Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Katie, it is ominous
Speaker 1: out there.
Speaker 2: The skies are darkening as we speak.
Speaker 1: It's Thursday at two o'clock and change. And will I
Speaker 1: get home?
Speaker 2: Will you get home?
Speaker 1: Will you get home?
Speaker 2: Gosh? I hope so one or more reversed, that's true.
Speaker 2: There are bodies of water to ford.
Speaker 1: Hello, and welcome to the Money Stuff Podcast. You're a
Speaker 1: weekly podcast where we talk about stuff related to money.
Speaker 1: I'm Matt Levine and I write the Money Stuff column
Speaker 1: for Bloomberg Opinion.
Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 2: an anchor for Bloomberg Television.
Speaker 1: I feel like we got feedback last week that people
Speaker 1: are like, please more ETF stuff, which is unusual for us.
Speaker 2: I feel like maybe the people who leave comments are
Speaker 2: actually just contrarians. Like message.
Speaker 1: They know that the default view is nowhere.
Speaker 2: Yeah, And we messaged so heavily that people don't like
Speaker 2: this that they were compelled to write, actually we like this,
Speaker 2: and here are our thoughtful thoughts on them. But we're
Speaker 2: not talking about utfs.
Speaker 1: No, No, we're talking about funds, which are really ETF
Speaker 1: is a term of art. But is it a fun
Speaker 1: The treads on expan uar. But yeah, we talk a
Speaker 1: lot about I read a lot about people who are
Speaker 1: trying to jam private stuff into retail investors. The people
Speaker 1: doing most of the jamming are the people doing like
Speaker 1: private credit funds. But the thing that the retail investors
Speaker 1: want the most is probably like SpaceX and Mai, right, Like.
Speaker 2: I don't want private bonds, just give me SpaceX.
Speaker 1: Yeah, private credit is like sold by financial advisors, but
Speaker 1: like SpaceX has bought and it's hard because you need
Speaker 1: to like go find shares of that. And I think
Speaker 1: a lot of people have, in various ways had the thought,
Speaker 1: what if we didn't find shares? Right, what if we
Speaker 1: just did naked derivatives on SpaceX or open ai stock
Speaker 1: or whatever. Right. And the idea is you find someone
Speaker 1: who wants to be short open Ai, and they run
Speaker 1: a contract saying I'll give you the returns on open
Speaker 1: Ai and package that into a box and you sell
Speaker 1: it to retail investors, and then the retail investors get
Speaker 1: long open Ai, and whoever wants to be short it
Speaker 1: gets short open Aya.
Speaker 2: Yeah, you're just only exposed to the price action theoretically, and.
Speaker 1: A certain amount of categorty risks.
Speaker 2: Right right, right right.
Speaker 1: I've written about We've tied about people who do like
Speaker 1: various tokenizations, various things. And I wrote this week about
Speaker 1: River North doing these paired clothed un funds, which is
Speaker 1: like really the way to do this, Like ultimately it's
Speaker 1: a paired clothed un fund and it's on this index
Speaker 1: of it's like the Prime Unicorn Index, which is sort
Speaker 1: of an index of big private companies sort of sort
Speaker 1: of sort of, there's some public companies in there too.
Speaker 1: To keep it on.
Speaker 2: Two of its top ten holdings are public companies.
Speaker 1: They don't update that frequently or something.
Speaker 2: This is July sixteenth. No, no, no, but like oh they
Speaker 2: don't rebalance.
Speaker 1: Yeah yeah, like you know you have some unicorns in
Speaker 1: your index they go public?
Speaker 2: Yeah sure sure.
Speaker 1: But right, so it's got like SpaceX, it's got some
Speaker 1: anthropic it's got some of the heads. And what they're
Speaker 1: doing is they are writing cash settled swaps on that index. Right.
Speaker 1: The index measures let's say, the value of these private
Speaker 1: stocks and public stocks. Right, there's some questions about how
Speaker 1: you measure the value of private stacks for these companies.
Speaker 1: There's like secondary trading. There's funding rounds all the time.
Speaker 1: It's fine. You can like get a value and then
Speaker 1: they have the index, so they have the price and
Speaker 1: they have just cash settled swaps on that index. And
Speaker 1: you can go long or short. So there's a long
Speaker 1: fund that gives you exposure to this unicorn index, and
Speaker 1: there's a short fund that gives you negative exposure to
Speaker 1: this unicorn index. And the obvious trick is they completely offset,
Speaker 1: so net nothing happens, right net. It's like if someone
Speaker 1: wants to go along and someone wants to go short,
Speaker 1: the issues to each of them and bof we have
Speaker 1: both a way to invest in private companies and a
Speaker 1: way to short private companies. Some people want right, some
Speaker 1: people think it's a bubble et cetera. And so you
Speaker 1: get two delightful products the Selta retail without doing any
Speaker 1: economic activity outside of it.
Speaker 2: Right.
Speaker 1: You don't have to buy shares, you don't have to
Speaker 1: do anything, just offset retail bets against each other.
Speaker 2: So typically when we talk about closed end funds on
Speaker 2: this podcast, we talk.
Speaker 1: About you do what you do?
Speaker 2: We do? You know, we dabble. We often talk about
Speaker 2: how they trade a discounts. Does that matter at all
Speaker 2: here that these are going to launch and then probably
Speaker 2: trade it a discount.
Speaker 1: I have no idea how they'll trade. In fact, there
Speaker 1: is a history of unicorny closed end funds trading at huge.
Speaker 2: Premiums, right, right, So they'll trade at some dislocation.
Speaker 1: Maybe it's not a discount, right if you look at
Speaker 1: the structure of this, there's like some stuff that suggests
Speaker 1: it shouldn't be too dislocated. So one one thing is
Speaker 1: like they are termed cash settled swaps, so settles in
Speaker 1: twenty twenty seven. I think the termination date is not clear,
Speaker 1: but it's twenty twenty seven is in the name. So
Speaker 1: this is the thing that like you buy it and
Speaker 1: in two years you get a payoff, So only so
Speaker 1: much discount you should really demand because you'll hopefully get
Speaker 1: you'll get your cash back in two years. And then
Speaker 1: the other thing that is interesting for discounts and premiums
Speaker 1: is like there are these two offsetting funds, right, so
Speaker 1: like if they both traded at a discount, you could
Speaker 1: buy both of them, and then you have a really
Speaker 1: interesting instrument. Right if you buy the long fund and
Speaker 1: you buy the short fund both at a discount, then
Speaker 1: you basically have captured the discount, but you have two
Speaker 1: years of counterparty risk weirdness risk, yeah, swabs risk, but
Speaker 1: like you know, fundamentally no market risk. I think probably
Speaker 1: this is not investment advice.
Speaker 2: I hope these lunch I mean, and.
Speaker 1: If they do trade at a discount like my first
Speaker 1: PA trade and twenty years, will be buying.
Speaker 2: Both of them, don't yourself.
Speaker 1: I will definitely not do that, And it's not investment advice.
Speaker 1: I might do that. I might do that just for
Speaker 1: just for giggles. Last weeking about auction rate securities, which
Speaker 1: is like my only PA trade ever was when I
Speaker 1: was a banker, and like the auction rate securities market
Speaker 1: got dislocated, and so I bought one lot of auction
Speaker 1: rate securities. Yeah you did not like a seven percent
Speaker 1: yield as a look at me living dangerously?
Speaker 2: God that did work out for you though?
Speaker 1: Oh yeah, I made seven percent for a week.
Speaker 2: All right, that's pretty good. Half a thought I had
Speaker 2: because I live in etf Land. Is you know, we
Speaker 2: talk about inverse single stock ETFs and there's some element
Speaker 2: of volatility drag there and if you hold these long
Speaker 2: term then it could be painful. Is there any funkiness
Speaker 2: that could happen on the short side.
Speaker 1: Here the inverse ETF problem, the volatility drag problem comes
Speaker 1: from rebalancing. Yeah, the rebalancing exists because every day you
Speaker 1: are offering the ETF to people, and you want to
Speaker 1: give them down from today, right, and so you're rebalancing
Speaker 1: to get the right amount of exposure with this thing.
Speaker 1: It's just swaps. It's a little easier. They're not leveraged,
Speaker 1: and you are not giving them like down from today,
Speaker 1: you're giving them like, you know, the total return over
Speaker 1: the period. So I don't think there's too much in
Speaker 1: the way of volatility drag. There's some possibility that's something
Speaker 1: you can get funky if like the index goes up
Speaker 1: a lot, there's like a cap on returns. Like there's
Speaker 1: some possibility of weirdness where if you buy the thing
Speaker 1: in six months, you're not getting quite the negative one
Speaker 1: times exposure you wanted, which is like the opposite of volatility.
Speaker 1: The volatility drag exists because every day you're getting exactly
Speaker 1: the same proposition, which is like negative one or two
Speaker 1: times or whatever the ETFs exposure, And like here there's
Speaker 1: not that here, there's just like there's a term to swap,
Speaker 1: and you can buy it at any time to the swap,
Speaker 1: or even you can't buy it anytime. It's a little
Speaker 1: close and fund so they don't have to continuous offering.
Speaker 1: But no, it's very simple, and you know, like it's
Speaker 1: based on this index. Yeah, I think in large part
Speaker 1: because it's nice to have a third party calculated index
Speaker 1: for your cash settled swaps, so you can be like, oh,
Speaker 1: the things settle that whatever the price of the indexes today,
Speaker 1: like and someone else is doing the index. But if
Speaker 1: this works, you could do it for single names. You
Speaker 1: could do it for open air. You could have the
Speaker 1: inverse open AI fund and the yes open AI fund,
Speaker 1: and you should offer that to people with no financials.
Speaker 1: I don't know. It seems like a stretch, but we're
Speaker 1: in a brave new world of like it's not clear
Speaker 1: what securities regulations apply to anything anymore. And if you
Speaker 1: wanted to do a single stock closed end fund, that's
Speaker 1: just like betting on and against a private company. Could
Speaker 1: you do that? I mean, I mean two years ago
Speaker 1: I would have said no. Now I'm like, yeah, I
Speaker 1: don't know.
Speaker 2: Maybe these closed un funds do seem like a stepping
Speaker 2: stone to that reality. So yeah, I mean we talked
Speaker 2: about X Y Z right or the Destiny type.
Speaker 1: Yeah, that's the close in fund. The trays has private
Speaker 1: companies and trades are a huge premium.
Speaker 2: And we talked about how like Stripe for example, or
Speaker 2: some of these private companies would not love this, So
Speaker 2: I would imagine that they would also theoretically not love
Speaker 2: this either, even though we're talking about swaps here.
Speaker 1: I mean with Destiny, like.
Speaker 2: Are they using forwards?
Speaker 1: They owned various cats and dogs, but like one thing
Speaker 1: they owned is like forwards on stock, which is like
Speaker 1: those forwards are physically settled, right. Those forwards are basically
Speaker 1: someone who owns strip stock signs of contracts saying I
Speaker 1: will give Destiny my Stripe stock as soon as I'm
Speaker 1: allowed to, right, and when Stripe goes public, And the
Speaker 1: reason they do that rather than just selling the shares
Speaker 1: is because Stripe doesn't let them sell their shares, right,
Speaker 1: they have some transfer restrictions. Stripe and probably every private
Speaker 1: company that transfer restricts that shares probably says you can't
Speaker 1: do a forward contract, right, Like forwards are to Stripe
Speaker 1: no better than selling the shares right now. And so
Speaker 1: it's not clear whether these forward contracts are valid, and
Speaker 1: if they're not valid, then bad things could happen, like
Speaker 1: Stripe saying no, we get that stock instead of it
Speaker 1: going to destiny. When you know, Stripe goes public and
Speaker 1: they settle the forward. Here there's like Stripe gets no,
Speaker 1: say that's RCT. The private companies getting no says they're
Speaker 1: not involved at all. There's no contract on their stock.
Speaker 1: Nobody has to own their stock at any point. It's
Speaker 1: just purely a cash settled side back between two people
Speaker 1: that don't involve the private company. So there's not a
Speaker 1: lot they can do.
Speaker 2: Yeah, and that's sort of what I was getting.
Speaker 1: You put out a statement being like we're not involved
Speaker 1: and shouldn't do it, but they can't stop it.
Speaker 2: It might be like an annoyance rather Yeah.
Speaker 1: I mean, they're not going to change their lives at
Speaker 1: Stripper or whatever.
Speaker 2: But I did like that. You make the point though,
Speaker 2: that if you're buying into this closing fund, you're not
Speaker 2: funding a private company. You're not giving your money and
Speaker 2: put it. Yeah, exactly, it's just the price. Yeah, that's
Speaker 2: truly the reality that we're stepping towards.
Speaker 1: I mean, it very much is and people want to
Speaker 1: gamble on private companies.
Speaker 2: God blessom you know who doesn't want to gamble UVS
Speaker 2: clients on range target profit.
Speaker 1: Forward, you don't know because they lost.
Speaker 2: That's true bigly. Apparently the ft has really owned this story.
Speaker 1: Yeah, so UVS. I don't know. I don't want to
Speaker 1: blame VS. As a former derivative salesperson, I said withouts,
Speaker 1: banks sell derivative products, right, Like you work in FX, right,
Speaker 1: and like the thing you do is like clients come
Speaker 1: to you and are like, I would like to change
Speaker 1: my Swiss francs for dollars. Sure, You're like okay, and
Speaker 1: they'll be like how much will that be? And you'll
Speaker 1: be like zero points zero zero zero one basis pins
Speaker 1: or whatever. Right, you've charged them. The teen's not you me,
Speaker 1: And so you spend all day in the lab cooking
Speaker 1: up things that can be more expensive, right. You're like
Speaker 1: what if? And you try to like give them a
Speaker 1: product that sounds cool, and there's only so many products
Speaker 1: I can time cool. But like what they were doing
Speaker 1: is I don't know, it's got names. It's like a
Speaker 1: conditional target redemption forward or a range target profit.
Speaker 2: Forward all yess yeah, whatever anyway household name.
Speaker 1: The thing they were doing is basically like, we will
Speaker 1: sell you dollars. It seems to have been like European
Speaker 1: whatever client's buying dollars, right, So UBS is like, we
Speaker 1: will sell you dollars at like three tens of percent
Speaker 1: below the like forward price, so you're getting a bargain.
Speaker 1: But if the actual price in a month or whatever
Speaker 1: goes below that target price, we will sell it to
Speaker 1: you at that target price. So you'll get not a bargain,
Speaker 1: you'll get like a bad deal. You'll be buying above market,
Speaker 1: and we'll sell you twice as much in that situation
Speaker 1: as in the good situation. So basically like we will
Speaker 1: sell you dollars at a better than market price most
Speaker 1: of the time, and then some of the time will
Speaker 1: sell you many more dollars at a much worse on
Speaker 1: the market price.
Speaker 2: Right.
Speaker 1: So basically, the clients get a good deal in like
Speaker 1: eighty or ninety percent of scenarios, so you have a
Speaker 1: good thing to sell them. You're like, oh, look, you're
Speaker 1: getting a good deal.
Speaker 2: I want to go.
Speaker 1: Scenarios, and then they get a terrible deal. They get
Speaker 1: like really hosed in like ten percent of scenarios, and
Speaker 1: unfortunately the bad scenario came true and all the clients
Speaker 1: were like, we didn't know what were signing up for.
Speaker 1: And UVS is sad and sorry and has made apparently
Speaker 1: the after you reported, made more than one hundred good
Speaker 1: will payments, yeah, which basically is like a refund of
Speaker 1: the money they lost or we're so.
Speaker 2: Sorry, please don't leave us, we won't do it again.
Speaker 1: It's not just the money. It's like the UVS banker
Speaker 1: has to go to the client and like the internet
Speaker 1: client is like, you didn't even bring any materials. Like
Speaker 1: it's like they just go and like look you in
Speaker 1: the eye and like very sincerely sorry, and they're like,
Speaker 1: we're not even pitching a different derivative today. Today, we're
Speaker 1: here to just talk about how sorry we are. It's
Speaker 1: a really like touching moment. Yeah. And they also have
Speaker 1: internal trainings where they're like being told not to scam
Speaker 1: clients and.
Speaker 2: Also role playing like how these meetings should go from
Speaker 2: now on when you're pitching.
Speaker 1: Right, it's this great tension in investment banking where obviously
Speaker 1: you want the client who when you come to them
Speaker 1: with some crazy derivative, they're like, Okay, sure sounds good,
Speaker 1: and they don't like bit it out to get the
Speaker 1: price down or like model it up themselves or just
Speaker 1: like sure you would, I trust you, right, But like
Speaker 1: those people are really good clients and they make you
Speaker 1: a lot of money until something goes wrong and then
Speaker 1: like it looks bad in court. You know, Yeah, the
Speaker 1: client who really trusted you, the client who was not
Speaker 1: sophisticated at modeling you know FX volatility, like, those are
Speaker 1: not the clients that you want to go to court with.
Speaker 1: So it's a delicate balancing act where two years ago, yes,
Speaker 1: I was probably rewarding the people who were.
Speaker 2: Out in the Yeah, definitely gated.
Speaker 1: Clients and large size, and now it's like no more
Speaker 1: of that.
Speaker 2: Well, the FT gave some great examples of the harm
Speaker 2: that was wrought by some of these trades really kind
Speaker 2: of blowing up. One client lost more than three million
Speaker 2: Swiss franc which equates to like three point seven million dollars.
Speaker 2: Another person said that they lost fifteen percent of their assets.
Speaker 2: They also asked the bank to exit the investment a
Speaker 2: few days after Trump's Liberation Day, and apparently, according to
Speaker 2: FT reporting, UVS sold these products to customers with the
Speaker 2: equivalent of fewer than eight hundred thousand dollars or so.
Speaker 2: So I don't know. It's just a weird trade in general.
Speaker 2: To put on like this sounds like something like if
Speaker 2: you were a big business trying to hedge your currency exposure,
Speaker 2: maybe this would make sense. But selling it to even
Speaker 2: like very wealthy individuals is weird.
Speaker 1: Yeah.
Speaker 2: Like the way that the Ft describes it is that
Speaker 2: these products offer limited upside but exposed clients to potentially
Speaker 2: unlimited losses.
Speaker 1: It's everything that's like accumulators. It's like everything, right, It's
Speaker 1: like the trade is.
Speaker 2: Everything except buffer ETFs.
Speaker 1: Maybe I know, but like for so many wealthy clients,
Speaker 1: the trade is like you can get two percent more
Speaker 1: on your money by like taking some black hole of risk,
Speaker 1: and then you know you have the meat, and they're like,
Speaker 1: but what do you think the chances are of that
Speaker 1: black hole frisk happening?
Speaker 2: Right?
Speaker 1: And the clans like, oh, it sounds good, right, and
Speaker 1: they buy it and they get two percent extra yield
Speaker 1: and then like the black hole happens and they're very up.
Speaker 2: Yeah, hear the.
Speaker 1: Black hole with libation day tars and the dollar plunging.
Speaker 2: I will say, you were talking about the sympathy that
Speaker 2: you feel towards you know, these bankers who make these
Speaker 2: derivative products. I don't know. I think that's cool and aesome.
Speaker 1: But I was one of them. I only saw this
Speaker 1: investigated clients right for sure of them got their faces
Speaker 1: I'm not even kidding really, no, well I'm kidding a little,
Speaker 1: but like none of them got their faces. True.
Speaker 2: Wow, someone's going to write in and say, Matt.
Speaker 1: Levine face off, but I really didn't. I was also
Speaker 1: very ineffectual, so it's fine.
Speaker 2: My first beat at Bloomberg was covering FX as a
Speaker 2: little baby journalist, and the period that I was covering FX,
Speaker 2: there was no volatility in currency markets. You had to
Speaker 2: beg people to read your stories and also like really
Speaker 2: scrape the bottom of the barrel to find stuff to
Speaker 2: write about. I joined Bloomberg in like twin sixteen and
Speaker 2: stop covering currencies in twenty nineteen. So President Trump's first
Speaker 2: term actually gave us something to write about. But you know,
Speaker 2: this trade probably wasn't as risky, like it probably really
Speaker 2: was fine ninety percent of the time because the type
Speaker 2: of volatility that we saw in you know, the Swiss
Speaker 2: franc dollar exchange rate on Liberation Day, Like that wasn't
Speaker 2: happening for a long time. Like, I mean you saw
Speaker 2: it a cross as cyclasses.
Speaker 1: It's like what did that tell you, right? I mean
Speaker 1: like if this trade had been perfectly explained to like
Speaker 1: clients who were not professional effects traders but were smart
Speaker 1: and sophisticated you know, financial people, this trade had been
Speaker 1: perfectly explained, Like the perfect explanation is in the ballpark
Speaker 1: of like you will get some extra you know, the
Speaker 1: older profit or whatever most of the time. But if
Speaker 1: the dollar plunges like it does not usually plunge, then
Speaker 1: you will get your face ripped off. Yeah, And like
Speaker 1: some people would have been like, okay, I'll take that
Speaker 1: bet and then the dollar plunge and then got their
Speaker 1: faces ripped off. Yeah. It's like I've read about this before,
Speaker 1: Like there are clearly some customers who did not understand
Speaker 1: what they're getting into, and Naudio ubs to solve them
Speaker 1: something they didn't understand. But also like probably some people
Speaker 1: were like, I will make the bet that the dollar
Speaker 1: will not be super volatile, and the dollar is super.
Speaker 2: Valatle yeah yeah.
Speaker 1: But like look, everyone else is getting a good will payment.
Speaker 1: I actually get a good will payment too.
Speaker 2: Yeah, I mean you would think that they would happen
Speaker 2: potentially across asset classes, like every asset class had an
Speaker 2: outsized move on Liberation Day.
Speaker 1: Right, And there's something about FCX where people people smaller
Speaker 1: customers get sold weirder stuff like I mean, they're definitely
Speaker 1: equity trades like this, right, Like we've talked about like
Speaker 1: is it the cocumulator. We've talked about like structured note
Speaker 1: trades that kind of have this shape, right, Yeah, but
Speaker 1: I don't know. In FX, it does seem like people
Speaker 1: take more random gambles. And also like people don't expect
Speaker 1: as much as relativity and then you know, they get volatility.
Speaker 2: Like they're very strange market. It was a fun trip
Speaker 2: being there for like two and a half years.
Speaker 1: Right. If you're in I think the business of selling equities,
Speaker 1: there's a lot of like you know, you do puppers
Speaker 1: and stuff, but there's a lot of just like oh,
Speaker 1: by open a eye, it's a good stuck. Right, here's
Speaker 1: the business fax Like you're kind of instantly going to
Speaker 1: where de rods.
Speaker 2: Yeah yeah, book which is just too insurance.
Speaker 1: Insurance sometimes blows up too.
Speaker 2: Yeah, well, trying to get us to hurricanes somehow, but
Speaker 2: I can't quite make the oracle jump. So anyway, ten minutes.
Speaker 1: I'm going to make a literal jump into the hurricane. Here.
Speaker 2: It's raining in New York.
Speaker 1: New York, and like they've already preamptively shut down.
Speaker 2: Well, all the subways keep breaking, right, I have to take.
Speaker 1: A subway and then a train. It's gonna be bad.
Speaker 2: My dad is picking me up today, so I'm happy.
Speaker 1: Okay, So Florida, Florida. So there are a lot of
Speaker 1: houses in hurricane zones. It's hard and expensive to buy
Speaker 1: insurance on your house if it's in a hurricane zone.
Speaker 1: There is people have jumped into the gap to meet
Speaker 1: that market of failure. Conceptually, the way you do it
Speaker 1: is you start an insurance company and you don't have
Speaker 1: any money, and you start selling insurance policies to raise money. Right,
Speaker 1: And if you do this for twenty years without a hurricane,
Speaker 1: you'll have so much money that you can pay off
Speaker 1: any claims. Right. But if you do it for one
Speaker 1: year and then there's a hurricane, you will not have
Speaker 1: so much money they can pay it any claims. And
Speaker 1: so there's a risk in starting a new I'm derradically
Speaker 1: oversimplifying and in fact, insurance companies are supposed to be
Speaker 1: well capitalized. But yeah, conceptually, you start a new insurance company,
Speaker 1: you've raised money by selling premiums, and then if there's
Speaker 1: no hurricanes, you're great, and if there's lots of hurricanes,
Speaker 1: you go to zero. And that's hard to do because
Speaker 1: insurance companies have to be rated. There's a couple of
Speaker 1: like big ratings agencies, and there have been a number
Speaker 1: of stories or something. There's one in the Wall Street
Speaker 1: Journal this week, and read about it last year. There's
Speaker 1: a ratings agency it's like a mom and pop operation
Speaker 1: called Demo Tech that rates a lot of smaller, less
Speaker 1: well capitalized insurance companies and it gives a lot of
Speaker 1: them A ratings and they have a higher incidence of
Speaker 1: their A rated companies becoming insolvent with them, you know,
Speaker 1: there is a period of.
Speaker 2: Time thirty times more likely, thirty times more.
Speaker 1: Likely than the other ratings agencies that use more traditional
Speaker 1: methods mean And it's like why does this exist? Well, well, well,
Speaker 1: people want to buy insurance. Someone sent me there's a
Speaker 1: there's a Monty Python skit where like a reverend comes
Speaker 1: into the insurance office and says like, why aren't you
Speaker 1: paying my claim? And he's like, oh, you see, you
Speaker 1: bought the never pay policy, which never pays off. It's
Speaker 1: a great policy if you don't have a claim, but
Speaker 1: if you have a claim, it never pays. It seems
Speaker 1: like people want to never pay policy. Yeah, you know,
Speaker 1: I've written a little bit about why, and like it's
Speaker 1: an interesting, like stemic answer, which the answer is that
Speaker 1: these insurance companies have enough money that if you like
Speaker 1: burn your house time by accident, they'll pay your claim.
Speaker 1: Have that kind of money, Yeah, what they don't have
Speaker 1: is the money to pay off everyone's claim if there's
Speaker 1: a big hurricane.
Speaker 2: It's like a town is wiped out.
Speaker 1: And why would you want to buy insurance that protects
Speaker 1: against you accidentally burning your house time but not a hurricane.
Speaker 1: The answer I think is that you probably correctly believe
Speaker 1: that there's some sort of bailout coming if your time
Speaker 1: gets whipped up. Yeah, and like an insurance like this
Speaker 1: is really quite literal where there's like state guarantee funds
Speaker 1: that basically will step in to cover wiped out insurers.
Speaker 1: So if you're a homeowner, you can buy the bad
Speaker 1: insurance policy figuring you know, either it'll pay out or
Speaker 1: if it doesn't pay out, someone else will step in
Speaker 1: to pay it out. And then like there's a question
Speaker 1: of why do states allow this, like the state's fund
Speaker 1: the guarantee funds, and like, you know, they're on the
Speaker 1: hook of this insured doesn't pay out. Yeah, I think
Speaker 1: the answer is that's a problem for another day, and
Speaker 1: right now, it's nice to have insurance, right So, if
Speaker 1: you're like a Florida politician and people can't get insurance
Speaker 1: to buy houses in Florida, that's really bad.
Speaker 2: For you, right, Yeah.
Speaker 1: And if they can get insurance, that's good for you.
Speaker 1: And if the insurance doesn't pay out and the state
Speaker 1: government has to step in to guarantee the insurance, that's
Speaker 1: a problem for later. Yeah. And so there's a certain
Speaker 1: amount of short sighted it's where regulators politicians are all
Speaker 1: happy to go with the system where you know, the
Speaker 1: insurers are not necessarily all that well capitalized, because that's
Speaker 1: a problem for someone else to figure out later on.
Speaker 2: Yeah, this is not the same thing, but it kind
Speaker 2: of reminded me of the conversation we were having about
Speaker 2: Egan Jones a couple of months ago. That is the
Speaker 2: ratings agency that basically gives pretty high ratings to private
Speaker 2: credit investments and has a track record of a lot
Speaker 2: of those private credit investments not going so well or
Speaker 2: you know, you think about it. Gave pretty good ratings
Speaker 2: to Chicken Soup for the Soul. It gave good ratings
Speaker 2: to Red Box and those went belly up. But there
Speaker 2: is a space for these rating agencies.
Speaker 1: Yeah, it's a similar dynamic in that, like ratings are
Speaker 1: not really for the consumer of the ratings, right, Like
Speaker 1: you're not getting insurance from an A rated insurance company
Speaker 1: because you want insurance from an aerrated insurance company. There's
Speaker 1: some sort of like regulatory backdrop, and so if ratings
Speaker 1: are kind of generous, like a lot of people are
Speaker 1: very happy to have generous ratings, and so there's a
Speaker 1: market niche for people who are willing to provide generous ratings.
Speaker 2: Yeah, and I mean it's all just future problems to
Speaker 2: deal with.
Speaker 1: So, yeah, everything is a rated now. Yeah, it hasn't
Speaker 1: defaulted yet. Yeah, who knows what'll happen.
Speaker 2: Hey, So this episode is coming out on August first,
Speaker 2: and in August, people including Matt Levine take vacation, So
Speaker 2: We're going to do another mail bag episode, so make
Speaker 2: sure you send us your cool questions money Pod at
Speaker 2: Bloomberg dot net, and there's a pretty high likelihood that
Speaker 2: will answer some of them.
Speaker 1: Matt, I might do a mail bag episode, Weser.
Speaker 2: If your questions are good enough, Gons. If your questions
Speaker 2: are good enough, we will do a mail bag So
Speaker 2: it's up to you.
Speaker 1: Yeah, sure, yeah, it's alrighty on you. And that was
Speaker 1: the Money Stuff Podcast.
Speaker 2: I'm Matt Leuvian and I'm Katie Greifeld.
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