Post-Election Playbook with Isaac Boltansky, Director of Policy Research at BTIG
Willy Walker: Good afternoon. Welcome to another Walker Webcast. It is my great pleasure to have my longtime friend and incredibly talented analyst, Isaac Boltansky, joining me today. A quick bio on Isaac, and then we're going to jump into all things Washington.
Isaac Boltansky is a managing director and director of policy research at BTIG. In his role, he is responsible for coordinating the firm's Washington Policy and Analysis, forecasting how potential policy shifts could impact investors, corporations, and other market participants. He focuses particularly on financial services, housing policy, digital assets, cannabis policy, tax legislation, and Congress. In other words, everything that drives our world. Prior to BTIG, Mr. Boltansky was the director of policy research at Compass Point Research and Trading. He also served as a research analyst on the Troubled Asset Relief Program. Those of you old enough to remember TARP, the Congressional Oversight Panel there, and as a research analyst at EJF Capital which is where he and I first got to know one another. Isaac, welcome. How are you?
Isaac Boltansky: I'm great. Thank you for the invite. I'm looking forward to the conversation.
Willy Walker: Very much so. A lot to talk about. I want to start here. You predicted that President-elect Trump would win, and you also predicted that the Senate would go red. We now have the House going red as well. You got all that right. Was the margin of victory surprising to you or not?
Isaac Boltansky: The answer to that is yes. I am surprised that we knew as quickly as we did on the presidency, and I was surprised by a few states. But by and large, the way that we looked at this was at the presidential level. I figured out what mattered most to the swing state voters. When you look at that data, it shows that the top two issues for those voters were the economy and immigration/border security. Trump led meaningfully the entire time on both of those issues. And that's what really informed our view on the presidential race.
Willy Walker: You noted, Isaac, that $16 billion was spent on this election cycle, both in the presidential election and congressional elections, senatorial, local. Is that the sign of a super healthy democracy or a corrupt democracy?
Isaac Boltansky: We've got a view that is a troubling sign by and large. I think, especially folks in those swing states, they were pretty tired of the ads by the end; I can tell you that much. But I am worried over the long term about how early these contests start. And I think that it's exhausting for the American public. I think that it leads to some qualified candidates not wanting to run because of how long it is, how arduous it is, and how difficult it is. And I think that, ultimately, the constant campaigning makes it hard to govern, which is ultimately what we want all these people to be doing.
Willy Walker: Do you think that, as it relates to what I take from it, you don't think that the $16 billion is a really healthy sign that our democracy is actually working?
Isaac Boltansky: Would it be healthy if you owned a TV station in one of the swing states?
Willy Walker: Yeah.
Isaac Boltansky: I don't think it's a great sign overall.
Willy Walker: Leading up to the election? I have a WhatsApp chat group with a bunch of friends of mine that extend from some very staunch MAGA people on the right to some very liberal people on the left. And I think we worked really well to maintain civility and a good discourse during that period of time. A number of issues were brought up that were really hard to tackle. People would throw in articles, and people would have very differing views on it. But as I watched that debate going, I said, “Man, this is democracy. Regardless of who wins. This is sort of democracy at its best in the sense of people really struggling with various issues, talking about two candidates that were wildly different from one another and what their policies would mean for the future of America.” And I felt that plenty of people don't like the fact that they can't sit at the Thanksgiving Day table with family members because they look at the world in such a diametrically opposed position. I also feel this election, for whatever reason, felt like it was a real stress on the issues, which was actually healthy in the sense that you knew what you were getting, and you knew what you weren't getting, depending on how you pull the lever. Do you agree with that?
Isaac Boltansky: I think that some of the issues were brought into stark repose this time. And I think that that made it feel as though this was more of an issue-based election at times. And I think, especially with the candidates, we knew where they stood, and there were some substantive policy differences. I think what worries me, Willy, is that the news is still becoming this choose-your-own-adventure book where folks choose that lens, and they stick with that. And there's a rigidity to that that I think is concerning. And that's the broader fear that I have, is that we don't have a universal baseline for reality and fact, and that's ultimately corrosive to our politics.
Willy Walker: On November 6th, you published a research report that listed the winners and losers from the previous day's election. And if you had read Isaac's report and you had followed the winners and the losers, you would have made a whole lot of money. I'm pretty sure you probably didn't think that people would make as much money as they would have made if they'd followed your recommendations, Isaac. But let's run through a couple of those.
The first one that you point out is increased M&A. You cite a couple of deals that have been caught up, whether it's the FTC trying to break apart some companies or whether it's blocking as it relates to anti-competitive approval by the DOJ that there are a couple of deals that will go through. But it's too early, obviously, for us to say, “That's actually going to happen.” But clearly, you've seen in the bank stocks that the increased expectations on M&A activity in the economy has pushed bank stocks up significantly. And I don't think that's because JPMorgan's asset base grew dramatically post-election. It's due to the fact that their investment bank and their fixed income and equities trading desks are going to have a really good time going forward. And that was a good one. Anything you want to add on that one before I go to number two. Number two was quite the gangbuster.
Isaac Boltansky: I think on the M&A, the point that I just want to make here is we've had four years of new thinking in Washington about consolidation and really trying to move away from the consumer harm standard that's defined consolidation thought for 60-70 years. It brought forward this new school of thinking called New Brandeis, or if you want to make fun of it, some folks call it hipster antitrust. And this has led to the opposition to numerous deals. And I think it's important to highlight here that opposition to the big deals that you saw from the FTC and the DOJ; I think that had a chilling effect on medium and small enterprise consolidation as well because, goodness, they wouldn't want to wait around. They wouldn't want to pay the lawyers and wait extra time to get a deal through. I think it's important to note here. There's going to be consolidation throughout the economy, big, small, little. The only caveat I have is the nation's biggest banks still aren't going to be allowed to buy anything. And I think the big tech firms that the Magnificent Seven aren't going to be able to go on a buying spree either.
Willy Walker: I'm assuming Lina Khan will leave her role, and someone else will come in as head of the FTC. During the campaign, Vice President-elect Vance made some comments about how some of what Lina Khan was doing as far as big tech would be embraced by a Trump administration.
Isaac Boltansky: This is something, Willy, that I'd love to spend some time with you on, but I've always thought about the ideological spectrum. You have the far left and the far right, but Willy, it's bent, and it's turned into a horseshoe over the past few years. And there are areas undeniably where the progressive left and the populist right agree. I can tick off a few. It's drug prices. It's capping interest rates on credit cards. And deep skepticism of big tech is part of that as well. And I think that that's one of the reasons that you saw Vice President-elect JD Vance offer those comments in support of Lina Khan's work at the FTC.
Willy Walker: You wrote a note relating to that capping on credit card interest charges. And I think the two senators you put in it were Elizabeth Warren and Josh Hawley. I sat there, scratched my head, and said, “I quite honestly can't believe that I'm reading something that says that Elizabeth Warren and Josh Hawley are of like mind on any issue on the face of the planet.” And that's the wrapping around of the far left and the far right that has got us on an issue like that's got two people who literally don't seemingly be able to even talk to each other and agree that it's 8:00 in the morning and here they are on a pretty significant policy initiative as it relates to credit card interest rates that they're in agreement on.
Isaac Boltansky: I don't think they would want to be in the same room as one another, except for if that bill was ever signed into law. I think you're absolutely right.
Willy Walker: And do you think there's any chance of movement on caps on credit card interest expense while we're on it?
Isaac Boltansky: I'm old enough to have learned the lesson that you never say never, especially in D.C., a town where things are impossible right up until they're inevitable. But I don't see immediate action here. Instead, I see us moving over to the next Congress or maybe two legislate for more competition to go after the duopoly of Visa and Mastercard. I think that's where this is going. I think capping rates is still difficult to see in the immediate term.
Willy Walker: I will say I listened to a podcast on Visa. I'm forgetting its name, but it was a fantastic deep dive into Visa, its business model, and how they were created. I will tell you, it's like they're running 80% gross margins. It's a license to print money. And it's really quite something how they've gotten set up and have operated in this duopolistic mode for as long as they have. But time will tell whether anything happens to that.
Let's go to the next one beyond increased M&A activity. If someone had read your note and bet here, it would have been really quite something. You put number two, the privatization of Fannie Mae and Freddie Mac, and that was number two. And on November 6th, when you wrote that note, Fannie Mae was trading at $1.40. Last I checked, in preparation for this call, it was trading at $3.17. That's a cool 126% appreciation you would have had if you'd gone to your number two idea and bought common shares of Fannie Mae. I want to dive into GSE reform or the spin out of Fannie and Freddie and the privatization in a moment in much further detail. But from a headline standpoint, I was surprised, Isaac, that you put that as your number two idea. It's a pretty niche idea in the sense that, obviously, Fannie and Freddie have a massive implication for the overall housing market, mortgage market, and overall capital markets. The whole reason that they were taken into conservatorship when the capital markets were exploding by the Bush administration was because of the massive role they play in the overall global financial system. I'm not trying to diminish that. As it relates to the ability to either buy Fannie or Freddie common equity, I think the market cap of Fannie Mae on the 6th of November was like 1,000,000,007 or something, which is really not a major deal. And why put that as number two also of all the things out there? It didn't seem like President-elect Trump spent that much time talking about the privatization of Fannie and Freddie.
Isaac Boltansky: I want to dig in as well later in this conversation because I think that there's a lot of nuance there. And I consider you to be one of the experts on this issue. I want to spend time on it. But why did I have it up so high? I think I'll answer it this way, Willy. My wife had twins about 18 months ago, a boy and a girl. And I love mortgage finance so much that I tried to get those kids named Fannie and Freddie. That's how much I love these issues. That's how much I love mortgage policy. You cover the waterfront here in town, and you end up liking some issues more than others. And this one is intellectually challenging, but it's also you're talking about something that's incredibly important, not just 15 to 20% of the economy, but also having a roof over your head is one of the most important things for anyone. And I think it's important economically and from a humanitarian standpoint as well. There are interesting times. I had it high on the list because I love the issues, and I find them worthy of examination which I hope we'll get to do a little bit later on.
Willy Walker: We are going to dive into them in a moment. Let's keep running through this, though, because the picks you had, as I said at the top, had somebody just said, “Alright, I'm going to place money on each one of these would have been extremely beneficial to you.”
Number three was private prisons. And the number one company that you put in there was the GEO Group. Had Geo Group's market cap increased from $2 billion to $4 billion in the last three weeks, it's doubled in value had you gone and bought GEO Group. I guess my question on that one, Isaac, is the play there on additional outsourcing of state and local law enforcement, if you will, and the prison system? Or is it more playing on the illegal immigrant issue and then playing a significant role in both, if you will, the containment or seizure of those people and then the deportation of those people?
Isaac Boltansky: As much as I feel good talking about mortgage policy, the counter to that is how bad I often feel talking about private prisons. But look, they play an important role, and part of their business that I think will benefit is the regular way business with the U.S. Marshals and the Bureau of Prisons. I think that's important. But really the move higher that you've seen in those names since the election is focused primarily on border security and on immigration enforcement. A third of each one of the companies that you mentioned, GEO Group, and the other were CXW, and a third of their businesses are with ICE, Immigration and Customs Enforcement. And I think there's a view based on the rhetoric of the Trump campaign that we're going to see a dramatic increase in border security. And I think that you can absolutely count on that. That's going to happen, I think, early next year in the Republican tax and spending bill. I think you're going to see all of the existing border security programs plussed up. But there's also obviously been an enormous amount of conversation about mass deportation. And I'm not as big of a believer in that occurring. I don't think that you're going to see the 11 million or so unauthorized immigrants deported from the U.S. I think that there are economic problems, logistic problems, and humanitarian problems, with all of that. But you're absolutely going to see an initial focus. And I think that this has been backed up by some commentary from some of President-elect Trump's team that they're going to focus initially on trying to deport unauthorized immigrants who, for example, have criminal records. It's going to start there. And all of that accrues to the benefit of companies like CXW and NGM.
Willy Walker: Number four on your list was digital assets. And there's probably not a single person who's listening who hasn't been watching the countdown to Bitcoin at $100,000 a coin over the past couple of weeks. I would say, “It's a good thing you did put this in number four” because actually, if you bought Bitcoin on the day after the election, it was at $70,200 per coin, and it's now only, relatively speaking, at $98,400. That's only a 40% return. Of all these of Fannie or Freddie at 120 some odd and of the GEO group at 100%, you’re stepping down significantly, Isaac. Incredible what's happened to digital currency since the election is incredible. It's still wildly speculative. One of the things that I've always been concerned about is the fact that there really isn't a use case for Bitcoin. You don't use Bitcoin to buy things. It hasn't actually gotten into our daily practices of using it to buy and sell things. And as a result of that, I clearly understand it as an investment, or that investment is a percentage of your investable assets, all that great stuff. But the fact that it hasn't gotten a use case yet really says to me, “It's more of an idea than it is actually a product or service that you would want to go buy.” Why has the narrative suddenly changed with the Trump administration coming in?
Isaac Boltansky: I can't remember how long ago it was. It was before the pandemic. I met the CEO of a digital asset startup, and we had a great conversation. And I was having fun. I asked him, “Is crypto the future of finance, or is it a fraud?” He waited a second and said, “Yes.” And I think that has informed my viewpoint here. I think that there is value here. I think there's incredible value to the blockchain. I really do. I think that that has been proven time and time again. I think that there are questions that I still have about what crypto and digital assets want to be when they grow up. And I think that's something that we're going to see over time. But from a purely political standpoint, Willy, what they've done in ten years is incredible. They have gone from folks on the Hill having absolutely no idea what they are and not caring to folks on this hill still probably do not know what they are but caring very much. And that's pretty incredible. And look, on the policy side, my line to clients here is everything is going to be directionally positive. You're going to have an SEC that is more supportive. You're going to have more IPOs via the SEC, which has been holding them up. The bank regulators are going to allow more banks to participate in that world through custody and others. That's meaningful. And my cautionary point, though, Willy, is after all this, we still don't know what security is. It's a big deal. And I think that at least from my seat, you're probably going to need clarity from the courts, which I think is going to take a few more years until we get our arms around that. I also think Congress might pass a Stablecoin bill, but I'm not betting on it until next year, and I'm definitely not betting on them passing something broader. Look, it's all positive. I caution that there's no policy panacea here. There's still lots of work and, frankly, some unknowns.
Willy Walker: Next on the list in number five is consumer finance. Clearly, there will be a change at the head of the CFPB. And we've clearly seen the bank stocks go up dramatically from a regulatory standpoint on consumer finance. Other than a general deregulatory framework, if you will, of a Trump administration and a new head of the CFPB and other regulators, anything specific that we ought to be looking for there on the consumer finance side from a regulatory standpoint that you think is going to either be overturned or implemented?
Isaac Boltansky: The one I'll mention, and it goes back to the horseshoe political ideology that I mentioned before, where you can see the far left and far right agreeing that credit card interest rates are bad. I think that Republicans are going to take over the bureau, and they're going to look at some of the work that was done under Director Chopra and say, “Let's continue that.” One area that I highlight is the residential mortgage side. I think that you could see continued scrutiny under a Trump CFPB of closing costs. Closing costs have gone up 40% over two years. And I think that's something that you saw in the bureau under Director Chopra. They released an RFI. They started looking at it. I could see the Trump administration saying, “Let's pick up this ball and run with it.” Perhaps they're not getting as much value for that 40% increase in overall closing costs, which is something that matters for our clients who invest in companies like title insurance.
Willy Walker: Yeah, number six is defense. I was interested in this in the sense that President-elect Trump has clearly taken a hard stance on U.S. preparedness and military expenditures. And at the same time, aren't we at an inflection point as it relates to investment in defense? When you look at the war in Ukraine and the amount of money and focus on drone warfare and the technologies that they've been able to develop as it relates to drones, I had General David Petraeus on the Walker Webcast probably about six weeks ago; maybe it was eight weeks ago. He talked at length about new warfare and how drones, AI, and unmanned aircraft, as well as ships, are the next frontier of our military expenditures. At the same time, it does appear as if President-elect Trump wants to put more boots on the ground and get our troop levels back up to previous levels. Where do you come down on that as it relates to where we are at a tipping point where we're going to have to redo all systems, and therefore, it's going to increase the overall spend? Or is the spending going to go to more traditional type of military expenditures of the troop bases and things of that nature that would be a different view of where you would place your bets as it relates to general military spending?
Isaac Boltansky: I think about defense spending in the following framing. Republicans want a huge military and don't want to send it anywhere. Democrats want a small military and want to send it everywhere. And I think that's informed my viewpoint here. And I truly believe that no matter how you think about this ideologically, it is clear to me that investment is going to continue, and this is going to be a tide that lifts all boats. Of course, unmanned space is of great interest to me. My colleague here, the firm, Andre Madrid, covers it. And it's been fascinating to learn about. I think that's one area that is undeniably going to see increased investment. But I'm of the view here that from a broader investment perspective, the dollars are going to keep flowing. And I would note, Willy, that this is important. This is where personnel and policy are. Senator McConnell is now going to run the subcommittee on Capitol Hill, which focuses on defense spending. And I bet he's going to get everything he wants on that, given his standing. And that's telling in the broader scope.
Willy Walker: Final one on your winners, then we'll jump to the losers for a moment. And then I want to go down to a couple of the appointees or nominees that we have seen so far are still waiting to see.
But you had fossil fuels, probably no surprise to anyone, given President-elect Trump's comments as it relates to drill, drill, drill. On the flip side, you have clean energy as the number one loser. We've invested so much in clean energy. And you also have a gentleman named Elon Musk, who is in this administration running the Department of Government Efficiency, who happens to own what I would deem to be the largest clean energy company on the face of the planet. Is it all down for clean energy and all up for fossil fuels, or do you think that these two are headed in a direction where the new energy secretary or nominee, I should say, is A, from the great state of Colorado, B, from having seen on his own LinkedIn account statements that he doesn't believe that there is a climate crisis or that global warming exists, which quite honestly is quite contrarian to where most people are. At the same time, I also have done enough and know enough people who know him to say that he's super bright and will do a very good job if he gets through the nomination process. But is it just a drill, drill, drill? We pump more oil, just a quick aside. We pump more oil in the United States in the month of July than we've ever pumped in the history of the United States of America. If you took the United States and Canada and put them together of our production in the month of July, we produced more oil in North America than OPEC produced. I see those numbers and what we're actually already doing. And I ask myself, how much more drilling can we do or should we do. So on that as far as fossil fuels go up and clean energy down, is it that clean a line?
Isaac Boltansky: It is not. And that's one of the reasons I have a job. It is far more nuanced, as you note. And the framing that I would use here is a de-prioritization of green energy. It's not necessarily negative for green energy. I think that what we're going to see here is a “all of the above energy policy”. And so sure, fossil fuels are going to be winners because they're going to get more leases on federal land. Great. And EPA, we're going to roll back some of the NEPA review timelines probably. All of that's pretty clear to me.
But what I'd highlight here is I think that one of the big fights and one of the areas of interest that I care about the most is will the Inflation Reduction Act, $500 plus billion in green energy tax credits, be repealed. The president-elect has said he wants to repeal it. And while I think it's important to know here, I don't think that the vast majority of those credits are going to get repealed. And there are lots of reasons why. There’s the climate change issue. There is the economic impact. But most importantly, for me, and this is what I will triple underline here, 80% of the dollars from those tax credits thus far have gone to Republican districts. That's a big deal. That matters. And look, I think that you're going to see tweaks. And that's the way that this tax bill is going to get done. You're going to see tweaks where they have earlier sunsets for some of those tax provisions. Maybe they removed some of the carve-outs maybe. And we know they're going to get rid of the electrical vehicle credit. But by and large, the bulk of the Inflation Reduction Act's tax credits are going to survive.
Willy Walker: Number two on your list of losers is global trade. And this is a good segway into tariffs. President-elect Trump put out some significant rhetoric during the campaign related to tariffs. You're very clear in saying take him at his word. He's definitely going to do something here. But then you also sit there and say, “It depends on where Lighthizer ends up as it relates to our role in the administration. And if Lighthizer doesn't get a significant role in the administration, it might be bringing down the tariff push a little bit.” And what's your take, given the way the cabinet's coming together, the conversation and I want to segway from here into Treasury secretary and a bunch of other jobs that are out there. But what's your take from a tariff standpoint as it relates to the rhetoric of the campaign? Clearly, something additional is going to happen against China. Do you think that the across-the-board tariff discussions stay on the table, or you might back away from those a little bit? And then I think the final piece to my question is, how scared does that make you about a potential resurgence in inflation?
Isaac Boltansky: Let's start with a framing of what the president-elect has proposed. He has proposed a universal baseline tariff of 10% to 20% on all foreign goods and a tariff of at least 60% on all Chinese goods. And then a bunch of one-off tariffs on autos from the EU and Mexico and a bunch of other things. My thought process here is that Congress isn't going to be a check on Trump. The courts, by and large, I don't think are going to be a check on Trump except for certain areas that we can talk about. I think the market is going to be a governor on some of Trump's policies, and I'm reminded that in the first Trump administration, they often used the S&P as a report card, a real-time litmus test of how they were doing. Willy, the former Treasury secretary, Mnuchin, said that they were a mark-to-market administration. And look, the way that I've thought about tariffs and immigration and the spending bill, all of which there was this soaring expanse of rhetoric on the campaign trail, I think that you're going to see a narrowing and a softening of all of those given the way that politics in town work. But also, if you did all of those things, it would be incredibly inflationary. We would see a change in the Fed's rate trajectory accordingly. And I think the bond vigilantes will come out, which we'll talk about in a moment. To answer your question on tariffs, I think there's going to be incrementalism here. I think on day one, they're going to start work on increasing some of the tariffs on Chinese goods, but they're going to be careful. They're going to really turn the dial high on non-consumer goods. But they might not dial it up to ten on consumer goods because they don't want you to feel it in your wallet initially. Also, it's going to take six or seven months to actually put those in place from a timing perspective. I do not think it's probable right now that we're going to have a universal baseline tariff. I think that's going to be more of a cudgel, a means of forcing negotiation across the world, than anything else.
Willy Walker: Do you think there's a chance, Isaac, I've thought about, as it relates to China, President-elect Trump in his first administration, many people would say, “Did an incredible job of pointing out China, holding them to task, putting up the tariffs and having a real impact on China.” But when he put up that first round of tariffs, at 20%, China devalued their currency in the process, and we put up the tariffs. They brought down the value of their currency, which offset those tariffs. Clearly, if he were to go and put the extreme tariffs of 60% on all Chinese goods, there's no way for them to devalue themselves out of that situation. And I sit there, and I wonder and get concerned that if President-elect Trump puts Xi Jinping into the corner to such a degree that manufacturing falls even further and given that they've got a massive real estate crisis in China right now and the economy isn't growing anything close to what it was, that the only thing left for Xi Jinping to do is to go after Taiwan. They have to be very careful as it relates to the amount of pressure they put on China before China could potentially break. Do you think I'm too dramatic in thinking that or is there a line there where we really do put him in the corner to the point where they really don't have anything else to do?
Isaac Boltansky: I think, first off, I worry about everything. I'll put that on the risks on the very long list of things I worry about. But I think we need to remember that all politics are local. Whatever we do will have an impact on China's economy and that's going to have its own puts and takes on their political landscape and on their priorities. And I think that when we are mucking around with something as complicated as global trade, there are going to be ripples. But I think your main point is a good one, which is that understanding the balance of trade with China and understanding how to compete appropriately and fairly is important. And I think that's evident most clearly by the fact that the Biden administration kept on almost all of the tariffs that were placed on China by the Trump administration. And that's one of the areas when we look for the silver lining in our political landscape, where there is broad bipartisan agreement, that's China hawkishness. That's why they're talking about passing new China legislation even in this lame-duck period. It's a big deal. And I think it's not going to be the terror front. You're going to see pressure from Congress as well.
Willy Walker: Tariffs lead to rates. Last I checked for this, the ten-year was at 4.42. What's your outlook on two things? One, continued Fed cuts or a pause? And two, does Jerome Powell serve out this term?
Isaac Boltansky: I think let's take the second one first. I think that Jerome Powell is serving out his term. I think that he will be in that job until May of 2026. And I think he will ride off into the sunset, having saved the global economy. He will write a book that we will all read. He will then, of course, be on the Walker Webcast to discuss it. And I think that's how that's going to go.
Look, I don't see President Trump picking a fight with the Fed. And again, if I go back to my mental model here, which is that the Trump team doesn't want to mess with markets too much. One way to mess with markets would be to try to throw Jay Powell out and have a legal fight about it. There's a chance that he might go after the vice chair of supervision at the Fed. But even that, I think, is a bridge too far. I think that Jerome Powell served out his term. In terms of where interest rates go, I'm so happy that my predictions were right about the election that I'm not going to go and try to make another prediction about where we're going.
Willy Walker: I love it.
Isaac Boltansky: I can tell you that what I think about this is that we're spending about $1 trillion every hundred days. I think that the next Congress is going to pass a tax and spending bill that adds another $5 to $10 trillion over a decade in deficit-financed tax cuts and other spending. I worry about our spending. I worry about our fiscal house. I worry about what happens if you have a president jawboning the central bank to do one thing: the central bank maintaining its independence and all of us in the market. Wondering what's going on while they're also asking us to continue buying more paper. I worry about that.
Willy Walker: But at the same time, if China is in retreat and the eurozone is in retreat. There's an article in The Economist that I saw the other day that relates to Germany. The headline was something along the lines of once-dominant Germany is now desperate. When you think about that, it makes you look at the importance of the United States in the world. And I view that as a very significant concern that we could very easily get cocky about this thing and really get in trouble. But the point is, the world needs us and what we're doing more than almost ever. And there really is no competitor related to the reserve currency. And it won't be for quite some time. And to your point about people continuing to buy ten-year paper at 4.28, what else are they going to do with their money?
Isaac Boltansky: This is something that I think about when I think about how the fiscal side is going to impact the monetary side. I am heartened by the fact that treasuries are still the cleanest dirty shirts in the Sovereign Bond laundry. Where else are you going to go? The US dollar is still dominant. I think we've all read of the dollar's decline about 35 different times over the past 25 years, and it's still here. And I'm heartened by that. Ultimately, I think it's going to remain beneficial that we're the nicest house on a bad block in a lot of ways. But it doesn't mean that the policymakers should have a pass from getting the fiscal house in order.
Willy Walker: I totally concur. Let's go to the Treasury Secretary because you made a comment a moment ago, Isaac, that the administration doesn't really want to mess around with the capital markets. We have now turned into three Treasury secretaries, and this will lead to our discussion on the GSEs: Scott Bessent, Mark Rowland, and Kevin Warsh. One really is hedge fund investor in Scott Bessent. Mark Rowland, a private equity investor, is buying and turning around operating companies and making big investments in Apollo. And then Kevin Warsh, a former central banker on the Fed for a long period of time, now invests with Stan Druckenmiller and clearly was in the running to have had Jay Powell's seat before the president-elect decided to go with Jay Powell over Kevin Warsh. As you think about those three individuals and the various skill sets that they bring. From your take, if you will, parking the names out of it and just the background. Do you want someone like Bessent, who has been trading in the markets? Do you want someone like Rowland, who has been buying companies and turning them around? Or do you want someone like Warsh, who's been really inside of the federal bureaucracy as a central banker for quite some time?
Isaac Boltansky: I honestly think that you would be well-served by any of those three. I also have to mention Senator Hagerty from Tennessee. I think that someone who's also in the mix could be a compromise candidate if there's too much infighting or other issues. I personally think and have thought that Scott Bessent makes a lot of sense. He's someone who I think can communicate about some of those ripples in the global economy that come from tariffs and other issues. And I think that's something that he can communicate. He can sell the president's economic messaging. But honestly, I think any of those three are going to be capable of doing that and are all successful in their own way. And I would also say that's why I think we all are playing the parlor game of who's going to be in what seat. And it's fun. But I can tell you about the big ticket items: it's going to be the man behind the resolute desk in the Oval Office who ultimately makes the call. And perhaps those around him can move him from 5% to 10% one way in his thinking. But I think that, really, it's going to be Trump who makes these calls. Those in the Treasury Department's main job is to sell some of these policies to the Hill and the capital markets and to the global leadership. And I think any of those names that we've mentioned would be capable of doing that.
Willy Walker: Incoming is one of those three or the senator that you mentioned, and they've got a big tax either extension or reform act, or the Trump tax breaks of 2017 expire in 2025 at the end of the year. We've got to keep in mind that it's got to be done by December of next year. But you've got the full year. But year one is probably really focused on tax policy. How far down the list is the privatization of Fannie and Freddie? And this is a topic that you know a ton about. And if that gets on the rails, does it go through a legislative route, or does it go through an administrative action route?
Isaac Boltansky: First, I wanted to highlight on the spending bill. This is the ballgame next year. This is the show. And it's important to note here that there are forcing mechanisms that actually make DC do things. In particular, the debt ceiling comes back in the middle of the year. Five trillion in tax cuts expire at the end of next year. So DC is going to do something. You throw into the mix that since Republicans have the trifecta of the House, the Senate, and the White House, they can use the budget reconciliation process to move forward on this goal. And look, it's a Byzantine archaic process that has limitations on what can be included. Ultimately, for our purposes, it means that you only need a simple majority in the Senate rather than the 60-vote threshold you typically need. They're going to get something done. I can tell you that with confidence, there is a real urgency among Republicans on that front. And also, I think they want to move quickly because, look, in the House, we don't know the final numbers, but I think Republicans are going to have 221 seats. You need 218 for the majority. That's a wafer-thin majority. And I think they want to move quickly. Because there is normal attrition in the House, we've all seen. There's resignation, there's death, there's going to jail. You lose House members all the time. They want to move very quickly. And I think that sense of urgency is going to be felt on the Hill where they're going to do the starting gun on budget reconciliation I think in February. That's the instructions. And they're off to the races. Everyone needs to understand that is where all of the focus in town is going to be for the first five or six months of next year. That is I think to answer your question, that's where all the focus is going to be.
Willy Walker: They only have two years before there's the very real possibility that either the House or the Senate flips back the other way. And trying to jam as much into the next two years as they can is very clearly on their minds.
Isaac Boltansky: Absolutely. And look, this is the point that I've tried to highlight with clients to two points to that. Number one is we've got to remember that this is year five of Trump, not year one. I think he is moving more quickly and has avoided some, but not all, of the potholes that he hit as a political novice when he came in the first time. Number two is you've got about 18 months. And that's when most of the accomplishments are going to happen. That's when you have your height of power. And after that, folks start thinking of you as a lame duck. And that's going to drive, I think, the prioritization hierarchy and the agenda.
Willy Walker: You picked GSC privatization as your number two idea post-Election Day. It's done extremely well. That would say that the markets are following you in saying the chances are that Fannie and Freddie get spun. Back to what I asked previously, do you think that they go down a legislative route, or do you think that they go down an administrative route? And let me add a little bit of context to this to the extent that many people like Mark Warner, someone that you and I both talked to extensively about the privatization of the GSEs, says, “You try and do it administratively and that would be a bad day. It needs to be done legislatively.” And yet Senator Warner and his staffers and former Senator Corker and his staffers, one of whom Jonathan McKernan, might end up as the FHFA director, spent umpteen amounts of time and effort trying to come up with a way to reform and reconstitute the GSEs. It never worked. There was no appetite for it on Capitol Hill. I guess the question for you would be this: Do Tim Scott coming in as head of the Senate Banking Committee and French Hill potentially coming in as the head of the House Financial Services Committee sit there and say, “This is an issue; we want to chew up a whole lot of time and effort over and let's do a legislative solution to it?” Or do they say, “You know what? This is a non-starter on Capitol Hill. Do it through an administrative action.”
Isaac Boltansky: There's a lot there. And I will tell you that I believe that Senator Scott and if it is French Hill, or Andy Barr, these are serious legislators who I think want to legislate. With that being said, we've lived through the wars. Willy, we've seen it. We've been there as staffer after staffer and lawmaker after lawmaker tried to remake the mortgage finance system on a whiteboard. And I'm not being dismissive of it. That's where we were. We had to try, and I think we can all agree that the system we have is not perfect. I can say that with absolute certainty, but it's pretty darn good. And I will say.
Willy Walker: I would jump in and say it's the best in the world. To exactly your point. It may not be perfect, but it is the best in the world.
Isaac Boltansky: And there's this other part of it where there are so many staffers on the Hill who at least ten years ago thought there needed to be this big vote. We reform the mortgage finance system. And it passed on the floor, and we did it. But I think that fundamentally misses the point that the Fannie and Freddie of today are not the Fannie and Freddie of 2007. In my mind, they are fundamentally different business models in terms of risk, data, and their relationship with market participants. We can go through all of the changes from UMBS to CRT to CSP. We can go through all of it, but they are different companies. And I think that needs to be part of this conversation as we think about what to do next. Look, we are not going to have broad-based legislative reform. Legislatively, Congress is either unwilling or unable to move forward with this. I don't think that they want it. I think that there's fear that anything you do could mess up the market. And why? Honestly, Congress struggles to fix the stuff that's broken. Why would they even come after this, something that isn't broken? Congress isn't doing it, Willy. At this point, it's a question of how much the Trump administration wants to move forward administratively.
Willy Walker: And so they say, “Let's go do it.” You and your most recent note point out that, first of all, the whole reason you can be talking about this today is that under President-elect Trump, they made a change that Mark Calabria put into place, which would allow Fannie and Freddie to start to aggregate capital. As a result of that, Fannie and Freddie today have a capital base of about $140 billion between the two of them.
Isaac Boltansky: Yeah, $147 billion. Pretty incredible, given that they were going to zero back in 2017.
Willy Walker: They both have capital bases, but in exchange for allowing them to stop paying dividends to the Treasury, they stepped up their liquidation preference to over $330,000,000,000. So there's a liquidation preference, which you point out, Isaac. And to people listening to this, bear with me as I dive into the weeds really deep on this. However, it's important to understand the hurdles related to the privatization of Fannie and Freddie.
They raise the liquidation preference up to $334 billion, which is a high measure except for the fact that the federal government has gotten back every penny they put into Fannie and Freddie plus another $100 billion. There is a thought that they would basically waive that liquidation preference and try to privatize Fannie and Freddie, taking into account that they have warrants for 80% of the equity in Fannie and Freddie. And if you were to spin them, that's what the federal government would get. Two quick things on that, Isaac. The first one is those warrants expire in 2028. Is that really an expiration date, or would they just go in and change and modify the PSPA if nothing is done in the next four years and we hit September of 2028 wouldn't they go in and modify the PSPA to kick those warrants out, or would they actually expire? The second question I have for you is to talk for a moment about the capital gap between what they have today and what they would need to raise in an IPO to make them have sufficient tier-one capital to be functioning financial services institutions.
Isaac Boltansky: Sure. First, when you list out the reasons that this time is different and that they may push these entities out of conservatorship, the number one reason why is the Capitol build. One of the last reasons why the warrants expire is that the warrants expire, as you noted, in September of 2028. I think that's a forcing mechanism, as you would have to do something, and someone somewhere would have to think about it. However, the warrants are for the creation of a contract between the U.S. Treasury and FHFA. They can be amended. I don't think of that as a big forcing mechanism. To outline and add to your summary there, which was better than I could do a summary. I'm happy you took that one. Because I would have gotten stuck back in the weeds on this one. But here's how I think about it.
The senior preferred, which is owned by the US Treasury Department, is concrete on the capital stack. It prevents any value from flowing down. Below the senior preferred is junior preferred. It's about $30 billion on par. And then the equity, which Uncle Sam owns warrants for 80% off. When you think about this, and it's a corporate finance exercise, you have different ways for the government to get its value. But no matter what, you have to handle that senior preferred somehow, whether it's forgiving it or converting it. And look, I'm not a banker. There are lots of smart bankers around this. They'll figure that out. But there is a bit of a policy decision there with political dynamics. You are taking something that is currently owed to Uncle Sam and altering it or removing it. I think that the GSEs have paid back the government. They sent over $100 billion more than they ever borrowed. I think they've been paid back. And then, obviously, the warrants can be a kicker. But look, I'm not the one making the decision. I'm in the cheap seats, commenting and trying to figure out what will happen.
In terms of the capital hole. I think it's important to note here that Director Calabria when he was in, finalized what is a very strong capital rule is. And there have been small tweaks under Director Thompson. But it is an incredibly stringent capital framework. And in aggregate, the GSEs have a capital target of $280 billion right now, give or take, depending upon how you look at it. But let's use that number, $280 billion. That compares to $147 billion in cash on the balance sheet. They're down about $130 billion or so. That's what they need. If you assume that the GSEs see net income of about $57 billion over the next two years, which is really fair, I think it is a conservative estimate given what they've been doing in their earnings power. Then, their aggregate capital shortfalls are about $75 billion. And that sounds like a lot of money to you and me because it is a lot of money, but it is doable. That is absolutely doable, especially when you compare it to the fact that we were talking about raising $250 billion back in 2017. $75 billion is doable. And it's important to recognize that these things are going to be incredibly well-capitalized entities that are then going to have a limited explicit guarantee behind that. And then, of course, always retain the implicit guarantee. And so these things, if they exit, I truly believe, are going to be in a strong position from a risk perspective and a capital perspective.
Willy Walker: Talk for a moment about the return on equity to be able to get the markets to pick your number $80 billion in IPOs for the two of them. And they're both right now running ROEs in the mid-single digits, 4% to 6% ROEs. What gets it to the point where private capital wants to go invest in Fannie and Freddie with those types of returns?
Isaac Boltansky: Yeah. Look, I think when we talk about it being possible for the GSEs to exit conservatorship, I think that's right. I think that there are hurdles that need to be cleared, Willy. One of the big hurdles is that $300 billion plus seniors preferred; what the heck you're going to do with that? The other is the return on equity. Look at these things: they currently have a high single-digit return business as their target. But I truly believe that you would probably need to be in the low double digits, given that the government took these things over before. And that's hard, Willy, because to get there by and large, you would need to raise some fees. You need to raise the guaranteed fees and other costs. And obviously, saying that I'm afraid to repeat it twice because I'll have lobbyists from the mortgage industrial complex drop out of the ceiling. It's tough.
Willy Walker: I will tell you one other way that they get to higher returns, which is doing more multifamily.
Isaac Boltansky: I think I'd like to ask you to expand on that if you don't mind.
Willy Walker: They're multifamily businesses, a higher return business than a single-family business. And even though there are multifamily businesses, only about 20% of their business is 80% of their business. It's a higher return business for the two of them. And so one of the big questions, I think, if they end up going down this path, will be, Isaac, there are caps on the volume of multifamily that Fannie and Freddie can do. If the idea is to privatize them with a high single-digit, low double-digit return. One of the ways you can do that without changing the fees on the single-family side is to allow them to do more on the multifamily side. And that clearly goes back to when Ed DeMarco was the regulator of Fannie and Freddie was the interim head of the FHFA. And Ed DeMarco, relatively randomly, nobody had sat there and said, “You need to do this,” came up with putting caps on Fannie and Freddie's multifamily businesses because he didn't want to see them have as much market share as their single-family businesses. And those caps have moved around, but they've stayed in place ever since. And there are plenty of people who say, “Look, we have a housing crisis in America. We don't have enough single-family nor enough multifamily. We need more supply.” And one of the ways you can create more supply in the densest way possible, given that NIMBYism and getting building permits is one of the hardest, is one of the big reasons why we don't have more housing in America today. The quickest way to get there is more multifamily housing, and the quickest way to add liquidity to the multifamily market is to let Fannie and Freddie do more. That's one piece to this Rubik's Cube where you're moving it all around and you do a little bit there, and it goes out there. But that's one point as it relates to returns and what they could do to increase those returns.
Isaac Boltansky: And I want to highlight this, which is part of the policy conversation now. I'd be interested to see where it goes under the next director for four other things that are really niche about permitting the agencies to provide some construction to permanent financing, mezz loans to support construction, and more support for workforce housing. There are ways where you can both increase that ROE and help with the mission, which is pretty important and central to all of this. I think within that, though, Willy, I will tell you, I do think whoever the next director is, and I think it will, my money is on Jonathan McKernan, who's at the FDIC at the moment. That's my bet. I think he'd be a tremendous director. But there is, in Republican orthodoxy, generally a view that you should shrink the GSEs' footprint and curtail their activity in mission-adjacent business lines, things like investor properties or second homes. And obviously, that runs contrary in a lot of ways to the need for more housing support to achieve housing affordability and the goal of ending the conservatorship. We're going to see pretty early on which one of the guiding lights we're following.
Willy Walker: There's one other important piece of that which you know better than I do, which is that all the work on Basel III has been put as you wrote this past week. It's been halted until the Trump administration gets into their seats. But Basel III is basically saying to our banking system, particularly the CFIUS, that they want them to be the lubricant to the market and not actually banks. And if you look at the capital reserves that JPMorgan needs to make off of making a loan to a commercial real estate borrower versus making a loan to Walker & Dunlop on a warehouse line to then allow Walker & Dunlop to go out and make that loan. The capital treatment of those two things is wholly different. And as a result of it, if you're sitting there, and by the way, J.P. Morgan's out making loans, but the way the capital rules today work, it's much better for them from a capital standpoint to make a loan to Walker & Dunlop and let us go make the actual loan than it is for them to go out directly to the consumer. And I think one of the things that's in here, Isaac, to exactly your point, is that in past efforts on GSE reform, there is now more Fannie Freddie spin or Fannie Freddie privatization. There was always the idea that we didn't want the agencies crowding out private capital. First of all, that's a done deal as it relates to the Single-family mortgage market. By the way, it has provided massive liquidity to the banking system, and we haven't had big problems with the Rocket Mortgages and the others from an origination standpoint like we did before the GSE. But on the multifamily side, you have to sit there and say to yourself, “Who's the other capital that either would or should come to the market? And then also, what role did they play when they had the opportunity to step in and play their role in the market?” You raise the issue of construction loans. I think it's a great area to think about as it relates to the GSEs. One of the biggest things that we are headed for, as you very well know, is a wildly undersupplied multifamily market in 2026 and 2027. Why? It's almost impossible right now to either get equity capital or debt capital to put a shovel on the ground to build a multifamily in a currently oversupplied market. But you just look at the data. We're dropping down from 600,000 deliveries in 2024 to right now; the estimate is 250,000 new developments for delivery in 2026. When you lose almost 400,000 multifamily units on a delivery basis. You're going to get back to a market where people can push rents, and that will add inflationary pressure to rent in the CPI calculation. This will get us maybe not right back to where we were, but it will have a very significant impact on the cost of living in America as well as where inflation is. And it's interesting because those loans aren't being made today. If the agencies were in that place, you have to think that they would be making those loans today when others aren't.
Isaac Boltansky: I think that I am excited to see what the next director does because I do think that, of course, Republican orthodoxy was crowd in private capital, increase fees on the GSEs in certain business lines so that it's easier for private actors to execute. But I think that over the past ten years, one area where it's shifted now is with the growth of CRT, credit risk transfer, and other means. You've seen the GSEs themselves be able to pass on credit risk to the market the same way in many cases that they passed on interest rate risk. And I think that our capital markets, our investor base, and our innovation around this has made it so that I think that there should be a conversation about the GSEs playing more of a role in construction financing. I think that would be directionally beneficial for the market, with the caveat that there is no panacea for this. We've gotten into this over 20 years of bad policy decisions. The housing affordability crisis, the lack of housing stock. And there's no panacea. But that doesn't mean we shouldn't be doing these things at the margin that could have a real impact. And that's where construction lending makes sense for workforce housing and manufactured housing. We should have all of the above types of policies around housing in order to address the very clear problem. The problem that I am heartened to say was on the debate stage among the presidential candidates finally. We finally saw housing getting some of the dues that are necessary and required for something that's so vitally important to us in our economy.
Willy Walker: Hundred percent. I could keep going forever with you. I got about four more pages of notes, Isaac, but I've used up my full hour a little bit. Great to talk to you. I'm going to get you back sometime in the new year. Maybe we do it in March when everyone's gotten in the seat, and we start to see how things are unfolding and where the real effort is on a number of things. And once we find out who the Treasury secretary will be, we'll obviously also be able to see things like CFPA and FHFA and whether someone comes in to work with the Treasury secretary on housing and the privatization of Fannie and Freddie, potentially, etc. The picture will become a lot clearer in a couple of months so that the two of us can come back at this and talk about it again.
I wish you a very happy Thanksgiving break. Thank you for all of your insights on these issues. And I would say very big congratulations on your day after the election list of winners and losers because it was wildly informative. And if you had been lucky enough to read Isaac's research and put a little bit of money behind some of his top ideas, you would have done really well between then and now.
Isaac Boltansky: Willy, thank you for the invite. Thank you for your friendship. And thank you for your thought leadership in housing and mortgage finance. I think it's something that we're going to need as much of as we can get over the next few years, and I look forward to continuing the conversation.
Willy Walker: Thanks, Isaac. Thanks, everyone, for joining us today. Have a fantastic Thanksgiving holiday.
