Transcription
So, another bombshell has just dropped in the unfolding saga regarding the private credit debt and loans that have piled up in the system over the last few years. Some of which, about $3 trillion of which, is invested by US life insurance companies.
And, to start, I'll share two stories with you that came out yesterday that again are not being shared, what I can see, in the mainstream media. But when this all comes out, uh, guys, I think it's going to impact every single market, every across the globe, and every single asset class. So I appreciate you sticking around, hear me out today on uh, on the uh, on the show. Okay.
So, the first story is out of Bloomberg yesterday that came out about 5 hours before the second story I'm going to share with you. And the second story is the um, major, major, major warning sign. And that, and hence the reason for the thumbnail title of the show today. So this says, uh, UBS boss is right on private crediting rating risks. The war of words between private credit and banks has stepped up a notch. And we said, I think, on last couple shows that, you know, at some point, all the banksters are going to come out and start turning on one another as things get worse, right? Pointing the finger at one another. Well, this is the, this is the potentially an opening salvo here. The war of words between private credit and banks has stepped up a notch.
Col Kellaher, chairman of the Swiss lender UBS group AG, warned this week that poor insurance regulation and credit ratings arbitrage were creating systemic risks, especially in the United States. Mark Rowan, chief executive officer of Apollo Global Management, the private capital manager that owns Life Insurance Athen, he fired back and said that comb was just simply wrong. Right? So imagine that, a, a private credit uh, private capital manager that says that uh, the UBS chief is simply off the mark.
In recent weeks, there's been mutual sniping between the two sides of the debt industry. It says about lending standards, risk management, and who made the errors in financial, in financing, excuse me, the failed companies and first brands. The banks that underwrote the corporate loans, or was it the private managers that put up the supply chain and inventory funding? And we've talked and and guys understand that trricirricolor and first brands are just the initial casualties, right? Where there's two, there's probably 200 or 2,000 of these things just waiting to come to the surface, says. But Keller trenchantly described a bigger issue is what it is, the sheer scale of private credit that's now being funded by life insurance companies, companies, insurers, and whether insurance regulators are competent to oversee the risks involved.
Go back and look at last week's show. I did a few day, well, a few days ago about New York Life Insurance Company funding a firm, the buy now pay later program, or excuse me, company with like $2 billion in line of credit, another hund, another billion dollars in loans on top of that. Go back and look at that show. By the way, if you guys aren't subscribed to the channel, I would humbly ask because as I do every day, you hit the subscribe button for me so we can keep uh, growing the community.
So, uh, it says credit um, ratings a, and this is the topic for today. I'm going to get to it in a second. There is a massive investigation just got launched against the biggest credit reporting, reporting, excuse me, credit rating agency that is involved in rating the life insurance deals. So it says credit ratings a grading system of borrower health, borrower health, play a critical role in this debate because they drive the calculations of how much capital insurers must hold for the investment risks they take. Investors I've spoken to, he says, in recent months worry that a lot of optimization of ratings relative to risk and yield is happening in this area right now. Optimization of ratings, folks, is a fancy word smithing uh, way of saying uh, that they're basically uh, cooking the books. They're giving their stamp of approval. Uh, they're overinflating uh, the uh, the asset values, right? To entice these insurers to feel comfortable they can invest money. Okay. What kind of money? It's pension funds, right? Uh, it's, it's, it's millions and millions, trillions of dollars of uh, taxpayer money. Right?
So the article goes on to say that uh, first, there, it says there are a couple strands to the debate. And it says that the first, and relative to this uh, concern about ratings companies getting involved uh, in optimization of the ratings, right? Basically rubber stamping this deals, which masks the underlying weakness in the collateral. Been discussing that for weeks now on the show. This says, first, the business of so-called private letter ratings, which can't be validated by outside observers because they're never made public. The lack of transparency means you users can keep asking different ratings companies for grades on a loan or a bond until they get the answer they like. They just shop it. Or they find a rating company that has a niche in that area, and that rating company is looking the other way and giving their stamp of approval. Give me about two minutes, and I'm going to jump into that one.
Such rating shopping is one obvious way in which the risks of losses associated with each credit grade can increase over time, but it could make a real difference closer to the type of deals where you're talking about investment grade and junk. The BBB and even single A categories. And here we go. Egan Jones Ratings Company has become a go-to shop for private letter grades and has turned out more than 3,000 of them in 2024 with just 20 analysts doing the work, according to an investigation by Bloomberg News in June. Okay. Egan Jones. Remember that name. It's going to be shared with you in about 30 seconds in the next article.
Now we can uh, this article says, "Now we can hope that ratings companies learned the lessons from the last time their standards got warped by an overheated ratings-driven business." The structured credit boom that caused the 2008 financial crisis. Among the most cringe-worthy quotes dredged up in the aftermath of that disaster was in a back and forth between ratings analysts at S&P about ridiculous collateralized debt obligations that they were grading. Quote, "It could be structured by cows, and we would rate it." Well, it says we can hope that ratings companies learned the lessons. As we know, folks, hope is a dangerous strategy.
And five hours um, after this article I just shared with you was released, another article on Bloomberg released. And guess what? The title of the article is Egan Jones probed by the Securities Exchange Commission, the SEC, over its credit ratings practices. The US Securities Exchange Commission has been scrutinizing Egan Jones range company, according to people familiar with the matter, delving into the business practices of a of a leader in the fast-growing market for private credit ratings. SEC enforcement attorneys have been looking into whether the firm and some of its senior executives have exerted improper commercial influence on its ratings procedures, said the people a be asked, excuse me, said people who asked not to be identified discussing the ongoing probe. No kidding. Officials in the agency's complex financial instruments unit are involved in the investigation. The people said the probe began, says, during the B administration and has continued this year. Okay.
So now this is coming out. Okay. And we know, according to the last article, there are about 20 analysts at Egan Jones that have been focusing on thousands of these ratings. Okay. So are they the um, the ones that are um, uh, the officials in the agency uh, that are being looked into? Again, we will wait and see. Egan Jones is a nationally recognized statistical rating organization, an accreditation that allows its grades to be used by US insurers. New York Life, right? Um, life insurance companies to calculate their regulatory capital charges. A higher rating means that an insurer has to set aside less against the asset, right? They believe that there's less potential exposure. So they rely on that rating and make a determination on how much to set aside and then, of course, how much to put into the loan deal they're looking at.
The firm built a dominant Egan Jones built a dominant position early in the rapidly expanding private credit market, as bigger ratings agencies focused on serving the larger public sectors. As much as a third, listen to this guys, of the $6 trillion of cash and invested assets held by US life insurance companies was allocated to various types of private credit investments. Moody's ratings estimates, based on a survey or estimates based on a survey of insurers that it rates. Egan Jones has built itself as the most prolific grader in that market. Last year alone, as I said, rated more than 3,000 private credit investments. The role that such ratings play in the industry's boom has been in the spotlight this year. The Bank for International Settlements said in a report published last month that private credit grades used by insurance companies tend to be concentrated among smaller ratings firms, raising the risk of inflated assessments of creditworthiness. And here we go. Go back to AIG 2008. I'm not saying it was a a mere image of the same type, same type of vehicles, but we had ratings agencies, okay, that again gave it the stamp of approval, whatever that grade was. And that was, you know, pun intended, taken to the bank.
UBS group AG chairman Colem said on Tuesday he's beginning to see the same guy I quoted you in the last article, beginning to see huge rating agency arbitrage in the insurance business. Okay. It says EEN Jones had attracted scrutiny from large players in the industry over its upbeat ratings of various private credit loans, according to Bloomberg's report in June. Right. So upbeat ratings. Okay. And they're so they're basically assisting in selling these deals to a lot of US life insurance companies. What could go wrong, right?
So listen to this, and I'll close it out. In 2024, two former employees of Egan Jones accused the company uh, founder Egan Sean Egan and his wife of firing them in retaliation for raising concerns about Egan Jones for the SEC. According to the previous Bloomberg report, among the allegations, they said in the lawsuit that Egan and his wife pressured analysts to alter early indicative ratings to motivate potential clients to pay the firm for final ones. Right? So, they're being, the allegation is the investigation whether the ratings agency is being bought and paid for. Right? Um, and that, folks, is extremely, should be extremely terrifying to anybody who has is holding any assets, has any retirement funds, um, because this thing is going to be, from my lay person perspective, much bigger than '08. Okay.
So there is what's going on in a spir, in a period of 24 hours. We get uh, some big players pointing the finger at one another, and boom, five or six hours later, a second story comes out and says, oh, by the way, the SEC is actually investigating this, the biggest credit report agency doing rating for US uh, insurance companies on these private credit deals. So, with that being said, I went longer than I intended to today, but I wanted to explain it as thoroughly as I could so you understand the scope and the depth and the peril, okay, involved in this situation. Um, I'll keep covering this. Thank you, guys. If you enjoy the content, leave me a like. If you're not subscribed, hit the subscribe button for me so we can keep growing. Leave your thoughts and comments. With that being said, I will talk to all of you soon. Bye.