R. Christopher Whalen is an investment banker and author who has for years married the forces driving the banking, mortgage, finance and fintech sectors with the political forces that impact them. As President Trump moves at warp speed to reshape the economic and financial landscape of the U.S., Chris says he does not think markets have yet to fully understand just how game changing this will quickly be.
For months, if not years, markets, economists, and government officials in the U.S. and around the world have worried aloud that Trump would quickly move to push the Fed to cut rates further as soon as he entered the White House. It hasn’t happened yet. Chris makes an important distinction on how this will play out when it comes to independence by drawing a line between issues where the Fed reports to Congress and those where it reports to the Executive Branch - the latter which he says conservatives have been seeking for decades.
So dive in hear as Chris applies his keen political and financial eye to how all of this will play out when it comes to coming debates on the passage of Basel III and other policy nuggets.
The Fed is political 00:01:22:07 - 00:01:50:06
Well, I think they are trying to balance their job, which is inflation and the economy, jobs specifically in politics. Everybody likes to think that the Fed is not political. It's the most political institution in the city.
Simply entering the Fed changes a person… 00:01:50:08 - 00:02:15:16
So, you know, this stuff was kitchen table talk for us. And I think, you know, even some of the Trump appointees on the board of Governors and the Open Market Committee are going to now dig in and defend the institution, because that's just their instinct. As you know, Kathleen, when you go through those doors, whether you're Mariner Eccles or Jerome Powell or Janet Yellen, you have a change occur.
The Fed has an important role 00:02:15:16 - 00:02:35:00
I worked at the Fed in New York, and I think everybody works there, has a great reverence and respect for the institution because they know how important it is and they know that this enterprise called the United States with our fiat currency and our tendency to spend too much money requires a moderator. And that's what the Fed is.
Fed in a fish-bowl 00:02:52:00 - 00:03:14:13
And now all of a sudden she said, well, we should shrink the balance sheet some more. So a remarkable turnabout in a matter of months. And other governors, too. You saw Musalem, the former Tudor executive. He's basically on hold. So I think it's fascinating because, you know, the Fed is not immune to politics. They have to operate in a political world.
Some problems hide in plain sight and can’t be seen 00:03:14:15 - 00:03:34:01
But at the same time, the data are all over the place, as you and I have been talking about. It really doesn't give you a clear indication in terms of the economy, the consumer. Right. Consumer <spending> falling consumer mortgages, things like that are no problem. The problems, if they are anywhere, are in the commercial side and you can't see them as easily.
Like Poltergeist…they’re here…the problems 00:03:34:03 - 00:04:01:15
They're there, but they are in the background with lawyers and investment bankers, you know, working away. So that to me… it's an unclear picture for Fed governors right now because so much of the bad stuff that's going on is not in the consumer sphere at all. It's not in autos, it's not in mortgages, it's in other areas.
Will markets fail to cooperate? 00:05:13:19 - 00:05:42:08
In 2018, we had a pivot, a rather dramatic and quick one. Right. So I think we're almost at that same point again, Kathleen, where, you know, the policymakers are trying to focus on jobs, inflation, but the markets may not cooperate. And particularly if you look at stocks and the dollar, you have to wonder how much longer this party is going to go on.
Is there a reversal pending? 00:05:42:10 - 00:06:12:09
And I honestly think, you know, for a lot of reasons related to Donald Trump and just where we are in the economic cycle, we may see a reversal soon. You may see a weaker dollar and higher interest rates in the U.S. And that, again, will throw another curve into the equation for the Fed.
White House wants regulatory control 00:07:15:08 - 00:07:59:06
What I would say almost back up for a second and say what is changing today since the election of Donald Trump? What is changing is something that conservative Republicans have talked about for 30 years, which is to get the executive branch under the control of the White House and the Office of Management Budget. So what does that mean? It means that in areas where Congress tells the agency what to do, like monetary policy, the Fed is an independent agency, but in all other respects, <the Fed will> report up to the White House.
Basel three: a central banking Kumbaya enterprise 00:07:59:06 - 00:08:54:00
Now, they just issued a new executive order that says just this week. I don't think people out there in the markets or in the economist community understand structurally how much is changing right now. So let's go back to Bowman's comment about bank supervision and the lack of progress. What she was really talking about was the revisions to ‘Basel Three.’ I'm not sure those revisions are going to occur at all. In fact, I think there's a 50-50 chance that Donald Trump is going to withdraw from Basel entirely. You know, Basel is a ministerial understanding that was created by our old friend Paul Volcker. It's a global bank supervisory regime where the finance ministers from the G20 basically, initially tried to come together and have a common approach to regulating banks.
Basel has been a keystone for international banking policy…next? 00:08:54:02 - 00:09:21:20
So Mickey Bowman has grown up in a world where we had cooperation, consultation, even using that process to have our own regulations and laws in the US. Going back since I was a child, my dad used to quiz me about the Basel Accord at the kitchen table in Washington. So, you know, today people like Mickey Bowman, who have built their careers on this world are seeing that change.
Down-sizing coming to FDIC? 00:09:21:22 - 00:09:49:07
And once Donald Trump has his people at FDIC and the control over its office, they may not pursue Basel at all. You know, the FDIC, which is an industry funded agency in Washington, just like, oh, a rather large chunk of their people. And I think you're going to see more downsizing in the future. Why? Because I think the banks would like to see a reduction in their deposit insurance assessment.
Banks are pushing back against the Fed 00:11:01:01 - 00:11:50:02
And it's a bit of a mess from a technical perspective. Kathleen. I think there are a lot of people in the industry who would like to take a step back and simplify it a little bit. So what's happened now is that the large banks led by Jamie Dimon are pushing back rather hard. You know, at the end of the Biden administration, they wanted to gather more data about bank exposure to buy bonds and non-bank financial companies and this sort of thing. Jamie just said no. They said no. We're going to put it in other in our call report. So by saying no, he basically pushed back very hard on the Fed and the other agencies, and there's nothing the Fed can do. You know, the Fed's ability to craft bankers supervision policy now has been completely truncated by the White House.
Hassett…Next Fed Chairman? 00:11:50:04 - 00:12:40:18
They have to report up. So Kevin Hassett is Jerome Powell, his boss still in power, is now head of the NEC, the National Economic Council, the heir apparent to Powell. If Powell steps down, I think Trump would put Hassett in there as chairman. Well, there's a lot of people vying for that. That's a whole other conversation. We could… we could have a pool there. We should have a Fed chairman pool. Kathleen. Oh, my God. I love it. Central Bank. Central. .
Risk from Shadow banks and others 00:13:26:20 - 00:14:20:03
…the FDIC included some new fields in their taxonomy that required banks to essentially disclose the loans they have to non-bank firms. This goes back to Janet Yellen's work on the Financial Stability Oversight Council, where they were fretting about the risk of non-banks. And is there a risk out there among the big buyout firms and to big ETF sponsors and things like that? Yes, there's a risk in the non-bank mortgage sector. Not really. It's very boring and very profitable. So if you look at their results, you'll see. But the point is, is that I think for a lot of us who grew up in this regime of Basel and consensus politics in Washington, in a general sense, that this is how we should do things when it comes to managing banks, as Tom <Hoenig> has written about extensively.
The End of excess regulation…Trumpification? 00:14:20:05 - 00:14:41:12
Well, that's going to change now. The industry has suffered for years under agencies like the Consumer Financial Protection Bureau, the S.E.C., the Fed. You know, stress testing, all of this stuff that came out of 2008, Kathleen. And now they want to change it. They would like to reduce the expense of regulation. And Donald Trump is going to give them what they want.
A new game, a new structure, a new hierarchy 00:14:41:14 - 00:15:31:04
So if you're the Fed, all of a sudden, all the other activities that you used to conduct independently, you're not independent anymore. Even if you publish something in the Federal Register, you've got to get it approved by the White House. That's a big change. So going back to what Mickey Bowman said about Basel, it may not happen. Mickey… and I have enormous respect for her. She understands what happens when banks spill. Okay. She's been in that business, too. So, you know, this is a huge sea change. I don't even think people in the banking industry and on Wall Street generally fully understand what's happening. It's happening so quickly that they can't keep up with it. Well, is there going to be do you think it's going to include banks will get supervised, so sharp on so many things they're going to lose.
Conservative think tanks move to center stage 00:15:59:00 - 00:16:46:09
Right. If you get down to it, he's actually very conservative, 19th century kind of conservative. So when they come to the table and remember heritage Foundation, Cato Institute, all the conservatives that Howard Lutnick told us were going to be toxic, now they're driving the bus. You know, the project 2025 is the agenda in Washington, and they're going to do it. So that's why when we talk about some of these traditional roles for government and different agencies, we've got to realize that this is changing and it's going to, I think, have some impacts that are potentially quite negative. But just put out a piece yesterday about what happens when you fire 40% of the people at the Department of the Treasury.
Fannie & Freddie to be pruned? 00:16:46:11 - 00:17:33:14
You know, it looks like that. But listen, Kathleen, conservatives have always wanted Fannie Mae, Freddie Mac to get out of multifamily. They're now half of that market. They support a lot of urban properties here in New York City, for example, that are not really financeable with banks. This is kind of like sub prime multifamily. Okay. There's nobody out there willing to really finance these properties other than these agencies. HUD is also big. Remember, Signature Bank, the clients of Signature Bank are now orphans and they will go to agencies like HUD and Fannie Mae, Freddie Mac to finance small apartment buildings, which are not particularly profitable. You know, the big thing about cities like New York is that the smaller buildings don't work. They don't have enough square footage to be economically viable.
And much more…on Home builders…
Administration targets long term rates not the Fed 00:23:02:17 - 00:23:56:05
The trouble is the Fed really doesn't control the rest of the market. They particularly don't control long term rates. So when Scott Bessent, the new treasury secretary, got up and said long term rates are my problem. Short-term rates are your problem. I think that indicated to me that they wanted to kind of tone things down because, you know, when bank board stepped down or announced he would step down as vice chairman for bank supervision, I think everybody on the board of governors and the Open Market Committee kind of got their backs up because they're defending the institution. That's the natural response. Right. So they were worried that the president would come in. And this, by the way, is why Mickey Bowman is not moving. She's going to stay on the board because if she were to move, Trump could appoint a new governor and he could have it would name the governor chairman. Okay. What would my why where would Mickey Boardman and why would you could be a great FDIC chairman?
Fed not in the cross-hairs- 00:24:43:03 - 00:25:11:12
So my hope is, is that the Fed is going to not be the point of the conversation under Trump and that they're going to realize that it's real savings on the fiscal side, you know, smaller Treasury auctions that's going to pull down long term rates. You know, this morning the ten year is on a or 50. And, you know, mortgage rates looking at the market are should be around a seven and a half if you want to make money on the loan.
Focus is on the long rates the Fed does not control- 00:25:11:14 - 00:25:35:08
So, you know, we have a lot to do there. We don't want to see long term rates go higher. So, you know, starting a fight with the Fed publicly is not the thing to do. You let Kevin Hassett go talk to the chairman and have lunch and see if you can build a working relationship with them, How they deal with Basel and the banks is going to be a key test of this was probably going to be the first test this year.
Whalen’s concern… on the upside 00:27:00:23 - 00:27:21:02
But, you know, if inflation doesn't come down, what do you do? Number one, you've got a 2% target still. And number two, what if it starts rising a little bit? Then what do you do and what so what do you see inflation doing and why? I would tend to be more worried on the upside for higher inflation and a possible rate increase.
Fed is cutting rates but inventors are still yield-hungry 00:28:12:06 - 00:28:59:02
But I think the reality is, if you look at the behavior of investors, there is still so much cash sloshing around that asset prices almost have to go up. If you look at what's been going on in some of the risk free assets, particularly mortgage securities and agencies, people are buying them hand over fist of what are they doing, the restructuring them into CMO's. We haven't seen the kind of activity we've seen in CMO's in a decade, so it tells you that people are hungry for yield and they're looking for different sorts of securities. So if you're at the Fed, you know, do you try and push reserves down even though you're not quite sure where that floor is? Remember, we have a floor system now that they try and maintain, but can you maintain it?
Key issue is liquidity and potentially bond yields 00:31:04:12 - 00:31:25:15
So I think the inflation number is part of the narrative, but I think really what they're concerned about is liquidity. And if they see liquidity being in the Treasury market, for example, because dealers are up to their ears and inventory right now that they can't sell at current yields, then yields are going to have to go higher. That, I think, will be the challenge to Scott Bessent.
Trump must deliver fiscal progress 00:31:47:11 - 00:32:13:10
So, you know, if Trump doesn't deliver substantial progress on the fiscal side, then I think they're going to get punished.
Richard Christopher Whalen is an investment banker and author who lives in New York. He is Chairman of Whalen Global Advisors LLC and focuses on the banking, mortgage finance and fintech sectors. Christopher is a contributing editor at National Mortgage News. He’s a general securities principal and member of FIN
From 2014 through 2017, Christopher was Senior Managing Director and Head of Research at Kroll Bond Rating Agency, where he was responsible for ratings by the Financial Institutions and Corporate Ratings Groups. He was a principal of Institutional Risk Analytics from 2003 through 2013.
Over the past three decades, Chris worked as an author, financial professional and journalist in Washington, New York and London. After college, he worked for the House Republican Conference Committee under Rep. Jack Kemp (R-NY).
In 1993, Chris was the first journalist to report on the then-secret FOMC minutes concealed by Fed Chairman Alan Greenspan. Chris worked at the Federal Reserve Bank of New York, Bear, Stearns & Co., Prudential Securities, Tangent Capital, and Carrington Mortgage Holdings.
Christopher holds a B.A. in History from Villanova University. He is the author of three books, including “Ford Men: From Inspiration to Enterprise” (2017), a study of Ford Motor Co and the Ford family published by Laissez Faire Books; "Inflated: How Money and Debt Built the American Dream" (2010) published by John Wiley & Sons; and co-author of “Financial Stability: Fraud,
Share this post