Weekend Listen: Why Private Credit Got Entangled With Insurance

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.

**Tracy Allaway** (0:18)
Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Allaway.

**Joe Weisenthal** (0:22)
And I'm Joe Wiesenthal.

**Tracy Allaway** (0:23)
Joe, there's a key tenet of finance and investing. And I think it's like essentially the thing that makes finance and investing work.

**Joe Weisenthal** (0:32)
Go on.

**Tracy Allaway** (0:33)
It is the idea that you can invest in pretty much anything, the world's most stupid thing. I don't care, Dogecoin, whatever.
But the key thing is if you do that, and the investment doesn't work out, and it goes belly up, you should bear that loss.

**Joe Weisenthal** (0:51)
Yeah, I think that's right.

**Tracy Allaway** (0:54)
Ideally, by the way, you invest in something that doesn't have negative externalities for other people, but let's just focus on the loss portion for a second.

**Joe Weisenthal** (1:02)
Yeah, I like this framing. I think the way you could say that financial structures overall, whether we're talking about a bank, whether we're talking about a multi-strategy, multi-platform hedge fund, whether we're talking about whatever, is an exercise in trying to establish this purpose, right? Because everyone wants to make the investment they don't bear the loss in, right? That's like we should all, to some extent, we should all be striving for that constantly.
You want to build up these things that more or less create that to happen, principal agent alignment problems and so forth.

**Tracy Allaway** (1:37)
Right. And so when you get moments in financial history where losses are not purely born by investors, people often get very upset. And as you know, 2008 was one of those moments, right? One of the reasons the 2008 financial crisis was such a huge deal was because we had banks who made a bunch of risky investments and ended up getting effectively bailed out by taxpayers, even though taxpayers arguably were not the ones deciding to invest in synthetic CDOs and things like that.

**Joe Weisenthal** (2:06)
Totally. Even in the absence of bailouts, this always bothers people. When someone makes money on a risk and then someone else holds the bag from the bailout example to people who promoted SPACs and made a lot of money just on the transaction but didn't participate in the downside, it upsets people. And so all across finance, you see in situations where people are upset when it turns out that the person doesn't have the requisite quote skin in the game unquote.

**Tracy Allaway** (2:34)
No one wants to be an unwilling bag holder. That sounds bad.

**Joe Weisenthal** (2:38)
But I want everyone else to be like, we strive.

**Tracy Allaway** (2:41)
Okay, okay, but wait, the reason I bring up 2008 is because it's actually a very important component of this conversation because we're going to be talking about private credit and private credit, to a large extent, has grown into this massive industry. The reason it's grown so much, one of the reasons is because after 2008, after the banks went belly up and had to be bailed out, etc., you had policymakers make an active decision saying that they wanted to move risk out of the regulated banking system into investment vehicles where if things went wrong, the investment vehicles themselves would bear losses without having those losses socialized through deposit insurance or taxpayer funded bailouts and all of that. And that's what basically happened, right?

**Joe Weisenthal** (3:25)
Yeah, I would say there are sort of in the financial system, we have sort of, I would say, two types of creditors, like we're cool with people losing their money when they give money to an institution, they take a risk. But I think there's essentially two types of entities for which we don't find that to be fully acceptable. We don't find it to be fully acceptable when someone deposits their money in a bank and we, you know, we could say this is a loan, right? But we don't really want to accept that this is a loan, like we don't want people to have the confidence, they're putting the money in the bank, I'm not really making a loan to the bank. And then I would say the other category is insurance holders. And we don't really like the idea, someone who owns a policy, it's a little bit different than a loan. But I think the idea of like an insurance holder as a bag holder does not sit well with people on a sort of democratic, sort of societal level.

**Tracy Allaway** (4:18)
All right, you have totally anticipated. The next thing I was going to say, which was we moved risk out of the regulated banking system into private credit.