My favorite part of this whole thing comes after the securitization scheme blows up and the government (i.e. taxpayers) starts bailing out the banks that sold these bundles of bad debt to investors. Then the regulators meet and congress issues a 200 page report where they declare the resulting disaster was a big surprise that no one saw coming.
Private credit has its uses, particularly for mid-sized companies with limited leveragable working capital and due to market inefficiencies caused by post Dodd-Frank bank regulations (ie banks can’t lend as much to leveraged entities). The real business case for it, though, was the long-gone zero interest rate and QE era (now replaced by inflation and “normal” interest rates).
Unfortunately, some of the recent surge has been used to refinance maturing bank loans from the COVID bubble (zero rate) era. These companies and real estate projects are in deteriorating condition financially and likely could not attract bank credit without restructuring or a credit event. We certainly hope the sponsors don’t have a “I’ll lend to your bad credit if you lend to mine” mentality. This has been supposed, but seems unlikely to me (at least not so baldly) given the deep pockets, on-call legal teams and jury-friendly identities (eg teachers’ pension funds) of their limited partner investors. If things go south, lawsuits and discovery and prosecution will follow.
I love your anecdote about the sponsors saying “no thanks” to transparent secondary markets. That would kill the bogus sharpe ratios of the whole sector.
Famous last words, but I am not too worried about a PE/leveraged credit financial sector meltdown. Leverage is what kills. In the GFC it was deposit-taking banks buying “AAA” CDOs and ABS, arbitraging the inane Basel 2 capital rules and reaching for just a little bit more return in an ROA-challenged environment with compressed credit spreads, following on from Bernanke’s helicopter money.
Rich people and pension funds and endowments losing money? That shouldn’t cause massive financial contagion (though it might lead to sane repricing of risk assets generally) and cause tax hikes at the state levels. Economically would be more like the dot com crash than the GFC.
What should not happen (but probably will) is non-HNW/non-accredited retail investors being legally offered a slice of these portfolios.
Given public markets are shrinking relative to private, and given all of the PE and VC types backing political parties, inviting retail investors in to hold the bag seems likely, unfortunately. Will it be any more disastrous, though, than so many retail types being 100 pct invested in the allegedly “diversified” and “broad” SP500 index which is actually like putting 40 pct of everything you own into the 7-10 biggest tech stocks of the moment?
You sound like a knowledgeable person tree, so I want your opinion on this idea from a member of the unwashed masses. 1.) I’m sure there exists some economic statistic that measures the ratio of the current value of all equities combined to the amount of real money (cash) available to pay investors when they liquidate their assets. I would guess it’s an astronomical number. So when mom and pop get spooked and want out now, like right now, and there’s no money to pay anywhere near what the notional value (prior to the described run on stocks) is, what happens? Here’s my crackpot theory, mom and pop get wiped out, the wealth they thought they were sitting pretty on is gone. They have to sell everything they own and move into the new Gaza like rebuilt Cabrini green 15 minute city . So the basic premise is that the great reckoning whereby the fictional value of all assets that could never be realized in reality happens via the next crisis and the mom and pop problem children, expecting to get paid, get wiped out. What do you say to that, if you can understand at all my lack of jargon explanation.
You're mostly correct in your assertion. The reason mom and pop get wiped out is because they are equity owners of the business, and in a foreclosure, bankruptcy, etc., the equity usually gets wiped out. The secured debt holders get paid first, followed by unsecured debt, followed by equity. So, if mom and pop thought they had a business worth $10 million, and that business had say, $6 million of debt, their equity would be worth $4 million. If they needed to get out quickly (fire sale), they may only find a buyer for $6 million. Ergo, the debt gets retired, but there is no equity value left. Same thing if the earnings of a business crater (value will decline). Whether or not the value is "fictional" is another story. It could be legit, and macro trends (recession) or competitive forces (company loses a major customer of market share) could force the value down over time (so it was not necessarily "fictional"). But, I too have concerns about where certain PE firms are holding their marks today.... I suspect many PE backed businesses are underwater, but have not been valued as such.
Leverage is the risk, which is why credit crises can be so destructive. Our entire financial system depends on ample and easy credit. Fortunately (?) the central banks know this and stand ready at the printing presses and discount windows.
Equities look expensive on some measures: CAPE, relative to bonds, and how does one get sustainable double digit earnings growth in a broad index when the broad economy grows at maybe 2 percent?
However, the amount of margin debt directly tied to equities isn’t very substantial proportionately at the moment, despite all the Robinhood and hedge fund types.
There is plenty of leverage in the overall economy, maybe not overloaded on any one place except banks (and governments), IMO, nor is mortgage or credit card debt at unusual levels. The risk is an exogenous event (war?) that disrupts the business as usual mentality. So far things like pandemics, small wars, tariffs, inflation, rate hikes, etc haven’t really mattered much (inflation is actually good for debtors). If we do get a catastrophic event the central banks will just spray money around - that might eventually trigger a debt crisis or a spiral of inflation, devaluation and default, but smart people have literally gone broke betting on disaster and against markets.
This is also why a debt crisis is far more destructive than an equity crisis.
The dot-com implosion was a classic equity bubble. Messy, but the cleanup was relatively unproblematic. The GFC was a debt crisis, and its effects are still widely felt to this day. For many people, the crisis never really went away.
Right, and it wouldn’t make sense if there was. I refer to Matt’s article and wonder if the scenario is being created whereby companies go poof, share holders wealth does as well and a run not unlike a bank run happens as 401k holders and individual investors want out asap. I guess the oligarchs can be standing by with their penny jars(filled with borrowed pennies) ready to buy so we can at least get something. It seems to me this is a dream scenario for the bad guys notwithstanding the fact someone mentioned regarding people going broke betting on a crash.
As a retired banker I can tell you that this will not end well. So JP Morgan Chase will finance the non bank financial institution so the non bank financial institution can finance a company the JP Morgan Chase would never finance as a bank loan. So tell me how does this end well? The NBFI only goal will be to make as many loans as possible because the dude out on the street is only paid if new loans are made. The credit standards will be ignored (trust me on this I have seen it inside a bank when mgmt wants loan growth). A slow down or recession blows this all up and the loan losses will break the NBFI’s and the folks at the FED will act like they never knew it was going on. They will once again have to step in and buy up the worthless debt held by the too big too fail FDIC insured banks. And they will print trillions of new dollars to do it fueling inflationary pressures in the economy.
How is this not a pyramid scheme? If you have to sell new loans to pay the old loans or print more money to pay the old loans, isn't that the very definition of a pyramid scheme? Or am I missing something?
You describe a situation akin to mortgage brokers in 2005 originating billions, securitizing them, and synthesizing the equity layer in the sausage grinder. Trouble was, real equity (eg bank reserve ratios and capital requirements) has agency over loan quality. Synthetic equity has no agency over the credit decision. And boom, quality bombs because all the returns are front loaded to the securitizer. This is amplified by sub prime interest rates where the securitizer sells at a lower interest rate than they lend, creating an upfront, explosive profit opportunity when they exit the "long term" relationship.
Yep you described it perfectly the folks that made the loan have zero risk and the folks who are on the street making the loans are only compensated by making another new loan so you can kiss credit quality good bye no matter how hard you try. There is nothing worse than a bunch of car salesmen personalities out generating loans they will lie about anything and everything
The government is allowing companies to get rid of pension obligations by transferring previously guaranteed pension money to insurance companies owned by Private Equity companies (example: insurance company Athene owned by Apollo). The insurance company then invests the pension funds in companies owned by Apollo along with other investments. They strip out enormous fees and don’t on average beat market returns. I have a lot of information on this. In my opinion, this will be a scandal and pensions will be lost. State Insurance guarantees are minimal compared to the PBGC guarantees which are lost when funds are transferred. Lots of risks in PE companies- they should not be allowed to get pension assets. Would love to see you investigate.
Eric, if you decide to pursue I’m happy to share the information I gathered as my pension will be moving to an insurer this year. I hired a lawyer and sent a lot of information to the company currently holding the pension in hopes that they will choose the insurance company carefully. Our plan has 40,000 participants and $2 Billion in Net Plan Assets. In my mind the government favors the PE business over secure pensions. Below are just some thoughts on this issue and more reading if you have an interest.
I did write to my state insurance agency to better understand legalities. The regulators basically support what the insurers want to do and the level of regulation is weak. Gretchen Morgenson’s investigation of Executive Life regulators is an eye opener. Executive Life went through bankruptcy in the 90’s and has only recently settled claims at a lot less than value. Note she wrote the book These Are The Plunderers. Also note that the Drexel executives who founded Apollo were the same executives who sold Executive Life the bonds that tanked the company. The Drexel executives bought these bonds from a bankrupt EL at rock bottom prices and made a killing to start Apollo and now the government allows them to get pension assets for their insurer Athene.
Gretchen also wrote an article titled “As Insurance Companies Take Over Pension Plans, Are Your Pensions At Risk? “.
There is a Federal Reserve Paper titled “Are Life Insurers the New Shadow Banks?”. The latest version is April 2023.
There is a December 2023 paper from Americans for Financial Reform Education Fund. Title is “Private Equity’s Life Insurance Gambit”.
The International Monetary Fund also published a paper addressing risk of the industry. PE private equity allocate about 45% to illiquid strategies versus 27% for other US insurers.
Bermuda is a huge problem. One group of pensioners tried to sue their insurance company regarding exorbitant fees. The suit was dismissed because the Bermuda location was deemed unreachable for plaintiffs. One can only fear what happens to pension assets in a bankruptcy.
Also note the Fed deems some insurers as systematically important and others as not. As a pensioner you have zero control over where your pension is sold.
Some people have also told me that during the GFC, assets were not carried at market value to prevent widespread defaults. Some think some of these GFC assets are now being sold to affiliated insurers at original value - not market. Since these asset transfers are internal there is no way to tell if these transfer are occurring.
Thousands of pages of Congressional testimony exist regarding the transfer of pension assets to insurers. I have several I can share - Department of Labor Employee Benefits Security Administration Interpretive Bulletin 95-1. Consultation Paper - ERISA Advisory Council.
Also Statement of Norman Stein on behalf of Pension Rights Center Before the ERISA Advisory Council.
Scope of pension transfers from 2012 through 2022 is $272.6 Billion. I don’t have updated numbers but I know significant assets transferred in 2023 and 2024.
My information is about a year out of date as most of my research was early 2024. Very frustrating that our legislators are putting our pension in the hands of high risk companies. I did not receive any replies from my two Senators after sending them extensive correspondence- one of whom is on the Pension Committee.
Don’t know if you want to pursue but I think it is interesting topic which might blow up in the near future.
Eric, if you do want more information regarding pension transfers I’m happy to provide but would prefer not to share on this thread. I don’t know if you can get my email from Substack but email might be a better way to exchange information.
Don't know how you can do a column on the 2008 collapse without even a mention of the role of the Community Reinvestment Act or HUD Secretary Andrew Cuomo's pressuring banks to make massive amounts of loans to people who couldn't qualify for them under standard lending criteria in the name of racial equity in home ownership. That's quite a trick. I hope neither of those factors, which led to the packaging of worthless loans with good loans as investment devices, leading to the collapse, are present today.
The relaxed (non-existent) standards of that period applied up and down the class ladder. Even the well-heeled have debt limits, but that was ignored in the frenzy to get mortgages out the door. I was treasurer for a condominium association from 2010-2012 while the 2008 after-action clean-up was happening, and most owners were very upper-middle class, but we had a number of foreclosures due to even the well-heeled spending every last dollar and extending themselves.
Grok disagrees with you, Cuomo & the CRA were NOT the primary cause. I would hold Warren Buffet's AIG & the rating agencies for giving high ratings. AIG along with the other Wall Street profiteers should be bankrupt. The execs at these companies laughed their way to the bank while homeowners lost their homes and ruined their credit.
The idea that the CRA is what caused the GFC is not borne out by facts. Hell, synthetic CDOs were created because there was demand for more garbage loan paper than banks themselves could generate.
For that matter, the banking industry certainly had the ear of the Bush 2.0 Administration, and they were not crying about how the CRA was forcing them to lend money.
So you took away from the book that the collapse was caused by the banks' demand for mortgage backed securities in which Fannie Mae packaged worthless loans (that it overrated) with decent loans and that this DIDN'T stem from the Clinton administration's resurrection of the CRA resulting in the loans to people who couldn't afford them? Wow, just wow.
The CRA wasn't resurrected by the Clinton Administration and as I said, demand for garbage paper was so great that banks could not get enough supply. Hence the synthetic CDO.
It was passed during the Carter administration but pretty much ignored until the Clinton Presidency ramped up enforcement. Facts are very stubborn things.
So you are saying that a private company has debt on its balance sheet. That debt on its balance sheet is supplied by a private credit enterprise that raises its capital by adding at least $3 in debt* for every $1 in equity. And the lender to the private credit enterprise is making money off of that loan.
The loan to the private company can carry 11%-15% interest, PIK payments, and other terms. But wait, there are so many piling in to the private credit trade that borrowers are no demanding "covenant light" terms, aka, the lender must take on unsustainable risks.
* In the pitch book, this is known as "leverage to juice returns"
If you're looking for a single, easily understandable source providing a deep dive into all this, I recommend the book "The Lords of Easy Money" by Christopher Leonard (2022). Too much to explain here, but basically the Fed evolved from its typical, staid money supply oversight role to an aggressive economic policy-making role, responding to virtualy every financial wrinkle with a bottomless supply of cheap money via quantitative easing and zero interest rates.
Then all that money set out in search of "value" among riskier investments with potentially higher returns, which Wall Street and the big banks have been only too happy to provide. One reluctant participant said the Fed effectively penalized prudent investing.
The current corporate debt-backed securities market features all the elements that led to the mortgage-backed securities market collapse. Given the comparatively huge numbers we're looking at here, its likely eventual meltdown promises to dwarf the 2008 debacle.
(The Center Square) – Wirepoints Executive Editor Mark Glennon is warning Chicago residents the city appears on the road to destruction as a mounting pension crisis has seen such debt soar by 13% over the last five years alone.
The 2024 Annual Comprehensive Financial Report for the city of Chicago now pegs the city’s unfunded liabilities at almost $36 billion, even after overall debt has dipped by $1.3 billion over the last year.
“The biggest problem is that they are being underfunded, every year the city and the state for pensions puts in less than the actuaries say they are supposed to be contributing,” Glennon told The Center Square. “These pension payments that took $2.5 billion out of the Chicago budget represent 16 to 20% of the city budget. That gobbles up not just taxes but diminishes other services that the city provides. To regain competitiveness and halt the population decline and keep employers here, we need to have a competitive level of total taxes and a competitive level of quality of services.”
While most large public pension funds ideally have average funding levels of about 70%, data shows Chicago’s police and firefighters funds are only funded at 24.5%, while the laborers fund is at 43% and the municipal workers fund is at just 26%.
Canary in the coal mine? Remember 2008? We also, here in the Northeast, are seeing a mania for real estate, with even the old Levitt tract homes on LI pushing up to $1 million. This is for a home that my parents bought in 1956 for $14 K.
Certainly an interesting topic. However, this article is heavy on innuendo and light on facts. I encourage interested readers to do some research on topics like “direct lending”, “private credit”, and related areas that can be easily discovered online. Loads of data, analysis, etc. are available and not paywalled.
No, there is no death wish. The fintech companies do well even if their clients lose money. The companies get their cut at the start and usually have priority in the end as to assets that have value.
The May 31 2025 issue of The Economist has a Special Report of the Wall Street, and has a section about the private credit revolution... Bad things are coming is the conclusion
With the newly legislated Trump Accounts for newborns, how much money will flow into Wall St. over the next 3 years. As I read about them, it felt like Bush trying to privatize Social Security, generating for Wall St, coincidentally, roughly the same amount of money the government spent on the bailout only a few years after his plan was rejected. This time, it's a different shade of lipstick being slathered on the preemptive bailout, but it's the state bailing out private debt just the same.
The idea that they can say no is the Hamster that doesn’t die of starvation given the choice of food or cocaine.
Mint? An imaginary NFT of a Mint, futures on NFT of Mint , nano thin.
Here’s an idea; Mr. Market. Meet Mr. market, Lord High Executioner.
No bailouts.
The government undertakes nothing beyond food, clothing, shelter, security from crime or disorder and basic medical care.
Lord High Executioner Market spares no one.
Ask me if I mind the Global Financial system meeting Mr Market, or Boomers reduced to one dwelling, or Financial Services Specialists selling their organs?
My favorite part of this whole thing comes after the securitization scheme blows up and the government (i.e. taxpayers) starts bailing out the banks that sold these bundles of bad debt to investors. Then the regulators meet and congress issues a 200 page report where they declare the resulting disaster was a big surprise that no one saw coming.
And people say Congress never does anything 😎
Privatize the profits, socialize the losses.
Then drinks all 'round!
What securitization? Don’t think that’s part of this particular situation.
Actually, they have begun the securitization….Collateralized Fund Obligations….slicing and dicing PE limited partner shares.
Oh this is exactly what I was thinking as I read this great article! Comment is spot-on.
Private credit has its uses, particularly for mid-sized companies with limited leveragable working capital and due to market inefficiencies caused by post Dodd-Frank bank regulations (ie banks can’t lend as much to leveraged entities). The real business case for it, though, was the long-gone zero interest rate and QE era (now replaced by inflation and “normal” interest rates).
Unfortunately, some of the recent surge has been used to refinance maturing bank loans from the COVID bubble (zero rate) era. These companies and real estate projects are in deteriorating condition financially and likely could not attract bank credit without restructuring or a credit event. We certainly hope the sponsors don’t have a “I’ll lend to your bad credit if you lend to mine” mentality. This has been supposed, but seems unlikely to me (at least not so baldly) given the deep pockets, on-call legal teams and jury-friendly identities (eg teachers’ pension funds) of their limited partner investors. If things go south, lawsuits and discovery and prosecution will follow.
I love your anecdote about the sponsors saying “no thanks” to transparent secondary markets. That would kill the bogus sharpe ratios of the whole sector.
Famous last words, but I am not too worried about a PE/leveraged credit financial sector meltdown. Leverage is what kills. In the GFC it was deposit-taking banks buying “AAA” CDOs and ABS, arbitraging the inane Basel 2 capital rules and reaching for just a little bit more return in an ROA-challenged environment with compressed credit spreads, following on from Bernanke’s helicopter money.
Rich people and pension funds and endowments losing money? That shouldn’t cause massive financial contagion (though it might lead to sane repricing of risk assets generally) and cause tax hikes at the state levels. Economically would be more like the dot com crash than the GFC.
What should not happen (but probably will) is non-HNW/non-accredited retail investors being legally offered a slice of these portfolios.
Given public markets are shrinking relative to private, and given all of the PE and VC types backing political parties, inviting retail investors in to hold the bag seems likely, unfortunately. Will it be any more disastrous, though, than so many retail types being 100 pct invested in the allegedly “diversified” and “broad” SP500 index which is actually like putting 40 pct of everything you own into the 7-10 biggest tech stocks of the moment?
You sound like a knowledgeable person tree, so I want your opinion on this idea from a member of the unwashed masses. 1.) I’m sure there exists some economic statistic that measures the ratio of the current value of all equities combined to the amount of real money (cash) available to pay investors when they liquidate their assets. I would guess it’s an astronomical number. So when mom and pop get spooked and want out now, like right now, and there’s no money to pay anywhere near what the notional value (prior to the described run on stocks) is, what happens? Here’s my crackpot theory, mom and pop get wiped out, the wealth they thought they were sitting pretty on is gone. They have to sell everything they own and move into the new Gaza like rebuilt Cabrini green 15 minute city . So the basic premise is that the great reckoning whereby the fictional value of all assets that could never be realized in reality happens via the next crisis and the mom and pop problem children, expecting to get paid, get wiped out. What do you say to that, if you can understand at all my lack of jargon explanation.
You're mostly correct in your assertion. The reason mom and pop get wiped out is because they are equity owners of the business, and in a foreclosure, bankruptcy, etc., the equity usually gets wiped out. The secured debt holders get paid first, followed by unsecured debt, followed by equity. So, if mom and pop thought they had a business worth $10 million, and that business had say, $6 million of debt, their equity would be worth $4 million. If they needed to get out quickly (fire sale), they may only find a buyer for $6 million. Ergo, the debt gets retired, but there is no equity value left. Same thing if the earnings of a business crater (value will decline). Whether or not the value is "fictional" is another story. It could be legit, and macro trends (recession) or competitive forces (company loses a major customer of market share) could force the value down over time (so it was not necessarily "fictional"). But, I too have concerns about where certain PE firms are holding their marks today.... I suspect many PE backed businesses are underwater, but have not been valued as such.
Leverage is the risk, which is why credit crises can be so destructive. Our entire financial system depends on ample and easy credit. Fortunately (?) the central banks know this and stand ready at the printing presses and discount windows.
Equities look expensive on some measures: CAPE, relative to bonds, and how does one get sustainable double digit earnings growth in a broad index when the broad economy grows at maybe 2 percent?
However, the amount of margin debt directly tied to equities isn’t very substantial proportionately at the moment, despite all the Robinhood and hedge fund types.
https://fred.stlouisfed.org/series/BOGZ1FL624123035Q
https://fred.stlouisfed.org/series/BOGZ1FL663067003Q
There is plenty of leverage in the overall economy, maybe not overloaded on any one place except banks (and governments), IMO, nor is mortgage or credit card debt at unusual levels. The risk is an exogenous event (war?) that disrupts the business as usual mentality. So far things like pandemics, small wars, tariffs, inflation, rate hikes, etc haven’t really mattered much (inflation is actually good for debtors). If we do get a catastrophic event the central banks will just spray money around - that might eventually trigger a debt crisis or a spiral of inflation, devaluation and default, but smart people have literally gone broke betting on disaster and against markets.
This is also why a debt crisis is far more destructive than an equity crisis.
The dot-com implosion was a classic equity bubble. Messy, but the cleanup was relatively unproblematic. The GFC was a debt crisis, and its effects are still widely felt to this day. For many people, the crisis never really went away.
True.
There has never existed enough cash to buy every non-cash asset at FMV.
Right, and it wouldn’t make sense if there was. I refer to Matt’s article and wonder if the scenario is being created whereby companies go poof, share holders wealth does as well and a run not unlike a bank run happens as 401k holders and individual investors want out asap. I guess the oligarchs can be standing by with their penny jars(filled with borrowed pennies) ready to buy so we can at least get something. It seems to me this is a dream scenario for the bad guys notwithstanding the fact someone mentioned regarding people going broke betting on a crash.
No, but Powell has a printer that goes brrrr
Excellent accurate overview. I followed it in real time, with a small private hedge fund.
As a retired banker I can tell you that this will not end well. So JP Morgan Chase will finance the non bank financial institution so the non bank financial institution can finance a company the JP Morgan Chase would never finance as a bank loan. So tell me how does this end well? The NBFI only goal will be to make as many loans as possible because the dude out on the street is only paid if new loans are made. The credit standards will be ignored (trust me on this I have seen it inside a bank when mgmt wants loan growth). A slow down or recession blows this all up and the loan losses will break the NBFI’s and the folks at the FED will act like they never knew it was going on. They will once again have to step in and buy up the worthless debt held by the too big too fail FDIC insured banks. And they will print trillions of new dollars to do it fueling inflationary pressures in the economy.
It’s sort of financial theme and variation of the NGO, private groups that take tax dollars and do the very things that government cannot do.
...or do things that government and taxpayers do NOT want to do! cue DOGE
How is this not a pyramid scheme? If you have to sell new loans to pay the old loans or print more money to pay the old loans, isn't that the very definition of a pyramid scheme? Or am I missing something?
You describe a situation akin to mortgage brokers in 2005 originating billions, securitizing them, and synthesizing the equity layer in the sausage grinder. Trouble was, real equity (eg bank reserve ratios and capital requirements) has agency over loan quality. Synthetic equity has no agency over the credit decision. And boom, quality bombs because all the returns are front loaded to the securitizer. This is amplified by sub prime interest rates where the securitizer sells at a lower interest rate than they lend, creating an upfront, explosive profit opportunity when they exit the "long term" relationship.
Yep you described it perfectly the folks that made the loan have zero risk and the folks who are on the street making the loans are only compensated by making another new loan so you can kiss credit quality good bye no matter how hard you try. There is nothing worse than a bunch of car salesmen personalities out generating loans they will lie about anything and everything
Depends on how levered the private lenders are.
I can guarantee you that they will be massively leveraged just like Lehmann Brothers was with Mortgage Securities that suddenly didn't have a market.
How can you get billion dollar bailouts without 1st creating something to bail out?
The government is allowing companies to get rid of pension obligations by transferring previously guaranteed pension money to insurance companies owned by Private Equity companies (example: insurance company Athene owned by Apollo). The insurance company then invests the pension funds in companies owned by Apollo along with other investments. They strip out enormous fees and don’t on average beat market returns. I have a lot of information on this. In my opinion, this will be a scandal and pensions will be lost. State Insurance guarantees are minimal compared to the PBGC guarantees which are lost when funds are transferred. Lots of risks in PE companies- they should not be allowed to get pension assets. Would love to see you investigate.
I have been reading a lot about this as well. I just came across this
https://www.moodys.com/web/en/us/insights/data-stories/private-credit-transforms-life-insurance-industry.html
I have also heard similar in the reinsurance sector. A friend sent this to me a while back..I have to admit I have not given it enough attention.
https://substack.news-items.com/p/a-huge-trend
Eric, if you decide to pursue I’m happy to share the information I gathered as my pension will be moving to an insurer this year. I hired a lawyer and sent a lot of information to the company currently holding the pension in hopes that they will choose the insurance company carefully. Our plan has 40,000 participants and $2 Billion in Net Plan Assets. In my mind the government favors the PE business over secure pensions. Below are just some thoughts on this issue and more reading if you have an interest.
I did write to my state insurance agency to better understand legalities. The regulators basically support what the insurers want to do and the level of regulation is weak. Gretchen Morgenson’s investigation of Executive Life regulators is an eye opener. Executive Life went through bankruptcy in the 90’s and has only recently settled claims at a lot less than value. Note she wrote the book These Are The Plunderers. Also note that the Drexel executives who founded Apollo were the same executives who sold Executive Life the bonds that tanked the company. The Drexel executives bought these bonds from a bankrupt EL at rock bottom prices and made a killing to start Apollo and now the government allows them to get pension assets for their insurer Athene.
Gretchen also wrote an article titled “As Insurance Companies Take Over Pension Plans, Are Your Pensions At Risk? “.
There is a Federal Reserve Paper titled “Are Life Insurers the New Shadow Banks?”. The latest version is April 2023.
There is a December 2023 paper from Americans for Financial Reform Education Fund. Title is “Private Equity’s Life Insurance Gambit”.
The International Monetary Fund also published a paper addressing risk of the industry. PE private equity allocate about 45% to illiquid strategies versus 27% for other US insurers.
Bermuda is a huge problem. One group of pensioners tried to sue their insurance company regarding exorbitant fees. The suit was dismissed because the Bermuda location was deemed unreachable for plaintiffs. One can only fear what happens to pension assets in a bankruptcy.
Also note the Fed deems some insurers as systematically important and others as not. As a pensioner you have zero control over where your pension is sold.
Some people have also told me that during the GFC, assets were not carried at market value to prevent widespread defaults. Some think some of these GFC assets are now being sold to affiliated insurers at original value - not market. Since these asset transfers are internal there is no way to tell if these transfer are occurring.
Thousands of pages of Congressional testimony exist regarding the transfer of pension assets to insurers. I have several I can share - Department of Labor Employee Benefits Security Administration Interpretive Bulletin 95-1. Consultation Paper - ERISA Advisory Council.
Also Statement of Norman Stein on behalf of Pension Rights Center Before the ERISA Advisory Council.
Scope of pension transfers from 2012 through 2022 is $272.6 Billion. I don’t have updated numbers but I know significant assets transferred in 2023 and 2024.
My information is about a year out of date as most of my research was early 2024. Very frustrating that our legislators are putting our pension in the hands of high risk companies. I did not receive any replies from my two Senators after sending them extensive correspondence- one of whom is on the Pension Committee.
Don’t know if you want to pursue but I think it is interesting topic which might blow up in the near future.
Thank you very much. I am very interested!
Eric, if you do want more information regarding pension transfers I’m happy to provide but would prefer not to share on this thread. I don’t know if you can get my email from Substack but email might be a better way to exchange information.
I knew this was happening from news snippets over the years, beginning in the 80’s, the Age of Greed and plunder of business assets.
Just when you think it couldn’t be any worse…
Don't know how you can do a column on the 2008 collapse without even a mention of the role of the Community Reinvestment Act or HUD Secretary Andrew Cuomo's pressuring banks to make massive amounts of loans to people who couldn't qualify for them under standard lending criteria in the name of racial equity in home ownership. That's quite a trick. I hope neither of those factors, which led to the packaging of worthless loans with good loans as investment devices, leading to the collapse, are present today.
Thanks and comments expand our understanding.
The relaxed (non-existent) standards of that period applied up and down the class ladder. Even the well-heeled have debt limits, but that was ignored in the frenzy to get mortgages out the door. I was treasurer for a condominium association from 2010-2012 while the 2008 after-action clean-up was happening, and most owners were very upper-middle class, but we had a number of foreclosures due to even the well-heeled spending every last dollar and extending themselves.
https://x.com/i/grok/share/zpPoi8Cz0Wmv5EWcIBvDDctcO
Grok disagrees with you, Cuomo & the CRA were NOT the primary cause. I would hold Warren Buffet's AIG & the rating agencies for giving high ratings. AIG along with the other Wall Street profiteers should be bankrupt. The execs at these companies laughed their way to the bank while homeowners lost their homes and ruined their credit.
Correct
The idea that the CRA is what caused the GFC is not borne out by facts. Hell, synthetic CDOs were created because there was demand for more garbage loan paper than banks themselves could generate.
For that matter, the banking industry certainly had the ear of the Bush 2.0 Administration, and they were not crying about how the CRA was forcing them to lend money.
Do yourself a favor. Read "To Big to Fail" by Andrew Ross Sworkin.
I read the book .
You apparently didn't read or didn't understand my comment.
So you took away from the book that the collapse was caused by the banks' demand for mortgage backed securities in which Fannie Mae packaged worthless loans (that it overrated) with decent loans and that this DIDN'T stem from the Clinton administration's resurrection of the CRA resulting in the loans to people who couldn't afford them? Wow, just wow.
The CRA wasn't resurrected by the Clinton Administration and as I said, demand for garbage paper was so great that banks could not get enough supply. Hence the synthetic CDO.
It was passed during the Carter administration but pretty much ignored until the Clinton Presidency ramped up enforcement. Facts are very stubborn things.
So you are saying that a private company has debt on its balance sheet. That debt on its balance sheet is supplied by a private credit enterprise that raises its capital by adding at least $3 in debt* for every $1 in equity. And the lender to the private credit enterprise is making money off of that loan.
The loan to the private company can carry 11%-15% interest, PIK payments, and other terms. But wait, there are so many piling in to the private credit trade that borrowers are no demanding "covenant light" terms, aka, the lender must take on unsustainable risks.
* In the pitch book, this is known as "leverage to juice returns"
If you're looking for a single, easily understandable source providing a deep dive into all this, I recommend the book "The Lords of Easy Money" by Christopher Leonard (2022). Too much to explain here, but basically the Fed evolved from its typical, staid money supply oversight role to an aggressive economic policy-making role, responding to virtualy every financial wrinkle with a bottomless supply of cheap money via quantitative easing and zero interest rates.
Then all that money set out in search of "value" among riskier investments with potentially higher returns, which Wall Street and the big banks have been only too happy to provide. One reluctant participant said the Fed effectively penalized prudent investing.
The current corporate debt-backed securities market features all the elements that led to the mortgage-backed securities market collapse. Given the comparatively huge numbers we're looking at here, its likely eventual meltdown promises to dwarf the 2008 debacle.
Just have to point something out
Chicago pension debt climbs to $36B, up 13% in five years
https://www.thecentersquare.com/illinois/article_21e2f65b-f2ee-4669-ba36-87d0582394ee.html
(The Center Square) – Wirepoints Executive Editor Mark Glennon is warning Chicago residents the city appears on the road to destruction as a mounting pension crisis has seen such debt soar by 13% over the last five years alone.
The 2024 Annual Comprehensive Financial Report for the city of Chicago now pegs the city’s unfunded liabilities at almost $36 billion, even after overall debt has dipped by $1.3 billion over the last year.
“The biggest problem is that they are being underfunded, every year the city and the state for pensions puts in less than the actuaries say they are supposed to be contributing,” Glennon told The Center Square. “These pension payments that took $2.5 billion out of the Chicago budget represent 16 to 20% of the city budget. That gobbles up not just taxes but diminishes other services that the city provides. To regain competitiveness and halt the population decline and keep employers here, we need to have a competitive level of total taxes and a competitive level of quality of services.”
While most large public pension funds ideally have average funding levels of about 70%, data shows Chicago’s police and firefighters funds are only funded at 24.5%, while the laborers fund is at 43% and the municipal workers fund is at just 26%.
(Snip)
_______________________________
How's your State Doin?
I live in Illinois and I did not know just how bad it is.
And not just Illinois.
Well, we all know what happened after the diner had just one more wafer thin mint.
Mr Creosote
Canary in the coal mine? Remember 2008? We also, here in the Northeast, are seeing a mania for real estate, with even the old Levitt tract homes on LI pushing up to $1 million. This is for a home that my parents bought in 1956 for $14 K.
Certainly an interesting topic. However, this article is heavy on innuendo and light on facts. I encourage interested readers to do some research on topics like “direct lending”, “private credit”, and related areas that can be easily discovered online. Loads of data, analysis, etc. are available and not paywalled.
Is there a death wish cult on Wall Street? Same playbook over and over.
No, there is no death wish. The fintech companies do well even if their clients lose money. The companies get their cut at the start and usually have priority in the end as to assets that have value.
The May 31 2025 issue of The Economist has a Special Report of the Wall Street, and has a section about the private credit revolution... Bad things are coming is the conclusion
Interesting timing.
With the newly legislated Trump Accounts for newborns, how much money will flow into Wall St. over the next 3 years. As I read about them, it felt like Bush trying to privatize Social Security, generating for Wall St, coincidentally, roughly the same amount of money the government spent on the bailout only a few years after his plan was rejected. This time, it's a different shade of lipstick being slathered on the preemptive bailout, but it's the state bailing out private debt just the same.
Damn it feels good to be a gangsta...
Wow you found a way to blame Trump. How novel. It's 1,000 per kid. Think of it as an EITC you won't spend on booze and weed.
Trump accounts must be invested in s&p like indexes. Not nearly the same thing as private credit.
The idea that they can say no is the Hamster that doesn’t die of starvation given the choice of food or cocaine.
Mint? An imaginary NFT of a Mint, futures on NFT of Mint , nano thin.
Here’s an idea; Mr. Market. Meet Mr. market, Lord High Executioner.
No bailouts.
The government undertakes nothing beyond food, clothing, shelter, security from crime or disorder and basic medical care.
Lord High Executioner Market spares no one.
Ask me if I mind the Global Financial system meeting Mr Market, or Boomers reduced to one dwelling, or Financial Services Specialists selling their organs?
The answer is NO.