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Banks Are Hiding Credit Losses (Here’s How) | Bill Moreland of BankRegData

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I'm walking through every single segment

of the economy, construction,

apartments, residential, right? And I'm

showing you how the largest banks,

they're just manipulating the out

of the data.

>> We live in a credit pmpkin village. >> Correct.

>> Correct. Yeah.

Yeah.

>> Meaning the delinquencies you see are

not accurate and even the modifications

you see are not accurate because the

rules have been changed.

>> Fake. Completely fake. Yes. Today's

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I'm speaking to someone who I've been

wanting to interview for a very long

time. His name has been whispered about

in the corners of Credit World, Bank

World. I'm speaking with Bill Morland of

Bank Reg Data. Bill, welcome to Monetary Matters.

Matters.

>> Thank you, Jack. I appreciate the

opportunity to get some time in front of

your audience.

>> Bill, in bank world, which I am a casual

observer of, you have many measures of

credit indicators, whether it's

delinquencies or charge offs indicating

that uh credit is actually easing. So,

credit stress is going down,

delinquencies are going down. What do

you make of that portfol of of that

picture when you look at, you know, all

of these big banks reporting their

quarterly earnings and having credit uh

their credit losses go down? Look, this

whole credit problem that we're having

with delinquencies, and we are, but we

can see that the delinquencies are

starting to get better. Well, that's a

myth. There's a lot of things going on

behind the scenes that are driving the

non the non-performing loan numbers

appear to be inverting for a number of

banks and improving. In some instances,

that may entirely be true. Um, for a lot

of those banks, it's a manipulation of

either uh note-to-note financing to get

them off the balance sheet temporarily

and non-depository financial institution

funding of that or andor it's um doing

enormous amounts of loan modifications

at levels we've never done before and

then changing the rules around the loan modifications

modifications

reporting so you don't see it. In some

ways, the story is improving. Um, in

many ways we are manipulating the way

that we report data to um, drive

numbers. And and what I mean by that is

it's it's a it's a it's an arcane

subject in banking, but I'm not some

guru. I'm a credit collections guy. I've

managed credit and collections at Wells,

American Express. I ran collection

shops. I ran risk shops. I've done loan

modifications. I know exactly how they

work. I know I I'm a fan of them, but

it's like medicine in moderation, right?

What you can do as a risk manager or

collection manager is you can do a a ton

of loan modifications.

These are unprecedented levels of loan

modifications. And when we say loan

modifications, Jack, what we mean is,

hey, Jack, you owe us $10,000 a month on

that little uh medical commercial real

estate loan that you have for your

medical office. I can't make it. All

right. Well, you got to make it. Well, I

can't. So, I'm going to go bankrupt and

you're going to get nothing or we can

negotiate. And so, they lower it to

eight million, $8,000. So, when we say

loan modification, the loan modification

negotiation perspective is done is to

keep you out of delinquency. The whole

point behind it is to get Bill Morland

through a time frame that allows

hopefully the recession or whatever

downturn we're in to turn back up and

the business to pick back up and

hopefully not go delinquent, not go

charge off. So it very much predicts

failure. So if Bill Morland is a cohort

and a lot of guys, small businesses like

Bill Morland, bankrag data start to have

stress in the system, one of the ways

that you can mitigate that stress is to

lower payments. And if you lower enough

payments and you lower it by a

substantial margin, um what ends up

happening is your delinquencies as an

echo will start to get better. So are

they better or are we just providing the

illusion that they're better? And and

one of the enormous significant changes

after five decades, four and a half

decades is the FDI in the last couple

years, the regulators, the policy makers

at the Fed, the OC, the FDI, Fazby, um

the BPI, the Bank Policy Institute,

um they changed the rules on how we

report loan modifications, which makes

getting a true picture of what is

happening much more difficult. So when I

look at many big banks and small banks

as well for that matter reporting lower

delinquencies, lower charge offs, you're

saying that those big banks are actually

moving those loans from delinquencies

and they're modifying them before they

go delinquent. Is that what you're saying?

saying?

>> Well, they can

technically you're not allowed to modify

a loan if it's in delinquency. Um at

least you weren't back in the 90s when I

did it at Wells Fargo. And I'm a big fan

of loan modifications. It's a tool in

the toolkit. Um the problem you run into

is it's a gateway drug. Once you step

across a certain threshold, it becomes

the de facto way. So please understand,

I want the I want the audience the wa

you know the people watching to

understand loan modifications in in

moderation are a very good tool. It's

when you get extreme. And so what's

happening is we've got a lot of extreme

loan modifications. So when we start

modifying those loans at such a level

that it gets beyond what a bank is

reserving is allowance and loan loss

reserves right then your capacity to

absorb losses and modifications will

solve a problem temporarily but if

you're not modifying good people you're

modifying people who are struggling and

if you know that that pool has an

elevated charge off risk just by

lowering the payment that doesn't

resolve the issue. What we found at

Wells, at least in our population, was

if we went in with a two-year charge off

rate of in excess of 20 22%.

Modifying loans, they worked great for a

year, but once you got into month 15,

month 18, month 21, past that loan

modification, your charge off rate is

10, 12, 15%. So, you're you're saving

some of these borrowers and bringing

them back into what I'd call a cured

status or ability to make the payment,

but your two-year charge off rate is

still a considerable multiple of your

base portfolio. So, that's why the

that's why the FDIC tracks loan

modifications. It's part of the Texas

ratio. Um, it is the single biggest

predictor of bank failures in the GFC.

And I did provide if if at some point

later if you want to walk through and

see what those numbers are and it's

pretty remarkable. So when we change the

rules to lifeate reporting what we've

done view it as a ferris wheel and so if

I get my payment modified I get on the

ferris wheel I'm making a lower payment.

I just go around and I keep making my

lower payment. I never get off. Well,

what they what what the policy makers

did in in 2023 Q1, right when commercial

real estate was going up, consumer

delinquencies were going up, right when

we started to have these huge

delinquency credit issues, we changed

the rules to you get on the ferris

wheel, you make 12 payments, you can get

off the ferris wheel. So as a risk

manager, as a collection manager, if I

just keep manipulating how many people

at a steady stream are getting on that

loan modification ferris wheel over a

course of two, three years, which we're

now two, two and a half years into this

cycle, I could have modified five, six,

seven, eight% of my loan book and you as

an observer from the outside would only

ever see one and a half to 2%. So when

you see the delinquencies climb and then

the echo is in 2025, two years later,

you start to see the delinquencies

coming down. It's because people are

getting on that loan modification ferris

wheel. And that is a very clever way of

managing your delinquencies. But it

doesn't solve the problem, right? If

your two-year charge off rate is still

elevated, you are re, you know, you're

resolving some of the delinquency

issues. But if your two-year charge off

rate still a problem, what are we going

to have in 2026, right? Or what are we

going to have in 2027? But here's where

the reporting change gets a little um

curious. I don't believe there's

anything in the rules that allow that

disallow the ability for a bank to just

modify a loan again. And I've

specifically asked policy makers, hey,

I'm a devious little guy because I've

done this before. I couldn't write the

rules better as Bill Morland at 27

working at Wells Fargo doing this. But

Bill Morland at 27 at Wells Fargo would

have said, "Sweet. Once I get past that

12 months and that borrower gets off the

ferris wheel, if they go back into

delinquency, I just lower their payment

again." So theoretically,

will we ever show delinquencies? Right?

And where a bank would see this is in

their net interest margin, their loan

yield. At some point, if they do this on

enough of their book,

>> their loan yields will start to go down.

So there is there is a regulator, but

right now we don't see it, right? We

don't we don't see it.

>> I think a lot of bank investors, myself

included, we look at the quarterly

earnings report. We look at

presentations. We also look at uh the

SEC filings, the 10 QS and the annual

report, the 10K. I believe in the SEC

filings, they do talk about loan

modifications. To be honest, I really

glazed over them until I started

speaking with you. But in the in the

presentations and in the quarterly

earnings reports, uh they don't I don't

believe they really talk about those

loan modifications at all. So, I think

there's a whole sleuth of whole slew of

bank investors particularly like in you

know, passive uh indices and such who

have no idea what this is going on at

all. Right.

Yeah. And you would and you wouldn't

know, right? So, um, Fazby made this

change first, and it isn't Fazby, it's

the big banking lobby. And I provided a

link to the BPI, the Bank Policy

Institute a little bit further down. Um,

in the document I sent over that

basically, it's it's the JP Morgans,

it's the Goldman Sachs, it's the Wells

Fargo, it's the Bank of Americas. Let's

be honest, it's the biggest banks,

right? So they started lobbying

the Fazby to change the rules. Now why

Fazby would want to do this is beyond

me. Um

but I also am old enough to remember we

had non-GAAP. There was no non-GAAP.

There was no disallow this. I mean when

I went to grad school back in the early

90s there was no such thing as non-GAAP,

right? Or a one off. But this is Fazby

was the initiator behind this. And then

what happened is it's my understanding

that they started to lean on the

regulators, right? Because there becomes

the honest reporting. So very subtly as

Fazby changes the way they require banks

to report loan modifications and they

just disappear. Loan modifications went

from 7172 billion at the end of 2022 to

19 billion. We wiped away 51 billion

dollars of collective knowledge about

what banks were modifying. 33% of those

were or 33 billion of that was

mortgages, which raises a whole bunch of

questions. Why are we why do we have $33

billion of modified mortgages in the

greatest housing market of all time?

>> Wait, modifications went down or up?

>> They went down, but they didn't go down.

They disappeared. So instead of having a

life-to-date ferris wheel that gets

bigger and bigger and bigger, they got

the ferris wheel. If you've if you had

your payment lowered and you made 12

consecutive payments, you can get off

the ferris wheel. So we went from $70

billion of loan modifications on the

ferris wheel to to 19 billion. So they

didn't raise the payments back on those

guys. They're still having lowered

payments, but our collective knowledge

of this got removed, right? So, if

Fazby's reporting one way and they

change it and banks just start reporting lower,

lower,

banks aren't going to say, "This is what

we used to report, but now the Fazby's

letting the Bank Policy Institute and

Fazby's is allowing us to report lower.

We're not going to report adjusted and

real. We're going to report adjusted."

But there was this tugof-war between the

OC, the Fed, and the FDIC. Um, it

predicts failure and and we'll walk

through this document in a second. I'll

ask you to bring it up, but it this is

the single biggest predictor of bank

failures in 2009,10 and 11. This is not

an insignificant issue. So, it's my

understanding that the the the some of

the regulatory bodies were on the same

side of the table as Fazby and they

happen to be the ones that manage the

biggest banks, right? So, it's they have

an incentive. Um, but I don't think it

was purely I don't think it was

unanimous. I think there so you can look

in the instructions. It went back and

forth. Cumulative life to date got wiped

away in 2023 Q1. Then it's rolling 12

only. what you report in the last 12.

And then that got wiped away and it went

back to life to date. And then some

banks are reporting something. And so we

were having to teach our clients, look,

if the bank is an OC bank and you see

that their delinquent, you see that

their modifications disappeared, it's

probably fake. It's probably a reporting

issue, but there's no way to track it,

right? And there's no there's no honest

reporting anywhere. But it's my

understanding that there was some

disagreement on this that went around

for a couple of years and apparently it

was just resolved July 11th. The FDIC

sent out what's called a financial

institution letter and I provide a link

on it there that basically says, "Hey,

look," and it's one of the shortest

fill. A financial institution letter is

a fill. It's one of the shortest fills

I've ever seen. Basically, hey, moving

forward in 1231 call report 2025. So

this quarter four, you only have to now

report rolling 12. And by the way, you

can actually start reporting it in Q3.

So party on.

So we were starting to get honest

reporting about what how delinquencies

are coming down,

but they don't want to show that. So

what we do is we change the rules so

that there's no way to know. And the

worst case scenario is it does allow. I

have pointlank allow asked several

policy makers. When I say policy makers,

I mean regulators across the three, hey,

can Bill Morland just get his payment

lowered again if I have a problem as

soon as I get off the ferris wheel. And

they're like, uh, there's nothing in the

reporting as it is now to keep that from

happening. So when you see great

delinquencies continue to happen and the

trend turned down and hey commercial

real estate was hideous but now it's

getting better green shoots understand

what's happening behind the scenes is

it's an illusion. You live in a pmpkin

village and the it's getting bigger and

we change the rules to make it to where

we can't see the edge of the village

anymore. We really honestly don't know

where that line is. It's been so

blurred. We live in a credit pmpkin village.

village. >> Correct.

>> Correct. Yeah.

Yeah.

>> Meaning the delinquencies you see are

not accurate and even the modifications

you see are not accurate because the

rules have been changed.

>> Fake. Completely fake. Yes.

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interview. So what started happening in

um so this all goes back to the these

things these credit problems don't just

happen right just like the Silicon

Valley bankled liquidity problems but it

wasn't just Silicon Valley bank there

were several problems that had this and

I think there's probably a few banks

that didn't pass the stress test because

you can see what their actions were in

the call report and it's like yeah

there's no way in hell that bank passed

the stress test but we're not going to

say that right you realize that all the

vested parties have to know what's going

on. If if our tiny little company, but

you know, we're we're we're small, but

we've got a lot of clients and our

clients are pretty well connected when

they can see what's going on and you

start to see that, hey, Silicon Valley

Bank was technically bankrupt a year

before they went down in 2023 Q1. They

were bankrupt in mid 2022 and a lot of

about 40% of the banks were bankrupt at

that point in time, but we don't talk

about that, right? in solvent if you if

you accurately account for their uh

securities and their held to maturity

securities based on the interest rate

losses. They would argue though that if you

you

>> factor in their liabilities are also

worth less because they're um you know

paying 1% when interest rates are at 5%.

Bill, so I've covered Silicon Valley

Bank and the duration issues at the

heart of the banking system like so much

on this show and I think it's it is

quite transparent like yeah they bought

mortgage back securities yielding 150

basis points and Fed funds was at its

peak 540

basis points and you know now now lower

like I think those issues are largely

behind the banking system. I want to

talk about credit. I want to talk about

yeah the the commercial real estate, the

credit card loans, all the uh very large

line items in the American banking

system that indicate lower delinquencies

and lower charge offs. So you're like

talk talk to me some examples about how

this is a credit pmpkin village. We

could talk about you know Bank of

America's um commercial real estate

modifications. We could talk about

Discover's credit card. you you take

walk us through and and I'll I'll put

some charts on the screen for us through

through your your service bankreak data.

>> Yeah. So the the first thing that the

first thing to understand is these

happen in waves. Um and and I I I'm

adopted Texan, although we're not in

Texas, but we'll get back at some point.

And so you live in Houston, you think of

hurricanes, right? And they're there

storms coming into the Gulf that are

going to start hitting. And some of them

hit, some of them come close. And so the

credit issues didn't all happen in in at

once, right? And and and once again, the

driver of this was $5 trillion of new

money at the end of 2019 to 2022 Q4. So

$5 trillion, 38% more money showed up in

the banking system. And how that money

was utilized because banks have to put

it to work to generate interest income.

Otherwise, you know, as interest rates

go up and they started. So basically

banks did one of two things. they they

they bought securities or they lent. The

banks that started to lend aggressively

in commercial real estate um had the

biggest problems and the consumer

lending that took place. But the

consumer was fake during this time,

right? And and I'm a credit guy. I build

models. That's what I did for 13 years.

And I did it in consumer portfolios,

business, but a lot of mostly consumer.

If you stop making rent payments and you

stop making mortgage payments and you

stop making student loan payments, what

do you think you're gonna have as

discretionary income? It's gonna go up. Yeah.

Yeah.

>> So, in 2020 and 2021, discretionary

income for the consumer went way up.

Well, what did they do? Well, the the

the prudent ones went out and started

paying down credit card and they started

paying down auto loans. So, all of a

sudden, we had a consumer that looked

really good,

>> extremely strong. And you say fake. I

think there definitely was an exogenous

event, but it was really strong because

of an exogenous event that if you don't

pay rent,

>> that's fake.

>> Yeah. And you're getting checks from the

government, you're Yeah. you're going to

be extremely strong.

>> Yeah. And that's just part of it. And

so, look, I I I see the world I see the

world through the data.

Not making payments on student loans.

What it is is economic. Do you know we

fill people up full of debt? That's what

I did. My job was to find ways to give

Jack more money so that he keeps

generating more interest income for my

bank. And that's great. But what you try

to do as a risk manager is fill Jack all

the way up to the capacity that he can

absorb and that no more. No more. If you

go too far, then you have to lower

payments, right? And so that's why this

all works. So what happens?

>> Isn't isn't US household debt quite low

as a percentage of disposable income or

as a percentage of GDP? that's going to

be a that's going to be on my purview of

commenting on um I I can I I can flat

out tell you it's to a point where

people can't pay it anymore. And so when

you see people when you see credit card

delinquencies go through the roof, they

can't pay it. When you start to see

portfolios like home equity loans, go

into your local bank about a year ago

and now you start to see on the board,

hey, talk to us about a heliloc home

equity line of credit. For 54 quarters,

that portfolio shrunk and shrunk and

shrunk and shrunk as the economy

expanded and jobs got really plentiful.

And right, people didn't need to tap

into their home equity to get a line of

credit. But that inverted like nine

quarters ago. Same thing with juniors.

one to four family junior leans, a

second mortgage. Those inverted and

started to climb. So those are

counteryclical. So when we had all that

money pump into 2023, a lot of is the

echo, it went into loans in 2022 and

2023. So the consumer >> Yeah.

>> Yeah.

>> and CRA, commercial real estate were the

two the two first two storms, right?

Getting back to that analogy, the first

two storms we could see coming in were

like, "Oh man, commercial real estate

delinquencies are higher, quicker,

doubling faster than they did in 20089."

And I overlaid the two and I showed

them. It's like, dude, this storm coming

in is is

>> All right, Bill, let's talk about the

data. I mean, you you are Mr. Data.

You're you're the principal of a company

called Bankreg Data. You have the data,

but I'll tell you as someone who, you

know, looks through all these banks, US

Bank. I'm like, their commercial real

estate losses are literally negative. Like

Like >> amazing.

>> amazing.

>> They're Yeah. Like,

>> you know, you refer that you referred to

the data that I looked at. You you

referred to that as basically like a

press release, which I guess technically

it is in some instances. Or

>> take a look at Bank of America.

>> Yeah. Let's look at Bank of America.

>> Yeah. Basically, what we're looking at

here is this. This was the second

largest commercial real estate non-owner

occupied lender in America. And what

non-owner occupied is is the FDIC the

call reports the FFIC they basically

make a delineation between non-owner

occupied and owner occupied both are

commercial real estate but nonowner

basically means the the debt the loan is

being repaid with rental income owner

occupied means it's being paid back from

business proceeds. So what we're looking

at here is primarily commercial real

estate that is is developed in the loans

out there and it's being paid back

through rental income. So if you take a

look at the NPL chart, so just to the

left of that mods right there on that

NPL, let's lay let's lay the groundwork.

So scroll down a little bit where we can

get there. You go right there. Perfect.

So in that first chart at the top that's

that blue brickish. Notice how we go

from 275 million, 286 million up to 2.25

billion. Now, every bank in America,

every large bank, Wells, JP Morgan, Key,

PNC, Fifth, they all look exactly like

this. And that second data element where

all the red is, if you look at the table

to the left, you can see that they went

from non-performing loans went from 78

basis points, 79 basis points, and

notice how they skyrocket within a year

to 4.88, 5.78.

But then you notice that it's just kind

of capping out. And if you squint real

hard in 2024 Q4, which is that $2.02 2

billion figure that that third from the

right data point in the in the blue

chart. You squint, it looks like it's

starting to get better. And so basically

this is the green shoots. And now you

see the percentage is coming down. So

we've gone from 5.78, 5.79, 5.73, 5.21

green shoot. Notice how the

delinquencies go from 2.1 to 2.0 to 1.9

to 1.775.

This is great news. So this is Wells.

This is uh JP Morgan. This is every

single big commercial rate real estate

lender. So scroll back up to the top and

click on the mods. So that modification

right there, it's fake. What is

happening during the same time the

delinquencies are going through the roof

is banks, the biggest banks were just

starting to modify an enormous amount of

their loan portfolio. So you can see

that from 2023 Q1 and we can come back

to that data point because that's that's

the new rule. That's the rule where you

only get on the ferris wheel for 12

months. Once you make the payments for

12 months, you can get off the ferris

wheel. And you see that in 24Q2. See how

the number drops from 2.03 billion to

1.67 billion. That's not because the

people are the the borrowers with the

reduced payment are paid off or sold or

charged off. That means it's a

reporting. So, it's a reporting. It's

it's fake.

>> It's a 12-month thing. So, they they

changed the window of it used to be if

you were modified, you were always

modified. But now, if you've been making

payments for 12 months, you're suddenly non-modified.

non-modified.

>> The last real reporting figure you have

on this table is the second row of

content, you'll see 2022 Q4 with 36.059

billion of non-owner, 512 million of

loan mods. So at that point in time they

had modified 1.42% of their book of

commercial real estate non-owner and

then you see the number in 2023 Q1 drop

300 million to 209 and drop 0.58. Right?

So we lost 90 basis points of loan

modifications. No, we didn't. It's a

reporting change. They're still on the

book. those $300 million

we're they're we're probably upwards of

600 million in 23 Q1. But then you see

the ferris wheel start to get loaded

back up, right? 210 million uh 462,

1.21, 1.8, 2.03, and then boom, it dips.

So what was happening here is they

modified and look at the percentage. The

percentage went from 58 basis points to

133 to 3.58 to four. We're up to we're

up to eight and a half percent of their

book. So

>> eight and a half percent of their

non-owner owner commercial real estate

loans modified not of their total loans

of their of this specific class.

>> Yeah. So where this really becomes

the most obvious to look at is in the

upper right you can see a table with a

bunch of blue links. Loan amount 34.09

billion delinquencies 1.8 billion. So

that's what they're reporting which for

a delinquency rate of 5.334

but remember that number is starting to

come down but we've modified 2.9 billion

1.9 billion of that is what we call

extend and pretend the 949

is put on nonacrrual. Nonacrrual is

means that the the borrower is the bank

is no longer recognizing interest and

fee income on the borrower because they

the likelihood of paying back is very

low. So why recognize fee and interest

income? Try to get principal payown. So

typically a bank is supposed to be

putting 80 90% of their loan

modifications on non-accr. But when

times get stressed the regulators look

the other way. And so to their credit

they put 30% on. But that's fake, too,

because if you're if you're taking

people off of the ferris wheel, they're

coming off the 1.968 part of the ferris

wheel, which means what's left on the

ferris wheel across time will

progressively get worse, right? Because

as more people start getting off, but

the problem is is what you're looking at

there is we have $1.96

billion dollar of extend and pretend

that's bigger than the actual

delinquency. So if you scroll up a

little bit to the green chart or the

green the green menu on that far right

on that submen you'll see portfolio

stress delinquency and performing mods.

So this is a this is a bankreg data

metric and and what this is is we say

look if you can manipulate delinquencies

by just doing more modifications and

performing is a misnomer. performing

means we've lowered Bill Morland's

payment and he's making the payment but

it's read it as lowered payment to avoid

delinquency but the the regulators the

policy makers call that performing modifications

modifications

it's 11% of their book so as you modify

a greater and greater percent of your

portfolio you're going to eventually

start to have the delinquency portion so

go back to total delk or NPL's total

delk is going to include 30 to and

that's on that that that chart where it

says mods just to the left.

>> Yeah. So, magically there's your green

shoots. There's your delinquency

starting to come down.

>> And again, for people watching this on

on YouTube with the chart, this is total

delinquent uh loans of Siri non-owner as

a percentage of total Siri non-owner,

not as a percentage of total loans.

>> No, it's just their it's their Yeah,

it's just each of their portfolios. So,

if you scroll down a little bit, you'll

see the rest of their portfolios, right?

And so there's your book that's all

other CNI and and you basically can

start cycling through and that's so this

is the one that's got their biggest

problems. Although you do see that real

estate and foreign offices looks to have

a problem at 8.49%.

Um but it's a smaller portfolio but it's

pretty big delinquencies. But every big

bank scroll up if you will and you're

going to see a a box in the upper right.

Put in WFC

>> Wells Fargo where you used to work.

>> Yes. So you see the same this is the

largest lender. You see the same

delinquency table. Now go to mods and

you see the same thing. So magically

every big bank with a commercial real

estate portfolio all had the exact same

thing happen at the same time. Their

delinquencies are going through the

roof. Now if you click on the review

button on the far left on that so we had

the mods. Click on review.

Does it look like Wells Fargo wants to

grow their commercial real estate portfolio?

portfolio?

>> No. Their sir non-owner occup is shrinking.

shrinking.

>> Now it may have inverted. Maybe. Right.

If we look at that chart, maybe in 25 Q2

it did. So what you've got going on is

every big bank is getting out of

commercial real estate lending. Every

big bank had huge delinquencies and

every big bank modified them. All these

things happened at the exact same time

almost like they're working on the same

playbook. So go to delinquencies and

click on JP Morgan.

>> Total delinquencies.

>> Yeah, total delinquencies right there.

Go up to the search box and put in JPM.

JP Morgan Chase. This is the third

largest. Woo doggy. Look at this. So

they were not as bad. Everyone else is

peeking out at six. They peaked out at

four. But go to loan mods. Once again,

same story.

>> So at the exact same time, every single

bank started to modify a greater and

greater percentage. So they

delinquencies all started climbing. And

remember, this all happened in 2023. So

they were getting ahead of this problem

by starting to change the rules on loan

mods. But what happened was there was

some disagreement between the regulatory

bodies, the OC, Fed, and the FDIC about

what was supposed to be reported and

that that resulted in some banks

reporting. And so you can see, look at

the 24 Q2 figure where it drops from 150

to 129 billion. It didn't drop. That's

people getting off the ferris wheel. But

then the regulatory bodies, the FDIC

specifically, started to say, "No, no,

no, no. You need to report cumulative.

You can't get We allowed everybody to

get off the ferris wheel in 23 Q1.

That's why it went from 51 to zero. But

once you're back on the ferris wheel,

you can never get off." So, you notice

how the number skyrockets from 129 to

265. The 129 number is fake. It's

probably 185 to 210. But that's how the

reporting went back and forth, back and

forth, back and forth. But this is what

we talked about at the very beginning.

They changed the definition starting.

It's now permanent. Um there will no

longer be a cumulative life-to-ate

performing TDR reporting um as of 29

2025 Q4 and many banks will start doing

it in Q3. And by the way, many banks are

already doing it.

So, um,

>> and is there going to be any way to

track that whatsoever? >> Zero.

>> Zero. >> No.

>> No.

>> Yeah. So, if you'll do me a favor, what

I would like to do is let's see if

that's just the only portfolio, right?

Maybe commercial real estate's the only

portfolio where this has happened. So,

bring up um Discover and sell D11. So,

the Discover card portfolio,

>> DFS loans 2012. Now, Discover's gone,

right? They're gone

>> with Capital One. I'm somewhat convinced

that was perhaps a shotgun marriage, but

I think I'm very much in the minority on

that decision, but Discover I think was

not doing so well.

>> Okay. And Bill, I want to say so

commercial real estate loans and you

know, you obviously know the data, so

you know what I what I'm going to say is

true. And if if if you correct me, then

I'm going to go with you. But I think

what I say is is true, which is you're

correct. Wells Fargo is the largest uh

definitely one of the largest commercial

real estate bank lender in the United

States. However, there it is definitely

not the top most concentrated CR lender

and and I just actually had in front of

me the percentage. It was a single-digit

percentage of their loans are non-owner

CRA loans. Like there are uh regional

banks that you would have heard of but

you know many people would not have

heard of unless they happen to live in

that region whose CRA you know lending

as a percentage of their total loans is

30 40 50 or even higher percentage. So

Wells Fargo, like all of that, all of

those loan loan mods could go to zero

and Wells Fargo would still be a solvent

institution. And and likewise with JP

Morgan, you know, we're talking about,

you know, a billion here, a billion

there. Like JP Morgan's net earnings on

an annualized basis are like 56 billion.

So it is somewhat of a drop in the

bucket if it's just CRA for big banks.

However, you're now we're now going on

to credit cards, which is a huge

percentage of of of loans for

particularly like JP Morgan and Discover

and Capital One and the like.

>> Yeah. Yeah, I mean we there's certainly

no doubt. I think the CRA concentration

ratio in the popular press. It's easy to

criticize small community banks or

mid-size community banks that don't

advertise with you. I had several people

u in the press and they're all names you

would recognize uh periodicals, news

organizations on cable.

They don't want to talk about what's

going on in JP Morgan. Wells. We'll come

back to some of that. But yes, if you

would go to um essentially card mods,

correct? So discover is gone, but if you

look at this, it's the it's almost the

exact same chart. So go to NPL's and

basically there's

>> Yeah, there's the same story, right? It

looks just like CRA. So those are the

two storms coming in at the same time.

Delinquency started to climb. Everyone

started to panic. We changed the rules

on loan mods. click back on mods and um

that's it. So the 1.8 billion to 631

million drop in 23 Q1 was changing the

rules, right? So really whatever we're

sitting at at 5.4 billion, you have to

add 1.2 billion to that. We're really at

66 6.7 billion. But even with the 12

months life to date, so this is 5.5%

of the credit card portfolio at

discovered had payments lowered. If you

scroll back up and look at the table to

the upper right, you will see that the

modified is 5.415. So maybe if you'd

highlight that for the viewers, 5.415 in

that upper right modified.

>> Notice how 16% of it is delinquent.

So 425 is 30 to 89 past day days past

due acrewing interest. 406 million is at

least 3 to four months past due acrewing

interest and 15 million is not acrewing

interest at all. So what they modified

was 5.4 billion 16% of it nearly 16% was

already delinquent again. So if you can

just keep modifying lowering payments

you can draw you can manage your

delinquency numbers. pull up Sally. So

go to just Sally May. S A L L I E. And

once again, lo L loans 2012. When it

pops up, this is a monoline lender,

right? So loans 2012. Now go down. And

so scroll down a little bit till you get

to individual others. That's going to be

their student loans. Now those are

guaranteed I believe. Click on mods. And

so what this is is 7% of the

student loans at Sally have basically

been modified. And the delinquency rate

in the upper right, 1.557 billion.

Notice how 83% of it is paying, but 17

16% is delinquent. So you're running 16

perent delinquents on people who've had

their payment lowered and they still

can't make it. So, pull up TFC truest.

Put in TFC

>> and scroll down. Go to uh auto loans.

>> Scroll down a little bit more.

5 and a half% have been modified. And as

it starts to taper off, 137 144,

understand those people getting off the

ferris wheel. So, those numbers aren't

real. And if you look at the upper

right, 23% delinquent or on non-accr.

So what truest is modified is what

percent of their book? Scroll back down.

5.5. Yeah. 5.18. So we've lowered

payments. So we've gone from four years

on a car payment, right? A loan to to

five years to six years to seven to

eight. And now we're lowering those

eight years.

>> So 5.18% of their auto loans are on

modification. That sounds like a lot,

but only 1.49% of their total loans are

modified because they also have

commercial and industrial. They have

CRA, they have construction loans.

>> Skip on multif family. You'll see multif

family right above it.

>> 5.52, but they only have $5 billion of

loans, which you know relative to $319

billion of total loans. So

>> yeah, but 70 billion of that's one to

four and that's the government dime. So

this is where you have to be careful

talking about concentration. Okay,

>> the all other loans. Click on the all

other loans.

>> What is what is all other loans?

>> What is this all other category? All

right. Now, click on states. First of

all, notice how the number skyrocketed

from 50 to 57 to 63 to 70 billion. So,

click on So, this is a catchall. 13

billion of it is money to your local

governments, right? Cities and states.

Click on non-depository financial institutions.

institutions.

>> Wait, shouldn't shouldn't a municipal

bond be classified as a bond?

>> It's a loan. Okay, interesting.

>> It's different. So, those don't count.

5% of their book is loans to local

government. So, this is where you have

to be careful saying and and I'm with

you 100%. And this is what the common

is, well, yeah, but CR only makes up X

or CNI only makes up Y. But, dude, so

much of their loan book is fake. Click

on non-depository financial institutions.

institutions. >> Okay,

>> Okay,

>> click on that bad boy. Huh? 35 billion.

Well, what is that? Well, if you scroll

down, you'll see their components.

Mortgage credit is 3.5 billion. Business

credit is 20 billion.

>> So, these are all all other loans, which

is a category for Truis. There's state

municipal, which is not municipal bond.

It's loans to states and municipal. I

didn't know that was such a big market.

So, thank the non-depository financial

institutions. We will suspend that, but

we'll get to it in a moment. But that

would that be like a loan to a private

credit fund?

>> Well, yeah. And that's that's part of

it. carry securities. What are we

looking at here?

>> So, you have rich customers that are

cash poor. I mean, they're not poor, but

their assets are all tied up in in

something else, right? Non-liquid

assets, but they're very wealthy. So,

they got stock, they got homes, they got

commercial real estate, they got

businesses, but they want to go out and

buy treasuries. How do they do it? Well,

they go to truest and they borrow $6.4 4

billion to speculate in the securities

market. So why is everybody all of a

sudden wanting to get purchase carry?

These are these are loans to rich

individuals that want to go out and buy

treasuries or mortgage back securities

because they're speculating.

>> What about equities or is it just

treasuries mortgage?

>> My belief it's securities. I don't

believe it's equity securities but I I

can't definitively answer. That would be

even more alarming.

My understanding was this was uh

treasuries munis. Um so you know go

ahead and click in JP Morgan put in true

>> this is huge JP Morgan. So in their

purchase carrying securities in 2023 the

second quarter it was 13 billion and now

it's $127 billion. That's a huge increase.

increase.

>> Correct. So basically dude n and a half%

of JP Morgan's entire loan book is

lending. And I'm not saying that this is

not a good risk adjusted loan for them,

but this is not what you would consider

benefiting Main Street, right? This is not

not

>> it's not if it's not a systemic risk.

And I think like lending to a hedge fund

that's doing a carry trade, you know,

maybe maybe it is helping society, maybe

it's not helping society. But I'm I'm

just saying that it's like generally

hedge funds tend to pay their loans

back. And when hedge funds don't pay

their loans back, it's it's in the news,

you know,

>> sort of like AIG was able to pay all

their insurance claims in 2009. Uh well

because they got taken over by the government.

government.

>> No because they failed. So we can say

there's no risk. There's always risk.

The question is is our banks setting

aside enough reserves

>> for but but we're talking about levels

we've never seen before. Go to NDFIS

>> This is big. So describe what a not so

these are loans

>> and it says components of non-eport

financial institutions mortgage credit

business credit consumer credit but it's

not actually lending to a mortgage a

business to consumer if it if they were

they wouldn't call non-depository

financial institution they're lending to

a non-depository financial institution

who is then making loans to these people

so is it like kind of like a warehouse

line type thing

>> it's going to be all the above um and

I'm going to give you some good examples

and I'm going to give you some really

that's what's in there um so Yes. Notice

how the mortgage credit one. So banks

don't want to lend anymore in mortgages.

They don't. But they can basically

wholesale and and fund and I'm not going

to say rocket, but that's the most

common one, right? Rocket mortgage goes

out and does all the mortgages. They

underwrite a bunch of them. Well, they

have to get the funding from somewhere.

And I I suspect they they got much more

sophisticated, but there's a lot of

other intermediaries. So mortgage credit

will essentially be funding mortgages.

Business credit could essentially be um

for example, you got a small business

lender that wants to do receivables

backed, right? So there's a number of

these guys. One's in Atlanta. They

basically do uh lending to Bank Data,

Children's Lane Partners is our, you

know, corporate structure. I need money.

They basically lend to me and it's

backed against my accounts payable,

right? And so that's the collateral.

Well, they want to grow. So instead of

Wells going out or JP Morgan going out

and lending to those people, they can

just basically lend to those

intermediaries. So they're competitors.

But the beauty of this is are we sure

they have to hold as much reserves and

capital against these loans or is the

risk waiting different? So some of these

are legitimate businesses. But I would

tell you from a risk perspective,

what happens if the if you're

disassociating the risk decision from

the bank to the business intermediary?

What happens if the business and

intermediary risk manager leaves and the

person that replaces them is not that

good? Is that loan still as strong or

does it get weaker? So there's that

risk, but there's also and this is a

real example. I gave a presentation to um

a bunch of people that were basically

looking for banks that do NDFIS,

non-depository funding. And so they get

this they they they're the they're the

borrowers and they were worried that

this these Houseion days are going to

come to the end or their bank is going

to call, you know, cap them out. They

need to go get more funding. So I looked

up all these guys and one of them

legitimately was Bill's used truck

financing. You can't get your big used

big rig funded through your local bank,

come to Bills. Bills will fund your used

bank. I no no credit score needed.

Nobody turned down. That's a business

credit intermediate.

So I I worry that we don't really know

what these are. But if we go back to

commercial real estate and we go back to

how do we manipulate delinquencies? One

of them is loan modifications. I think

we kind of beat that one into the

ground. But one that we haven't talked

about is note-to-eote financing. >> Yes.

>> Yes.

>> So a bank has a 50 and this is a real

example by the way because we have 65 75

clients that are private equity groups

that use bankrag data to prospect for

banks that have CRA CNI resi um to buy

it off their books. And and what happens

is they have I mean an overvaluation

problem can't be solved without value

destruction. But we got a lot of clever

people, right? We're putting our best

and brightest into finance for the last

two decades, three decades. So we come

up with very creative ways of solving

problems, but really all you're doing is

financial engineering. But we have $50

million of commercial real estate on our

book that we need to sell. So I got

seven loans. So, Bill's Private Equity

Group basically calls up and says,

"Jack, I want to buy that off of you.

Can we take a look at it?" And you go

look at it and that $50 million on the

books is really only worth 84 cents on

the dollar and I could kind of make it

work at 84. So, I'm going to offer you

84 cents on the dollar. Bank says, "No

way, man. I I I I can't take an $8

million loss on this, right? But here's

what we'll do. We'll take a $2 million loss.

loss.

You put in 10 million and I'll give you

$38 million of note onote financing. And

so you take $50 million of

not so strong CRA that's in delinquency

out of delinquency in delinquency out of

delinquency and you sell it to Bill. But

you fund 50 million of that through $38

million CNI loan, commercial industrial loan.

loan.

>> So that's what I would call loan laundering.

laundering.

You're you're laundering

a bad CRA note offbalance sheet and then

you're basically

putting back on the balance sheet a $38

million performing CNI loan but it's

nonreourse. So what the bank would argue

is look we got a $10 million capital

buffer. So what we've done is we've

changed our loan to value from 100 to

84. Right? So there's a buffer. I I

struggle with this is why would you pay

96 cents on the dollar when you think

it's only worth 84 cents a dollar? Well,

allows me to buy more with my capital

stack. It's like, okay, that makes

sense. Plus, they have a longer time

frame, right? So, I get it. There's lots

of good ways this could work.

>> But a lot of these deals are nonreourse.

So, starting about two and a half years

ago, our note buying community, private

equity groups were saying, "Dude, we

can't buy. No one wants to sell.

Everything is moving to note on note."

And then you start hearing this and at

first it was 7030 8020 but then it

became 9010.

So the bank is funding 90%. And it's

really n out of $10 is still exposed to

commercial real estate but it shows up

on CNI. So I started reaching out to the

regulators and I'm like hey man I'm sure

I'm not the only guy seeing this. I'm

probably just a voice in the chorus

right? But I do you know that they're

putting this stuff in Yeah. CNI and so

there was a big push to move it into

non-depository financial institutions

reporting. So that's why you see these

big runups is banks were having to

reclassify from commercial and

individual other into so not only was

there huge organic growth there was

reclassification growth. But I heard

from two separate parties about nine,

eight, nine months ago that JP Morgan

Chase was shopping a $300 million note

in Chicago and their their negotiating

started at 9010. I'm like, what? So

these are clients on the other side. I

got clients that are banks. I got

clients that buy it, right? So you can

talk to both sides and I sit in the hub

of a wheel and I get educated by each

sector of that wheel like they started

at 90 non-reourse

and I'm like

okay but we know that property and we

know that that tenant is only 60%

occupied in two years it renegotiates

and basically it's not going to be worth

anything right but we turned it down JP

Morgan came back and said, "We'll do 100%."

100%."

You don't have to put any money in. So

JP Morgan Chase balance sheet. JP Morgan Chase

Chase

basically is offering multiple people

100% note on. So basically, we're giving

you money to take the stuff off our

balance sheet so we don't have to report it.

it.

>> And this is not this is not a synthetic

risk transfer. This is

>> Well, this is straight up a note on no

financing. So bring up, if you would,

let's go look at let's go see were they successful.

successful.

>> So go to JP Morgan Chase. Bring up Bank

Data. Go back to JP Morgan Chase.

>> Oh yeah, I got it. I got it.

>> Next to review Maine. Scroll down. Woo.

Look at all those loans. Look. Woo.

Delinquencies are getting better. Just

ignore the orange chart.

>> Click on um CRA non-owner occupied

number eight. >> Okay,

>> Okay,

>> by the way, they seem to have a lot of

red, right? So, scroll down and let's go

back and look at owner non-owner

occupied. So, the one right above it, non-owner.

non-owner.

>> You see how that number goes from 1.2 billion

billion

>> and it drops 300 million in Q1

>> and he bets that that was a $300 million

loan that got taken off the books

>> and and recycled into a non deposit. >> Correct.

>> Correct.

>> Correct. So when you look at

delinquencies going down,

know that loan modifications is an enormous

enormous

uh game changer on how you manage

delinquencies and we changed the rules

to make it um like an accelerant, right?

We made it that much more powerful. But

also understand there is a separate way

of doing this which is just pay give

people money to take the stuff off your

balance sheet non-reourse. So, in two

years, it's entirely possible that that

$300 million note will get thrown back

over onto JP Morgan's balance sheet in

2027, Q1, Q2.

>> So, to be fair, I it is I guess to have

a dodgy loan on your book or to have a

loan to an entity that then owns that

dodgy loan like areas.

>> They don't own it. They're renting it. >> Okay.

>> Okay.

>> They're renting it. It's not

>> how long how long are these note on note financings?

financings?

>> I don't know. They could be across the

board, right? So, part of note onote

financing is bank A funds a private

equity or private buyer to buy assets

off bank A's balance sheet. And I've

I've asked the FDI and the the

regulators, hey, look, the NDFIS are

great reporting. I like what we've done,

but really what I care about is how much

is it loan laundering, right? How much

of those non-depository financial

institution massive loan growth is banks

paying or lending to people to take bad

balance sheet assets off their own book

temporarily. It's temporarily. Don't

think that it's off the book. It's fine.

It's non-reourse. It can get put right.

And so I asked these clients of ours,

how do you make money on this? Like

basically JP Morgan Chase lends us $300

million. at 3%. We're generating rental

income that covers that spread and we

make net interest margin and we use some

of that to right to as profit. Then when

it turns sour and it has to get

re-evaluated back to normal market

rates, we just give it back to JP Morgan

and we don't lose anything.

>> And would these would these private

equity firms or private credit firms

would they alternative asset managers

would they refer to this as bank capital

relief transactions? Uh they all have

names, right? Synthetic risk transfers.

But this is what I'm talking about. Look,

Look,

>> there's a lot of very bright people

trying to solve an overvaluation

problem. The problem is when have we

ever solved an overvaluation problem in

an asset class without some asset

destruction. So if the asset destruction

only comes But now you see the

cleverness of the loan mods. If we just

kept dumping inventory and charging it

off and reppricing wet commercial real

estate, that property in Chicago that's

300 million is probably only worth 65

cents on the dollar. If you had to

re-evaluate that that market price,

every other bank has to now lower and

now the private equity groups are now

right. And so by by extending and

pretending it by changing the rules and

hiding what we report not report and by

pushing it off balance sheet it gives

the illusion that things are better. So

Bill Morland the 27year-old

a collection manager at wells and risk

manner said this is no way in hell this

is going to work right. I I

I'm more dude the village the pmpkin

village just keeps getting bigger and so

I have a lot of bank clients and I had

two phone calls about a month ago. Hey,

you're very negative. I'm like I'm not

the pied piper of doom. I'm just showing

you numbers, man. I got kids that are

trying to get jobs. I don't want a bad

economy. I but I also want my kids to be

able to afford a house,

>> right? And so we have overvaluation in

asset class after asset class after

asset class. Eventually we're going to

have to have value destruction. How do

you have value? Well, we don't. We just

keep changing the rules and changing how

we do things to hide it. And so I've

become here's the curve of skepticism.

No way in the world. Oh yeah,

everything's great. Everything's

awesome. I'm moving maybe a little bit

more. Hey, I'm getting phone calls from

chief risk officers and chief lending

officers of 10, 12, 15 billion dollar

very strong community banks. Go do

business with your community bank. Do

it. They're great. They're well-run. Not

everyone, but this there's a knock. It's

the large banks that morph the rules. It

isn't your local community bank. Your

local community bank is going to

probably be not problematic, but these

community banks are saying, "Hey,

commercial real estate's looking great.

And I'm like, "Dude, are you aware of

note-on note financing? Are you aware of

the loan modification rules?" So, when

you look in your local markets, when

they use bank rag data to get local

market peers, they look at what their

performance. Hey, Bill, all the guys

that we do comp competition with in our

local market, their CR delinquencies are

going down. We're thinking about lending

more. No, no, this may work. Then you

start coming to the realization it's

it's it's the it's the perception. It's

the concept of wealth impact, right? If

everyone thinks they're wealthy because

their 401's up and their house is way

up, they spend more. So, if we can

provide banks with that illusion, hey,

delinquencies are starting to look

pretty good. You should start lending

more. Does it become self-fulfilling?

Maybe. I'm not as dogmatic and no way,

no way is this going to happen. I'm

moving a little bit le. But I honestly

believe that all we're doing is

stretching out that runway, we are we

should be in a recession. We should be.

But if you just lower payments on enough

people and you keep lending and pumping

money into the economy, you can keep

going on with the illusion liquidity

raises all asset valuations. And that's

the banks are now pushing this, right?

And Bill, so what what does the

modification cycle or modification rates

normally look like in the 80s, 90s,

2000s, 2010s? How frequent was the use

of modifications in terms of a rough

percentage and what does it compare to

to now?

>> Way lower. I mean, if you go back, I

showed we were looking at the commercial

real estate portfolio of the non-owner

portfolio of um Bank of America and it

was like 8 and a half% and there was

that black chart that showed it for the last 10 year. eight and a half was like

last 10 year. eight and a half was like nine times bigger than it's ever been

nine times bigger than it's ever been before.

before. It's being used at unprecedented levels.

It's being used at unprecedented levels. Did we have loan modifications in 9, 10,

Did we have loan modifications in 9, 10, and 11? Yeah, we did, but we weren't

and 11? Yeah, we did, but we weren't doing them this fast. Um, it's part of

doing them this fast. Um, it's part of the Texas ratio. So, if you would pull

the Texas ratio. So, if you would pull up that spreadsheet, you'll see a chart

up that spreadsheet, you'll see a chart down at the very bottom called TDR and

down at the very bottom called TDR and failures. Why do I keep pounding this

failures. Why do I keep pounding this table? Right? And so on that

table? Right? And so on that >> I don't see that. I don't see that

>> I don't see that. I don't see that >> on the very bottom.

>> on the very bottom. >> Oh yeah. Okay. Okay.

>> Oh yeah. Okay. Okay. >> Yeah. So share that share that document.

>> Yeah. So share that share that document. So I this was like about nine months

So I this was like about nine months ago. I put this out there. So performing

ago. I put this out there. So performing TDR is a misnomer. Um and but what this

TDR is a misnomer. Um and but what this is is 2009 Q1 performing as a percent of

is is 2009 Q1 performing as a percent of your total loan book. So this is what it

your total loan book. So this is what it was right when we first started to and

was right when we first started to and you don't just have a cliff, right? The

you don't just have a cliff, right? The cliff is leading up an 8 Q1 08 Q2. But

cliff is leading up an 8 Q1 08 Q2. But if we just put a line in the sand at the

if we just put a line in the sand at the beginning, right 2009 Q1, what percent

beginning, right 2009 Q1, what percent of your loan book has been modified and

of your loan book has been modified and left off nonacrrual? Now, the way a

left off nonacrrual? Now, the way a modification and and I use TDR and and

modification and and I use TDR and and and and your your older audience that's

and and your your older audience that's George Carlin fans would recognize this.

George Carlin fans would recognize this. Um, we no longer call it shell shock,

Um, we no longer call it shell shock, right? It's PTSD and it and it it's it

right? It's PTSD and it and it it's it just keeps changing to less meaningful

just keeps changing to less meaningful words that are longer descriptions. TDR

words that are longer descriptions. TDR is troubled debt restructuring. It's

is troubled debt restructuring. It's very clear what it is. Troubled debt

very clear what it is. Troubled debt restructuring. Up until 2023 Q1, that's

restructuring. Up until 2023 Q1, that's what it was called. Then in 2023 Q1 when

what it was called. Then in 2023 Q1 when we changed the rules and we set it some

we changed the rules and we set it some Cecil things and there was we put a lot

Cecil things and there was we put a lot of window dressing on it but we changed

of window dressing on it but we changed it to no longer have to report the big

it to no longer have to report the big ferris wheel only rolling 12 but we also

ferris wheel only rolling 12 but we also called it loan modifications to

called it loan modifications to borrowers experiencing financial

borrowers experiencing financial distress or

distress or >> and this was in 2012

>> and this was in 2012 >> 20 23 Q1.

>> 20 23 Q1. >> So I'm looking back. So, what when you

>> So I'm looking back. So, what when you modify a loan, you're supposed to put it

modify a loan, you're supposed to put it on nonacrrual, which means you're not

on nonacrrual, which means you're not recognizing fee and interest income. The

recognizing fee and interest income. The problem is when you put it on non-accr,

problem is when you put it on non-accr, it gets stained with the scarlet letter

it gets stained with the scarlet letter of TDR non-performing. So, banks don't

of TDR non-performing. So, banks don't want to do that. So, what they do is

want to do that. So, what they do is they lower the payment to bank rag data

they lower the payment to bank rag data from $10,000 a month to $7,000. And then

from $10,000 a month to $7,000. And then Bill makes his $7,000 payment. And

Bill makes his $7,000 payment. And that's considered performing. So it's

that's considered performing. So it's making payments at a lower payment

making payments at a lower payment obligation.

obligation. >> So it's it's considered performing and

>> So it's it's considered performing and it's considered not delinquent.

it's considered not delinquent. >> Correct. Yes. So these are the good

>> Correct. Yes. So these are the good ones, right? So how and and and what I

ones, right? So how and and and what I tell people is look, this is a gateway

tell people is look, this is a gateway drug. So a little bit of it. So you see

drug. So a little bit of it. So you see there were 4,940

there were 4,940 financial institutions that had none,

financial institutions that had none, that had zero. They weren't doing any

that had zero. They weren't doing any modifications.

modifications. Three years later, 392 of them were

Three years later, 392 of them were gone. Now, what gone is is we can't we

gone. Now, what gone is is we can't we don't know failures. Oh, well, Bill,

don't know failures. Oh, well, Bill, there are failures. No, there aren't.

there are failures. No, there aren't. Some banks failed. But what happened

Some banks failed. But what happened real quickly, if you and I'm old enough

real quickly, if you and I'm old enough to remember and paying attention during

to remember and paying attention during this time, we stopped doing failure

this time, we stopped doing failure Friday. So, every Friday at 5:00, the

Friday. So, every Friday at 5:00, the FDI would release here's how many banks

FDI would release here's how many banks failed. And the market would open up

failed. And the market would open up 400, 500, 600 points down. if that

400, 500, 600 points down. if that number was big on Monday. That was back

number was big on Monday. That was back when 4500 was enormous. Now that's just

when 4500 was enormous. Now that's just a rounding error, right? Um so what

a rounding error, right? Um so what happened was we stopped doing failure

happened was we stopped doing failure Friday. We started doing shotgun

Friday. We started doing shotgun marriages and then we started doing

marriages and then we started doing proactive shotgun marriages. So what

proactive shotgun marriages. So what I've measured here is how many banks

I've measured here is how many banks existed three years later. So 92%

existed three years later. So 92% of zero modification banks still were

of zero modification banks still were around. So that means 8% were gone. Some

around. So that means 8% were gone. Some of those could have been happy, right?

of those could have been happy, right? They could have been mergers of good

They could have been mergers of good happy or cash outs or families getting

happy or cash outs or families getting out after three generations or five

out after three generations or five generations, right? But most of them

generations, right? But most of them were bad during this time frame. But you

were bad during this time frame. But you notice how if you do a little bit of

notice how if you do a little bit of performing TDR,

performing TDR, it goes down to 6.9%. So this is the

it goes down to 6.9%. So this is the medicine. If you manage TDR in a

medicine. If you manage TDR in a responsible way, you can actually banks

responsible way, you can actually banks that did it at a low enough level,

that did it at a low enough level, actually a greater percentage of them

actually a greater percentage of them survived. Not like Sheila Bayer, former

survived. Not like Sheila Bayer, former FDIC chair, talks about in her book uh

FDIC chair, talks about in her book uh uh Bull by the Horns, I believe, about

uh Bull by the Horns, I believe, about how

how actually in 2008 and 2009, I guess this

actually in 2008 and 2009, I guess this is outside of the banking system mostly,

is outside of the banking system mostly, but in um mortgage back securities and

but in um mortgage back securities and in colliz debt obligations that that

in colliz debt obligations that that held them, the mortgage back securities

held them, the mortgage back securities were almost never modifying loans. They

were almost never modifying loans. They were always foreclosing. And if everyone

were always foreclosing. And if everyone forcloses at the same time, that's a a

forcloses at the same time, that's a a crisis. So, so yeah, modifying can be a

crisis. So, so yeah, modifying can be a good thing because if you just let it

good thing because if you just let it roll it down, kick the can down the road

roll it down, kick the can down the road a little bit, you can get uh you know,

a little bit, you can get uh you know, they they can pay it back and you you

they they can pay it back and you you won't cause a huge systemic crisis if

won't cause a huge systemic crisis if you forclose all at once.

you forclose all at once. >> Well, no one views a systemic crisis

>> Well, no one views a systemic crisis when we're lending all the money. It's

when we're lending all the money. It's only when you get the the price or the

only when you get the the price or the payback, right? Um I agree with that to

payback, right? Um I agree with that to a certain extent but if you look 371

a certain extent but if you look 371 banks were between 1 and 2%. 234

banks were between 1 and 2%. 234 uh were at two uh to four. So you're

uh were at two uh to four. So you're talking 100 334 you're talking 600 700

talking 100 334 you're talking 600 700 banks were doing quite a bit of loan

banks were doing quite a bit of loan modifications at this time. So I don't

modifications at this time. So I don't know that I fully agree. I think she's

know that I fully agree. I think she's right to a certain extent, but what

right to a certain extent, but what we're doing now

we're doing now >> maybe she was referring to I guess uh

>> maybe she was referring to I guess uh mortgage back securities loans is in

mortgage back securities loans is in mortgage back securities and the special

mortgage back securities and the special servicesers

servicesers >> possibly. Yeah, entirely possible. So

>> possibly. Yeah, entirely possible. So what you're seeing here is there is a

what you're seeing here is there is a direct relationship that the more loan

direct relationship that the more loan modifications a bank does the more

modifications a bank does the more likely they are to fail. So once you go

likely they are to fail. So once you go to 1.2% 2% one to 1.99 17% of the banks

to 1.2% 2% one to 1.99 17% of the banks fail. Once you go to two to four 23% of

fail. Once you go to two to four 23% of the banks fail. So realistically this is

the banks fail. So realistically this is the single biggest predictor of bank

the single biggest predictor of bank failure. Remember banks only hold about

failure. Remember banks only hold about 1.2 to 1.3% of their loans is reserves.

1.2 to 1.3% of their loans is reserves. So when you start modifying more than

So when you start modifying more than you even have reserved that doesn't even

you even have reserved that doesn't even include delinquencies. So it is these

include delinquencies. So it is these are it's directional it's on big volume

are it's directional it's on big volume 66 banks and 28% of them 40 28 43%

66 banks and 28% of them 40 28 43% 42.42% 42% of the banks failed. This is

42.42% 42% of the banks failed. This is the single best predictor of bank

the single best predictor of bank failure proactively. Not like Texas

failure proactively. Not like Texas ratio, which is, you know, hey, you

ratio, which is, you know, hey, you stink because you stink. This was

stink because you stink. This was proactive. These were people that

proactive. These were people that already had enormous levels of loan mods

already had enormous levels of loan mods at the beginning. So, where are we at

at the beginning. So, where are we at now? They're all drinking Sheila Bear

now? They're all drinking Sheila Bear Kool-Aid. Let's just modify everything.

Kool-Aid. Let's just modify everything. But we know that that is problematic.

But we know that that is problematic. And so what is the TDR for

And so what is the TDR for >> trouble debt restructuring? So when I

>> trouble debt restructuring? So when I say TDR, think loan modification.

say TDR, think loan modification. >> Okay. And so yeah, this is the George

>> Okay. And so yeah, this is the George Carlin. This is the shell shock that's

Carlin. This is the shell shock that's now called modification rate. So what is

now called modification rate. So what is the modification rate now? If you said

the modification rate now? If you said that, you know, 42% of banks that had a

that, you know, 42% of banks that had a troubled debt restructuring aka uh

troubled debt restructuring aka uh modification rate of over 5%. Like what

modification rate of over 5%. Like what are what are the modifications rates now

are what are the modifications rates now like for JP?

like for JP? >> It's hard to say.

>> It's hard to say. >> Yeah. Yeah.

>> Yeah. Yeah. >> So pull up bankr data and pull up

>> So pull up bankr data and pull up flagar.

flagar. >> Yeah. Oh, I will happily.

>> Yeah. Oh, I will happily. >> Who could have saw it coming? I don't

>> Who could have saw it coming? I don't know. A lot of people maybe pull up

know. A lot of people maybe pull up Eagle. I mean, there's a lot of banks

Eagle. I mean, there's a lot of banks that you can look at that are going to

that you can look at that are going to be problematic. But yeah, let's go in

be problematic. But yeah, let's go in and let's take a look.

and let's take a look. >> I'm in Flagstar.

>> I'm in Flagstar. >> There's the big acquisition where they

>> There's the big acquisition where they just kept putting them together. Hey,

just kept putting them together. Hey, what could ever go bad? Look at the FTE

what could ever go bad? Look at the FTE column in the upper left. Notice how the

column in the upper left. Notice how the number of FTEEs, that's full-time

number of FTEEs, that's full-time equivalent. Notice how in 23 Q4 there

equivalent. Notice how in 23 Q4 there was 8,766

was 8,766 employees. Notice how there fired 3,000

employees. Notice how there fired 3,000 of them. Yeah. So if you basically look

of them. Yeah. So if you basically look at this bank,

at this bank, >> go to tier one capital on the third

>> go to tier one capital on the third menu. We are more capitalized than we've

menu. We are more capitalized than we've ever been.

ever been. >> Correct.

>> Correct. >> Yeah.

>> Yeah. >> Yes.

>> Yes. >> 13.9%.

>> 13.9%. Now scroll up to that table at the top

Now scroll up to that table at the top and take a look at 23 2023 Q3 at 9.69

and take a look at 23 2023 Q3 at 9.69 billion. Notice how we had 9.7 billion

billion. Notice how we had 9.7 billion of capital. Notice how that number has

of capital. Notice how that number has gone down almost virtually every

gone down almost virtually every quarter.

quarter. >> But risk weighted cap risk weighted

>> But risk weighted cap risk weighted assets have gone down by more. And I'm

assets have gone down by more. And I'm guessing you'll say that that's because

guessing you'll say that that's because the the risk weights have gone down. So

the the risk weights have gone down. So they've transferred stuff into lower

they've transferred stuff into lower risk. They're selling stuff left and

risk. They're selling stuff left and right. They're selling seed corn. So go

right. They're selling seed corn. So go to loans 2012.

to loans 2012. >> What they're doing is they're shrinking

>> What they're doing is they're shrinking the balance sheet to give you the

the balance sheet to give you the illusion that they're more capitalized.

illusion that they're more capitalized. Meanwhile, Steven Yu can put in 1

Meanwhile, Steven Yu can put in 1 billion. 750 800 million of that has

billion. 750 800 million of that has already been burned through. So look,

already been burned through. So look, look at the total delinquencies. They've

look at the total delinquencies. They've skyrocketed. And it's not just one

skyrocketed. And it's not just one portfolio. Click on the NPL. Click on

portfolio. Click on the NPL. Click on the NPL right above in the middle.

the NPL right above in the middle. Now, there's the Wow, it looks like it's

Now, there's the Wow, it looks like it's starting to peak. All right. So, scroll

starting to peak. All right. So, scroll down. Let's just cycle through their

down. Let's just cycle through their portfolios. There's multif family. And I

portfolios. There's multif family. And I know what you're going to say. Click on

know what you're going to say. Click on multif family.

multif family. >> So, there's their there's their

>> So, there's their there's their apartment book. And I know everyone's

apartment book. And I know everyone's going to give excuses, but but dude,

going to give excuses, but but dude, these are whether they're rent

these are whether they're rent controlled or not rent control, this

controlled or not rent control, this still tells you something about the

still tells you something about the economy. Forget Flagstar. seven and a

economy. Forget Flagstar. seven and a half percent of their their mortg their

half percent of their their mortg their their MFR book is delinquent. Scroll

their MFR book is delinquent. Scroll down and go to non-owner occupied. So,

down and go to non-owner occupied. So, we'll just start cycling through or

we'll just start cycling through or click on non-owner occupied. All right,

click on non-owner occupied. All right, so that number skyrocketed to 12.6%.

so that number skyrocketed to 12.6%. And then magically has gotten better.

And then magically has gotten better. >> Scroll down a little bit more. Yeah,

>> Scroll down a little bit more. Yeah, it's incredible. Well, there you go.

it's incredible. Well, there you go. Oops.

Oops. >> Oh, what happened to mods? Mods.

>> Oh, what happened to mods? Mods. >> Where did it all go? We know everything

>> Where did it all go? We know everything I've been preaching and you know

I've been preaching and you know standing on the soap box and screaming.

standing on the soap box and screaming. Is that real? And here's the here's the

Is that real? And here's the here's the perverse thing about this. Maybe it is

perverse thing about this. Maybe it is real. Maybe they did sell $340 million

real. Maybe they did sell $340 million off their books. Well, then you have to

off their books. Well, then you have to ask is did they do note onote financing?

ask is did they do note onote financing? So there's lots of other questions

So there's lots of other questions >> using bankr data. Can we see note on

>> using bankr data. Can we see note on note financing or no?

note financing or no? >> No. convenient that we only know if it's

>> No. convenient that we only know if it's an NDFIS. But

an NDFIS. But >> how can we do that? How do we go to

>> how can we do that? How do we go to >> Before we go into the NDFIS, let me let

>> Before we go into the NDFIS, let me let me show you how these rules become

me show you how these rules become perverse. And this is where I don't

perverse. And this is where I don't think everybody's really thought this

think everybody's really thought this through. I get why everyone's doing it.

through. I get why everyone's doing it. It's not a bug, it's a feature. They

It's not a bug, it's a feature. They want people to not know. But when guys

want people to not know. But when guys like me procilitize and say, "Look, uh,

like me procilitize and say, "Look, uh, Jack, can you trust that $330 million

Jack, can you trust that $330 million drop?" What happens is you have to say,

drop?" What happens is you have to say, "No, you can't." Because how do you go

"No, you can't." Because how do you go off of TDR? Do you go off because the

off of TDR? Do you go off because the note charged off? Do you go off because

note charged off? Do you go off because the guy basically paid his note off? Do

the guy basically paid his note off? Do you do you go off because he was sold?

you do you go off because he was sold? And if he was sold and it was a

And if he was sold and it was a legitimate note sale, that's a great

legitimate note sale, that's a great thing. or did it go off because they

thing. or did it go off because they changed the rules? And so in a perverse

changed the rules? And so in a perverse way,

way, you now can't trust the data. So if you

you now can't trust the data. So if you can't trust the data, you assume they're

can't trust the data, you assume they're lying, right? You're assuming that

lying, right? You're assuming that that's it's not a lie, but it's taking

that's it's not a lie, but it's taking advantage of conveniently changed rules

advantage of conveniently changed rules to make it more difficult to really

to make it more difficult to really know.

know. >> The bad stuff is extremely clear. Like

>> The bad stuff is extremely clear. Like the non-performing loans are very high

the non-performing loans are very high and yeah,

and yeah, >> they had skyrocketed and now they've

>> they had skyrocketed and now they've been like somewhat flat. So

been like somewhat flat. So >> yeah,

>> yeah, >> I think that you could the reason maybe

>> I think that you could the reason maybe we're not seeing as much quoteunquote

we're not seeing as much quoteunquote funny business is because like the dirt

funny business is because like the dirt is out in the open, you know?

is out in the open, you know? >> Correct. Well, not entirely. Go back to

>> Correct. Well, not entirely. Go back to go up to asset quality in the in that

go up to asset quality in the in that blue menu in the top right in the middle

blue menu in the top right in the middle underneath main asset quality. Now

underneath main asset quality. Now underneath asset quality on the far

underneath asset quality on the far right, scroll back up a little bit above

right, scroll back up a little bit above that orange chart. Click on res to NPL's

that orange chart. Click on res to NPL's third menu.

third menu. >> Yep,

>> Yep, >> right there. This is what's called a

>> right there. This is what's called a coverage ratio.

coverage ratio. Don't look at allowance levels. What the

Don't look at allowance levels. What the numerator and denominator are in the

numerator and denominator are in the chart in the upper left is adjusted NPLs

chart in the upper left is adjusted NPLs are 3.179 billion. That's going to be

are 3.179 billion. That's going to be adjusted for any government guarantees.

adjusted for any government guarantees. So any mortgages that are guaranteed by

So any mortgages that are guaranteed by the taxpayer that are never getting

the taxpayer that are never getting charged off and they just keep getting

charged off and they just keep getting payments lowered and this is why your

payments lowered and this is why your kids can't buy a house, those are taken

kids can't buy a house, those are taken out.

out. Loss allowance is how much reserves do

Loss allowance is how much reserves do you have set aside? Notice how in 2024

you have set aside? Notice how in 2024 Q2 they had 1.952 billion of NPLs and

Q2 they had 1.952 billion of NPLs and 1.268 billion of loss allowance. They

1.268 billion of loss allowance. They had 65 cents of reserves for every

had 65 cents of reserves for every dollar of ugliness coming down for

dollar of ugliness coming down for potential charge off. So you notice how

potential charge off. So you notice how the number went from 4.8 which is $4.80

the number went from 4.8 which is $4.80 80 cents of reserves for every dollar to

80 cents of reserves for every dollar to three to two to 1.5 to 65 to 45 to 35.

three to two to 1.5 to 65 to 45 to 35. This is one. And look at that black and

This is one. And look at that black and purple chart. 10 years. This bank is not

purple chart. 10 years. This bank is not reserved. They're not reserved. So,

reserved. They're not reserved. So, they're burning capital. Their

they're burning capital. Their delinquencies look like they may be kind

delinquencies look like they may be kind of peeking out, but we can't tell what

of peeking out, but we can't tell what they're doing with loan modifications

they're doing with loan modifications because they just all disappeared.

because they just all disappeared. But net net, you only got 35 cents. And

But net net, you only got 35 cents. And so if you scroll to the very bottom of

so if you scroll to the very bottom of this page, I'm all about context. So

this page, I'm all about context. So keep scrolling down. There's the So

keep scrolling down. There's the So there's the 10 banks that are closest to

there's the 10 banks that are closest to them in asset size. They got they're

them in asset size. They got they're number 10. So Western Alliance, which is

number 10. So Western Alliance, which is no paragon of performance, is at 82

no paragon of performance, is at 82 cents. Everyone else is above a buck.

cents. Everyone else is above a buck. Look at $241. Look at East West at 565.

Look at $241. Look at East West at 565. >> Right. But people people do know this

>> Right. But people people do know this like Flagstar is the worst performing

like Flagstar is the worst performing bank over the past

bank over the past >> correct. So yeah. So if you scroll down,

>> correct. So yeah. So if you scroll down, you'll see that they're going to be in

you'll see that they're going to be in the bottom. Keep going. This is 100.

the bottom. Keep going. This is 100. This is the 100 banks their size

This is the 100 banks their size nationally. They're 97. And you really

nationally. They're 97. And you really can't look at Beal and Deutsch because

can't look at Beal and Deutsch because they buy discounted purchased assets.

they buy discounted purchased assets. >> Flagstar is not reserved. Flagstar is

>> Flagstar is not reserved. Flagstar is burning capital. Flagstar's hiding loan

burning capital. Flagstar's hiding loan modifications. Um, that's the worst case

modifications. Um, that's the worst case scenario. Best case scenario, they're

scenario. Best case scenario, they're managing them, but any way you strike it

managing them, but any way you strike it up, that bank that that bank should be

up, that bank that that bank should be sold off, but who's going to buy? So,

sold off, but who's going to buy? So, Bill, this is extremely important.

Bill, this is extremely important. Number one, I think it's interesting by

Number one, I think it's interesting by its own merit, and I think that

its own merit, and I think that investors should be aware of this.

investors should be aware of this. Bankers should be aware of this,

Bankers should be aware of this, definitely. And I I think I'm glad that

definitely. And I I think I'm glad that to whether institutional people watching

to whether institutional people watching or just folks at home, you know,

or just folks at home, you know, watching this, I'm glad that we can

watching this, I'm glad that we can share this message how and this

share this message how and this information, which is, you know, I

information, which is, you know, I didn't know this before talking to you.

didn't know this before talking to you. However, when you talk about like

However, when you talk about like systemic risk, look at like JP Morgan or

systemic risk, look at like JP Morgan or Bank of America, all of those numbers, I

Bank of America, all of those numbers, I think, in terms of modifications are a

think, in terms of modifications are a very very small fraction of their

very very small fraction of their earnings or their equity. You're shaking

earnings or their equity. You're shaking your head.

your head. >> No, no way at all.

>> No, no way at all. >> Okay, let's let's do the numbers. Should

>> Okay, let's let's do the numbers. Should we Bank of America, JP Morgan or or any

we Bank of America, JP Morgan or or any other big bank? Let's go. So look, it

other big bank? Let's go. So look, it doesn't matter what their earnings are.

doesn't matter what their earnings are. If I'm not if I'm not reserving any if

If I'm not if I'm not reserving any if I'm not reserving money, my earnings are

I'm not reserving money, my earnings are going to be great. I can show you a lot

going to be great. I can show you a lot of banks that that take negative

of banks that that take negative provision. So

provision. So >> yeah,

>> yeah, >> all all financial earnings are somewhat

>> all all financial earnings are somewhat fake in terms of uh they reflect

fake in terms of uh they reflect expectations about the future that could

expectations about the future that could be wildly optimistic or wildly

be wildly optimistic or wildly pessimistic. And ultimately what matters

pessimistic. And ultimately what matters is how how what is really going to

is how how what is really going to happen in terms of

happen in terms of >> Yeah. I think there's a lot of banks

>> Yeah. I think there's a lot of banks that do a great job.

that do a great job. >> Yeah.

>> Yeah. >> But the problem is is if all you do is

>> But the problem is is if all you do is look at earnings and you don't look at

look at earnings and you don't look at the restructured debt.

the restructured debt. >> Well, let's look at capital then. Should

>> Well, let's look at capital then. Should we look at capital?

we look at capital? >> Well, I just showed you Flagstar's

>> Well, I just showed you Flagstar's burning capital. Okay. Let's look up

burning capital. Okay. Let's look up another one.

another one. >> JP Bank of America. A big one.

>> JP Bank of America. A big one. >> Look up No, look up Truest.

>> Look up No, look up Truest. >> Okay. Truest. Okay. Kind of big. Kind

>> Okay. Truest. Okay. Kind of big. Kind of.

of. >> Yeah. No. Well, we look at any bank you

>> Yeah. No. Well, we look at any bank you want. The biggest banks are going to

want. The biggest banks are going to have plenty of capital. But let's look

have plenty of capital. But let's look at the ones.

at the ones. >> Let's look at truest. Truest is huge. So

>> Let's look at truest. Truest is huge. So pull up truest.

pull up truest. >> Got it. You got it.

>> Got it. You got it. >> Yeah. And essentially go to tier one

>> Yeah. And essentially go to tier one capital on that third. Now remember this

capital on that third. Now remember this is the depository.

is the depository. This is not going to be the holding

This is not going to be the holding company where they have lots of other

company where they have lots of other stuff going on. So when you look at tier

stuff going on. So when you look at tier one capital, understand that this is

one capital, understand that this is what shows up on the call report is the

what shows up on the call report is the bank. What deposits are insured. That's

bank. What deposits are insured. That's this sub entity which is the majority,

this sub entity which is the majority, but they can have capital outside. So

but they can have capital outside. So what you're looking at here is and once

what you're looking at here is and once again in the upper left quarter risk

again in the upper left quarter risk weighted assets tier one capital. Look

weighted assets tier one capital. Look at the 2024 Q1 figure of 48367.

at the 2024 Q1 figure of 48367. I don't know if you can highlight that

I don't know if you can highlight that with your mouse. Yep.

with your mouse. Yep. >> All right.

>> All right. >> So notice just prior to this they were

>> So notice just prior to this they were sub10

sub10 and they did a 40. They went from 40.81

and they did a 40. They went from 40.81 to 45. What did they do? They did a

to 45. What did they do? They did a capital raise. Why? Because nobody

capital raise. Why? Because nobody below, nobody's a 10. If a if a So,

below, nobody's a 10. If a if a So, forget Basle, forget all this. If a bank

forget Basle, forget all this. If a bank has a 10 handle,

has a 10 handle, they're told to raise capital. So, you

they're told to raise capital. So, you can see in 2022 Q4, it went from 40.8 to

can see in 2022 Q4, it went from 40.8 to 45. The number went from 997 to 1059.

45. The number went from 997 to 1059. Then what you see is the number climbs

Then what you see is the number climbs to 47, 48, 48, 48, 367, which I

to 47, 48, 48, 48, 367, which I highlighted. So they issued shares. They

highlighted. So they issued shares. They issued shares. They issued shares. They

issued shares. They issued shares. They raised capital.

raised capital. >> Uh yeah, I I can't speak to that

>> Uh yeah, I I can't speak to that earlier.

earlier. >> I'll look it up. I'll look it up. Yeah.

>> I'll look it up. I'll look it up. Yeah. >> Yeah. Yeah. It's entirely possible

>> Yeah. Yeah. It's entirely possible that's what they did. But Netnet, I can

that's what they did. But Netnet, I can see the extra five billion, four and a

see the extra five billion, four and a half billion showed up on the B on the

half billion showed up on the B on the income right on the balance sheet. So

income right on the balance sheet. So what you're looking at here is the

what you're looking at here is the illusion that things are improving.

illusion that things are improving. They're managing the risk weighted

They're managing the risk weighted assets by shrinking the book, selling

assets by shrinking the book, selling loans, not taking FHLB advances,

loans, not taking FHLB advances, lowering their cash levels, selling

lowering their cash levels, selling securities. So we go from 9.97 to 1174.

securities. So we go from 9.97 to 1174. But then the number jumps to 52.7

But then the number jumps to 52.7 billion. The very next court that was

billion. The very next court that was them selling the insurance arm. They

them selling the insurance arm. They raised 10.5 billion dollars by selling

raised 10.5 billion dollars by selling another subsidiary off off the call

another subsidiary off off the call report

report >> for 10.5 billion. They took six half

>> for 10.5 billion. They took six half billion and they threw it in the

billion and they threw it in the fireplace by selling securities

fireplace by selling securities portfolios and taking $6.5 billion

portfolios and taking $6.5 billion dollars a loss. They took the other 4

dollars a loss. They took the other 4 billion and raised tier one capital. So

billion and raised tier one capital. So now the number goes to 52728.

So basically they sold seed corn to get more capital. But notice when banks say

more capital. But notice when banks say they want capital relief, notice how

they want capital relief, notice how it's gone from 52728

it's gone from 52728 to 51440 to 58.98 to 576.

to 51440 to 58.98 to 576. >> They've done buybacks and bill. So I

>> They've done buybacks and bill. So I looked it up. They actually did not do

looked it up. They actually did not do any share issuance since 2020. They just

any share issuance since 2020. They just in 2023 they stopped doing buybacks. So

in 2023 they stopped doing buybacks. So I think they just let the capital acrue

I think they just let the capital acrue and then you said the thing they they

and then you said the thing they they sold an insurance arm so they they had

sold an insurance arm so they they had some more capital there and then they

some more capital there and then they started doing more buybacks over the

started doing more buybacks over the past year. So I think that as capital

past year. So I think that as capital has gone down that's because they've

has gone down that's because they've been doing buybacks.

been doing buybacks. >> Well well I think it's more insidious as

>> Well well I think it's more insidious as well. But notice how the 52.764

well. But notice how the 52.764 has dropped $2 billion in the last year.

has dropped $2 billion in the last year. >> Their tier one capital rate has gone

>> Their tier one capital rate has gone from 1311 to 1191. So, this bank is

from 1311 to 1191. So, this bank is going the opposite direction.

going the opposite direction. >> Go to income and expense in the blue

>> Go to income and expense in the blue tabs in the upper left.

tabs in the upper left. >> Now, down below on that third menu, all

>> Now, down below on that third menu, all the way to the right, you'll see div. Go

the way to the right, you'll see div. Go back up.

back up. >> Div.

>> Div. >> Third menu.

>> Third menu. >> Yeah. Keep going up.

>> Yeah. Keep going up. >> Oh, sorry.

>> Oh, sorry. >> Div on the far right. That's going to be

>> Div on the far right. That's going to be dividends. That third menu far, far

dividends. That third menu far, far right.

right. >> Oh, sorry. Sorry. Sorry. Okay. Yeah.

>> Oh, sorry. Sorry. Sorry. Okay. Yeah. >> Yeah. It's all right. Notice in 2024 Q2

>> Yeah. It's all right. Notice in 2024 Q2 when I said this bank had peaked in tier

when I said this bank had peaked in tier one capital. Notice they're paying out

one capital. Notice they're paying out 156, 113, 207, 121, and 120 of

156, 113, 207, 121, and 120 of dividends.

dividends. This bank is paying out more dividends

This bank is paying out more dividends than they're generating in income.

than they're generating in income. That's why capital went down.

That's why capital went down. >> So their payout ratio was higher than

>> So their payout ratio was higher than >> correct.

>> correct. >> Yeah. And if you include the share

>> Yeah. And if you include the share buybacks. Okay. Yeah. their payout ratio

buybacks. Okay. Yeah. their payout ratio is higher than 100%. meaning they're

is higher than 100%. meaning they're paying more to share.

paying more to share. >> When big banks tell you we need capital

>> When big banks tell you we need capital relief, this is what they mean. They

relief, this is what they mean. They want to pay out more in dividends,

want to pay out more in dividends, >> right? And Bill, I do think that banks

>> right? And Bill, I do think that banks for banks are incredibly levered

for banks are incredibly levered institutions by their very nature and

institutions by their very nature and large banks uh I think because of

large banks uh I think because of DoddFrank and other reasons like they

DoddFrank and other reasons like they have a G SIB not that truis is a GIB I

have a G SIB not that truis is a GIB I don't think but they have like the

don't think but they have like the larger the bank is the higher the

larger the bank is the higher the capital ratio they have to have like

capital ratio they have to have like those community banks about whom you

those community banks about whom you spoke so glowingly they have much lower

spoke so glowingly they have much lower capital ratios than pretty much every

capital ratios than pretty much every bank we've talked about and they have a

bank we've talked about and they have a higher percentage of commercial real

higher percentage of commercial real estate loans so I feel like

estate loans so I feel like >> that's not true.

>> that's not true. >> Okay.

>> Okay. >> Yeah. That's what that's what the press

>> Yeah. That's what that's what the press look if I if I look if I lend to

look if I if I look if I lend to international entities that's going to

international entities that's going to make my loan book bigger. If I go out

make my loan book bigger. If I go out and do lots of trading, do you remember

and do lots of trading, do you remember when JP Morgan lost $6 billion because

when JP Morgan lost $6 billion because quote unquote a whale fat finger?

quote unquote a whale fat finger? >> Yeah.

>> Yeah. >> Yeah. We don't talk about a trading

>> Yeah. We don't talk about a trading concentration risk, but that it was 10

concentration risk, but that it was 10 12 years ago. JP Morgan Chase lost$6

12 years ago. JP Morgan Chase lost$6 billion dollars and yet that's part of

billion dollars and yet that's part of CRA concentration right these are all

CRA concentration right these are all banks big banks do so many more things

banks big banks do so many more things than the local community banks do their

than the local community banks do their exposure to commercial real estate is

exposure to commercial real estate is enormous if you go to and and I'm not

enormous if you go to and and I'm not trying to be argumentative what I'm

trying to be argumentative what I'm trying to say is

trying to say is >> but Bill the capital

>> but Bill the capital >> everybody wants to say the capital thing

>> everybody wants to say the capital thing I said is true you acknowledge that yes

I said is true you acknowledge that yes the capital

the capital >> that that community banks have lower

>> that that community banks have lower capital ratio than big banks

capital ratio than big banks >> oh I don't think that's true at all

>> oh I don't think that's true at all >> really Okay. The problem with that is we

>> really Okay. The problem with that is we don't really know because of the '051

don't really know because of the '051 reporter, but I'll bring up tier one

reporter, but I'll bring up tier one leverage. I'll have you do it. So, pull

leverage. I'll have you do it. So, pull up bankr data and go to industry. Once

up bankr data and go to industry. Once again, it's we can talk data, right?

again, it's we can talk data, right? Let's talk data and see what the data

Let's talk data and see what the data says.

says. >> Go to um in the upper upper right you'll

>> Go to um in the upper upper right you'll see an industry tab. Every ratio you can

see an industry tab. Every ratio you can get at an individual bank level, you can

get at an individual bank level, you can get aggregated day today together for

get aggregated day today together for the industry. So, we can look at the

the industry. So, we can look at the tier one leverage ratio by asset size.

tier one leverage ratio by asset size. Sure. Okay. Okay.

Sure. Okay. Okay. >> Yeah.

>> Yeah. >> Tier Okay. So, this shows the larger

>> Tier Okay. So, this shows the larger banks having a smaller tier one leverage

banks having a smaller tier one leverage ratio. So, it shows that I'm wrong and

ratio. So, it shows that I'm wrong and you're right. Um, but what about the uh

you're right. Um, but what about the uh G SIB search charge though that I

G SIB search charge though that I thought banks have to have higher

thought banks have to have higher capital.

capital. >> I can't speak to that. I can tell you.

>> I can't speak to that. I can tell you. Look, publicly traded banks want to be

Look, publicly traded banks want to be tech stocks.

tech stocks. >> They've always wanted to be and the

>> They've always wanted to be and the bigger they are, the more they want to

bigger they are, the more they want to be. So whatever metric you look at, how

be. So whatever metric you look at, how much provision they're setting aside,

much provision they're setting aside, what's their coverage ratio, how much

what's their coverage ratio, how much how much loan modifications, there is

how much loan modifications, there is always a very clear divide of publicly

always a very clear divide of publicly traded bank and privately held bank. A

traded bank and privately held bank. A publicly traded bank is always going to

publicly traded bank is always going to show higher earnings by managing and

show higher earnings by managing and keeping all their other ratios low. So

keeping all their other ratios low. So they don't set aside enough reserves.

they don't set aside enough reserves. They don't have enough provision filling

They don't have enough provision filling that reserves. They're doing a lot more

that reserves. They're doing a lot more loan modifications and so what ends up

loan modifications and so what ends up happening and they're doing a lot more

happening and they're doing a lot more NDFI reporting that doesn't mean they

NDFI reporting that doesn't mean they have to get so NDFIS

have to get so NDFIS and I would suggest check with an expert

and I would suggest check with an expert on this because I'm not that guy but

on this because I'm not that guy but I've heard they don't have to hold as

I've heard they don't have to hold as much reserves and capital against

much reserves and capital against non-depository financial institution

non-depository financial institution loans. So what ends up happening is

loans. So what ends up happening is you're encouraged as a bank to do more

you're encouraged as a bank to do more of those lendings. Well, who sets those

of those lendings. Well, who sets those rules? The big banks. They lobby for

rules? The big banks. They lobby for them, right?

them, right? >> Okay. So, but isn't so this is tier one

>> Okay. So, but isn't so this is tier one capital. Uh what about risk weighted? Is

capital. Uh what about risk weighted? Is tier one risk weighted?

tier one risk weighted? >> Risk weighted capital is basically the

>> Risk weighted capital is basically the denominator. The problem is I'm showing

denominator. The problem is I'm showing you tier one leverage because it's the

you tier one leverage because it's the only thing that's universally reported.

only thing that's universally reported. Back under Trump 1.0, there was a big

Back under Trump 1.0, there was a big deregulatory push and call reports got

deregulatory push and call reports got whacked. And in the beginning it made a

whacked. And in the beginning it made a lot of sense, but then they started

lot of sense, but then they started getting into the muscle and then they

getting into the muscle and then they started getting into the bone. One of

started getting into the bone. One of the ones they got rid of is for about

the ones they got rid of is for about 3,000 small community banks, they don't

3,000 small community banks, they don't report schedule RCR2, which is capital.

report schedule RCR2, which is capital. And the reason is because the regulators

And the reason is because the regulators wanted to hit their annual goal of

wanted to hit their annual goal of deregulatory burden and they'd already

deregulatory burden and they'd already cut a bunch of stuff and they said look

cut a bunch of stuff and they said look if we just get rid of risk weighted

if we just get rid of risk weighted assets for all the small community banks

assets for all the small community banks we can reduce their regulatory burden.

we can reduce their regulatory burden. So the problem is is tier one capital

So the problem is is tier one capital divided by risk weighted assets

divided by risk weighted assets completely got screwed up because you

completely got screwed up because you can't do big bank small bank comparisons

can't do big bank small bank comparisons anymore because not all the small bank

anymore because not all the small bank the majority of small banks are what's

the majority of small banks are what's called community bait community bank

called community bait community bank leverage ratio. The only number that's

leverage ratio. The only number that's universally reported is a average assets

universally reported is a average assets for leverage purposes. But if you go

for leverage purposes. But if you go back to before the '051 call report

back to before the '051 call report implementation,

implementation, 2018, 2019, the smaller banks are always

2018, 2019, the smaller banks are always more capitalized than the biggest banks.

more capitalized than the biggest banks. Always because they're privately held,

Always because they're privately held, dude. Dad started grand great grandpa

dude. Dad started grand great grandpa started the bank, right? And you have to

started the bank, right? And you have to understand I manage my business

understand I manage my business different than if a private equity group

different than if a private equity group managed my business. How I treat my

managed my business. How I treat my customers.

customers. >> So totally tier one leverage uh which

>> So totally tier one leverage uh which doesn't take into account risk waiting.

doesn't take into account risk waiting. You're completely right. Uh but tier one

You're completely right. Uh but tier one capital banks that have

capital banks that have >> tier one capital is relative to the

>> tier one capital is relative to the asset size. You can't compare the dollar

asset size. You can't compare the dollar amount. Any way you stack it up,

amount. Any way you stack it up, community banks are more capitalized

community banks are more capitalized than the bigger.

than the bigger. >> Okay. Community banks, but but like

>> Okay. Community banks, but but like banks with 50 to 99 billion have a lower

banks with 50 to 99 billion have a lower tier one capital ratio than 100 to 999

tier one capital ratio than 100 to 999 billion and over a trillion.

billion and over a trillion. >> So I guess that's what I was referring

>> So I guess that's what I was referring to. But yeah, you're you're right.

to. But yeah, you're you're right. Community banks the the smallest banks

Community banks the the smallest banks have the highest capital ratios. I stand

have the highest capital ratios. I stand corrected. You are correct.

corrected. You are correct. >> Yeah. No, you there's no doubt and and

>> Yeah. No, you there's no doubt and and please understand it's

please understand it's >> you can show like this is it's the

>> you can show like this is it's the illusion. Flagstar shows that they're

illusion. Flagstar shows that they're more capitalized than they've ever been,

more capitalized than they've ever been, >> but they're not.

>> but they're not. >> They're managing their assets and loans

>> They're managing their assets and loans and cash. They're stripping they're

and cash. They're stripping they're strip mining the assets and getting them

strip mining the assets and getting them off their book. And how they're doing

off their book. And how they're doing that is they're selling seed corn.

that is they're selling seed corn. They're not selling the delinquent

They're not selling the delinquent loans. Otherwise, they'd be taking big

loans. Otherwise, they'd be taking big losses on the value, right? And you can

losses on the value, right? And you can see loan sales, non-interest income, and

see loan sales, non-interest income, and it's not negative. So what they're doing

it's not negative. So what they're doing is they're the bigger banks and they all

is they're the bigger banks and they all started doing this key truest flag they

started doing this key truest flag they all started raising and manipulating one

all started raising and manipulating one they were raising capital or two they

they were raising capital or two they were manipulating the denominator and

were manipulating the denominator and selling off seed corn to shrink the risk

selling off seed corn to shrink the risk weighted assets so that they could say

weighted assets so that they could say hey we're you can go back and look at

hey we're you can go back and look at Silicon Valley Bank they were one of the

Silicon Valley Bank they were one of the most tier one capital banks in the

most tier one capital banks in the country but But but it's fake.

country but But but it's fake. >> Could you summarize your views on the

>> Could you summarize your views on the bank banks?

bank banks? >> I'm walking through every single segment

>> I'm walking through every single segment of the economy, construction,

of the economy, construction, apartments, residential, right? And I'm

apartments, residential, right? And I'm showing you how the largest banks are

showing you how the largest banks are the monoline lenders. Like Sally May is

the monoline lenders. Like Sally May is a monoline lender. They're just

a monoline lender. They're just manipulating the out of the data.

manipulating the out of the data. So the question is is will it work? And

So the question is is will it work? And I don't know. I'm I used to say no. No

I don't know. I'm I used to say no. No way. But if enough people, and I mean

way. But if enough people, and I mean banks, chief risk officers, and lending

banks, chief risk officers, and lending officers think that things are getting

officers think that things are getting better, can it have the same impact as

better, can it have the same impact as the wealth effect? But I'll still come

the wealth effect? But I'll still come back to it. Is commercial real estate in

back to it. Is commercial real estate in four years going to be worth what it's

four years going to be worth what it's worth now or still going to be worth

worth now or still going to be worth less, right? How long do you have to

less, right? How long do you have to keep the charade going before we grow

keep the charade going before we grow back into the real asset the the on the

back into the real asset the the on the books asset valuations? And if they can

books asset valuations? And if they can thread the needle and thread several of

thread the needle and thread several of those needles, they may. But I'm kind of

those needles, they may. But I'm kind of under the opinion there's going to be an

under the opinion there's going to be an exogenous impact that will

exogenous impact that will there will be a bank or two that will

there will be a bank or two that will stumble. Um but yeah, starting to look

stumble. Um but yeah, starting to look great, man. Party on.

great, man. Party on. >> Yeah, you really opened my eyes, Bill.

>> Yeah, you really opened my eyes, Bill. And I think that you can think of this

And I think that you can think of this as kind of a credit easing if you

as kind of a credit easing if you basically make delinquencies disappear.

basically make delinquencies disappear. >> I'm optimistic, you know, Bill. I want

>> I'm optimistic, you know, Bill. I want people to have jobs, too. I don't want

people to have jobs, too. I don't want there to be a recession. So, I'm

there to be a recession. So, I'm optimistic we can kind of kick the can

optimistic we can kind of kick the can uh down the road, but it does seem a

uh down the road, but it does seem a little bit ominous. I will note, Bill,

little bit ominous. I will note, Bill, you maybe I'd love to have you back on,

you maybe I'd love to have you back on, you know, maybe this year or next, but

you know, maybe this year or next, but you know, we could talk about this next

you know, we could talk about this next time is you said what is real is net

time is you said what is real is net interest income and you know, if if uh

interest income and you know, if if uh all these loans are getting modified and

all these loans are getting modified and they're getting lower interest, that

they're getting lower interest, that would be reflected in net interest

would be reflected in net interest spread. So, you know, the fact that net

spread. So, you know, the fact that net interest margins are still relatively

interest margins are still relatively healthy, I guess they have not been as

healthy, I guess they have not been as strong as I would have thought. And I

strong as I would have thought. And I guess now what you're what you're saying

guess now what you're what you're saying is is a reason for why. But I think like

is is a reason for why. But I think like if every loan was modified and it was a

if every loan was modified and it was a total zombie loan, you know, banks would

total zombie loan, you know, banks would have like very crappy net interest

have like very crappy net interest margins and many many of them don't. Um

margins and many many of them don't. Um but we'll leave it there. Bill, thank

but we'll leave it there. Bill, thank you so much for coming on Monetary

you so much for coming on Monetary Matters. People can find you on

Matters. People can find you on bankregdata.com.

bankregdata.com. You're a hard man to track down, but um

You're a hard man to track down, but um if there are institutional investors

if there are institutional investors involved who uh listening who want to uh

involved who uh listening who want to uh learn more about your research. I mean,

learn more about your research. I mean, here's the thing. Whether I agree with

here's the thing. Whether I agree with your conclusion or not, your your

your conclusion or not, your your platform is amazing and extremely

platform is amazing and extremely useful. If I was an institutional

useful. If I was an institutional investor investing in banks, which I I

investor investing in banks, which I I probably would be if I was an

probably would be if I was an institutional investor, um I I would

institutional investor, um I I would definitely use your your service. Uh and

definitely use your your service. Uh and I'll also say that yeah, I really like

I'll also say that yeah, I really like the crossover. One other conclusion to

the crossover. One other conclusion to draw is just that the large amounts of

draw is just that the large amounts of banks exposure to non-depository

banks exposure to non-depository financial institutions. I think Bill a

financial institutions. I think Bill a lot of you we've talked about funny

lot of you we've talked about funny business with in the banking system. I

business with in the banking system. I think a lot of the aggressive

think a lot of the aggressive risk-taking has migrated outside of the

risk-taking has migrated outside of the banking system. You know, I read a

banking system. You know, I read a Bloomberg article about Apollo uh

Bloomberg article about Apollo uh basically issuing um a bond to itself

basically issuing um a bond to itself where it the bond is collateralized by

where it the bond is collateralized by all of these more risky loans and like

all of these more risky loans and like Apollo probably can get away with it,

Apollo probably can get away with it, but you know, they're going to be

but you know, they're going to be copycats who are not as smart as Apollo

copycats who are not as smart as Apollo and uh that could cause another

and uh that could cause another financial crisis. Who knows? But uh

financial crisis. Who knows? But uh Bill, we will leave it there. Thank you

Bill, we will leave it there. Thank you so much. Thank you everyone for

so much. Thank you everyone for watching. Uh a reminder to leave a

watching. Uh a reminder to leave a rating and review on Monetary Matters

rating and review on Monetary Matters and subscribe to the Monetary Matters

and subscribe to the Monetary Matters YouTube channel. Until next time. Thank

YouTube channel. Until next time. Thank you, Jack.

you, Jack. >> Thanks for tuning in. Looking into SMH

>> Thanks for tuning in. Looking into SMH or SMHX? Head to van.comshjack

or SMHX? Head to van.comshjack and van.comsmhxjack

and van.comsmhxjack to learn more. Until next time.

to learn more. Until next time. [Music]

[Music] Thank you. Just close the door.

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YouTube Transcript:Banks Are Hiding Credit Losses (Here’s How) | Bill Moreland of BankRegData

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Banks Are Hiding Credit Losses (Here’s How) | Bill Moreland of BankRegData