On No... Now HSBC is in Trouble

Added: 2026-05-09

[00:00:00]The stock market was not happy with HSBC. What should have been a small little nothing, a $400 million loan loss to an Irish entity with a name that sounds like a Star Wars droid, AGF WHCO185.

[00:00:14]It ended up pulling the curtain back a little bit further on the private credit mess, exposing more big cracks in that foundation, as did the comments from Apollo CEO, where he used the words contagion and egregious.

[00:00:30]And the egregious part of it was about insurance companies because it's insurance companies, not necessarily big banks, that are at the center of this still growing mess. And we can't take the big banks out of it because they are major suppliers of funding for the whole onion. And it really is an onion with many different layers to it. And we're going to peel back a couple of them here with huge, if inadvertent, assistance from HSBC as well as Mark Rowan of Apollo. Now, Mr. Rowan would know an onion when he sees one because Apollo is deep in the insurance business. And in his pretty shocking comments from earlier today, the Wall Street exec first admitted that insurance firms, the ones that he oversees, get this, they're pulling back on risky credit. Remember, as I always say, it's not what they say, it's what they do. Because they always say there's nothing to worry about. And what Apollo's insurance companies are doing is indeed huge news.

[00:01:27]as is the other part of his statement, which fits together perfectly with what we're going to talk about with HSBC. He was talking about the egregious behavior of insurance companies that include heavy use of, yes, you guessed it, offshore repo. Those people out there making similarities to 2008. Yeah, you can see it. And that's not all.

[00:01:49]officials themselves at the Federal Reserve and elsewhere, they have already shifted from saying there's nothing to private credit to now they say, "Okay, there is something, but we don't think it's catastrophic." Again, it's not what they say, it's what they actually do.

[00:02:03]But let's start at the beginning, or at least the beginning of what is now the latest chapter as the pick your analogy, the we peel back the layers of the private credit onion at the same time as pulling back the curtain on all of it.

[00:02:14]So yesterday, HSBC reported earnings that shocked Wall Street and sent the stock price down by 6%. Now, on the surface, didn't seem to be too much that was out of line, but it was one item that caught the market's attention.

[00:02:28]Quote, the Londonbased dual listed lender booked a total of 1.3 billion in credit losses largely driven by a 400 million charge linked to a fraud related secondary securization exposure with a financial sponsor in the UK. Now, there's more to this. There's this other little tidbit which you'll immediately recognize is the same problem that keeps coming up over and over and over again where it comes to private credit. They all keep saying their underwriting is unimpeachable and the credits that they own are stunningly solid. Well, does anyone anywhere ever bother to check for sure before they write the checks for hundreds of millions, if not billions of dollars or billions of other currency?

[00:03:09]Quote, "On Tuesday, Pam Cow, who's HSBC's chief financial officer, said the bank had relied on the financial sponsor's due diligence," referring to Apollo, which we'll get to in a second, "When making the loans that led to the $400 million charge, the bank is working on additional procedures to vet borrowers." She added, "A little late, don't you think?" The fact that they have to say they're starting to do now what they should have been doing from the very beginning is the reason why HSBC stock was down six%. Now, yeah, shares have recovered since then, but they're that's just because they're caught up in the current market euphoria. But that initial sell-off speaks to just how much we all expect the worst at this point because they keep giving us every reason to think that way. Now, we know what that secondary exposure was. That's how the loss was characterized. It was the UK cockroach MFS. And in the grand scheme of things, $400 million is next to nothing for a bank of the size of HSBC.

[00:04:05]But as we've seen from the very beginning all the way back withricolor and first brands, it's not the amount of money. Not yet anyway. It's more confirmation of widespread bubble behavior and quite frankly way too much stupidity with next to zero due diligence. That's the theme we have to keep coming back to. She said they were depending upon somebody else to do the due diligence. That's just crap. That's garbage. But in prying back the curtain on private credit and shadow banking, we're also seeing more of how that sausage has been made. We're using another analogy here. And it is not pretty. And the reason it isn't pretty is because we've seen this kind of sausage before. This is where the 2008 comparisons really start to come into play.

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[00:06:15]So, get a load of this going a little bit further with HSBC here. This is the part that will be familiar to 2008.

[00:06:21]We're not talking about subprime mortgages, but the processes, the general framework, the behavior, the stench of the behavior. Quote, HSBC led to an Ireland registered entity of Apollo's Atlas unit called AGF WHCO185 designated activity company, according to UK and Irish corporate filings. Now, that Irish entity lent around $650 million to a UK company, Zirkcon Bridging. Zirkcon Bridging had a servicing and origination agreement with our cockroach MFS which had funded around 525 property loans through Zirkcon when Atlas pushed Zirkcon Bridging into bankruptcy proceedings in February. Zirkcon Bridging wasn't owned by MFS but by another company called Zirkcon Group controlled by MFS owner Parish Raja. A spokesperson for Raja declined to comment in these quote back leverage deals. And that's a term that we've talked about before and we'll get into a little bit more here. The special purpose vehicles do the borrowing and the banks have no recourse on the non-bank lender, which really puts the onus on due diligence, don't you think?

[00:07:29]In this case, Apollo's Atlas unit if the underlying assets do sour. Because an MFS unit allegedly double pledged its collateral, there may be little for HSBC and the other lenders to recover in the insolveny. And it all just is a huge mess. Now, some of this is missing the point. as if the only concern is about the state of regulated banking. Now, we should be concerned just as much about the state of shadow banking given how important it has become to the flow of money and credit, especially at the margins, even if that flow is hidden in the shadows. So, yes, this can be and can continue to be an issue for the banks, but being a major issue for shadow banks already makes it a possible big problem for financial markets and the wider economy. As I talked about in a video last month, we aren't on the lookout for the next Leman. You have to think much broader than that. Again, even if the money involved isn't huge, at least in this one instance, $400 million for the bank the size of HSBC, that's not really the point at this stage. What is the point or several points at this stage is how all of this is shaped up, how all of this has been put together and hidden ways that we see that are entirely too familiar to 2008 plus confirming yet again the bubble framework and also the bubble behavior that goes along with it. Lack of due diligence. Focus on the deals. Don't care about anything other than tomorrow's big bonus check that comes in once the deal gets done. The lack of care and due diligence really does seem to be endemic. And if it is, then we're talking about real money, especially since it wouldn't be just HSBC or Barclays or Santander or the other names that have come up with this MFS business. As we've talked about before, ground zero is going to be the insurance industry. Insurers have been some of the biggest reachers for yield across the entire financial spectrum. huge buyers of private credit and as it turns out huge fans of using leverage to really juice their returns and even bigger fans of not telling anybody about that. But not just huge leverage, no that's not enough. Huge leverage via offshore entities that are set up to both maximize this financial efficiency as well as obscure the entire thing. Now I touched on this part of the insurance story along with back leverage that term we just went over in a previous video from a little less than a month ago.

[00:09:50]Now, before I get to the comments from Apollo CEO, let's do the background on what he's going to be talking about and the connection between insurers and offshore repo leverage. So, let's go back to that previous video real quick.

[00:10:02]Because it's never good enough just to get a higher coupon from a high yield bond. Why not go into repo, borrow at a smaller rate, and use the funds to finance much of the bonds purchase? In that case, you get the higher yield from the asset itself, but the repo leverage amplifies those returns into something extra special. And if you think these things are risk- free or close to risk-free, they're investment grade rating, all the better. And it's much easier to do when as a life insurance company, you've got access to tons of high quality collateral like US treasuries that are just sitting around in regulated reserve portfolios. So yes, this should sound familiar to anyone who paid attention in 2007 heading into 2008. Look at what the diagram shows on the right side for funding these risky assets. There are the policy holders, those who own the annuities and and the like making their premium payments and putting in upfront capital. But look just below that, institutional investors they call them like the federal home loan banks. But just below that also repo securities lending. The insurance company pledges collateral and borrows short-term funding in repo markets to gain the leverage on already risky assets. And those assets are what are shown on the left side of the diagram.

[00:11:18]The private credit providers like blue owl or other CLLO vehicles leverage loan syndications. They take the money they get from the insurers, which is money the insurers got from policy holders plus repo, and then they reend it to the riskier firms, the middle market corporate segment. But here's the thing, because a lot of that repo leverage is offshore, which is a whole other topic here. It's largely hidden. Plus, the structure obscures everything on top of everything else. From the outside, everything looks good, solid, steady, limited leverage. So it looks like there's just 2:1 leverage for the asset manager, but in reality it could be 12 to1, but who the hell really knows? Now I'd wager just like 2008, none of those who are doing it know either. The companies themselves, the repo funders, nobody really knows the extent of all this. They just do it because the money looks so darn good. So with all that in mind, there are a couple of key points raised by Apollo CEO Mark Rowan.

[00:12:19]Starting with the fact that Apollo's insurance companies are pulling back from risky credit. They all say everything's fine. Nothing to see here.

[00:12:28]But it's not what they say. It starts with what they're doing. Quote, "While Apollo is experiencing robust results today," Rowan said he is preparing for choppier times ahead. The firm has moved up the credit quality of its fixed income investments, cut exposure to riskier sectors like software, and stockpiled stockpiled about 40 billion of cash in its insurance business. It means we're investing with an eye toward protecting our capital and making sure that we are here to ride through the cycles if there are corrections, which we quite frankly expect. Again, that's big news because it shows an awareness of the risk and confirming those risks are sizable. Otherwise, Rowan wouldn't have to wouldn't have his financial firms moving up the credit quality of its fixed income and stockpiling an enormous amount of cash. They keep saying there's nothing to see here, but it's not what they say, it's what they do. They tell you it's no big deal, but then they tighten down the screws in their own credit portfolios. But then, this is another key part. Rowan took it a step further and called out the rest of the insurance business. Basically accusing them of all the bad things that we've been hearing and talking about.

[00:13:40]Back to Rowan here. Not everyone in our industry is doing what they should do.

[00:13:44]Not everyone runs their business the way we have run our business. We do worry about contagion. Now contagion would mean that stress spreads through the industry raising the risk that regulators or central banks cares about central banks have to intervene to protect insurance and retirement customers. That's your annuities and retirement funds. Now, Rowan did not name specific firms that he thought were acting badly, but he suggested that some insurers are relying on what he called egregious practices, including, here we go, offshore Cayman structures, complex collateralized loans, and aggressive credit assumptions that can make some balance sheets look stronger than they are. So, this is where the comparisons to 2008 really apply. It's not the systemic takedown of the regulated banking system or even big chunks of it.

[00:14:33]We're talking about shadow money moving among shadow banks obscuring the line between investors, lenders, leverage, and leaving no one to have any idea how it's all really pieced together. What you end up with is a complex tangled web of interlocking relationships. And guess what? In that situation, the risk of contagion is not nothing. Now remember what's really behind all this, how we got to stage two in the credit crisis in the first place is the lack of forthright information, asymmetry. And the more that gets uncovered and documented, the more layers of the onion we peel back, the more curtains we pull open, the worse it gets. The more we know, the more we wish we didn't know.

[00:15:16]Especially since it doesn't line up with public statements, widely dispersed public statements. In fact, that's one of the biggest problems. They say one thing and what we find out isn't what they said. Now, all the insurance companies kept saying, "No, there's no leverage here. There's nothing nothing to worry about." And while they were technically not lying about it, the technicalities are functionally irrelevant. There is leverage as we went over in that previous video and it is tied up with insurance portfolios just not directly as we can see with this HSBC example. In fact, that's why I wanted to bring it up here because it really does expose a lot about how all of this is put together and how all of it works. Plus, it also starts to explain how we could have gotten into the situation where HSBC is just lending out $400 million on the say so of who knows what. Because that's the other thing here too in this framework, in this structure, the back leverage, the bank lends to a company which lends to another company that lends to another company. the bank really has no idea who the borrower is on the final end of it.

[00:16:22]In fact, they did not care, which again, bubble behavior exposed. They didn't care who the ultimate borrower was because they thought, well, first of all, there's some collateral in there somewhere. And second of all, we're getting huge returns with seemingly no risk. So, why would we want to rock the boat? And this is all starting to make officials uncomfortable, not just in the US, but over in the UK where they're quasi stress testing the banking relationships of private credit. I mean, this is something that central bankers would they would rather talk about anything else other than something like a credit. They would rather talk about flat beverage and job losses than the possibility of a credit cycle. That's how you know this thing is is progressing. When they go from, hey, this is all big nothing to okay, it's something. It really is something. I mean Jay Powell last month he gave us our subprime as contained for this generation because he also had to admit there was this was no longer nothing. In fact as far as it now stands in the official world we have gone from this is nothing to okay there is something but now they say it's not something huge.

[00:17:24]And the latest to say just that is Michael Bar. Quote, "The Federal Reserve governor said stress in private credit could spark psychological contagion leading to a broader credit crunch once again warning against loosening the reigns on Wall Street at a time of rising risk." In an interview with Bloomberg News, Bar said that while direct links between banks and private credit do not yet appear super worrisome, is that an official technical term? There were other areas of concern such as insurance sector, insurance sectors overlaps with private lenders and of course the leverage and hidden leverage that goes along with it. Then you also have the problem of kind of psychological contagion. He said people might look at private credit and instead of saying this is an idiosyncratic problem, these were high-risk loans and the rest of the corporate sector is different. They might say wow there seem to be cracks in our corporate sector.

[00:18:15]Maybe over here in the corporate bond market there are also cracks. then you could have a credit pullback that could lead to more financial strain. And yes, that's exactly what we went over in our webinar because that's exactly how this happens. But see, we went from nothing to see here to now I see a possible pathway to contagion and big problems even if bar like pow still downplays the chances. So from zero to okay, maybe there is a chance. And we still haven't even scratched the surface behind insurance companies and offshore leverage, whether in the back door or out the front. So, what have we been saying about private credit from the very beginning? Bubble behavior, garbage lending, stupidity, all of that stuff, do the deals, volume, lack of due diligence, it continues to pop up. Not only does it continue to pop up, as we peel back the onion and we peel back the curtains and whatever, we look at the sausage being made, what does it show?

[00:19:10]exactly that and only that they all just signed contracts without checking what they were signing or even figuring out who was on the other end actually borrowing the money. That is exactly what HSBC's law shows us. And you better believe this is not the only way or the only example. This is how these things are structured. When they talk about back leverage, think about that Irish company with a name like a Star Wars droid. That's not the only one. They didn't care who was borrowing because the returns were just way too good to pass up. Do the deal. Do the deal. Do the deal. But in order to get those deals done, they had to engineers all kinds of hidden arrangements, piggybacking on the good names of regulated insurance companies to take on big-time leverage via a couple of ways, but in large part offshore repo. That's fine when everything's going well and collateral is being valued at top prices. If or for maybe when it doesn't go well and collateral starts to be questioned as it has been more recently, then this internationally tangled web doesn't just unravel a couple of its threads. One layer of the onion, one more layer of the onion, one more curtain pulled back. It can and does spread to other parts, particularly in the absence of information, solid information. The only solid information that we're getting or that we ever get is when something goes wrong and various parties are forced to disclose what they otherwise never wanted you to know. So yes, this is not nothing. And what we don't know yet is how big of a something it ends up being. There are going to be losses. This is going to get messy. But what we don't know is who's going to get stuck with the losses and how messy it will get along the way. But stick around because we are going to find out.

[00:20:55]If you want to see my full video on insurance companies and back leverage and you know offshore repo and given what the Apollo CEO just said, it's well worth your time. The video link below.

[00:21:07]As always, thank you very much for joining me. Huge thank you University members and subscribers. And until next time, take care.