Latest / The Chuck ToddCast / TODDCAST SPECIAL REPORT Part 2 - Did The Lakers Sale Reveal The Next Financial Crisis Waiting To Happen?

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TODDCAST SPECIAL REPORT Part 2 - Did The Lakers Sale Reveal The Next Financial Crisis Waiting To Happen? · The Chuck ToddCast

0:00
Speaker 1: All right, Coming up is part two of my deep
0:02
Speaker 1: dive explanation of how what the hell happened here with
0:05
Speaker 1: Mark Walter and the Lakers. What began is trying to
0:08
Speaker 1: figure out why did Mark Walter have to sell the
0:10
Speaker 1: Lakers turned into essentially an explanation and a journey of
0:16
Speaker 1: understanding how the American financial system now works. Well. Here
0:21
Speaker 1: in part two, I assemble the questions we still have
0:24
Speaker 1: left to answer and the potential fallout here. All right, Look,
0:29
Speaker 1: there are plenty of scenarios here that could mean all
0:34
Speaker 1: of this concern I've raised will mean nothing, that is
0:37
Speaker 1: my hope. But there are sort of two other scenarios
0:42
Speaker 1: that could lead us in a direction that we're going
0:45
Speaker 1: to be uncomfortable about. And I will say this, there's
0:49
Speaker 1: a part of me that wonders, is show Ao Todi
0:51
Speaker 1: ever going to get his money? But I'll digress on
0:54
Speaker 1: that a little bit. But the point is this second
0:57
Speaker 1: part then gets at to what questions Congress should be acting,
1:03
Speaker 1: asking whether or not this is a regulatory failure or
1:07
Speaker 1: whether it's just simply too hard for regulators to keep
1:10
Speaker 1: up with how fast money transacts, and then finally, how
1:18
Speaker 1: this connects to our current politics and the growing concern
1:23
Speaker 1: that capitalism doesn't work for all of us anymore, that
1:27
Speaker 1: instead there's two sets of rules. Those that there's capitalism
1:32
Speaker 1: for those of us that follow the rules, and then
1:34
Speaker 1: there's an entirely entire other ecosystem that none of us
1:39
Speaker 1: have access to that is creating this super rich on paper.
1:44
Speaker 1: But it's all paper money. And what happens when everybody
1:48
Speaker 1: decides they want access to their paper money all at
1:51
Speaker 1: the same time. So with that in mind, here's part
1:56
Speaker 1: two of my deep dive into trying to understand Mark
2:00
Speaker 1: Walter sold the Lakers after owning them for just fourteen months.
2:08
Speaker 1: So in part one we sort of took you through
2:11
Speaker 1: a little bit of this process. Really it was about
2:13
Speaker 1: understanding Mark Walter's world, this world of tay basically trying
2:21
Speaker 1: to take slicing and dicing, securitizing assets, coming up with
2:26
Speaker 1: different vehicles. Right, it's kind of what he knew. Then
2:30
Speaker 1: we told you about the financial crisis in life insurance companies,
2:33
Speaker 1: and suddenly they became an incredible source of money, pure
2:38
Speaker 1: and simple for the entire private equity world, which has
2:41
Speaker 1: now increased this world of private credit. And this appears
2:44
Speaker 1: to this I keep pulling the thread. This is what
2:47
Speaker 1: it comes down to. So now we begin this part
2:49
Speaker 1: two with this question. Who looked inside the box of
2:52
Speaker 1: these special vehicles here that the insurance company that were
2:56
Speaker 1: created that were then owned by the insurance companies and
2:59
Speaker 1: decided safe it was. So before we answer that, let
3:02
Speaker 1: me remember why this answer reminds you why this answer matters.
3:05
Speaker 1: And again I'm keeping this an American. An insurance company
3:08
Speaker 1: has one hundred dollars to invest, it buys a US
3:11
Speaker 1: Treasury bond. That's safe. Regulators don't need the insurance company
3:15
Speaker 1: keeping another giant pile of money around just in case
3:18
Speaker 1: the US government disappears tomorrow. Right, that's a safe. But
3:21
Speaker 1: suppose the insurer takes that one hundred dollars and lends
3:23
Speaker 1: it to my widget company, and my widget company is
3:26
Speaker 1: hanging on by a threat. Regulators might say, Okay, that's different.
3:30
Speaker 1: There's a much greater chance that I won't be able
3:33
Speaker 1: to pay you back, so we want you to have
3:36
Speaker 1: more of your own financial cushions sitting behind that investment.
3:39
Speaker 1: That's the basic idea. Right, the riskier the asset, the
3:42
Speaker 1: bigger the rainy day fund, the insurer may need that
3:46
Speaker 1: means the question we ended up ended the last part
3:49
Speaker 1: of this story matters so enormously. Who decides how risky
3:54
Speaker 1: this thing is? Here's one important answer. Credit rating agencies.
3:58
Speaker 1: Your triple A ratings, your double A, single layer triple
4:00
Speaker 1: b's than down into junk. Right, It's all sort of
4:03
Speaker 1: a report card for debt. And the grade matters because
4:06
Speaker 1: the grade can help determine how regulators treat the investment, right,
4:09
Speaker 1: how much money you need to have, interest rates, etc.
4:12
Speaker 1: A better grade can mean the insurer needs less capital
4:15
Speaker 1: sitting behind it. A worse grade can mean it needs more.
4:18
Speaker 1: So a rating isn't simply somebody on Wall Street saying
4:21
Speaker 1: I like this bond. The rating can change the economics
4:25
Speaker 1: of owning the bond itself. And now remember the box
4:28
Speaker 1: from the last part of this episode. Suppose a complicated
4:33
Speaker 1: underlying investment gets put inside a special purpose vehicle, one
4:37
Speaker 1: of these LLCs named after a street just outside Guggenheims
4:42
Speaker 1: head quarters. The vehicle issues a note, and the note
4:44
Speaker 1: gets rated. If that note qualifies for treatment as a
4:48
Speaker 1: bond and receives a strong enough rating, the insurer may
4:51
Speaker 1: able to hold it with substantially less capital than it
4:55
Speaker 1: might need for some riskier forms of exposure. That's why
4:59
Speaker 1: regulator have become increasingly interested in exactly these structures. The
5:04
Speaker 1: question isn't whether putting something in a box makes it
5:06
Speaker 1: safe or at least sort of isolates the risk. It's
5:11
Speaker 1: does the grade on the box accurately reflect what's inside it? Right?
5:17
Speaker 1: Can you have three things separately be seeing as triple
5:20
Speaker 1: A rated, but if you had put them all together,
5:22
Speaker 1: you'd be like, oh, that's risk here, that shouldn't be
5:24
Speaker 1: triple A rated. And you see where I'm going, right?
5:26
Speaker 1: And this is where some remarkable reporting from Shane Shiftlet
5:29
Speaker 1: and Heather Gillers at the Wall Street Journal becomes important.
5:32
Speaker 1: They assembled data on nearly eighteen thousand privately rated investments
5:37
Speaker 1: held by insurance companies. Now, the first number you need
5:40
Speaker 1: to hear is astonishing. In twenty eighteen, American insurers held
5:45
Speaker 1: roughly forty seven billion dollars of privately rated debt. Seven
5:50
Speaker 1: years later, that number jump tenfold to four hundred and
5:55
Speaker 1: eighty billion dollars. Okay, in seven years, more than ten x.
6:01
Speaker 1: The journal also cites an estimate from am Best putting
6:04
Speaker 1: private credit at roughly nine hundred and eighty billion dollars
6:07
Speaker 1: of insurance holding, so could be double what we think.
6:10
Speaker 1: That's close to a trillion dollars billionaire billionaire. Suddenly it's
6:14
Speaker 1: a lot of real money. Huh. I know. This is
6:16
Speaker 1: where you can get lost in the numbers. Try not
6:18
Speaker 1: to just remember one thing. This guy really big, really fast,
6:22
Speaker 1: and there's a lot of debt that is now privately rated. Now,
6:25
Speaker 1: what does privately rated mean? Pretty much? What exactly what
6:28
Speaker 1: it sounds like. A company or financial vehicle wants a
6:30
Speaker 1: credit rating. A ratings agency examines information about the investment
6:34
Speaker 1: and issues what's called a private letter rating. Unlike the
6:37
Speaker 1: rating at a big public bond issue, you and I
6:40
Speaker 1: may not be able to pull up all the underlying material.
6:44
Speaker 1: The loan is private, the rating may be private, and
6:47
Speaker 1: sometimes there may only be one rating. None of that
6:51
Speaker 1: makes the rating wrong. In fact, private ratings agencies may
6:55
Speaker 1: receive detailed information about the borrower that you and I
6:58
Speaker 1: will never see. Maybe it does understand the investment far
7:02
Speaker 1: better than some outsider like me could. But if that
7:05
Speaker 1: rating helps determine how much capital an insurance company needs
7:09
Speaker 1: to hold against the asset, then the quality and independence
7:13
Speaker 1: of that rating become enormously important, and that brings me
7:17
Speaker 1: to a company called Egan Jones. And this gave me
7:22
Speaker 1: some Arthur Anderson flashbacks. If you remember the Enron story,
7:27
Speaker 1: you've probably heard of Moody's my pal Mark Zandy that
7:30
Speaker 1: I bring in every quarter to give us the reality
7:33
Speaker 1: check in the economy. He works at Moody's Standard and
7:36
Speaker 1: Poors is a rating thedan, so you've probably heard of them.
7:38
Speaker 1: Fitch is another one. I'm guessing you never heard of
7:41
Speaker 1: Egan Jones. Insurance companies certainly have, though according to the
7:45
Speaker 1: Journal's analysis, American insurers held roughly forty billion dollars of
7:49
Speaker 1: debt privately rated by Egan Jones. Egan Jones becomes especially
7:53
Speaker 1: important in this Mark Walter story. According to the Journal,
7:57
Speaker 1: Egan Jones supplied ratings for roughly third of Delaware Life's
8:02
Speaker 1: privately rated debts. At clear Spring, they rated about seventy
8:06
Speaker 1: percent of it. And remember American media productions the Dodgers,
8:10
Speaker 1: TV Network, Sports and at La, Egan Jones rated that
8:14
Speaker 1: debt too. So now you follow the chain. Our hypothetical
8:18
Speaker 1: annuity customer gives money to an insurance company. The insurance
8:21
Speaker 1: company invests some of the money supporting its promises in
8:24
Speaker 1: private credit. Some of that private credit may be issued
8:27
Speaker 1: through financial vehicles. The debt gets privately rated, and that
8:31
Speaker 1: rating can influence how much capital the insurer needs to
8:34
Speaker 1: keep as a cushion against the investment. This is why
8:37
Speaker 1: the ratings aren't some technical side plot here. They're part
8:40
Speaker 1: of the machinery. And now comes the obvious question who
8:43
Speaker 1: pays the ratings agencies? Generally the insurer or another party
8:49
Speaker 1: seeking the rating pays for it. That's not unique to
8:52
Speaker 1: Egan Jones. That's how much of the ratings business is
8:54
Speaker 1: operated for years. Plenty of legitimate reasons for the arrangement,
8:58
Speaker 1: but it does have inherent in it now, doesn't it.
9:01
Speaker 1: The person who wants the grade is paying the person
9:03
Speaker 1: who gives the grade. Independence matters a lot. Shifflet and
9:09
Speaker 1: Gillers tried to test this. Because private ratings are private,
9:12
Speaker 1: it's difficult to find cases where two agencies rated exactly
9:16
Speaker 1: the same investment and you can compare the grades. But
9:18
Speaker 1: the journal found a subset where comparisons were possible, and
9:22
Speaker 1: in those comparisons, Egan Jones averaged roughly one grade higher
9:27
Speaker 1: than competing ratings in roughly two dozen cases, Egan Jones
9:31
Speaker 1: was at least three notches higher. Does this proved that
9:35
Speaker 1: Egan Jones did great inflation? No, Different agencies can disagree
9:41
Speaker 1: ratings issued at different times, maybe based on different information.
9:43
Speaker 1: I'm in the card collecting business PSA, CGC, SGC. All
9:48
Speaker 1: these companies decide what a card is worth. What's a ten.
9:51
Speaker 1: There's different tens some one person's nine is another person's ten,
9:55
Speaker 1: So there's usually only a little bit of difference. This
9:59
Speaker 1: is interesting, this consistent difference. Egan Drones. Egan Jones, by
10:04
Speaker 1: the way, strongly disputed the journal's analysis. The firm claims
10:07
Speaker 1: those comparisons can be misleading and say it's methodologies are sound.
10:11
Speaker 1: But there are other reasons. Regulators and investors have been
10:13
Speaker 1: asking questions because former Egan Jones executives have sued the company,
10:17
Speaker 1: alleging they face pressure to inflate ratings to win or
10:20
Speaker 1: retain business. Egan Jones denies it. The SEC has separately
10:25
Speaker 1: been examining aspects of that firm's ratings processes. Again, right,
10:29
Speaker 1: this is the Enron flashback I had when I went
10:32
Speaker 1: down this rabbit hole. Earlier this year, Bermuda's financial regulator
10:35
Speaker 1: Bermuda folks stopped recognizing Egan Jones as an approved ratings provider.
10:40
Speaker 1: I don't want to draw stereotypes about, you know, keeping
10:44
Speaker 1: money in Bermuda, but if you're too if you're too
10:47
Speaker 1: hot to handle for Bermuda's regulatory environment, I'm not saying.
10:51
Speaker 1: I'm just saying some insurers have responded themselves. Alliance sold
10:55
Speaker 1: the journal that stopped allowing its asset managers to use
10:57
Speaker 1: Egan Jones late last year, and for debt already carrying
11:00
Speaker 1: an Egan Jones' rating, Alliance now requires a second rating.
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Speaker 1: None of this means Egan Jones' ratings are shall we say,
11:08
Speaker 1: wrong or corrupt. It just means the ratings deserve more scrutiny,
11:14
Speaker 1: because if a rating helps determine the size of the
11:17
Speaker 1: Rainy Day Fund, being wrong about the rating can mean
11:20
Speaker 1: being wrong about the size of the cushion. And again,
11:24
Speaker 1: Walter controls both sides of this transaction. It's astonishing how
11:30
Speaker 1: legal this all is. And now we need to introduce
11:33
Speaker 1: another referee. There's an auditor. KPMG audited the statutory financial
11:37
Speaker 1: statements we've been talking about, and the audit opinions remained
11:40
Speaker 1: clean even after the insurers revised important related party disclosures.
11:45
Speaker 1: So you think, well, how can that be? How can
11:48
Speaker 1: a disclosure change by billions of dollars? Right, we went
11:51
Speaker 1: from three billion to sixteen billion. How can the auditor
11:54
Speaker 1: say the financial statements are okay? Well, that's why we
11:57
Speaker 1: need that. We may need another distinction here, but it
12:00
Speaker 1: is not a guarantee that every investment is safe. An
12:02
Speaker 1: auditor isn't a credit rating agency either. KPMG isn't telling
12:07
Speaker 1: a policy holder this private loan will definitely be repaid
12:10
Speaker 1: in this one won't. And audit opinion addresses whether the
12:13
Speaker 1: financial statements, taken as a whole, fairly present the company's
12:17
Speaker 1: financial position under the applicable accounting rules. So does everything
12:22
Speaker 1: follow the rules? And a correction to a regulatory disclosure
12:25
Speaker 1: does not automatically mean that the financial statements themselves were
12:29
Speaker 1: materially mistated. There may be a perfectly legitimate accounting explanation
12:34
Speaker 1: for why kpmg opinion remain clean. So the question isn't
12:39
Speaker 1: why did KPMG say these loans are safe? That's not
12:42
Speaker 1: what KPMG was hired to say. Their question is what
12:46
Speaker 1: exactly did KPMG's clean opinion tell regulators and policy holders,
12:50
Speaker 1: and what did it not tell them? And that leads
12:54
Speaker 1: us to something that was missing from my first way
12:56
Speaker 1: of thinking about this story. We've talked about Enron, and
12:58
Speaker 1: we've talked about two thousand and eight, but there's another
13:00
Speaker 1: financial collapse that may actually be a more useful historical
13:03
Speaker 1: warning here. Executive Life. If you're under fifty, you may
13:07
Speaker 1: barely remember it. Executive Life was a major life insurance company,
13:10
Speaker 1: and in the nineteen eighties it became famous for doing
13:12
Speaker 1: something that looked extremely clever. Most insurers owned enormous amounts
13:16
Speaker 1: of boring bonds. Executive Life went looking for more yield,
13:20
Speaker 1: just like Mark Walter did, and found it in high
13:22
Speaker 1: yield debt junk bonds. Now a lot of it is
13:25
Speaker 1: associated with the financial ecosystem around Michael Milkin, Drexel, Burnham, Landbert.
13:29
Speaker 1: Those names may seem familiar. Junk bonds, Michael Milkin kind
13:33
Speaker 1: of go hand in hand, right. For years, those higher
13:35
Speaker 1: yields made Executive Life look innovative, and it offered attractive
13:39
Speaker 1: insurance by products they could earn even more on its investments.
13:43
Speaker 1: Everybody benefited while that machine worked. Then the junk bond
13:47
Speaker 1: market came under stress, Questions emerged about what those assets
13:50
Speaker 1: really were worth, The market value of the portfolio fell,
13:53
Speaker 1: policyholders became nervous, and eventually regulators seized Executive Life. This
13:58
Speaker 1: doesn't mean Executive Life is like what is what Mark
14:02
Speaker 1: Walter created. Junk borrowns are not necessarily private credit. The
14:06
Speaker 1: regulatory system today is not the regulatory system of nineteen
14:10
Speaker 1: ninety one. Delaware Life and clear Spring do not, based
14:12
Speaker 1: on the public measures we have, look today like insurance
14:16
Speaker 1: companies on the verge of seizure. In fact, some of
14:20
Speaker 1: the evidence that cuts directly against the scariest version of
14:22
Speaker 1: this story. The end of the first quart of twenty
14:24
Speaker 1: twenty six, Delaware Life reported about sixty nine billion dollars
14:27
Speaker 1: of admitted assets and about three point nine billion dollars
14:30
Speaker 1: of capital and surplus. So it has financial strength ratings
14:33
Speaker 1: of a minus from AMBST Standard Ports and Fitch. Am
14:38
Speaker 1: Best calls a minus excellent. It is the lowest excellent
14:41
Speaker 1: rating you can get, though, for what it's worth. And
14:43
Speaker 1: when AMBS last publicly reviewed the broader group one on
14:46
Speaker 1: one Life, an annuity group which includes Delaware Life and
14:48
Speaker 1: clear Spring, it described the group's balance sheep strength is
14:52
Speaker 1: strong and said its risk adjusted capitalization had been improving. Okay,
14:57
Speaker 1: so there is some all all of that needs to
15:01
Speaker 1: be stated that way. There is some more recent caution though.
15:05
Speaker 1: SMP now has a negative outlook on Delaware Life. Fitch
15:08
Speaker 1: has put its rating on a negative watch. So the
15:11
Speaker 1: picture isn't everything is wonderful, but it certainly isn't. These
15:14
Speaker 1: insurers are obviously failing. It's sort of like, Huh, there's
15:18
Speaker 1: something we need to take a closer look at here.
15:21
Speaker 1: And I think that's important enough to say, because if
15:23
Speaker 1: you're waiting for me to reveal that we discovered an
15:25
Speaker 1: insurance company that's already insolvent, I did not. That's not
15:29
Speaker 1: this story. The question, though, is different. How much confidence
15:32
Speaker 1: should we have in the conventional measures of financial strength
15:35
Speaker 1: if a significant portion of the assets underneath them are
15:38
Speaker 1: private assets whose market values outsiders cannot continuously test ievia
15:44
Speaker 1: a public market, And how would those measures behave if
15:48
Speaker 1: a lot of those assets came under stress all at
15:50
Speaker 1: the same time. Executive Life matters not because it tells
15:56
Speaker 1: us Delaware Life is going to fail. It tells us
15:58
Speaker 1: why asset quality and liquidity matter to a life insurer,
16:01
Speaker 1: even when the customer thinks she's buying something that was
16:05
Speaker 1: supposed to be just sort of normal and predictable. Because
16:09
Speaker 1: an insurance company isn't simply investing some billionaire's money. It's
16:12
Speaker 1: backing promises to people annuities, life insurance, and retirement savings.
16:17
Speaker 1: And if an insurer ever does fail, there is a
16:18
Speaker 1: safety net. State insurance guarantee associations provide protection up to
16:24
Speaker 1: limits that varies by state and by product. It's kind
16:27
Speaker 1: of like the FDIC right insures your bank accounts if
16:29
Speaker 1: it's with an FDIC insured bank. Same thing here. So
16:33
Speaker 1: our hypothetical annuity customer isn't simply standing there with no protection.
16:37
Speaker 1: Now the protection, though, is probably our tax dollars somewhere
16:41
Speaker 1: along the road. Now we'll come back to that. Now,
16:44
Speaker 1: let's step back, because we're beginning to accumulate historical echoes.
16:47
Speaker 1: Executive Life gives us one. Insurance companies reaching for yield
16:50
Speaker 1: and credit markets. Enron gives us another. All these special
16:54
Speaker 1: purpose entities sliced and diced. Related party questions, complexity, the
16:58
Speaker 1: difference between legal form and economic reality, and the danger
17:02
Speaker 1: of assuming that a prestigious outside gatekeeper Arthur Anderson has
17:05
Speaker 1: necessarily answered every question you're worried about. Then two thousand
17:10
Speaker 1: and eight gave us another complex debt financial engineering, ratings, agencies,
17:14
Speaker 1: regulatory treatment by ratings, influenced by ratings, assets that looked
17:18
Speaker 1: extremely safe until the assumptions underneath them were tested. Three
17:22
Speaker 1: different episodes, three different sets of facts, three different failures.
17:27
Speaker 1: I'm not saying this is any one of them, But man,
17:30
Speaker 1: do does it rhyme? The tune sounds and familiar? Doesn't it?
17:35
Speaker 1: Look at the warning lights we're encountering In twenty twenty six,
17:38
Speaker 1: we have a rapidly growing private credit market. We have
17:41
Speaker 1: life insurance owning enormous amounts of it, private financial vehicles,
17:45
Speaker 1: limited public price discovery, private ratings, capital treatment influenced by
17:50
Speaker 1: those ratings, questions about related party exposure, auditors whose clean
17:54
Speaker 1: opinions don't necessarily answer the questions ordinary people assume that
17:58
Speaker 1: they're supposed to answer, and regulators themselves changing rules because
18:02
Speaker 1: the market has evolved. It's enough to make us sit up.
18:07
Speaker 1: I'm not saying it's a crisis. We need to continue
18:10
Speaker 1: to ask better questions. The regulators are paying attention, the
18:14
Speaker 1: rules are changing, We're examining private ratings everybody's looking harder
18:19
Speaker 1: underneath here. So good news is the regulators were there.
18:23
Speaker 1: But here's a harder question. Can the people regulating the
18:26
Speaker 1: system adapt as quickly as the system itself is changing?
18:30
Speaker 1: This is what scares the shit out of me, folks.
18:34
Speaker 1: So can the people watching this system keep up with
18:37
Speaker 1: how quickly it is changing? Where? You know, the last
18:41
Speaker 1: time in twenty oh eight, we asked where were the regulators?
18:45
Speaker 1: But guess what, the regulators aren't a sleep here. They're
18:48
Speaker 1: all here. They're doing quite a bit. What's scary is
18:51
Speaker 1: that the regulators may be getting used. And I'll get
18:55
Speaker 1: to that. Insurance regulators have been changing the rules governing
18:58
Speaker 1: private investments. They're paying attention to private letter ratings, They're
19:01
Speaker 1: changing definitions of what insurers can call upon, and they
19:04
Speaker 1: are trying to look through financial structures that are opagued
19:07
Speaker 1: and ask what is the underlying exposure? Actually here, federal
19:12
Speaker 1: regulators have been studying the connections between private credit insurance
19:15
Speaker 1: companies and banks, and what about the Bermuda connect Even
19:17
Speaker 1: Bermuda stopped recognizing Egan Jones as an approved ratings provider.
19:22
Speaker 1: So I'm not going to sit here. This is not
19:25
Speaker 1: asleep at the switch stuff that would be inaccurate. This
19:30
Speaker 1: is the more interesting problem, frankly, is structural, because there
19:33
Speaker 1: isn't one regulator responsible for the financial system I just described,
19:38
Speaker 1: and that may be the problem. There's too many regulators.
19:51
Speaker 1: Guess who's gaming the regulatory system. Each one sees a
19:54
Speaker 1: different part. You're a bank, you've got banking regulators. You're
19:58
Speaker 1: the Federal Reserve, the FDI, your state regulator. Maybe there's
20:02
Speaker 1: even a state regulator for your bank. What if you're
20:05
Speaker 1: an investment advisor, Oh, that's the SEC. What if you're
20:07
Speaker 1: a life insurance company, Well, that's primarily a state responsibility.
20:11
Speaker 1: Fifty states, fifty insurance departments. Now they do coordinate the
20:14
Speaker 1: National Association of Insurance Commissioners. They help try to create
20:17
Speaker 1: some common standards, but fundamentally American insurance regulation is still
20:22
Speaker 1: state based. If you're a ratings agency, there's different regulatory structure.
20:26
Speaker 1: If you're a private investment fund, there's different rules for that.
20:28
Speaker 1: If you're an LLC, maybe you incorporated in Delaware. If
20:31
Speaker 1: you're a reinsurer offshore, maybe now you're in Bermuda or Barbados,
20:35
Speaker 1: a different country, a different regulator, potentially different capital requirements,
20:41
Speaker 1: different accounting rules. None of this necessarily is a mistake.
20:45
Speaker 1: This could be a feature, folks. There are reasons we
20:48
Speaker 1: regulate different financial businesses differently. A life insurance company is
20:52
Speaker 1: not a bank. A private investment fund is not a
20:54
Speaker 1: checking account. A ratings agency is not an insurer. But
20:57
Speaker 1: if you put all these things together, a private manager
21:00
Speaker 1: originates a loan. Maybe the loan sits inside a special
21:03
Speaker 1: purpose vehicle. The vehicle issues a note, the ratings agency
21:06
Speaker 1: grades the note. Insurance company buys it. Investment manager manages
21:09
Speaker 1: the insurance portfolio. Some insurance risk gets reinsured somewhere else,
21:13
Speaker 1: maybe it's offshore. Maybe a bank provides financing somewhere else
21:16
Speaker 1: in the chain, maybe have a different Regulators may have
21:18
Speaker 1: jurisdiction over different pieces of this economic machine. So the
21:24
Speaker 1: better question is who's seeing the entire machine? Because the
21:29
Speaker 1: regulators aren't blind, but they don't have oversight over it
21:33
Speaker 1: at all, only the portion they have to regulate. How
21:39
Speaker 1: quickly can everybody assemble the entire machine? When each regulator
21:43
Speaker 1: is holding a different piece, And then the finance world
21:47
Speaker 1: moves quickly, things change. Suddenly there's a new structure, a
21:51
Speaker 1: lawyer reviews it, a new ratings agency, then new investors
21:55
Speaker 1: show up. A financial instrument can spread across Wall Street
21:59
Speaker 1: before most of have ever heard of the new terminology.
22:02
Speaker 1: Remember the spacts all of a sudden, They just showed
22:04
Speaker 1: up one day during twenty and then it disappeared as
22:06
Speaker 1: fast as it came. Regulation, of course, never moves that way.
22:10
Speaker 1: A regulator identifies an issue, you study it, you collect data,
22:14
Speaker 1: You propose a rule. Industry comments, lawyers respond, rules get revised.
22:18
Speaker 1: You know campaign finance, you know campaign donations happen, lobbying,
22:23
Speaker 1: you get it. And with insurance you may also be
22:25
Speaker 1: coordinating across fifty state systems. Sometimes you're international. Capital moves
22:32
Speaker 1: at the speed of a term sheet. Regulation moves at
22:34
Speaker 1: the speed of rule making. So it's not necessarily in
22:38
Speaker 1: competence or where are the regulators, It's just how our
22:42
Speaker 1: government works. Sometimes we generally don't want regulators making enormous
22:45
Speaker 1: rules overnight, but it creates a structural problem. Finance gets
22:51
Speaker 1: ahead start and this is where we need to understand
22:53
Speaker 1: something called regulatory arbitrage. Don't let the phrase scare you.
22:58
Speaker 1: You've probably done regulatory art yourself. You live near a
23:02
Speaker 1: state line. Gas is twenty cents cheaper on the other side,
23:05
Speaker 1: you drive across and fill up. Congratulations. Regulatory arbitrage. Maybe
23:09
Speaker 1: the sales tax is lower across the state line. You
23:11
Speaker 1: buy the television there, same television, different rules. Financial firms
23:14
Speaker 1: do versions of this, and they're very good at it.
23:17
Speaker 1: Suppose one kind of institution has to hold a lot
23:19
Speaker 1: of capital against a particular investment. Can another kind of
23:22
Speaker 1: institution hold it more efficiently. Suppose one legal structure receives
23:26
Speaker 1: expensive regulatory treatment. Can you structure the investment differently and
23:29
Speaker 1: have a different regulator look at it? Right? You get
23:32
Speaker 1: my drift. One jurisdiction requires more capital, another gets treated differently. Boom.
23:38
Speaker 1: So Suppose a bank no longer finds a certain loan
23:41
Speaker 1: attractive because post two thousand and eight regulation makes it expensive. Fine,
23:45
Speaker 1: don't make the loan through a bank. None of that
23:47
Speaker 1: is automatically illegal. A lot of regulatory arbitrage is perfectly legal, right,
23:52
Speaker 1: it's not. It's not illegal for you to go across
23:55
Speaker 1: state lines and buy television in another state with a
23:58
Speaker 1: lower sales tax. Sometimes it's exactly what markets are supposed
24:01
Speaker 1: to do. Rules change incentives, people respond. But here's the problem.
24:06
Speaker 1: The risk doesn't necessarily change just because the address changes.
24:11
Speaker 1: And that's where I think the story becomes much bigger
24:13
Speaker 1: than Mark Walter, because look at what regulators themselves are
24:16
Speaker 1: doing right now. Insurance regulators have been reconsidering what qualifies
24:19
Speaker 1: as a bond. Why because if you take an economic
24:22
Speaker 1: exposure that looks one way, you put it inside a structure,
24:25
Speaker 1: issue a note, have that note treated like a bond.
24:27
Speaker 1: The regulatory label may no longer tell you everything you
24:30
Speaker 1: need to know about the underlying risk. You have no
24:32
Speaker 1: idea whether or not that's good money or bad money.
24:34
Speaker 1: You have no idea whether it's a good you know.
24:37
Speaker 1: And so regulators are increasingly now asking, don't just show
24:40
Speaker 1: me the wrapping paper, show me what's inside this box.
24:42
Speaker 1: So they're playing closer attention. That's good, but if the
24:46
Speaker 1: rating doesn't actually capture the risk, the capital requirement may
24:50
Speaker 1: not either. Now that's why I can't sit here and
24:53
Speaker 1: say the regulation failed. Regulators are responding. The question is
24:58
Speaker 1: whether they can respond fast enough before we end up
25:02
Speaker 1: in a place that I fear we're going to end up.
25:05
Speaker 1: Because while the rules are being rewritten, the money's already
25:07
Speaker 1: there hundreds of billions of dollars in privately rated insured
25:10
Speaker 1: at close to a trillion dollars or private credit insurance
25:12
Speaker 1: portfolios by one estimate that's been cited, and a private
25:17
Speaker 1: credit market that has grown enormously outside traditional banking, basically
25:20
Speaker 1: all to evade scrutiny and evade regulation. It's hard not
25:23
Speaker 1: to look at it any other way. And that brings
25:25
Speaker 1: us to the mistake I think Washington may have made
25:28
Speaker 1: after two thousand and eight. And I want to be
25:30
Speaker 1: precise about the word mistake. I'm not saying Dodd Frank
25:33
Speaker 1: was a mistake. I'm not saying higher bank capital was
25:35
Speaker 1: a mistake. The stress tests were not a mistake. Better
25:39
Speaker 1: mortgage underwriting was not a mistake. It's quite the opposite.
25:42
Speaker 1: We had a banking crisis, and we made banks safer good.
25:45
Speaker 1: The mistake may have been believing that making the institution
25:47
Speaker 1: safer would eliminate the behavior that had created the risk.
25:51
Speaker 1: Because what were those behaviors underneath two thousand and eight?
25:54
Speaker 1: Borrowers wanted credit, Investors wanted higher yield, financial firms fees,
26:00
Speaker 1: people wanted leverage. Everybody wanted to put as little unproductive
26:05
Speaker 1: capital as possible behind an investment, and sophisticated people at
26:09
Speaker 1: enormous incentives to find ways to finance things more efficiently.
26:11
Speaker 1: This is why I have very a lot of skepticism
26:14
Speaker 1: about crypto. It's a value that not anybody can feel
26:18
Speaker 1: like it, can actually understand what the value is. And
26:20
Speaker 1: yet people are borrowing money against a value that somebody
26:23
Speaker 1: claims is there, and that's real money. And what happens
26:26
Speaker 1: when all that crashes. It's kind of similar here. And
26:29
Speaker 1: that's the thing. God Frank didn't eliminate all of that.
26:32
Speaker 1: You can't pass a law that eliminates the desire to
26:34
Speaker 1: make money. Money's going to find a way. When one
26:37
Speaker 1: road gets more expensive, money looks for another road. So
26:41
Speaker 1: that's why I keep coming back to the campaign finance
26:43
Speaker 1: reform problem that we run into. I've watched Washington do
26:47
Speaker 1: this my entire professional life. Everybody gets outraged about money
26:50
Speaker 1: in politics. Congress attacks the vehicle, They close the soft
26:53
Speaker 1: money loophole. All right, great, did money disappear? Nope, it
26:56
Speaker 1: went to a five twenty seven. You regulate that woop
26:59
Speaker 1: to super pack, different organization, different rule book, same behavior.
27:04
Speaker 1: The people with money still want influence of politicians still
27:06
Speaker 1: want help. Money always finds a way, and maybe that's
27:11
Speaker 1: one way to understand what happened after the financial crisis.
27:13
Speaker 1: We looked at the wreckage banks, mortgages, derivatives, ratings, agencies, securitization,
27:18
Speaker 1: and we regulated the scene of the accident. After Enron,
27:21
Speaker 1: we did something similar public company accounting, auditor independence, internal controls,
27:26
Speaker 1: executive certification. That was Sarbine's Oxley. Again, all sensible responses,
27:32
Speaker 1: reactionary responses, but they were responses to the thing that
27:36
Speaker 1: had already happened. And that's the pattern we keep repeating.
27:39
Speaker 1: We get very good at preventing the last financial crisis,
27:42
Speaker 1: the financial system immediately starts evolving towards the next set
27:46
Speaker 1: of opportunities. Now it doesn't mean that everybody's looking to
27:50
Speaker 1: create another crisis. They are not. But incentives work. Right.
27:56
Speaker 1: If banks pull back from certain lendings, somebody else can
27:58
Speaker 1: make the loans. If investors one high yield, somebody will
28:00
Speaker 1: try to provide them. If insurance companies need investments, somebody
28:04
Speaker 1: will create investments for them. If one structure requires thirty
28:07
Speaker 1: dollars of capital and another requires one dollar, somebody's going
28:09
Speaker 1: to ask and I legitimately structure this as the second thing.
28:12
Speaker 1: Because I only have one dollar to put down. That's
28:15
Speaker 1: not corruption, that's finance. So the regulators have been adapting.
28:21
Speaker 1: So maybe the story isn't that Wall Street broke the
28:23
Speaker 1: handcuffs Washington put on it after two thousand and eight.
28:26
Speaker 1: Maybe the story is we put the handcuffs on a
28:28
Speaker 1: particular set of institutions and the behavior migrated. Thanks became safer,
28:34
Speaker 1: but credit moved. Private credit grew, Asset managers became more
28:38
Speaker 1: important lenders. Insurance companies became an extraordinary source of long
28:42
Speaker 1: term capital. Financial structures adapted to insurance regulation. Ratings became
28:47
Speaker 1: part of the equation. Reinsurance could move pieces of risk
28:51
Speaker 1: into still another jurisdiction, essentially to move the really bad
28:55
Speaker 1: shit off your books, and regulators are adapting. Again. It's
28:59
Speaker 1: a race. It's financial innovation versus regulatory adaptation. Finance usually
29:05
Speaker 1: gets to move first, which raises a different version of
29:08
Speaker 1: this large machine that we have not been able to
29:11
Speaker 1: regulate as one. Maybe every regulator can see the piece
29:14
Speaker 1: sitting in front of them. Maybe the state insurers understand
29:18
Speaker 1: what's happening inside the insurance portfolios. Maybe the SEC understands
29:21
Speaker 1: what the investment manager is doing. Maybe the FED understands
29:24
Speaker 1: bank exposure to private credit funds, and maybe Bermuda understands
29:28
Speaker 1: the reinsurer issues. But when something goes wrong in one piece,
29:33
Speaker 1: how quickly can everybody determine what it means for the others.
29:36
Speaker 1: That's the systemic stress test that I don't think we
29:39
Speaker 1: can pass. The connections that matter during a crisis aren't
29:42
Speaker 1: always the connections regulators were originally assigned to monitor. And
29:46
Speaker 1: this is where the Walter investigation becomes useful to us.
29:50
Speaker 1: Even if Walter ultimately did nothing wrong, or did nothing
29:53
Speaker 1: criminal wrong, is a different story. That's morality issue. The
29:57
Speaker 1: subpoenas appeared to have forced a different kind of question,
30:00
Speaker 1: whose economic performance does this investment depend upon? That question
30:04
Speaker 1: helped produce a dramatically different disclosure when we had to
30:07
Speaker 1: do it again. Wasn't necessarily about a loss or fraud
30:09
Speaker 1: or insolvency, right, but a different picture of the relationship
30:14
Speaker 1: inside the portfolio. Sometimes understanding risk requires looking through the
30:18
Speaker 1: legal boxes and asking what is happening economically underneath all
30:21
Speaker 1: of them. Now the regulators understand it, the question is
30:25
Speaker 1: whether the rules can evolve as quickly as the structures do,
30:28
Speaker 1: and that's where our central argument lands We spent fifteen
30:31
Speaker 1: years making sure banks couldn't do two thousand and eight again,
30:34
Speaker 1: and in many ways we succeeded. But we didn't spend
30:37
Speaker 1: fifteen years asking where the behavior would go. The borrowers
30:40
Speaker 1: still needed money, the investors still wanted yield, the insure
30:44
Speaker 1: the insurers still needed returns, the financial engineers still knew
30:47
Speaker 1: how to build structures, and the money found another way.
30:51
Speaker 1: Maybe it's manageable, Maybe the regulators will catch it in time.
30:55
Speaker 1: Maybe this private credit system will be more resilient than
30:58
Speaker 1: the banking system that it partially supplanet. But there's only
31:03
Speaker 1: one way to find out whether our financial system is
31:04
Speaker 1: actually resilient. Eventually something puts it under stress, which brings
31:09
Speaker 1: us to the question I've been trying not to ask
31:12
Speaker 1: for most of this deep dive. What happens when something
31:16
Speaker 1: goes wrong? The honest answer is we don't know. And
31:19
Speaker 1: I don't mean nobody on Wall Street is modeled, and
31:21
Speaker 1: I mean we don't know what a serious period of
31:23
Speaker 1: stress in this market would actually look like. Because private
31:26
Speaker 1: credit at this scale, intertwined with insurance at this scale,
31:29
Speaker 1: has not really been tested through a financial crisis. It's
31:34
Speaker 1: very well we are three or four years before nineteen
31:37
Speaker 1: twenty nine, and before we imagine one. Let's make the
31:40
Speaker 1: strongest argument that maybe nothing Catastrakhan happens at all. Maybe
31:43
Speaker 1: private credit is not the mortgage market of two thousand
31:46
Speaker 1: and eight. There are plenty of differences, right, There's no
31:51
Speaker 1: depositors here that suddenly panic. Everybody gets scared on a
31:54
Speaker 1: Tuesday morning, they can make a bank run. Right. The
31:57
Speaker 1: traditional private credit market generally doesn't work the way a
32:01
Speaker 1: lot of this money is committed for years. Investors can't
32:04
Speaker 1: necessarily wake up tomorrow and say, I'm nervous give it
32:06
Speaker 1: all back. Right, that's an advantage here. Private lenders have flexibility. Right,
32:13
Speaker 1: if my widget company misses a payment, the lender doesn't
32:15
Speaker 1: necessarily have to dump the loan immediately. They can sit
32:18
Speaker 1: down with me. Maybe they extend how long I have
32:20
Speaker 1: to pay, Maybe the interest rate changes, maybe they get
32:22
Speaker 1: more equity in my company. And insurance companies tend to
32:27
Speaker 1: have longer term liabilities too, and that's and they generally
32:30
Speaker 1: have a decent idea of when much of that money
32:32
Speaker 1: they owe will come do. So it's it's planable, right,
32:34
Speaker 1: It's not a bank run, So it's a It's not
32:37
Speaker 1: a system that suddenly could collapse because of fear. So
32:43
Speaker 1: maybe private credit simply takes losses, some borrowers fail, Maybe
32:47
Speaker 1: just a bunch of rich people lose money, okay, and
32:51
Speaker 1: the system will work exactly as design, Which brings me
32:54
Speaker 1: back to Mark Walter, because there are basically three ways
32:57
Speaker 1: I can imagine this story ending Possibilynumber one Walter is
33:01
Speaker 1: the problem. The federal investigation uncovers issues specific to the
33:04
Speaker 1: financial crime, and some of if they find a crime
33:10
Speaker 1: or some form of it, specific to his financial empire,
33:13
Speaker 1: maybe some investments should have been disclosed differently. Maybe some
33:16
Speaker 1: relationships were classified it incorrectly. Maybe corrections are made and
33:20
Speaker 1: somebody simply pays a fine and nobody gets charged, and
33:22
Speaker 1: that's it. Interesting billionaire, complicated empire, move on possibility. Number two.
33:28
Speaker 1: Walter is an extreme example of a broader but manageable problem.
33:31
Speaker 1: Private credit is fundamentally sound, but parts of the industry
33:34
Speaker 1: grew too quickly. Private ratings need more scrutiny, insurers need
33:37
Speaker 1: better disclosure, and regulators need more information about what's inside
33:41
Speaker 1: some of these structures. Maybe the capital rules need adjusting,
33:44
Speaker 1: Maybe related party rules need tightening. Those are significant problems,
33:48
Speaker 1: but they're fixable, and regulators are already working on some
33:51
Speaker 1: of them. But then there's possibility number three, and this
33:54
Speaker 1: is the one that worries me. And this is where
33:57
Speaker 1: lawmakers need to go, because your job is to protect
34:00
Speaker 1: our system. What if Walter is the X ray. The
34:04
Speaker 1: investigation didn't create the financial system we've been talking about.
34:08
Speaker 1: It simply caused people to look unusually hard at one
34:11
Speaker 1: corner of it, and when they did, some economic relationships
34:14
Speaker 1: became more visible than they had been seen before. That
34:18
Speaker 1: does not mean everybody else is doing what investigators are
34:21
Speaker 1: examining it Walter's companies. We have no evidence of that.
34:24
Speaker 1: What it raises is a different question. What happens that
34:27
Speaker 1: the characteristics we're seeing here private assets, limited public price discovery,
34:31
Speaker 1: private ratings, complicated vehicles, insurance capital, reinsurance, bank financing, refinancing
34:37
Speaker 1: around parts of the ecosystem turn out to be turn
34:40
Speaker 1: out to matter during a period of stress. And this
34:43
Speaker 1: is where I want to be careful not to invent
34:45
Speaker 1: the next two thousand and eight simply because we understood
34:48
Speaker 1: what happened in the last one. A private loan sitting
34:50
Speaker 1: on an insurance company's books generally doesn't get marked down
34:53
Speaker 1: every afternoon. There isn't necessarily a margin call tomorrow morning
34:58
Speaker 1: because somebody elsewhere thinks it's worth lefe us. So where
35:01
Speaker 1: could pressure actually come from? There's several possibilities The insurance
35:06
Speaker 1: customer one hypothetical retirees money is stickier than a bank deposit,
35:11
Speaker 1: but it isn't necessarily trapped forever. Innuity contracts can be surrendered, surrendered,
35:16
Speaker 1: charges expire, Customers can move money when rates change, and
35:20
Speaker 1: if policyholders become frightened about an insurer, that all that
35:24
Speaker 1: some suddenly patient money becomes a little less patient. Then
35:28
Speaker 1: there are other sources of insurance company funding, funding agreements, borrowing,
35:32
Speaker 1: federal home loan, bank advances, things like that. Different liabilities
35:36
Speaker 1: behave differently under stress outside the insurance company. Private credit
35:40
Speaker 1: managers can themselves borrow banks provide lines of credit. Banks
35:44
Speaker 1: finance loans before they're placed with long term investors. Funds
35:47
Speaker 1: can borrow against portfolios. Holding companies can have debt. You
35:52
Speaker 1: can see how suddenly this feels like a circle. At
35:55
Speaker 1: some points, reinsurance agreements can contain triggers. So the question
35:58
Speaker 1: isn't simply who owns a bad Life. It's who else
36:01
Speaker 1: made a promise based on that loan being worth what
36:03
Speaker 1: everybody thought it was worth. Just like the mortgage crisis,
36:07
Speaker 1: one mortgage refinance into another, into another, into another. That's
36:11
Speaker 1: the wire we're looking for, and we do not yet
36:13
Speaker 1: know which wire, if any, would carry enough current to
36:16
Speaker 1: create the systemic problem. Maybe none of it exists, and
36:20
Speaker 1: that's exactly what needs to be tested. This is where
36:34
Speaker 1: we also have to be fair to Delaware Life in
36:36
Speaker 1: clear spring, complicated private assets do not equal insolvency. Related
36:41
Speaker 1: party exposure does not equal insolvency. A federal investigation does
36:45
Speaker 1: not equal insolvency. Their auditors have continued issuing clean opinions.
36:51
Speaker 1: Regulators have not declared either company in solvent, and we
36:55
Speaker 1: already looked at the publicly available measures that bear on
36:58
Speaker 1: that question, statutory SERP plus and the financial strength ratings
37:01
Speaker 1: of the insurers themselves. But the question from there is
37:05
Speaker 1: much narrower. How much stress could these cushions absorb if
37:08
Speaker 1: a large group of private assets performed worse than expected
37:12
Speaker 1: all at the same time. That is much harder for
37:15
Speaker 1: us to model from the outside, and it's one of
37:17
Speaker 1: the places where the public record simply just runs out
37:19
Speaker 1: for us, which brings us back one last time to
37:23
Speaker 1: the Lakers. Maybe there's absolutely nothing wrong with the Lakers.
37:27
Speaker 1: In fact, that's the point. They're a fantastic asset. There's
37:30
Speaker 1: only one Lakers, they generate real money, they're globally recognized,
37:35
Speaker 1: and more importantly, there was a buyer for the Lakers.
37:37
Speaker 1: So Walter wanted an additional financial flexibility. We do not
37:42
Speaker 1: know that this is why he sold. But if you
37:45
Speaker 1: want cash, what's easier to sell a complicated private asset
37:48
Speaker 1: that barely trades, or something deeply intertwined with businesses you've
37:51
Speaker 1: owned for fourteen years, or the shiny new asset for
37:54
Speaker 1: which somebody is standing there offering twelve and a half
37:57
Speaker 1: billion dollars for Maybe Walter sold the Lakers because the
38:00
Speaker 1: Lakers were good. Maybe he didn't. We can't establish that,
38:04
Speaker 1: but it illustrates something important. Financial stress doesn't necessarily force
38:07
Speaker 1: you to sell a thing that's in trouble. Sometimes you
38:10
Speaker 1: sell the thing you can sell, And that's one way
38:13
Speaker 1: unrelated parts of a financial system can suddenly look related.
38:16
Speaker 1: So I'm not ready to tell you private credit is
38:18
Speaker 1: going to crash, and I'm not ready to tell you
38:20
Speaker 1: these insurers are in danger, and I'm certainly not ready
38:24
Speaker 1: to tell you the Lakers sale proves either fact correct.
38:27
Speaker 1: What I'm ready to say is that there is enough
38:29
Speaker 1: connections here that I want to know exactly where the
38:31
Speaker 1: risk sits before those connections are tested in real life,
38:35
Speaker 1: Which means the next question isn't is my suspicion correct?
38:39
Speaker 1: It's something much more useful. What would we actually need
38:42
Speaker 1: to know to find out? So? If I had subpoena power,
38:47
Speaker 1: I got a bunch of questions. So I tell you
38:50
Speaker 1: where all of this leads me. Let's do something journalists
38:52
Speaker 1: don't often do enough of. Let me identify what would
38:56
Speaker 1: actually answer these questions. I'm essentially a one person shop.
39:00
Speaker 1: This is an open source reporting and informed commentary. I'm
39:03
Speaker 1: reading the filings, I'm reading the regulatory documents. I'm building
39:07
Speaker 1: on some excellent original reporting by people who've gone deeper
39:11
Speaker 1: into individual pieces than I can possibly do on my own.
39:15
Speaker 1: And I'm trying to do what I've spent my career doing,
39:17
Speaker 1: connect the dots and figure out what questions the evidence
39:19
Speaker 1: is telling us to ask next. This is not a
39:22
Speaker 1: sixth month forensic investigation. I don't have subpoena power. Insurance
39:27
Speaker 1: regulators have examination authority I don't have. Federal investigators can
39:30
Speaker 1: compel documents and testimony I can't. Congress can demand things
39:34
Speaker 1: I can't. So if I still had a newsroom with
39:37
Speaker 1: an investigative team, or if I were sitting on a
39:39
Speaker 1: congressional committee with subpoena power, here's what I'd send people next. First,
39:43
Speaker 1: open the boxes of those LLCs, Fertamont Hills, Pinzanita Hills,
39:47
Speaker 1: the other private vehicles. I don't care whether they have websites.
39:50
Speaker 1: That's not the point, right. We need the documents, the
39:53
Speaker 1: collateral schedules, the underlying assets. What economic exposure does the
39:57
Speaker 1: insurance sure really own here? I was that structure chosen? Second,
40:01
Speaker 1: did putting the investment inside the box change the regulatory treatment? Oh?
40:06
Speaker 1: I don't want the FEDS on this, I want state
40:08
Speaker 1: insurers on this. Right. Insurance companies essentially have different regulatory
40:12
Speaker 1: shelves for different kinds of investments. Traditional bonds generally go
40:17
Speaker 1: onto something called scheduled D. Other long term investment assets
40:20
Speaker 1: go on to schedule BA. Again, I'm going down a
40:24
Speaker 1: rabbit hole here. For some of you, this is not
40:26
Speaker 1: something regulators have ignored. They're trying to figure this out.
40:30
Speaker 1: Show us the math. If the insurer own the underlying
40:33
Speaker 1: exposure directly, how much capital would it need after the
40:36
Speaker 1: structure was created? How much capital does it need? There
40:39
Speaker 1: is a specific number, we don't see it. Number three,
40:43
Speaker 1: Who graded the box? What information did the ratings agencies receive?
40:48
Speaker 1: What was actually underneath the note? What assumptions were made?
40:51
Speaker 1: What methodology was used? Again, the regulators have all the
40:54
Speaker 1: tools to find these things. Okay, all testable. Here's number four.
40:59
Speaker 1: I want to know exactly why three percent became something
41:02
Speaker 1: vastly larger, not because sixteen billion dollars disappeared. We've established
41:07
Speaker 1: it never disappeared. The question is how Delaware Life interpreted
41:10
Speaker 1: related party disclosure originally? Were they trying to cover up
41:14
Speaker 1: how much Mark Walter controlled both sides of this transaction?
41:17
Speaker 1: Who made that judgment, what information did they have, who
41:20
Speaker 1: signed off of it? What changed after the subpenis Did
41:23
Speaker 1: lawyers simply conclude that a broader regulatory question needed to
41:26
Speaker 1: be answered more broadly? Okay? Maybe? Or did the review
41:29
Speaker 1: reveal economic relationships that should have been characterized differently? All along?
41:34
Speaker 1: We know there's an answer. We just don't have it. Fifth,
41:37
Speaker 1: I want to know whether the Lakers' money actually mattered. Where,
41:39
Speaker 1: if anywhere, was there a need for liquidity. Was it
41:42
Speaker 1: him personally, TWG his holding company Group one thousand and one,
41:46
Speaker 1: and insure somewhere else? What debt exists? What has been
41:49
Speaker 1: pledged as collateral? What to selling the Lakers actually free up?
41:53
Speaker 1: Some of that may simply not be publicly obtainable, but
41:56
Speaker 1: somewhere there are documents that answer it. And finally, the
41:58
Speaker 1: question that matters most to our hypothetical annuity customer, how
42:02
Speaker 1: much stress can these insurers actually absorb? Some of that
42:04
Speaker 1: is public and we've already looked at it statutory surveplus,
42:08
Speaker 1: financial strength, ratings, assets and my abilities. But what we
42:11
Speaker 1: can independently do from the outside is build a reliable,
42:14
Speaker 1: correlated stress test across a large private portfolio like Walter's.
42:18
Speaker 1: When we cannot independently test every underlying valuation or see
42:22
Speaker 1: every economic relationship, nobody knows. This isn't a case where
42:27
Speaker 1: nobody knows anything. We know quite a lot. What we
42:30
Speaker 1: don't know are some of the answers that would tell
42:32
Speaker 1: us whether this is simply complicated finance or something potentially
42:37
Speaker 1: more dangerous to our entire economic system, and there are
42:40
Speaker 1: people with legal authority to get those answers. Folks, let
42:44
Speaker 1: me give you one final test, my own. What would
42:47
Speaker 1: make me come back here six months from now and
42:49
Speaker 1: say I was too worried. Show me the insurers remain
42:52
Speaker 1: strongly capitalized after the private assets are generally stressed. Show
42:55
Speaker 1: me that what's inside these financial vehicles is ordinary diversified
42:59
Speaker 1: credit and that the structures accurately reflect the economic risk.
43:03
Speaker 1: Show me independent valuations supporting the marks. Show me the
43:07
Speaker 1: private ratings hold up under outside scrutiny. Show me that
43:10
Speaker 1: these loans seasoning and getting repaid at or near what
43:14
Speaker 1: they're being carried for. Show me that whatever financing questions
43:19
Speaker 1: exist around Walter have nothing to do with the financial
43:22
Speaker 1: stress in this system. And if that happens, great, I'll
43:25
Speaker 1: come back here and tell you the warning lights looked
43:27
Speaker 1: worse than the engine. I'd love to make that podcast,
43:30
Speaker 1: I hope too. But that's the reporting roadmap. That's where
43:34
Speaker 1: what we can know and that's what we can't know yet,
43:38
Speaker 1: and that's what would change my mind. Which leads us
43:40
Speaker 1: with one final question, not what might investigators eventually find?
43:45
Speaker 1: Something we actually can answer now, given everything we can
43:48
Speaker 1: see today, what is this story already tell us, and
43:53
Speaker 1: how does this connect to our current politics? Before I
43:56
Speaker 1: answer that I told you earlier i'd come back to
43:58
Speaker 1: Josh Kushner. So here's what I have learned it. I
44:01
Speaker 1: still think the timing is worth reporting. Walter is dealing
44:04
Speaker 1: with a federal investigation. There are unresolved questions about liquidity
44:07
Speaker 1: elsewhere in his financial world. Iiger and Kushner arrived with
44:10
Speaker 1: an extraordinary offer, and Kushner happens to be the brother
44:13
Speaker 1: of the president's son in law. We still have no
44:15
Speaker 1: evidence that Donald Trump had anything to do with the transaction.
44:18
Speaker 1: There's no evidence of a quid pro quo. There's no
44:20
Speaker 1: evidence Walter has promised anything or that Walter was promised anything.
44:24
Speaker 1: And after everything we've just walked through, I've actually come
44:27
Speaker 1: to think that the political question is a much smaller question.
44:30
Speaker 1: Even if somebody eventually proves that Walter's circumstances made him
44:34
Speaker 1: particularly vulnerable and a motivated seller, that doesn't explain the circumstances.
44:39
Speaker 1: It doesn't explain the insurance companies, It doesn't explain the
44:42
Speaker 1: private credit exposure, doesn't explain those ratings. And it doesn't
44:46
Speaker 1: explain how this enormous financial system developed after two thousand
44:49
Speaker 1: and eight. Maybe somebody took advantage of Walter's situation, maybe
44:53
Speaker 1: nobody did. The story I find much more consequential, though,
44:56
Speaker 1: is how Walter got this situation, how he got into
44:59
Speaker 1: this situation in the first place, and that brings us
45:02
Speaker 1: to what we've actually learned. We started with the Lakers,
45:06
Speaker 1: a shiny object, maybe the shiniest object in American sports.
45:09
Speaker 1: A guy took control of them. Fourteen months later, he
45:12
Speaker 1: unexpectedly agreed to sell them again. We pulled the thread
45:15
Speaker 1: and we kept pulling. The Lakers led us to Mark Walter.
45:18
Speaker 1: Walter led us to the Dodgers. The Dodgers led us
45:20
Speaker 1: to insurance. Insurance led us to private credit. Private credit
45:23
Speaker 1: led us to financial vehicles. Those vehicles led us to
45:26
Speaker 1: private ratings. Ratings led us to capital requirements, and that
45:29
Speaker 1: led us to state regulators, federal regulators, offshore reinsurance, and
45:33
Speaker 1: a financial system that looks very different from the one
45:36
Speaker 1: most Americans think of when they hear the words Wall Street.
45:40
Speaker 1: That's what we have found. We haven't established fraud or
45:43
Speaker 1: insolvency yet. This is not yet the next two thousand
45:46
Speaker 1: and eight. But what we have found is one of
45:50
Speaker 1: the largest transformations of American finance since the last economic crisis.
45:54
Speaker 1: We spent fifteen years making banks safer, and in many
45:57
Speaker 1: respects we succeeded. Banks have more capital, mortgages are better underwritten.
46:01
Speaker 1: There are stress tests. But it's harder to get a
46:03
Speaker 1: mortgage now, isn't it. There's more supervision reinforced the part
46:06
Speaker 1: of the house that burned down, But companies still needed loans.
46:10
Speaker 1: Investors still wanted great returns. Insurance companies still needed those
46:13
Speaker 1: great returns. Financial firms still want of those fees. The
46:17
Speaker 1: behavior just didn't disappear. The money just moved. Private credit exploded,
46:21
Speaker 1: Insurance capital became increasingly important as a source of funding.
46:26
Speaker 1: Financial structures evolved. Every private equity firm wanted its own
46:29
Speaker 1: insurance company ratings became part of the capital equation. Reinsurance
46:34
Speaker 1: moved pieces of risk across not just state lines, but
46:38
Speaker 1: international lines, and regulators began adapting to a financial system
46:42
Speaker 1: that was changing as fast as they could adapt. So
46:46
Speaker 1: I keep coming back to the same phrase I've told
46:48
Speaker 1: you that I've borrowed from the first Jurassic Park. When
46:52
Speaker 1: Jeff Goblum said, life finds a way, and I've always
46:54
Speaker 1: said that's how I feel about money. Money always finds
46:56
Speaker 1: a way, while I've watched it happen my entire career
46:59
Speaker 1: in campaign finance. Close one door, the money finds another.
47:02
Speaker 1: Regulate the institution, the behavior migrates somewhere else. Maybe that's
47:05
Speaker 1: one of the lessons of this financial story too. We
47:08
Speaker 1: didn't fail because we made bank safer. Making bank safer
47:11
Speaker 1: was a good thing. Maybe the failure was assuming we
47:13
Speaker 1: had solved the behavior, because we'd reinforce the institution. And
47:17
Speaker 1: this matters beyond Wall Street, because if there ever is
47:19
Speaker 1: a serious failure somewhere in this new financial architecture, the
47:22
Speaker 1: political consequences could travel almost as quickly as the economic ones.
47:27
Speaker 1: Think about what Americans heard after two thousand and eight.
47:30
Speaker 1: We learned our lesson, we fixed Wall Street. Then imagine
47:34
Speaker 1: discovering that while everybody was living under the rules of
47:37
Speaker 1: the post crisis economy, an enormous new credit system had
47:41
Speaker 1: developed somewhere else. And imagine our hypothetical retiree. She bought
47:45
Speaker 1: an annuity because she wanted boring returns. She isn't supposed
47:49
Speaker 1: to understand Schedule D or schedule BA or the private
47:51
Speaker 1: letter ratings or what offshore reinsurance could mean. She has
47:55
Speaker 1: to trust somebody else to understand all of that for her.
48:00
Speaker 1: And that's the thing that may ultimately be at stake
48:03
Speaker 1: care trust. Capitalism doesn't run on money alone. It runs
48:07
Speaker 1: on people believing that a price means what the price says.
48:11
Speaker 1: It means, that a balance sheet means something, that the
48:14
Speaker 1: rating means something, that the audit means something, that when
48:18
Speaker 1: an institution promises to give your retirement money thirty years
48:22
Speaker 1: from now, somebody understands the risk underneath that promise. If
48:28
Speaker 1: that trust gets broken again, the left will have one explanation,
48:32
Speaker 1: the populace right will have another. They'll all identify different
48:35
Speaker 1: villains villains here, but millions of people will reach the
48:39
Speaker 1: same conclusion. The system was rigged for somebody else. That's
48:44
Speaker 1: the political danger in this story. And that's why I'm
48:48
Speaker 1: willing to tell you where my instincts are. While being
48:51
Speaker 1: clear about what the evidence does not yet establish, I
48:54
Speaker 1: still have a sneaking suspicion we may be seeing the
48:56
Speaker 1: beginning of something much bigger and much more catastrophe and
49:00
Speaker 1: much more damaging than we realize it. May be something
49:04
Speaker 1: very bad, But now I've also told you exactly what
49:07
Speaker 1: would make me change my mind. Maybe Walter is an aberration.
49:10
Speaker 1: Maybe the regulators are going to get ahead of this.
49:13
Speaker 1: Maybe the assets simply perform and nobody loses money and
49:16
Speaker 1: the ratings hold up. Maybe I hope so. But the
49:20
Speaker 1: responsible response to uncertainty isn't to stop looking. And that's
49:25
Speaker 1: what makes it almost poetic that we found our way
49:27
Speaker 1: into this through the Lakers. The Lakers weren't the crisis.
49:31
Speaker 1: They weren't even necessarily the troubled asset. They may simply
49:34
Speaker 1: have been the asset everybody could see. There's a buyer,
49:37
Speaker 1: there's a seller, there's a price. It's the private assets
49:40
Speaker 1: underneath the story that are harder to see. We pulled
49:44
Speaker 1: on a thread because a guy unexpectedly sold the Lakers
49:47
Speaker 1: so quickly, and then we kept pulling, and somehow on
49:49
Speaker 1: the other end we found one of the largest and
49:51
Speaker 1: least understood transformations of the American financial system since two
49:54
Speaker 1: thousand and eight. I hope we haven't stumbled across the
49:57
Speaker 1: next financial crisis. I don't know whether we have found
50:01
Speaker 1: a crisis at all, but I think we found something
50:03
Speaker 1: on the X ray Worth looking at and this time
50:06
Speaker 1: maybe we ought to figure out what it is before
50:11
Speaker 1: the patient gets sick.