and download a replay of last week's quarterly call on the Top Rankings page. Recent Posts WGA Bank Top 50 Q2 2026 | Bank Failures and Mortgage Bankers https://www.theinstitutionalriskanalyst.com/post/theira841 Trading Points: China, Sulfur & Silver 银 https://www.theinstitutionalriskanalyst.com/post/theira839 The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

"Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself…. There is no distinctly American criminal class—except Congress." Mark Twain May 4, 2026 | This week The Institutional Risk Analyst celebrates the one-year anniversary of the publication of the Second Edition of “Inflated: Money, Debt and the American Dream” by our friends at John Wiley & Sons. The message of Inflated is very simple: Americans don’t like paying taxes and the Congress, being democratically elected, is comprised of invidious cowards unwilling to make tough decisions. As Americans, we pay our way via continuous currency inflation, yet in doing so have created the world's default means of exchange and also finance. This suggests a barbel strategy to prudent investing that we’ll address in a future comment. FDIC Promptly Resolves Second Bank Failure Last week, Community Bank and Trust - West Georgia of LaGrange, Georgia was closed by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC acted as per the Depression era laws that facilitate bank resolutions and literally saved the country from a forced liquidation a 110 years ago The creation of the FDIC as the first federal receiver in 1933 enabled the restructuring of the US economy. In particular, FDIC allowed Federal Reserve Banks to lend to solvent member banks in a meaningful way. Wisconsin businessman Leo Crowley at the FDIC and Houston business giant Jesse Jones at the Reconstruction Finance Corp proceeded to restructure thousands of banks and the US economy and, later, prepare for war. Both men served the United States through WWII. As FDIC Chairman, Crowley focused on stabilizing the banking system by strengthening capital structures and eliminating weak, unsound banks, rather than merely bailing them out. He urged banks to adopt a "10-to-1" deposit-to-capital ratio, advocating that banks sell capital stock or notes to the Reconstruction Finance Corporation (RFC) to improve solvency and public confidence. Crowley later ran war finance for the FDR Administration. Last week, the Crowley designed FDIC entered into an agreement with Anchor Bank of Palm Beach Gardens, Florida to assume substantially all insured deposits and acquire certain assets of Community Bank and Trust - West Georgia, which had $288 million in total assets at the end of 2025. FDIC currently estimates that the failure of Community Bank and Trust, which is located on the I-85 corridor between Atlanta and Montgomery, will cost its Deposit Insurance Fund approximately $97 million or one-third of total assets. Why did the bank fail? Realized losses related to construction loans, farm land and owner-occupied commercial loans. The bank had almost 6% of total assets in non-performing loans, a Texas ratio of 150% at year-end 2025 and did not file a call report in Q1 2026. But any banker will tell you that real estate exposures along the endless highways of Georgia can be treacherous places to extend credit. But big hat tip to FDIC for another prompt resolution. The lesson of Silicon Valley bank is that insolvent institutions are sold immediately. UWMC Raises Bid for Two Harbors Meanwhile in the world of mortgage finance, United Wholesale Mortgage Corp (UWMC) audaciously issued an open letter to the stockholders of Two Harbors Investment Corp. (TWO) last week. The letter sets out why UWMC’s believes that the new $12 per share offer is clearly superior to Two Harbors’ proposed transaction with private Cross Country Mortgage. At present, TWO is trading just north of $12 per share for a market capitalization of about $1.3 billion. Yet TWO owns a mortgage servicing right (MSR) with a fair value over $2.2 billion. What gives? Sad to say, TWO has a $1.3 billion negative book value due to mark-to-market losses on its mortgage-backed securities (MBS) portfolio from rising interest rates and widening spreads, a disastrous $375 million litigation settlement, high operating expenses, and extensive share buybacks. Which deal is better? To us, holders of TWO should pick the highest cash offer available, whether from wholesale giant UWMC or retail leader Cross Country. We like the LT prospect of Cross Country better than UWMC because of the lower leverage and more rational business model. Like some other large lenders, UWMC has been waiting for lower mortgage interest rates to drive up lending volumes and essentially dig their way out of a hole. But rates may rise from here. Source: dataQollab We’ve written about the eye-watering corporate debt at UWMC (“Countrywide II: UWMC + TWO = ? Loan Depot Flops, Again”), net of secured debt for loan production. When a non-bank lender has a lot more unsecured debt than MSR, that’s bad. The levels of leverage at UWMC have caught the attention of the mortgage finance industry. More, at below $5 per share, UWMC has zero collateral value, another reason why TWO holders should stick with Cross Country. Remember, the MSR is the net present value of future cash flows. Imagine what Leo Crowley would say about an intangible, negative duration MSR in a discussion about bank solvency? Banks did not book intangibles period in 1933. When a non-bank lender like UWMC is selling MSRs at a discount to the cost of creation to offset operating losses, that’s even worse in our book. The more astute players in the industry retain the MSR, finance the asset in the bank and HY debt markets, keep MSR hedge costs to a minimum, and spend their cash creating new servicing assets. To us, creating MSRs on a ~ 6x multiple because your bid for loans in the wholesale channel is totally excessive, then selling the servicing at a discount to raise cash is not a viable model LT. UWMC 10-K February 2026 We’d like to see UWMC back off their bid a tad for new loans and retain the MSR, but it may already be too late for such prudent counsel to change the ultimate outcome we’ve warned about for several years. Trouble is, unlike Countrywide which was acquired by Bank of America (BAC) in mid-2008, none of the secured bank lenders to UWMC including Goldman Sachs (GS) and Citigroup (C) are likely to purchase the largest non-bank lender in the US when they stumble. The WGA Bank Top 50 The results for the WGA Bank Top 50 reflect market conditions, with some of the larger banks in the industry far down on the list. The top-ranked bank in Q2 2026 among the 99 publicly traded banks in our test group was Morgan Stanley (MS) followed by Northern Trust (NTRS) and Bank of New York Mellon (BK). NTRS was #2 last quarter as well and BK moved up from #9 in Q1. MS had a total score of 459 out of a maximum possible score of 495. The chart below shows the distribution of banks by market cap starting from the highest score for MS at left. WGA Bank Top 50 | Q2 2026 Source: Yahoo Finance/WGA LLC Some notable observations from the group include: Goldman Sachs dropped to #6 in Q2 vs #1 in Q1 2026. JPMorgan rose to #13 from 44th in Q1 2026. Citigroup rose to #8 in Q2 from 16th in Q1 2026 due to continued strong market performance, but notice the tiny market cap vs JPM. State Street (STT) rose from 13th in Q1 2026 to #4 in Q2 2026. The Toronto-Dominion Bank (TD) rose from 30th in Q1 2026 to #7 in Q2. Of course, in the muddled markets at present, there are a number of low-scoring banks which have done relatively well in recent weeks. The parent company of tiny Merchants Bank of Indiana, Merchants Bancorp (MBIN), for example, saw its stock price rise significantly in early 2026, 2x the S&P 500 over the past year, driven primarily by its inclusion in a major index and strong financial performance. We've written positively about MBIN in the past, yet based upon size and the qualitative factors in our test, the overall score ended up at 50th. Subscribers to the Premium Service may login to view the Bank Top 50 and the entire 99 bank test group on our website, down from 101 subjects in Q1 2026. Comerica Incorporated was acquired in an act if supreme generosity by Fifth Third Bancorp (FITB), and Two Rivers Financial Group was acquired by First Mid Bancshares (FBMH). https://www.theinstitutionalriskanalyst.com/toprankings We will be updating The WGA Precious Metals Top 25 this week. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

In this week’s edition of “The Wrap,” we feature our view of the top events in Washington and on Wall Street over the past week. And please do watch “The Wrap with Chris Whalen” on The Julia LaRoche Show every Saturday on YouTube to catch our discussion of what’s hot and what’s not in the world of finance and investing. May 1, 2026 | This week the nomination of Kevin Warsh to be the next Chairman of the Federal Reserve Board was approved by the Senate Banking Committee. But as we predicted some time ago, Fed Chairman Jerome Powell is going to re main on the Fed's Board of Governors after his term as chairman ends on May 15th. We expect a Senate vote for Kevin Warsh before Powell's term ends. The FOMC press conference this week was remarkable for many reasons, but the key factor for the banking and mortgage industries is that there is clearly not a consensus for rate cuts at this time. In fact, the FOMC voted to leave interest rates unchanged, but with the most dissenting votes cast since 1992. The 8-4 FOMC vote included three dissents that agreed with leaving rates unchanged but didn’t support the weak comment about “easing bias” in the FOMC statement. That suggests Warsh will face major obstacles if he tries to convince the Committee to cut rates. More, the decision by Powell to stay on means that President Trump is denied a second open seat on the Board of Governors. Governor Stephen Miran will exit to make room for Warsh. One aspect of the Powell press conference that has received too little attention was Powell's comments about Warsh possibly replacing Reserve Bank presidents. Powell warned against removing regional Fed presidents because of their monetary policy views. “That would be the beginning of the end of the Fed’s ability to make monetary policy independently,” he said, but the media did not notice. As we discussed in our interview with Alex Pollock ("Interview: Alex Pollock on the Fed and Gold | Part I"), the 1935 amendments to the Federal Reserve Act designed by Marriner Eccles made the chairman the chief executive of the agency with unilateral power to reject the appointment of Reserve Bank presidents by the local boards of directors. See article below from The International Economy. This week we featured a comment about the growing inflationary impact of the US-Israeli war with Iran (“Trading Points: China, Sulfur & Silver 银”) and our thoughts on positioning to benefit from the disruption. In Washington, the Trump Administration thinks that curtailing Iranian exports of oil and byproducts will bring Tehran to heel, but it is also boosting inflation and causing a critical shortage of sulfuric acid and other byproducts. As we wrote this week: “China is the world's leading producer of sulfur (19 million metric tons in 2025), but already faced tight supply and rising prices in January. China has since implemented a ban on sulfuric acid exports starting in May 2026. Along with a 37.67% year-over-year drop in Q1 2026 imports, China is restricting global supply of sulfuric acid dramatically. What does this mean for stocks and precious metals?” Earlier this week we had a great conversation with Keith McCullough, CEO of Hedgeye. You can watch the podcast below. Markets moved down during the past five trading days, with gold and silver off single digits and crypto tokens sagging. Stocks were mostly lower most of the week, but surged on Thursday within a highly concentrated group of technology stocks. Charlie McElligott at Nomura (NMR) described the market action earlier this week: "Mutual funds are getting crunched because they can’t / don’t own enough of what matters—As ten Tech stocks account for ~75% of the 12% SPX rally since March 30th—and officially killing-off the brief 4Q25/1Q26 “Dispersion” out of MegaCap Tech AI into “Everything Else.” Instead, it’s now “back to the future”: Mag7+ in total control of index returns yet again, where due to the return to “extreme concentration of returns,” these structural underweights in the largest Index market cap stocks sees performance pain further compounded by legacy “Funding Shorts” (INTC, AMD, QCOM, analog chip makers, power names) also booming higher and creating what’s been a nonstop scramble to close the undercapture." Recent Posts & Reading Trading Points: China, Sulfur & Silver 银 https://www.theinstitutionalriskanalyst.com/post/theira839 D. Ricardo on Private Credit & the Real Risk to Financial Markets https://www.theinstitutionalriskanalyst.com/post/theira836 How to Really Reform the Fed https://www.international-economy.com/TIE_Su25_Whalen.pdf The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

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

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

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

April 20, 2026  | First some important news. A working group at Financial Accounting Standards Board (FASB) finally has voted to explicitly include loan recapture in the valuation of mortgage servicing assets (MSRs). We suspect that the change, if adopted, will be used to support current MSR valuations instead of boosting fair values higher, but we appreciate the thoughts of our readers in this regard. The value of bank-owned MSRs over the past 30 years averages about 1.5% of the unpaid principal balance of the underlying loans, as shown in the chart below. Source: FDIC/WGA LLC As we pondered the Sunday media, the Strait of Hormuz remains closed to maritime traffic and the Trump Administration has decided to start boarding Iranian flag ships following the attacks last week on two Indian vessels. Truth to tell, Trump’s savvy decision to blockade the Strait of Hormuz is actually going to bring Iran to its knees economically, as Brandon Smith  of Alt-Markets predicted in Zero Hedge  last week .   In the US, financial markets are doing their level best to ignore the Iran conflict, but the continued focus of attention is the slow collapse of the AI trade and its components in the world of private equity and credit. For those of us fortunate enough to ride the momentum trade up on Nvidia (NVDA)  for some impressive triple digit gains, the latest musings about this tech darling from Shanaka Anslem Perera  on Substack (“ The NVIDIA Chokehold ”) may cause people to toss their proverbial Cheerios.  Perera describes a situation where NVDA has a potentially lethal concentration in terms of customers in the AI domain and captive company funding for said customers. Like private credit, AI is an opaque world where the number of planned data centers is rapidly being dwarfed by projects being cancelled. This imbalance in terms of debt, anticipated vs likely revenue and the sources of finance reportedly has caused a number of former NVDA cheerleaders to flee for the exits. Has SoftBank CEO Masayoshi Son really left the Nvidia building? Perera writes: “SoftBank disclosed in November 2025 that it had sold its entire 32.1 million-share NVIDIA stake for approximately $5.83 billion as it reallocated capital toward OpenAI and related AI infrastructure bets. Peter Thiel’s Thiel Macro LLC separately exited its full 537,742-share NVIDIA position in the third quarter of 2025. NVIDIA insider sales aggregate in excess of three billion dollars across hundreds of transactions over the trailing window per Form 4 filings, with Chief Executive Officer Jensen Huang’s personal 10b5-1 plan liquidations above two billion dollars since mid-2024, with Chief Financial Officer Colette Kress and Executive Vice President Ajay Puri and Director Mark Stevens among the most active sellers, and with the single characteristic that unites every insider filing across the entire period: the complete absence of open-market purchases.” To add further spice for our readers regarding the outlook for the coming week, below we feature a fascinating comment on the risk known as private credit from a prominent New York banker who writes for us on occasion under the nom de plume of D. Ricardo . Long-time readers of The IRA may recall his series of comments from 2019 (" China is Weak "). On Private Credit By D. Ricardo I’ve been following your posts in The IRA on private credit. Wanted to chime in. I’d start by asking a question: Is there more debt about, in aggregate, because of the growth of private credit, or would debt levels be the same had regulators not encouraged banks to shy direct lending to middle-market, non-investment grade debt following the GFC of 2007-08 and private credit funds/direct lenders, business development companies stepped in?  I think the answer is a toss-up. And rather what we have seen is a shift in risk and a change in who is lending to whom, not an increase in how much risk is in the system, or how much is borrowed in aggregate. Second question then would seem to be: What drives the term, quantity and quality of debt, in aggregate?   And to this I think we could point a finger at central banks, ZIRP and a decade of Modern Monetary Theory (MMT).  Low yields forced natural buyers of yield and duration into “alternative asset classes” and riskier debt (inc. Cov-Lite, increases in allowable PIK, etc.).  Private debt companies and instruments simply provided convenient mechanisms to gain exposure.  In this case, cheap money has increased risk in the system.  Another question one could ask about private credit: Is debt issued in/by the private market riskier than debt issued by publicly regulated entities?  Here I think one can begin to raise legitimate questions about opacity of valuations and classifications of exposures. But having sat on innumerable loan and credit committees, I am not sure that which transpires on the regulated side of the credit market is any less variable, capricious or optimistic than that we see from the private side.  Yes, regulators and auditors through reviews can challenge risk assessments, but regulated institutions still have considerable latitude when assigning PDs, LGDs and expected recovery rates to credits.  Which leads to the question: Is this market structure of private debt (CLO, BDC, etc.) replacing public debt more risky than the alternative structure (i.e. having these middle-market non-IG loans directly and wholly on Bank balance sheets)?   Here again, private credit works to shift risk, not amplify it, as in the structural covenants, like tranching, subordination, collateral tests and interest coverage tests work to make senior debt holders better off (though to the detriment of junior creditors and equity holders); and, other structural covenants, like gating, prevents simultaneous systemic wholesale liquidations less likely, making the system more resilient than the alternative of a bank-only marketplace for credit.  What I think is underappreciated is the “normal credit cycle.”  We had brief credit pains in 2015-16 related to oil companies, some hard-hit sectors during Covid, and of course the GFC in 2007-08, but before that, what?  The 2001-03 recession following the Dotcom bust? Perhaps the last real normal cyclical credit event was the recession of 1991-93.   How many current lending executives remember recessions in the early 1990’s or before?  Fast forward to GFC - which was nearly 18 years ago - how many senior finance executives were in a position of real power then to have learned lessons, and are still employed today - few, unless they are in the C-Suite like Jamie Dimon at JPMorgan (JPM) , Colm Kelleher at UBS AG (UBS) or Ted Pick at Morgan Stanley (MS) .  Very few senior executives in the credit space are experienced at managing a normal, let alone large market downturn. To these points add the extraordinary levels of debt that exist today in the system, which limits central bank policy options. Add the hollowing-out of real value in companies by the private equity/private debt ‘extend and pretend’ discipline, which has extracted value from underlying assets at each turn, leaving less real value in the company, and making historical LGD estimates way off the mark from what we should expect from future recoveries in a bankruptcy event.  And then add the increase in market velocity over the last twenty years (think: meme stocks); and the fact so few have experienced a slowdown or recession, given central bank practices over recent years, and we are primed for a nasty awakening when a slowdown eventually comes, whether global macro event driven, or otherwise. “Private debt” gating retail investors is the whipping boy du jour , but not the canary in the coal mine, nor the real problem, nor the real risk. Over-investment and malinvestment in things like data centers or unprofitable business models that require cheap money and are based on hype and suspension of common sense, excessive government spending, inflation and currency debasement, populism and socialist rhetoric manifesting itself in real policy and tax decisions, these are the real risks. The public-private divide is merely a nuance. The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

January 25, 2018 | With the global punditry assembled in Davos this week, the topic of the dollar seems to have bubbled to the surface again. Down more that 10% from the December 2016 peak, the greenback has started to sag at just the time when Treasury deficits are climbing and the Fed is paring back its purchases of US government debt and agency mortgage bonds, as shown in Chart 1 below. With the 10-year Treasury back over 2.6% yield, gravity seems to have been restored to the global economy. The last peak of the trade weighted dollar was in mid-2002, after which the US currency slid steadily into the 2008 financial crisis. Did investors and government officials outside the US perceive the approaching contagion? You bet -- but especially in China, where the political leadership understands the process of “dollar recycling.” Simply stated, if China stops buying US Treasury debt or other dollar assets, the surging yuan strengthens even more. And even as President Trump starts a trade war with China, the yuan is already soaring against the dollar. Duh? Starting in 2008, the dollar climbed steadily even as interest rates and credit spreads remained suppressed. But from 2009 through 2011, the dollar actually gave back ground even as the Federal Reserve ramped up purchases of Treasury debt and mortgage securities via QE. By 2012, the flood of foreign capital pouring into US real estate and financial assets finally began to lift the dollar, which by 2014 began a sustained rise in value that finally peaked at the end of 2016, just after the election of Donald Trump. The peak in the dollar in December 2016 came after years when strong capital inflows helped to reflate the US equity and real estate markets, the latter both for commercial and residential properties. But as prices for US stocks and real estate reached absurd levels, foreign purchases began to decline. In particular, changes in US tax rules for foreign investors in real estate as well as political changes in nations such as China have caused the dollar to slump over the past year, as shown in Chart 2 below. Notice that the yuan/dollar exchange rate and the dollar/euro rate have both seen the value of the dollar deteriorate over the past year under the leadership of Donald Trump. Of course, some observers would blame the slump in the value of the dollar on President Trump, especially now that Treasury Secretary Steven Mnuchin is publicly lauding the benefits of a weaker dollar. In Davos, for example, Mnuchin said: “Obviously, a weaker dollar is good for us as it relates to trade and opportunities.” Secretary Mnuchin is said to think President Trump is an "idiot," but compared to what? In reality the factor which seems to govern the movement of the dollar is not the pronouncements of Mr. Mnuchin but rather mounting federal budget deficits. The US deficit fell to “only” $438 billion in 2015 and has been growing substantially ever since. With the just passed tax legislation thrown into the mix, US deficits are expected to surge to more than 5% of GDP annually. Chart 3 shows the US fiscal deficit vs the trade weighted dollar. It’s interesting to note that while President Trump and Secretary Mnuchin may think that they are driving the proverbial bus when it comes to the value of the dollar, in fact the deteriorating fiscal situation for the US seems to be the key determinant. Indeed, the passage of the tax legislation at the end of 2017 makes us somewhat more cautious about our bullish view of the 10-year Treasury, which now seems headed lower in price and higher in yield under the weight of expectations regarding Treasury debt issuance. But while we may be less bullish on the 10-year Treasury bond, the curve flattening trade is still a very real scenario because of the Treasury’s huge debt issuance calendar. The fact that the Federal Open Market Committee is slowly allowing its portfolio to run off is an important factor in the analysis. We continue to think that the Fed is being overly optimistic as to how quickly the late-vintage MBS in the System portfolio will prepay. Let’s review the questionable actions of the FOMC under Chairs Ben Bernanke and Janet Yellen from 2008 to 2014: QE1 (December 2008-March 2010): The FOMC started with $600 billion in “sterilized” purchases of MBS (funded with sales of Treasury debt), then increased to a further $750 billion in outright purchases of MBS funded with excess bank reserves. QE2 (December 2010-June 2011): Fed purchased another $600 billion in longer dated Treasury paper funded with bank reserves, extended duration of System portfolio. Operation Twist (2011): The FOMC sold short term Treasury paper and bought longer dated Treasury maturities, significantly extending the duration of the System portfolio. QE3 (September 2012-December 2013): FOMC committed to buy $40 billion per month in MBS and purchased an additional $45 billion in Treasury debt funded with excess bank reserves. Since then, increased interest rates and falling prepayments have extended duration of System portfolio. The FOMC under Chairs Bernanke and Yellen did everything possible wrong in managing the System portfolio. Now the Fed is illiquid, trapped in a long duration position in a rising rate environment because they violated the cardinal rule of central bankers: stay short duration. As we've noted previously, the FOMC dares not sell any of the System portfolio out of fear of generating losses. So the Mnuchin Treasury is planning to fund its spending deficits with short-term debt issuance, but the runoff from the Fed’s MBS portfolio may, in fact, be so slow that the central bank will not be able to purchase much of the Treasury’s new debt. As the FOMC tries to rebalance the System portfolio back to 100% US government debt, it may take years longer than currently estimated by the Fed staff for the System MBS positions to actually runoff. This means that the full weight of Treasury issuance of short-term debt will hit the markets with no support from the Fed and at a time when the dollar is falling. So the good news is that the FOMC has ended its long, strange period of social engineering known as QE. The bad news is that the Republicans in Washington have just cut taxes and the resulting red ink could see the US dollar test post-WWII lows. Because of fears regarding future deficits, the 10-year Treasury bond may not rally appreciably. Yet there remains a dearth of long-dated Treasury paper available in the markets, in part due to purchases by the FOMC. The surprise for newly installed Fed Chairman Jerome Powell is that the short-end of the yield curve could surge above the Fed’s target for short-term interest rates once Treasury begins to seriously increase issuance to an expected deficit of 5% of GDP annually. By 2022, the annual US deficit could be a trillion dollars. And even with significantly higher short-term interest rates, the dollar may continue to fall under the weight of rising fiscal deficits and the falling credibility of the US government. Doug Bandow stated the situation nicely in The American Conservative last week: “The United States is effectively bankrupt, but that doesn’t matter to the GOP. Once evangelists of fiscal responsibility and scourges of deficit spending, Republicans today glory in spilling red ink. The national debt is now $20.6 trillion, greater than the annual GDP of about $19.5 trillion. Alas, with Republicans at the helm, deficits are set to continue racing upwards, apparently without end.” So two questions: First, will the surge in US fiscal deficits cause short-term interest rates to rise and the dollar to fall faster than currently expected? Second, what happens to the overheated prices for stocks and US real estate in such a scenario? Further reading: No good reason for banks to offer more government-backed mortgages American Banker January 23, 2018 https://www.americanbanker.com/opinion/no-good-reason-for-banks-to-offer-more-government-backed-mortgages The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.

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