YouSaid · the spoken record

Chris Whalen

lines on the record: 99
first: 2022-08-22
most recent: 2022-08-22
sittings or episodes: 1
sources: podcast

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“Yeah, so the Fed is actually really sensitive to affecting the market. So the Fed is the biggest investor in the mortgage-backed security space. And it doesn't want to affect market functioning. So if it feels like there's some scarcity in the mortgage market, it'll delay taking delivery and roll it over to the next month. So what's a judgment call that the Fed makes?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“But when it's not shrinking its balance sheet, it takes the principle it receives and it reinvests them in mortgages. So let's say it gets $100 repaid in May, then it takes that $100 and it uses it to purchase more mortgage-backed securities. It's just reinvesting it and maintaining the size of its balance sheet. So that's why in May it was still purchasing mortgage-backed securities. So some of the things that they bought in the past three months are still settling on its balance sheet. That's why sometimes, even though the Fed is shrinking its MBS portfolio, you see increases. Now over time, the Fed will no longer have enough to reinvest, so you won't see that anymore. But if you take that into account, you see that the mortgage securities portfolio is actually dropping, as they've noted.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“So every month you can see the tips portfolio growing a little bit. Now that creates illusion that the Fed is buying more treasuries because their treasury holdings are increasing, but it's just tips increasing because of inflation. That's one part. The second part is the MBS portfolio. It looks like it's not falling as much as it should. In fact, sometimes it looks like it's increasing. Now that just has to do with how the Fed conducts settlements. So when the Fed buys mortgage-backed securities, it can take delivery of them within three months. So some of the mortgage-backed securities you're looking at right now were actually purchased three months ago. Now you may wonder why was the Fed buying mortgages in May? Was it May already the end of QE? Well, in May, so every month the Fed receives repayments from mortgages.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“No, it's not a lie. The Fed is doing exactly what they've said they would do. And what you're seeing right now is just the difference in how accounting works. So I'll explain this from Treasuries and from Mortgage-Backed Securities. So if you look at Fred Treasuries, you'll notice that after QE, it actually gradually grew a little bit. Now that's not the Fed continuing to buy treasuries. What that is, is tips which are inflation protected securities appreciating. So the Fed holds a few hundred billion dollars in tips and tips every month they are adjusted for inflation. So let's say you have $100 in tips and inflation is 12%, then in a month maybe you end up with $101 in face value of tips. So the Fed holds a lot of tips. Inflation has been high.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“I think we should license them and they should have to put out regular predictions and we should score them. How about that?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“I agree completely. And let's say they get everything wrong like they did, there's no consequence. All the people who made the terrible decisions, they're still there. Well, who knows? Maybe they got promotions and they're still there contributing their bad judgment. So we are probably going to screw up again because the same people are there making the same mistakes.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“We shouldn't let them make up their own terminology, Joseph. They should have to use real-world terminology and say this is either inflationary or deflationary. But don't come up with new ideas with little stars next to them and tell me you're not sure what it is. These are the imaginings of economists. This is the basic problem. If we were dealing with physicists with slide rules in their hands, we'd have a way of benchmarking their performance. But with economists, we have no idea.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“I think we're going to get over four as well. Here's the thing about the Fed. I think it's very important to understand how the Fed thinks about the world because the Fed has a lot of power. So if we understand that they think that three and a half fours will be restrictive, then that's really important when we go about making investment decisions. But how the Fed actually thinks about the world isn't actually necessarily how the world actually works. So you have this idea of something called the neutral rate, where if you get there or above, that's kind of how you get there and stay above inflation will come down. But I have no idea if this new show rate concept is real or even if they know where it is. So they could very well be very wrong and get the neutral rate completely wrong. And so we could be in a place where we were at 4% and we can see inflation stay pretty elevated.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“But he forgot the old lesson, which is you've got to be able to put the fear of God in members of Congress. And when Paul Volcker, Alan Greenspan went up there, they would talk about fiscal issues and they would put them on the spot. This crowd won't do that. They don't have enough money in the bank to behave that way. That's the problem. Do you think Carter Glass would have let Elizabeth Warren push him around on Capitol Hill? No. That woman wouldn't give him the time of day. That's the difference. We have a bunch of syncophants and functionaries instead of leaders in our major government agencies and especially the Fed. You have to have people of character who have some money in their pocket who don't care if they have to resign. That's the difference.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“I remember that Powell always made a point to try to not be political. I did Stanfrey Hawkins' hearings, he would also always be like, I'm trying to stay in my lane. I'm not going to comment on that. But then during the, I think during the time when they were passing the huge stimulus bill, he was basically egging everyone on, right? So he was basically being part of the nut saying in his laying and just basically giving advice.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Well, that's the problem, though. You see, they allowed themselves to be pushed around politically. Let's be fair. And now they're in a position where they have to try and regain their credibility. So, you know, there's no winning in Washington, let's be plain. I think these guys would be better off if they just stayed out of Jackson Hall.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“And that's what they're looking at. So I think the Fed is trying to manage a process where they are still flying blonde on the portfolio on the one hand and not do too much because what if the inflation numbers start falling by the end of the year defying everybody's expectations and they will have done too much, right? So they created this problem. The problem is capital V volatility either way. And how you get out of that? See, I think the Fed and Powell would like to have a year when they did nothing. Maybe just let the balance sheet run off next year. And don't change Fed funds at all. That would be wonderful for the interest rate market.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Question to you, which is what is the Fed worried about? They're worried about volatility. At least two I've spoken to, I've said, look, volatility is your biggest problem. Everybody's in a hurry. Why did we go to 75? It's because the equity managers wanted to get done with this in two corners. They're all thinking, well, the Fed can declare success now and then we can drop rates because the last thing the equity crowd wants is to have a year of down quarters.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Think it would help normalize it whether or not when people hedge mortgages, they typically sell a combination of treasuries and forward what we call TBA contracts, which is a 30 or a 60-day contract to deliver a pool of mortgages, a new mortgage-backed security, right? So when the Fed came in, they distorted this market tremendously. And you had a period when rates were only falling, right? So there was a temptation on the part of a lot of people not to hedge or not to hedge as much. So you would be short on your hedge, but your long production, right? You were making mortgages. Now, however, as we normalize, I think people are going to have to be more honest in how they hedge. And that can increase the cost depending on what they're hedging, right? So, you know, to me, that's the issue. But this goes back to Jack's earlier question.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Once upon a time, when the private sector held a lot of mortgages, they would hedge their mortgage interest rates, right? Lots of convexity hedging. So what that means usually was, you know, let's say they would sell a lot of treasuries when rates were going higher and then buy treasuries when the rates were going lower. So it exacerbated the volatility of the rates market. Chris, do you think that if the Fed basically gradually getting out of this MBS thing market, even by Little Would that make a return of convexity hedging being more of a force in the rates market?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Which case the mortgage deals Yes, yes, but remember there's a competitive, irrational aspect to mortgages. We still have a third to a half too much capacity right now. We got to get these people out of the market because they are underpricing mortgages in an attempt to survive. And we're sympathetic to survival, right? Until we get supply and demand in that market back in the balance after what the Fed did to increase capacity, it's going to be hard to price mortgages in a rational way.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“I'll say no because there's still so much demand for that collateral and the swing in the visible supply has been so extraordinary. You know, a couple years ago, we were doing trillions a year. This year we'll be lucky to do two. We were doing trillions of dollars a quarter a year ago. So, you know, there's a lack of collateral out there, and the Fed can use that to their advantage if they're smart and if they have a, I think, a greater sensitivity to the market and to short-term moves in the market. They could dribble this stuff out over time without bothering anybody. It just depends how you do it. And frankly, Joe, you could use the dealers too. They would work with you.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Don't want them to disturb the market anymore than it's already been disturbed. I mean, the irony of Jinny Mae and the Federal Housing Finance Agency putting out new capital requirements today when half of the industry is on the verge of insolvency is rather bitter, I must say, as somebody who works with mortgage companies every day. So I don't want them to disturb the market any more than they have already. But you know what? Joe, if rates rally, the desk in New York should have standing instructions to sell. Take advantage of it. Little bets, five.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“And this is stuff you would put away, Joseph. This would be held to maturity, the short stuff would go to that audience, an investment grade investor, even a money market fund. The medium duration paper would go inside an insurance company, held the maturity. Goodbye. And then the long stuff, which was very volatile, I think the Fed ought to keep. Why not? They've already taken the loss when they sell the securities, and over time they could recoup a little bit. That's the kind of risk, frankly, that the Fed or a central bank can hold and I'll worry about it. Very volatile piece of paper, by the way. It's the tailpiece of a mortgage-backed security, so it's totally correlated to interest rates.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“And I think consider how much of an impact they have on the market, even when they are indifferent to loss, because someone's losing money. Maybe they're not losing money, but someone is. And that's a terrible cost that they're imposing on private companies right now.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“That's correct. But let me say this. In the old days when I worked at the Fed in New York, we had more or less of a free hand. The committee would give us instructions and tell us to go do it. And we would do it quietly. Now everything has gotten to be very scripted and very media focused. So if they were to sell, that becomes a big event. I think what they ought to do is opportunistically manage the book. If rates are falling, they should sell into it. If they're rising, they should stop and look for other ways to diversify the portfolio. They could carve it up in the CMOs and have Fannie Mae sell structured securities with the mortgage bonds inside and then keep the long piece for when rates fall and they would earn back some of the laws. But remember the Fed doesn't care about losing money. They are here for the dual mandate and I think that unfortunately they don't always fully assess.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Market value of that if rates are rising will go down, and if the Fed sells that, they would realize a loss as a commercial bank would. But if they hold it to maturity because it's guaranteed by the US government or cause that guaranteed in the case of Fannie Mae, it's Quote unquote impossible for folks listening to the podcast, I did air quotes, impossible for them to lose money if they hold it to maturity. So the Federal Reserve will only realize losses if they sell. Yes?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“I take that as a hint. I think they're going to keep it unless they get creative and start swapping that paper with other central banks. You could do that for treasury. It's given a concessional price on the mortgages. Because, you know, there are investors who will hold that paper because it's sovereign risk, right? But they got to be investors that are not market facing and don't have to worry about a quarterly mark-to-market on their book.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and it's so unfortunate because you're taking income out of the market that should have been left. This whole notion that forcing down rates and going back to your comment, Joseph, about the transmission mechanism, it's been broken for a long time. So they injected a lot of speculative juice and a lot of short-term activity pulling tomorrow's mortgages into today, but tomorrow's going to be light. We're going to be at half a trillion a quarter this year in the mortgage market, which is striking. So I don't, if you read the Fed of New York projections for the portfolio that they published last month, it says no realized losses.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Place where Chris has been discussing, and we should hear more about because, well, one is that there's some chatter about how the Fed might have to sell a little bit of mortgages, even though they don't talk about it as much. And two, if they don't sell it, how are they ever going to get all those mortgages off their balance sheet? I mean, like Chris mentioned, if you can just assume a mortgage, They're risk going to stay there for a long, long, long time. Because they're not going to prepay.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“That happens, well, the Fed is going to be tempted or maybe forced to go back and do QE or cut rates and something like that. But we could have this market accident when inflation is still 5, 6, 7 percent. So that puts the Fed in an awkward position. But if you have the Treasury there ready to fix this market mechanism just by this mechanical failure of not enough liquidity causing some kind of accident, then you can keep the Fed defect and keep tightening, maintaining a pretty restrictive monetary policy. So it kind of separates the financial market accidents from the stance of monetary policy. So I think that it's actually a pretty good idea for them to do this. Just at least have it in the back pocket in case something happens. But that's just the shrojew side of QT. The more interesting side that people are talking about right now is the mortgage side. And that's the...”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Yes, absolutely. It helps QT, right? So right now, what we're seeing in QT, it's only draining the banking sector. So that actually puts a limit to how QT can proceed if all the money is coming out of the banking sector, because sooner or later the federal think that we've just drained too much in the banking sector, all the money in the RP is untouched, we're in a bind because we can't really control that. But the Treasury can help with that. The second thing is that I actually think this buyback program it allows the Fed to be a lot tighter than the market expects because one of the things that might happen if the Fed tightens a lot is that you have this accident somewhere in the capital markets. It could be in the Treasury markets like it was in the past.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“So, yeah, so like you mentioned, because it's not attractive, the low coupon stuff, one way to get rid of it out of the market so that it's Factory liquidity, like you have these off the rung coupons that maybe people don't really want, you could just have the treasury buy it and take it off the market. So I actually think this is really good for a couple reasons. So one way, one thing is that The treasury is doing this, they're shifting money out of the reverse fuel facility and basically putting it back into the banking sector because whoever sells that coupon treasury to the buyback program to treasury, it's going to have a bank account somewhere. And so money gets siphoned from the RRP into the Treasury General account and then gets sent into the commercial banking system. So that's one way that's good. The second way”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Also, it's for Treasury's perspective to the market is more stable if they can balance out the duration of the securities and not have a lot of low coupon stuff there, which frankly is cheap, but nobody wants it because owning a two right now, Ginny May 2, is an excuse to lose money. You're going to spend more money hedging that security than you're going to earn on the coupon. Why do we want to do this?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“So bills are special because they're short dated, so they mature within a year, and they can be purchased by money market funds. And right now, as we discussed earlier, money market funds have a whole bunch of money and nowhere to put it. So they're just depositing it in the RRP. So if you issue bills, then what will happen is that the money market funds will just buy bills instead of the RRP. You basically have a whole bunch of cash sitting in the money market funds with nowhere to go. So if the Treasury were to issue bills, that money would easily be lapped up. So it's not going to be very disruptive to the market.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Joseph, I want to return to the treasury buyback that was proposed in the minutes that came out earlier this month. Why can you go through why buying back coupon securities, duration securities, longer term, longer out in the yield curve tenor maturity, whatever you want to call it, and then funding that by issuing shorter-term bills that don't have a coupon? And specifically, why is the fact that they don't have a coupon so significant? And how does that tie into the trillions of dollars that are locked up in the RRP? And then also, what about this whole humidifier dehumidifier thing?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Are getting paid off, they'll refy them or do something. So, my point is that in this world we have with banks and also non-bank companies Reeds, doesn't matter what it is, they always have to keep up with the runoff on their book because those loans are maturing. Sometimes they get prepaid ahead of time. So if you're the treasurer, you see the money coming in, you've got to go out and redeploy it. And that's the challenge, Jack, that you're alluding to. Sure, there's growth. Of course there's growth, but in order to get ahead of the redemptions, we've got to be double-digit growth.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“It was muted for so long now that the bond market's been a little volatile. Borrowers are going to go back to the banks. That's just the basics. Right now on our repo book, we're not competitive with the banks. The banks are 50 basis points inside us because the market has gone up. The bank's funding costs haven't gone up. So, I mean, yes, you're seeing growth in new loan originations, but remember that book is running off fifteen, twenty percent a year. So in order to keep your balance sheet stable, you've got to make up for your runoff and then make new loans to get growth. So for example, home equity lines, you're starting to see banks really focus on that product again because it's a higher interest rate rising interest rate kind of product, right? But in order to catch up with the runoff, these are normally seven-year loans. Well, structurally this 10, 15% runoff in that book every year.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“For now, for now, yes, but believe me, those funding costs are going to catch up by next year. The Fed took 35 basis points out of earning assets for all banks in the United States with quantitative easing. Will we get it back? No, probably not. There's just too many factors holding it down. But I think that you will see banks get a lot smaller as the Fed drops reserves it's dollar for dollar and ironically even though they're going to keep short term interest rates higher I think the medium and long term rates are good to go down Because people want the paper, you know, there's a demand for risk free assets all over the world, and it's not going to, they want us to borrow more money and we can't. That's what it comes down to.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Costs aren't going down. Their costs, if anything, are inching up a little bit. So think about that example I gave you before, JP City three or less, gross on the loan. A third of that is for administrative costs and everything else and called 30 basis points of funding costs. What's left? You're working for less than a point and you've got to put credit loss provisions aside too.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Not yet. Their funding costs are still low. The rate on loans is starting to rise, but funding costs are rising faster than the yield on the loan buck”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“You know, trillion and a half dollars in the next couple of quarters. It's going to shock investors, by the way. They're not going to believe it. And so, you know, when you tell the raw-raq crowd on the buy side, oh, banks are getting smaller, income is falling, they don't know what to do with that. So I think this effort by the Fed to build capital on the bank side, it's going to have negative consequences for the economy. And by the way, investors are not going to like it. They want to buy these stocks. If you watch the market, they were up dramatically in the last 30 days, 20, 30 percent some of these names. They're going to go back down now.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Of America Oh, I do. The banker Brian, I use them. They're my bank. I love Brian. But don't buy this stock. So what's going on here is that the Fed is essentially forcing Jamie Diamond to turn down the flow of new assets into the bank. That in turn lets the bank shrink. What he is forcing down that Joe explained very nicely is risk-weighted assets. That's the number he focused on in the conference call, and whether it's a commercial loan or a jumbo mortgage or a warehouse loan to an auto lender or a mortgage lender, all of those have a weight in terms of Basel and capital. And so what they're going to do is they're going to push them down. Why is Wells Fargo getting out of the correspondent mortgage business? They used to have a third market share. Well, they're getting smaller. They're in the penalty box. They're going to go down to like...”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Cho explain the balance sheet side very well. Think of your typical bank like JPMorgan, some of the others. They turn over their balance sheet every three years.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“And this regulation is so important, right? Like, I think Basel II in the early 2000s was extraordinarily lenient on complicated collateralized debt obligation structures that, you know, as long as they were rated AAA, they were rated AAA. So banks could hold a lot more against them now in the wake of the great financial crisis, the regulations are much more stringent under Basel III. And that's why a lot of big banks opt to hold tons of treasuries. It's not because they think deflation is coming or they're not necessarily taking a macroeconomic view. That's just the way regulations are. Likewise, I think in 2020, early 2021, the supplementary leverage ratio was raised so banks could hold a lot more, or they could deduct treasuries from that. But Chris, how is this impacting banks' actual activity? Are they withdrawing from markets? Are they not getting as involved? Which are the sort of eye of the storm? What asset class?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“A bank's balance sheet. And when the government tweaks the capital requirements, like Chris mentioned, essentially that's trying to tamp down on bank lending, bank credit creation. It's a way to maybe make the banking sector safer, or maybe to slow down the economy a little bit because it's perceived that we have maybe too much credit creation driving up inflation.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“So I think the big ratios are the leverage ratio and the capital ratio, and there's a lot of different ways to calculate that in ratios that are similar to them. On a high level, you have the leverage ratio, which kind of limits the size of a bank relative to its capital. So let's say you have $5 in capital, then maybe you can only have $100 in your balance sheet size. The other way to look at this is the capital ratio, which is similar except that it's a risk-weighted asset ratio. So for example, in the leverage ratio, they treat an asset reserves or a treasury or a corporate loan, the same. So that all counts the same under the leverage ratio. But when you go to the capital ratio, there's a risk weighted asset segment where something, let's say, corporate loan would have higher risk accord to higher risk weighting, where anatreasuria would have no risk weighting. Overall, you can think of it as a constraining the size and the composition of”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Know, I look at credit carding, which is you kind of expect that late cycle. But Joseph, can you just explain the ratios and then Chris, I want to get your view on how that's impacting banks' actual activity?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Banks not only took losses on private securities, but they had huge costs, fines, settlements. It was extraordinary. So they look at the Fed, they look at quantitative easing, COVID, everything else, and they say, uh oh, we could have another problem. And that's why they came up with these big numbers, Jack. I think they're wrong. I think the surrogates they use in their model are outsized. You're never going to see those kind of losses in a market which is 99% government guaranteed securities today, the private label market is a rounding error in today's market. So I think that's why it's different. They're worried really, though, not about credit risk. You said this before, Jack. They're worried about market risk. At the end of the day, what they're worried about.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, your viewers, if you have a moment, should go back and read the transcript of the JPMorgan earnings call for the second quarter, because Jamie Diamond went off. He was very unhappy. I actually wrote a column at National Mortgage News just about Jamie because he said, look, tell me I'm going to lose $40 billion in a stress scenario, and most of that was coming from mortgage. No, Jamie has the most pristine jumbo mortgage book in the industry. His loss given default has been negative for years. That means is he can't lose money even if a loan defaults because they're such high quality and they sell the home. That's what's been happening for the last few years for all banks. So the whole group, I think, is now being forced to raise capital because the regulators look back. And when they look back, they see 2010, 2012, which were bad years.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“So, Chris, tell us, I know in July, the Federal Reserve exercised a stress test against all the large, huge banks, G-SIBs, and they said, okay, what happens if real estate declines by 40%? What happens if high yield bond spreads explode higher? What happens if the unemployment rate ticks up? And I think based on the headline, I think all the banks passed, but the Fed imposed a higher ratio on them, so they have to hold more capital. And is that why they're getting on the market? Can you just explain to me and explain to viewers what exactly happened there?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Three times the core deposits of Goldman Sachs. So I'm telling you, David Solomon wishes he could buy that little bank. It's a money machine. They collect advisors. That's what they do.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Jamie's three Bank of America is almost three cities two and Wells is under two now. And throw in U.S. bank and you're there.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“Go look at Treasury. Look at the HAMP program at Treasury when Barr was there. It only started to work after he left. I might write a little article about that at some point.”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT
“And he'd be just fine. I mean, seriously, half of the transfers every day that JP makes are internal. So, you know, he has no problems. He's just going to fold his arms and go home. That's bad for the U.S. economy. And that's unfortunately what the bank regulators down the hall from Powell are doing right now. And you know what? They never talk. I actually confirmed this the other day. They never talk. So they had a soup and reg at the Fed never talks to Jay Powell about countercyclical buffers. I think that's a mistake. What do you think, Palestine?”
2022-08-22 · Forward Guidance · The Fed’s Ticking Time Bomb Is About To Explode | Joseph Wang & Chris Whalen · IDENTIFIED FROM THE TRANSCRIPT