Banks Face $500 Billion In Losses: Debt Bomb Strikes | Chris Whalen

Bank of America

Across the shows: 3 speakers in other episodes, 0 bullish and 4 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  Bank of America mismanaged its bond book and is leaving money on the table, so earnings should be higher.

  Bank of America has not restructured its bond book even today, so it carries large unrealized losses on low-coupon securities, and the wider industry still has roughly $500 billion of total securities losses. Whalen says the bank should be earning far more, that management mismanaged the balance sheet and does not understand duration, and that peers like Citi, JPMorgan, Wells Fargo and American Express handled it better. He frames this as an earnings problem and says he is not worried about deposits, because Bank of America is his own bank.

  “But for some reason, the folks at Bank of America were kinda brain dead as usual. They're my bank, by the way. And they have constantly mismanaged that institution.”at 4:20

The Charles Schwab

Across the shows: 2 speakers in other episodes, 1 bullish and 2 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  Schwab has the lowest bond-book yield of any large bank, leaving billions for shareholders on the table.

  Whalen says Schwab's bond book yields less than any large bank's. Schwab defends this by pointing to its low cost of funds, but Whalen rejects that, arguing that proper management would be worth billions to shareholders. He also says he had a Schwab position and sold it, so the view is critical rather than a current holding.

  “Schwab has the lowest yield on their bond book of any large bank. ... Because if they had gotten this right, it'd be worth billions and billions of dollars to Schwab shareholders.”at 5:18

Oracle

Across the shows: 13 speakers in other episodes, 0 bullish and 11 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  Oracle's balance sheet cannot handle its AI debt and commitments, so it is likely to end in trouble.

  Whalen argues that Oracle and similar companies are issuing debt and making commitments their balance sheets cannot support. He points to Oracle having already issued several force majeure notices because the deals it is involved in cannot be completed, and says it lacks the electricity and other resources needed to finish the projects. He expects some of these companies to be restructured or bought.

  “And when you see all these companies issuing debt and making financial commitments that, frankly, their balance sheets can't handle, you almost know that they're gonna end up in trouble. I think Oracle is a case in point.”at 13:05

NVIDIA

Across the shows: 25 speakers in other episodes, 21 bullish and 9 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  NVIDIA is financing chip customers who cannot use the chips, a sign of circular demand.

  Whalen describes buyers who bought NVIDIA chips, often financed by NVIDIA, and then stored them in warehouses because they cannot use them. He sees this as typical of the AI build-out. He also argues that NVIDIA has been aggressive about funding customers because those customers cannot carry the burden on their own balance sheets, and that NVIDIA has to hedge the exposure as if it were running a bank.

  “So, you know, today, you have this bizarre situation where people have bought NVIDIA chips, often financed by NVIDIA, and they stick them in a warehouse somewhere because they can't use them.”at 13:30

SoftBank Group

Across the shows: 1 speaker in other episodes, 0 bullish and 2 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  SoftBank inflates portfolio valuations by investing in a company and then reinvesting at higher prices.

  Whalen says SoftBank invests in a company and then, six to twelve months later, invests again at a higher valuation, and then points to the higher valuation as proof of gains. He argues this is pumping up value rather than creating it, and that it would once have been called securities fraud. He adds that SoftBank has said this year that it ran out of money and lacks enough capital for the opportunities it is pursuing.

  “And you see this with SoftBank. SoftBank has used this approach where they will invest in a company, and then they'll go invest six months or twelve months later at a higher valuation.”at 16:39

CoreWeave

Across the shows: 29 speakers in other episodes, 6 bullish and 22 bearish calls, past 30 days

• Chris Whalen · Whalen Global Advisors LLCBearish

  CoreWeave has limited capacity to carry its debt and is likely to be restructured or bought.

  Whalen says a number of AI data center companies, naming CoreWeave with Oracle, will probably end up restructured or bought. He argues they have limited capacity to carry debt, especially when the payoff and time horizon of their investments are uncertain. Rising interest rates and the debt they must roll make the risk more acute.

  “You talked about Oracle. You talked about CoreWeave. These are companies that have a limited capacity to carry debt, you know, especially if we're not sure about the payoff on the debt, the time horizon.”at 19:09

Banks

• Chris Whalen · Whalen Global Advisors LLC

  Bank earnings will weaken because Wall Street capital markets activity has slowed sharply.

  Whalen expects weaker bank earnings because the Wall Street side of banks has slowed a lot. AI deal activity has cooled after a sell-off. Lending has been quiet, with loan growth in low single digits, and the strong debt issuance and derivatives business from the first half of the year has faded. He says some quarterly yield help is coming as banks finish reporting.

  “Well, I think you're going to see weaker earnings because the Wall Street side of the house has slowed down a lot. AI has slowed down, obviously. You've seen the sell off.”at 6:17

• Chris Whalen · Whalen Global Advisors LLC

  Whalen is out of bank stocks and shorting a couple names on rising inflation and Iran-war credit costs.

  Whalen says he has lightened his bank holdings and is now short a couple of unnamed bank names. His reason is that credit costs will rise because of inflation and the war with Iran. He also notes that financials have been pulled back by buy-side investors who are worried about the Fed and future credit costs, and that the large-cap banks have not led the sector this year.

  “I'm out of banks. You know, I have lightened up my portfolio when it comes to banks. ... And I'm actually short a couple names right now because I think credit costs due to inflation, due to the war with Iran are gonna go up.”at 7:29

• Chris Whalen · Whalen Global Advisors LLC

  Bank liquidity is not drying up; banks have plenty of cash and are underutilized.

  Whalen rejects the idea that bank liquidity is drying up. He says banks have plenty of cash and are underutilized. AI-related margin and securities lending has been the one hot area over the past six months, and the rest of the balance sheet is calm. He says banks would like more consumer and business borrowing, but demand is weak, citing low utilization of home equity lines and credit cards.

  “No. The banks have plenty of cash. If anything, banks are underutilized today. The one hot area has been AI, margin lending, securities lending past six months.”at 20:03

US housing

• Chris Whalen · Whalen Global Advisors LLC

  US mortgage originations will fall from about $2 trillion this year to roughly $1.7-1.8 trillion next year.

  Whalen says mortgage volumes fell sharply in the third quarter after strong second-quarter lending. He expects about $2 trillion in originations this year and below $2 trillion next year, around $1.7 to $1.8 trillion. He expects the market to contract, consolidate, and see banks exit parts of mortgage finance because volume no longer justifies the risk. JPMorgan keeps the large jumbo mortgages it originates because they are profitable.

  “We're gonna do about $2,000,000,000,000 in new mortgage originations this year. Next year, we're probably gonna be below two. We're probably gonna be, like, 1.7, 1,800,000,000,000, and the market is gonna contract.”at 22:46

• Chris Whalen · Whalen Global Advisors LLC

  Business-purpose loans for rental properties will become a problem next year.

  Whalen points to a boom in business-purpose financing for rental properties, which lenders have been extending heavily. He expects that segment to become a problem next year. This is the one area where he sees credit risk in residential lending, while home prices are so high that banks are unlikely to lose money on one-to-four family loans.

  “The one area I would flag for you, though, is rental properties. There's been a boom in financing for what we call business purpose loans for rental properties. Those are gonna be a problem next year.”at 24:28

• Chris Whalen · Whalen Global Advisors LLC

  Homebuilders are not a buy: they must liquidate subsidized inventory and cut costs, slowing the industry.

  Whalen says homebuilders have two problems. First, they must move inventory they had already been subsidizing loans on, and are now shifting it into rental strategies because they cannot sell it. Second, costs are forcing them to build smaller homes and be more careful with speculative homes built without a buyer, which will slow the industry.

  “No. They have two problems. One is, as you pointed out, they have to move inventory. They had already been aggressively subsidizing loans for new home buyers, but now they're starting to move that inventory in the rental strategies.”at 25:06

US Treasuries & yields

• Chris Whalen · Whalen Global Advisors LLC

  Ten-year yields will not return to 5% or lower; confidence erosion keeps yields high.

  Whalen expects a bond rally to fall short of the big rally investors expect, so he doesn't think ten-year yields will get back to 5% or lower. He cites the Fed not buying securities and President Trump's statements, which he says have eroded confidence in the United States and kept yields high. He also says AI-related credit demand has pushed yields up. He argues that Treasury buybacks have not helped.

  “we may see a rally in bonds, but are we gonna go back to 5% on tens, or lower? I don't think so. ... the fact that the Fed is not buying securities ... has eroded confidence in The United States, and that's why bond yields are higher.”at 9:49

AI infrastructure & data centers

• Chris Whalen · Whalen Global Advisors LLC

  Data center buildout lacks the funding, electricity and capability to be completed as planned.

  Whalen says the industry lacks the funding, electricity and capability needed to make all the planned data centers real. As an example, he says Microsoft pulled out of a UK data center because power will not be available until 2030. He sees a fundamental lack of infrastructure, and says companies are taking on debt and commitments that their balance sheets cannot handle.

  “But the reality is we don't have the wherewithal, the funding, the electricity to make all of these data centers real. You saw Microsoft pulling out of a data center in The UK because they're not gonna have power until 2030.”at 12:36

AI bubble & tech valuations

• Chris Whalen · Whalen Global Advisors LLC

  AI is a mania of vast proportions; many current players may not survive a couple of years.

  Whalen calls the AI boom a mania of vast proportions. He grants that AI is a useful technology, but says the clients who really benefit use it internally rather than rolling it out to consumers. He says we are in the early stages, that many of today's players may not be around in a couple of years, and that others will pick up the baton. He also says AI's monetization is still limited, so the build-out depends on funding that is not yet supported by revenue.

  “That to me typifies what's going on here. The AI thing is just a mania of vast proportions.”at 13:43

Private equity

• Chris Whalen · Whalen Global Advisors LLC

  Continuation vehicles show PE companies cannot sell their holdings, so holding periods are extended.

  Whalen reads PE continuation vehicles as a sign that the companies private equity firms bought cannot be sold, so holding periods have to be extended. He says the quality of opportunities has declined as the industry has grown, and that continuation funds let bankers keep earning fees on what is effectively a failed investment. He says PE firms often sell assets to one another and pretend the assets are still good.

  “Well, it means that the private equity companies that they underwrote can't be sold. And so they have to extend the time that they're gonna hold the investment.”at 14:38

US rates & the Fed

• Chris Whalen · Whalen Global Advisors LLC

  Fed funds hikes barely hurt bank lending; long-end bond yields matter far more.

  Whalen says short-term increases in the Fed funds target have little effect on bank lending. The long end of the bond market has had a much bigger impact over the past six months, raising loan yields, which he views as helpful for banks. The problem is on the borrower side, since borrowers face higher rates when they roll their debt.

  “Well, the short term, you know, increases in the target for fed funds don't have much impact. The long end of the [bond] market that we've seen over past six months, that has a much bigger impact.”at 20:46

Commercial real estate

• Chris Whalen · Whalen Global Advisors LLC

  CRE borrowers struggle as seven-year post-COVID debt must be rolled at yields 2-3 points higher.

  Whalen points to commercial real estate projects with seven-year debt originated right after COVID that now have to be refinanced at yields two to three points higher than seven years ago. Real long-end rates are positive, so borrowers face a real challenge, and many obligors have large amounts of debt to roll.

  “the customers are struggling because if you're, say, a commercial real estate project and you've got debt that had a seven year tenure ... you're rolling it at yields that are two and three points higher than where we were seven years ago.”at 21:02

Agriculture & food commodities

• Chris Whalen · Whalen Global Advisors LLC

  Food prices will rise next year as farmers cannot afford fertilizer after the Iran war sulfur shortage.

  Whalen expects food prices to be higher next year. The Iran war cut sulfur supply to the global market, and sulfur is mainly used to make fertilizer. Higher diesel prices and lower expected farmland yields next year mean farmers cannot afford fertilizer. He says this is a global problem, not just a US one, and consumers will face higher food prices going into the spring.

  “I think energy prices are gonna stay elevated for a while. Also, food prices are likely to go higher next year because farmers can't afford to buy fertilizer.”at 30:27

Oil & fuels

• Chris Whalen · Whalen Global Advisors LLC

  Energy prices will stay elevated for a while because of the Iran war.

  Whalen expects energy prices to stay elevated for a while. He ties this to the war with Iran, along with high gas and diesel prices. He also says Europe has a profound increase in prices and does not have enough fuel for the winter, which adds to the pressure.

  “I think energy prices are gonna stay elevated for a while.”at 30:27

US deficit & government debt

• Chris Whalen · Whalen Global Advisors LLC

  US debt is sleepwalking toward crisis; the Fed will have to buy more securities, causing inflation.

  Whalen argues Treasury Secretary Scott Bessent should focus on the budget deficit and push Congress toward fiscal responsibility rather than intervening in bond markets. He says the country is sleepwalking into a debt crisis. The US will pay its bills, but the Fed will then have to buy many more securities, and that will lead to inflation. He concludes that democracies are dysfunctional when it comes to protecting the currency's value.

  “Intervention has very limited utility. He's the chief financial officer of The United States. He should be focused on the budget deficit.”at 32:54

European politics

• Chris Whalen · Whalen Global Advisors LLC

  France's unrest echoes pre-revolution debt debasement; Macron has been a failure as leader.

  Whalen compares France's protests and fiscal problems to the decades of money debasement and defaults that preceded the French Revolution and the rise of Bonaparte. He calls Macron a failure who is not engaged. He adds that the Iran war has driven up prices in Europe, that Europe lacks enough fuel for winter, and that the Ukraine-Russia war adds to the pressure.

  “it's kind of the precursor to the French revolution. You know, you had decades of money debasement and defaults, before the rise of Bonaparte after the revolution. So I think Macron has been a failure as a leader.”at 34:51