Banks Just Started Dumping Private Credit onto Insurance Companies

Hinzugefügt: 2026-05-04

[00:00:00]Banks are taking more steps to distance themselves from this growing private credit mess. They have been re-evaluating assets that have been pledged to them to secure financing. I told you a month ago when JP Morgan did this, there would be others to follow and we just got confirmation there was.

[00:00:17]But that's only the half of it.

[00:00:18]Insurance companies, they continue to be dragged further and further into this growing mess, which is understandable given their exposures to it. Got some big news as far as insurance companies go. A double dose of stage two.

[00:00:32]Now what JP Morgan had done in March was reduce the value of private credit assets that could be pledged to the bank as collateral for obtaining basically emergency loans, but also some other kinds, too. The point of doing that was to effectively limit access to JP Morgan. In other words, JPM was distancing itself from the mess by making it harder for shadow banks to borrow from it. But now we've got confirmation the rest of the banking sector is furiously trying to protect itself, too. And we'll go over what that means and what it is they're exactly doing. It's not good, nor is the other big story, insurance companies. The annuity underwriters and retirement plan product managers, it was only a matter of time before they got dragged into this since life insurers have been the biggest reachers for yield out of anyone. And they've already been quietly pulling back. Well, it's starting to get loud. According to the Financial Times this past week, the bond market, the freaking bond market is now getting cold feet not just about private credit, but also insurers exposure to it. That's a big one. As was how the Financial Times article elicited a, let's call it, interesting response from the American Council of Life Insurers.

[00:01:44]In other words, now that the spotlight is starting to expand to include not just the private credit providers, the shadow bankers, but also those who fund them, the insurance companies, and we're starting to hear from them and how they must have come to the Blue Owl School of Crisis Management. It is really that bad. When they protest this much, it's difficult to take them seriously when they say there's nothing to see here.

[00:02:07]Instead, what we're getting is, as I already just said, a double dose of stage two, both hedge funds and insurance companies. And as Mr. Turman of Deutsche Bank said not long ago, if it wasn't for the Iran conflict, this would be on the front page everywhere.

[00:02:25]As far as insurance goes, I said this in a video earlier this week, up until now it's been the dog which didn't bark. The big bankers like Jamie Dimon and, you know, Solomon over there at Goldman, they can't stop talking about the private credit bus because this time, unlike last time, it's not their necks that are in the noose. Instead, it's Blue Owls. But that was only the beginning. Follow the money. In other words, where did Blue Owl, Blackstone, Cliffwater, and all the rest of these names that people now heard of, where did they get their funds? These shadow banks don't take in deposits like regulated banks do. In fact, that's why they're not considered banks. They're called shadow banks because they do re-lend money that they do raise. And those shadow re-lenders first get their funding from equity investors and some other lenders. They've got all the connections across Wall Street to all the deepest pocketed institutions, the big guys who have both the cash and the need to do something exciting with it.

[00:03:24]That's always going to be the insurers, the pension funds, the retirement planners, and the annuity people. Shadow bank money mainly comes from there, not necessarily J.P. Morgan. And in that previous video, I showed you where the insurers get their money. It comes from policy holders. Sure, that's a good place to start, but a lot of it also comes from repo. There is more leverage in this arrangement on the insurance side than the insurance companies have ever let on or ever will, as we'll see.

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[00:04:52]Okay, but that doesn't mean that JP Morgan isn't important, especially at the margins, and especially under these conditions. So, while insurance companies and pension funds provide the bulk of funding, the banks do provide a lot of additional funding and emergency funding. The additional funding something called back leverage, which I'll get to here. In other words, shadow bank investment vehicles, these hedge funds that you've been hearing about, they raise their money from the institutions and some wealthy individuals. But, to really enhance their returns, they aren't just re-lending to risky corporate borrowers who are willing to pay them higher interest coupons. The hedge funds also pledge some of the assets that go into their portfolios to banks like JP Morgan to borrow a little bit additional from them. This is leverage, or in this case it's called back leverage because you're not supposed to know about this. It's how hedge funds performance can go from, say, 8 or 9% to 12% or better. That's the leverage. So, if you're seeing an investment that's offering double-digit returns, first off, basic rule of finance, it's risky, no matter what Wall Street and its salesmen tells you. And second, it's got to have some leverage in there somewhere. There's going to be some in the fine print. There is no such thing as free money huge returns. And in addition to back leverage, banks like JPMorgan offer the emergency credit lines, which as you might imagine, the hedge funds shadow bank are increasingly desperate to access right now. As fund investors pull their money, including as we'll see insurance companies, the fund managers just don't have the cash laying around to pay for all those withdrawals.

[00:06:25]So, they can either sell their assets, which none of them want to do, or they can arrange to borrow cash from a bank, a regulated bank, to tide them over until all of this blows over.

[00:06:35]At least that's what they hope happens.

[00:06:38]So, you can see how important bank financing is at the margins, even if it doesn't make up the bulk of shadow bank funding. It's the marginal source of leverage for returns, as well as that emergency. So, if the banks begin to pull back, that's stage two behavior, back leverage gets more expensive or even just disappears, which reduces the returns available to these hedge funds, which won't help them with their private credit funds that are badly in need in the performance just to keep their investors from fleeing. Plus, if they can't access the backstop that JPMorgan and the other banks provide, since a good chunk of their investors are already pulling out, it's going to force some of these funds to have to sell. And that's when it gets to be full-blown stage two.

[00:07:21]Now, remember these stages cuz they're important, and I went over them in my last webinar a couple weeks ago. And that's still available here on YouTube.

[00:07:28]You can check it out on the channel.

[00:07:30]Stage one, people start to realize it was a bubble and there are a lot of garbage, lots of errors being made, money starts to reverse. However, banks and other investors are still not quite there yet. They stand behind whoever it is that's in question, this case private credit, and things generally equalize.

[00:07:47]But it's the first time that money begins to flow out in reverse. But then, you know, after the banks initially, their impulse is to stand behind everything, and other investors are willing to keep putting money in. But then you get closer to stage two, more investors begin pulling their money out, and banks are increasingly reluctant to provide the emergency funding, let alone more back leverage.

[00:08:07]And the chances and the incidences of force sales goes way up. That's what really defines stage two. And that raises the probability of going all the way into stage two towards stage three, which is where you get into the systemic part of the mess. We went over those details, like I said, in the webinar.

[00:08:24]So what this video is really about is documenting big couple of big stage two signals. The one is what banks are doing, and the other is what the insurance companies and what's going on with them. Now for the banks, JPMorgan started this last month. And because JPM was doing it, you knew it wasn't going to be long before everyone else followed. And this is something else I went over in the webinar, too, cuz it's that important. Both what JPMorgan was doing and what it would mean if, or actually now when, the rest of the banking sector inevitably did the same thing. And what is that? Well, they're distancing themselves via collateral.

[00:09:00]Here's Bloomberg summing it up.

[00:09:02]Some big banks are raising interest rates for the leverage they provide, and they're also marking down specific loans posted as collateral. Behind the scenes, that's prompting private credit fund managers to swap out holdings from the pools as banks, including JPMorgan Chase, Goldman Sachs, and Barclays (I love how they're actually naming names here), exercise their right to write down individual assets, according to people involved in the talks who are going to remain anonymous because they're not authorized to speak, you know the drill here. The strategies banks are employing to address risks in existing facilities aren't new, but they're are more prevalent given the turmoil rolling global markets, said the people asking not to be blah blah blah.

[00:09:41]Some banks, for example, are scrutinizing loans made to software companies and other industries at risk of being disrupted by artificial intelligence in the coming years, basically doing due diligence that they weren't doing beforehand. The stakes are high enough that top bank executives are getting directly involved in adjusting the interest rates they charge for leverage and tightening collateral terms, some of the people said. Because banks don't all have the same rates to challenge assets, some may end up better protected than rivals of private credit defaults begin to rise. Now, this is sort of misses the point. The stakes are high for banks, sure.

[00:10:17]Banks distancing themselves from private credit like this isn't going to threaten the banks themselves necessarily, but it will leave the hedge fund shadow banks without access to money they need to avoid having to sell their assets. And without the banks, they'll sell assets and reduce their prices even more than they may already be doing. Plus, the more sales that happen, the more the rest of the world gets to see that distress, what's called price discovery. And the lower the prices go, the more fear it creates, leading to more problems, more sales, and so on as stage two entrenches and heads toward stage three. And what will make stage three more likely than anything else? That's insurance companies being forced to distance themselves, too. Not just JP Morgan and collateral swaps. We'd be talking about the biggest source of money for private credit and shadow bank hedge funds, the biggest source by far. If the insurance companies start to get cold feet, that's game over. And that chill started a little while ago. I went over this at the end of February, how a couple of insurance companies in Europe were starting to talk about how, "Hey, we're not so exposed to private credit, and we are separating ourselves, too." So, here's a clip from that video at the end of February.

[00:11:33]So, AXA's position today is, "Okay, there could be some fallout from this growing mess, but not for us. Our holdings are much less than all of our peers." And while you can understand what Mr. Bouberl is trying to do, I'm not sure his admission actually achieves the goal of reassuring anyone. He just said, "Private credit is going to be some degree of problem, so not nothing, and all my competitors are really in deep with it." Not that we didn't know that, but for the most from the general public, this is the first time they're hearing it. So, great for AXA, not great potentially for the entire system. And once again, major European insurer now saying, after reporting earnings, when top management would love to talk about anything else, Allianz's CFO admits they're separating themselves from trends in that part of the market. And what does that mean? Exactly what you think it does. Now we've got to the point where, again, two of the biggest financials in Europe are basically saying they feel a little dirty about having done what they did. To try to clean it up, they're separating themselves from the growing sense of, I'm going to use the term, toxic waste.

[00:12:36]That's the big one here.

[00:12:38]So, combined with AXA pointing the finger at Allianz and all the rest, it represents a significant shift in sentiment at the very least and likely activity behind it. Everyone bought all this stuff last year, couldn't get enough of it. Now they're saying, "We're distancing ourselves from it." It's getting the reputation of toxic waste, and that is potentially huge.

[00:13:02]Yeah, toxic waste. That's the thing.

[00:13:05]That's the real risk here, and that's what brings us to what's going on this week. So, yes, we got JP Morgan collateral swaps revaluation, but the more private credit gets to be treated like toxic waste, what that means is anyone who is anywhere near it ends up becoming toxic, too. This is what really turns subprime into full-blown global monetary crisis. Not saying that's what we're facing here.

[00:13:28]It's the process, as I pointed out in the webinar. Because at that point, the entire financial system runs for the hills, and then there's no stopping the slide into stage three, whatever stage three might end up looking like.

[00:13:40]And if insurance companies that were already getting nervous in late February, then what the Financial Times reported just a couple days ago is not going to help. What it said is that insurance company debt has become of one of the worst performing sectors in the US investment grade universe. Basically, the freaking bond market is now looking at insurance companies in a very funny way, to the point that it's starting to avoid insurers debt. Not catastrophically, not running for the hills, but saying, "Hey, I need to take a second look at what these people are doing." Now, the Financial Times says that in general, these bonds are now yielding about a percentage point higher than US Treasuries, which is a measure of how much additional return the market says it needs in order to buy and to hold what are supposed to be safe life insurance credit. And why? Obviously, it's their exposure, their heavy exposure to private credit. The bond market isn't just, you know, saying private credit's not nothing. It's acting on those concerns and doing so in an increasing fashion.

[00:14:43]Not overwhelmingly avoiding insurance companies, but enough at this stage to signal the broader market is taking toxic waste seriously.

[00:14:53]And you know who took the Financial Times article seriously? The life insurance industry itself, or at least one of the prominent trade groups that represents it. They fired off a letter immediately as soon as the article was published and said, "What are you talking about? There's nothing to see here." Very blue owl ask.

[00:15:12]This is the American Council of Life Insurers and their president who says writes, quote, "The recent Financial Times piece called private credit exposure turns investors away from US life insurers April 14th, 2026 offers a misleading representation of the industry's private credit assets. If it had included insights from life insurers, the article would have provided readers with important and salient facts. Now, honestly, we all know what anyone from the life insurance business would say.

[00:15:43]Same thing as Blue Owl and all the rest of them thus far. Our investments are strong, solid, universally loved and adored and our process is so unimpeachable it's as if God himself did our underwriting. That's what they would say. It's worthless. And then the guy goes on to name drop the IMF, S&P's ratings as if that's a positive because we all know how dependable ratings are for questionable assets and keeping up with the opaque exposures with all sorts of boatloads of hidden leverage. So yeah, ratings agency, that's not a good name to drop, either. He also tells us insurance companies are, get this, heavily regulated by the state, which is even less reassuring and that's even before we get to something like regulatory capture. Not to mention, I went over this recently, how the Treasury Department just just told those same state regulators, "Yeah, you may want to take a closer look at private credit and the entanglements with insurance companies."

[00:16:38]In other words, it was indeed very Blue Owl-esque, protesting a little too much without actually saying anything tangible or more importantly directly addressing the serious questions that are indeed swirling around everywhere.

[00:16:52]Just more lashing out at against the idea that, "Hey, the bond market, the bond market might be getting a little uncomfortable about insurance reaching for yield during the past couple of very clear garbage years." So yes, there are two very big stage two matters going on here. One, with the banks revaluing collateral and second, insurance companies being drawn further and further into this mess, which was like I said inevitable. So taking the second one first insurance companies, what we're getting from them is more and more whiffs or flavor, whatever scent you want to call it, sense of toxic waste.

[00:17:33]I mean retirement assets, they've been the biggest source of money for private credit and all the garbage and there is as I went over lots of leverage in repo as well. Now we aren't there yet, but the idea of full toxic waste for private credit is indeed getting closer and you can feel it. You can actually see it.

[00:17:52]That's when it gets to be so bad not it's not even about losses or too many losses. It just becomes too many questions that no one on the inside is willing to honestly answer. Just more bland corporate statements and reassurances. But when the whole financial world not only avoids private credit assets, it also begins to pull back from anyone who is adjacent to it, that's when you know you've got a toxic waste problem that is brewing. So if the entire bond market is darkening on insurance company debt, that's a pretty big sign. Not a huge one, not full confirmation, but another one of those mile post along the road, stage one, stage two heading towards stage three.

[00:18:35]Because it will absolutely impact what insurance companies do. They need to preserve the debt market and the debt market favor or they're toast. So that could mean as as the toxic waste label gets to be more accepted, insurance companies, retirement asset, the annuity provider, they're going to have to cut many ties to private credit just to save themselves the expense of disfavoring the bond market. So the insurers really turn off the money to the shadow banks, which by the way, that's something that we've already seen. I went over this before as well. It was in the blue owl presentation. When the company said it was only a couple of investors that were responsible for most of those huge withdrawals. That was institutions. That was the insurance companies. They're already starting to turn off the money.

[00:19:21]And now it's spilling over to the outside world, to the bond market. And then the second stage two thing, what the banks are doing with collateral, that's just as big. Like insurers, starting with JP Morgan last month, they've been distancing themselves via collateral revaluation and forcing these private credit shadow banks to swap in other forms of collateral. It's tightening down. It's a credit cycle that continues to tighten.

[00:19:47]Just making it more difficult for shadow banks to avoid having to sell assets, being forced to sell assets, going further down the road of stage two, closer to that point where you get full-blown stage two asset sales in more than just here or there.

[00:20:04]Mr. Turman, the guy from Deutsche Bank, was right. This stuff should be everywhere. Well, that's okay. Well, the stock market is in the midst of an orgiastic, frenzied euphoria over the Iran conflict, the private credit crisis, sadly, it's not going anywhere.

[00:20:21]At least nowhere good. At every opportunity over last six plus months, it is only escalated, and broadened, spilled over, moved deeper into those crisis stages, getting closer to toxic waste status. And by the time everybody might figure this out, the rest of the financial world by then, it would be already too late.

[00:20:44]Now, it is important to understand how insurance companies are neck deep in all this, and what that actually means, including, yes, repo and collateral hidden leverage in the video link below.

[00:20:56]As always, thank you very much for joining me. Huge thank you, Euro Dollar University members and subscribers. And until next time, take care.