New book on Apollo has a cautionary note
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There's a warning about the financial system in the last chapter of William Cohan's new book, "Money to Burn: The Unvarnished Truth About Leon Black, Apollo, and the Rise of a New Wall Street."
The latest: When asked in an interview on Slate's "Money" podcast this weekend if Apollo Global Management, which had more than $1 trillion under management as of the second quarter, could trigger a financial crisis, Cohan said: "Absolutely, yes."
The big picture: The massive financial institution that Black helped create has evolved away from its traditional private equity business and is now operating almost like a bank, several industry experts tell him in the book.
- The catch? It's not regulated like a bank. It's regulated at the state level, like all insurers.
How it works: A traditional private equity or private credit firm takes money from investors and puts it into various assets — buys a company, say, or lends directly to one. Investors hope for a return.
- But Apollo and rivals like KKR are operating differently now. They have insurance arms — Apollo's main insurer is called Athene — that sell annuities to regular folks, who pay money and in return are promised certain returns or payouts.
- Insurers invest the money in assets that pay higher interest rates, earning a spread between the two.
Follow the money: It's not unlike traditional fractional-reserve banking, where a bank takes deposits and invests them in assets that pay higher interest rates.
- That has been a tricky business because depositors can snatch back their money at any time. Until the government insured deposits, bank runs were a big destabilizing risk in the U.S.
The intrigue: Unlike a bank funded by deposits that can flee quickly, Apollo emphasizes that Athene's long-term assets are matched with long-term liabilities.
- In a recent slide deck, Apollo points out that 90% of its annuity deposits either cannot be withdrawn or are subject to a penalty for withdrawals.
Yes, but: The annuitants, the beneficiaries of the annuities, can still ask for their money back. The investments that Apollo is making, some of them in the more opaque private credit arena, could stumble.
- "There could be a walk on the bank, if not a trot on the bank," said Cohan, whose 2009 book "House of Cards" chronicled the collapse of Bear Stearns. "There is a risk."
- "If we've learned anything over the years, it's that Wall Street banking can turn rapidly into a very dangerous business indeed," he writes in the book, "especially just when you think things couldn't be any better."
