It’s 10 p.m. Do you know where your insurance-company premiums are?

Follow the money, if you can
Do you know what your insurance company does with the premiums you send it every month? You may think you do, and in general you may be right. The company puts that money into income-generating investments so it can pay out claims if and when it needs to. But you probably don’t know the specific investments into which your money is going. The problem is that for a growing percentage of those investments, nobody else knows, either.

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Nearly a third of the total assets held by U.S. insurance companies – about $2 trillion out of roughly $5.6 trillion – have been shifted into  opaque, off balance-sheet investments, our Kate Berry reported on Monday. There are some regulatory loopholes and arbitrages that have allowed this situation to grow. But moving investments offshore means regulators have little insight into insurers balance sheets. If they are underinvested, if they would not be able to pay claims, it may be that nobody discovers that until there’s a crisis.

And it seems that one reason for this trend is that insurance companies increasingly are becoming interconnected with private credit firms. Athene being owned by Apollo, for instance. The opacity of the private-credit market is its own concern, one that could pose risks to the broader financial system. The fear is that through the connection between insurance companies and private-credit firms that either own insurance companies or partner with them, the money is being used by those private-credit firms to fund their own risky investments. 

There is an intricate connection between insurance companies, private-credit firms and banks that makes this an issue not just for insurance regulators, but for bankers as well. Banks are a primary channel for distributing insurance products, and banks provide liquidity to the private credit funds that insurers invest in. The health of insurers and private credit, therefore, is a real concern to the banking industry. 

When I was growing up, channel five in New York used to run a public service announcement before the late news: “It’s 10 p.m. Do you know where your children are?” It popped into my head while I was writing this, because it’s kind of a good question. 

Do you know where your investments are?

The Maestro, RIP
It is hard to overstate the faith that Wall Street had back in the day in Alan Greenspan, the former Federal Reserve chairman who died on Monday.  He was like Wall Street Superman, full of magical powers and always swooping in when things looked dark. He swooped in on Black Monday in 1987. He swooped in when Long Term Capital Management threatened, somehow, the solvency of the entire world, or something like that, in 1994. He swooped in even after he warned the market that it was full of “irrational exuberance” after the dot-com bubble popped. Yes, Greenspan had the power of the Fed at his disposal, but that wasn’t really his super power. Greenspan’s super power was that he talked, a lot.

Greenspan completely changed the public’s relationship with Fed chairmen and the central bank. Before him, the Fed was a shrouded institution. The central bank didn’t even release the results of its rate-setting meetings, and it never held press conferences. The market had to glean what the Fed had decided to do with the economy by seeing which way interest rates were moving; only then did traders know if the Fed was buying or selling, easing or tightening. The Fed didn’t come out and say “we have decided to move interest rates to a range of…yada yada yada.” The Fed didn’t say anything. Until Greenspan.

I don’t know if Greenspan consciously understood the power he had to persuade as the chairman of the Fed, or if he just intuitively used it, but he made the most of it. He also benefitted I suppose from the ascension of cable news, and especially CNBC, the 24-hour business channel that started up a few years after he took over at the Fed.  His Congressional testimonies became appointment viewing. Under his stewardship, the Fed first started announcing its policy decisions following FOMC meetings, and later began releasing the minutes. (He did not, however, start the practice of holding regular press conferences; Ben Bernanke started that).

It is an odd quirk of fate that Greenspan died just after a new Fed chair, Kevin Warsh, was seated, and one of the first things Warsh is doing is reversing how much the Fed will chat with the public, as our Kyle Campbell reports. 

Greenspan also benefitted, enormously, from the end of the Cold War and the economic boom that followed it. The “peace dividend” and the dot-com boom made it extremely easy to run the Fed, and I’m trying to diminish Greenspan by saying that. But Greenspan as much as anybody rode the waves of those good times and became a celebrity in his own right. There was something about his nebbishy persona and impenetrable statements that was kind of fun. CNBC loved him. I think, at least in the boom years of the ’90s, everybody did.