This is Josh Jalinsky, the Financial Quarterback. Don't touch that dial. This is Josh Jalinsky. Tariffs, Tech, and Turmoil with William Cohan, bestselling author. I want to hear about all your previous books, but the newest book most excites me just because it's Apollo Unbound about Leon Black and the Wall Street powerhouse. So are you allowed to share, because the book's going to be published next year, are you allowed to share a little bit of what you're learning?
I can talk about it. I'm happy to talk about it.
So what's the angle of Apollo Unbound?
Well, all my books tend to be, you know, histories of the firms involved. So this is, you know, a character study of the people who founded the firm and a history of the firm. You know, all three of these guys, everybody sort of worked at Drexel Burnham before it blew up. You know, then they founded Apollo after that. So it's been 35 years since they founded the firm, and so, you know, there's a lot of colorful characters. They've done a lot of clever deals, and there's sort of a big succession battle, which is sort of interesting too. So, you know, and a twist of Jeffrey Epstein.
Apollo Unbound, whenever it's available on pre-order, I want to get it. I'm curious. So this is nothing to do with Epstein? Everybody wants to know, I mean, I want to know, what did Leon have to do with all these people on the Epstein list? I want to know, like, were they there because it was a business dealing? You know, who was the scumbag, who wasn't? You know, all of those various things. But I guess that'll be for next year. However, Apollo was involved in purchasing Athene. Are you familiar with this? And Apollo's interested in Athene. They actually started Athene. It wasn't something that they purchased.
Well, no, Athene then bought Aviva, which was a venerable, long-time...
That's right. After Apollo started Athene, then it went on an acquisition spree and bought a lot of, after the 2008 financial crisis, a lot of insurance companies with annuity businesses, you know, were looking to divest them, and Apollo scooped them up, including Aviva, and just getting bigger and bigger and more successful all the time. And, you know, eventually went public, public company IPO with Apollo owning a lot of it. And then when Mark Rowan became the CEO of Apollo in 2021, he quickly announced an $11 billion deal to buy the rest of Athene that they didn't own, and essentially Apollo and Athene are one.
Now Barry Dyke, who's a friend of mine, wrote the book Pirates of Manhattan, all these, all these like interesting exposés. If you're familiar with him, he's really worried about Athene and other insurance companies that are owned by private equity. Do you believe that's a systemic risk when millions of retirees depend on these companies for retirement income in the form of pensions or annuities?
You know, that is, that's a very good question. And I would say before, you know, the market gyrations of the last week or so, I think many people considered it sort of a golden age of annuity insurance businesses, and a lot of them now are owned by private equity firms. I mean, I think probably Athene is better off being owned by Apollo in total. If you're an annuity holder of Athene, you're probably better off with the fact that it's part of Apollo because Apollo is a bigger and stronger company than Athene was on its own. You know, Apollo is sort of filled with smart people who know how to invest wisely, you know, the assets that are generated by the people who buy the annuities, the cash that comes in to Athene and then is, you know, invested. So basically they're in the spread business where they, I don't know what the numbers are exactly, but if they owe an annuity holder, you know, 4% a year, they then invest that money and hopefully they get 10% or some number, and then the difference between the 10 and the 4, the 6, is their profit. And as long as they earn more on the assets than they owe on the liabilities, you know, they're going to be happy, the annuity holder is going to be happy.
In terms of systemic risk, you know, again, I say people feel we're kind of in a golden age with regard to this business because, you know, the liabilities and the assets, the duration are matched. You know, banks get into trouble because their assets and liabilities have different durations. You know, Silicon Valley Bank, you'll recall, went down the tubes very quickly because people could push a button on their iPhone and take their deposits out of the bank. And meanwhile, they had their assets, even if they were treasury securities that were long duration. They thought they were, you know, AAA, 7 years, 10 years, whatever it was. But when you are forced to sell assets, you know, on demand or, you know, before you want to, or when you have to, you know, you're going to take a big hit to sell those assets, and that represents big losses. And the combination of the two was deadly at Silicon Valley Bank, just like it was deadly at Bear Stearns and Lehman Brothers and Merrill Lynch and all the rest of them back in 2008.
So I think what Athene and Apollo believe is that, you know, their annuities are seven years and their assets are seven years. So, you know, they have seven-year debt that they've invested in, senior secured debt mostly, and the annuities are seven years. So, you know, no one could, you know, there are penalties if you try to terminate the annuity early. And, you know, they originate a lot of private credit that they're buying, they're investing in, so they cut out sort of the fee-taking middlemen. So they think they've created something special. In the last few weeks, their stock's gotten hammered as interest rates have risen rapidly, and so there's some concern both on the private equity and the private credit side. So their market cap, which was about $100 billion, is now closer to 70.
Yeah, it's a big hit that they took.
But they're not alone. Blackstone, KKR, Carlyle, TPG, they all took hits, you know, in this very volatile, self-inflicted wound that's occurred here.
But you think they'll be fine? They're like the masters of the universe.
Well, I mean, I think that's a very big question because they really haven't been tested yet. You know, they're a relatively new phenomenon. They started appearing, you know, Athene was started right after the 2008 financial crisis, and so, you know, then it went public and then was bought in 2021. And so has it been, you know, been tested? It's been four years, three-plus years as part of Apollo. You know, I don't think there's been a test. This might be a test. There's, you know, some concern that, you know, if regulations change or interest rates, you know, go up rapidly, it could be a problem. You know, but I think they're pretty confident that they've created something that is certainly less dangerous than a depository institution, and so, you know, where the deposits can just leave immediately and the assets are long-term. I mean, I think it's a phenomenon. You know, the market was going crazy for it, loving it, investors were loving it, and it's really not been tested yet. And, you know, the last week or so, there's been a little test, and the stocks have come down quite a bit, a staggering amount, frankly. But I don't think there's any near-term risk of a meltdown like we saw with Bear Stearns and Lehman Brothers and others in 2008.
My friend, who's done a lot of research on this, says the big problem with Athene and these other private equity insurers is what they call the Bermuda Triangle. So they create these offshore reinsurance companies in Bermuda. So if we look at, I don't know, I'll say a conservative company like Globe Life or, I don't know, Lafayette Life or MassMutual, you can look at their books and you can see what they own and how many treasuries they have and this. But the level of opacity, you can't really see what these private equity-owned insurance companies are actually doing with their money. So you could see, okay, why Silicon Valley Bank went under is because they did this, you know, they bought one duration, then when the interest... But generally in insurance companies, they're supposed to buy treasuries, hold on to them for a long time, hold on to the debt for a long time, and then you could see, okay, their credit quality is A++ or A+, you know, like a mutual insurer or even a stock insurer. You can kind of see what they're doing. With these private equity insurers, because they're doing everything in Bermuda, you don't have that level of clarity and transparency. So he's worried that they're doing things that are probably a little bit more risky with those monies. And I don't know if he's right. And in some ways, it looks like it was a good deal the last, you know, 15, 16, and 17 years. Security Benefit's done well. There's been a lot of them owned by private equity. But he's always worried that this will be the next, you know, thing to go under. So I didn't know with your background if you...
Well, I would just say that, you know, if your friend wants to see what they're up to, you know, there's actually quite a bit of information because, you know, Athene itself, the insurance company, is based in Iowa, and so there are statutory filings that they have to make, hundreds of boring pages that actually list pretty much all of the assets that they're invested in. So you can actually see what they're invested in. But what's clear, too, is they've got a lot of money invested in riskier debt instruments, not just senior secured. You know, there's a lot of senior secured debt, but there's a lot of riskier, higher-yielding debt, too. It's a fine line that has to be walked, and, you know, so far they believe they're walking it. But, you know, so, you know, if you talk to people at Apollo, of course, they think this is like the greatest thing ever. If you talk to some of their competitors, they note the risk because Apollo has become a principal in this, not just an agent. In other words, a lot of this is on the Apollo balance sheet, and of course, Athene is part of Apollo. And if you talk to people like I have who are sort of watchdogs in the industry, they are concerned. They are concerned because of what they see as some of the risky assets that they think are risky. I mean, there's a lot of degrees of risk. So, you know, just because you use the word risky doesn't mean that, you know, the house of cards is going to come down. But, you know, obviously, the higher you go on the risk scale, the more reward you get. But there are, you know, the risk of default is higher. And so, but again, I think, you know, we've been in a relatively benign interest rate environment for, you know, since 2009, since certainly 2022 when we were in a zero interest rate environment, and interest rates have gone up since then, both the Fed level and, you know, in the market levels, long-term debt levels. So, you know, there are risks, and, you know, regulatory regimes can change, regulatory requirements can change, and, you know, Athene could get caught in, you know, in a trap like that. There certainly have been insurance company defaults and liquidations in the last year or two, so it's not something that doesn't happen. It does happen, and so, you know, it's important to be aware. It's not all of which is to say it's... there's this, like, again, before the last week or so, there was this euphoria about Apollo and Brookfield, and Brookfield bought American Equity, Ares bought Aspida, formed it...
Well, who's... and Bain just today announced a 10% stake in Lincoln, I believe.
Well, a 10% stake is different. That's like an investment as opposed to, you know, Athene is Apollo and Athene is Brookfield, and, you know, they're together, right? They're one. And Apollo's even, because Brookfield sort of is like a holding company that owns, you know, a number of different businesses, whether it's infrastructure or real estate or insurance. You know, and they also own, you know, a distressed debt firm, Howard Marks's firm. So Apollo, though, is, you know, all in on this. They're quite integrated. It's the vision of Mark Rowan. It's proved to be extremely lucrative and sort of a bonanza in the stock market until recent, until this past week. And I think, you know, once this settles out, if it does settle out, that's a big if, we don't know yet, if it does settle out, then I think, you know, Apollo will resume its upward trajectory. But that means, you know, still the jury is out on whether this new paradigm, this sort of marriage between private equity and private credit, you know, the now-dubbed alternative asset managers, has got the same kind of flaws that, you know, the depository, you know, the investment banks and the commercial banks of the past, because of their structure, has, you know, really caused various financial crises over the centuries. Whether there's actually a new paradigm in place now that's less risky and safer, the jury is definitely still out on that. Although, you know, clearly the Apollo principals feel like they've created something new and built a better mousetrap. So we'll have to see.
Yeah, my two friends are industry watchdogs. So Tom Gober is a former forensic accountant, auditor. Are you familiar with him?
I've talked to Tom. Tom is worried about this.
Yeah, and he seems like he knows what he's talking about.
I mean, he definitely seems to know what he's talking about. And what he told me is in the book, and it's in there, and he's approved what I wrote about him. And because I want to make sure I got it right, I critique him too. I don't totally buy into what he's saying because private equity can be an instrument of good in these companies. But I think he's just saying, well, I don't know what they're investing in. You know, he has this ratio he calls it the TSR ratio.
Yeah, he's a smart guy and seems like high integrity. So you think there's some truth to what he's saying that you're worried about?
I do, because I've heard it from competitors who I also have a lot of respect for. The only reason why I challenge it sometimes is, you know, well, who's paying Gober now, you know, or who's paying these people, you know, because if I'm a mutual insurer...
No, my sense is Gober is sort of in the expert witness camp.
Yes, yeah, so I think he's just looking at the numbers.
Yeah, look, he can at least, unlike 99.9999% of the people in the world, he can actually look at these statutory filings and make sense of them.
Exactly, yeah. But I remember talking to him about, because I'll go to him and I'll ask him about, you know, basically every new company he doesn't like, you know, every private equity company, like, who would you trust? And, you know, he does tell you, he ranks them. But what I got is it's really the thing he doesn't like is the level that he can't see what they're doing. He can't look under the hood as a former regulator, auditor.
You know, but I always tell him and his other friend Barry, you know, they could be doing good, you know, with the things under the hood that you can't see and just be doing it for less fees and less regulatory oversight. You know, it could end up being a win, right?
Yeah, I mean, Apollo's Apollo, Athene is not the cheapest out there, but they're the biggest at this point and probably the savviest investors and probably the best originators of private credit. It's a pretty compelling package if you're somebody who's interested in annuities and preparing for retirement. I mean, I've spent a lot of time, obviously, talking to Mark Rowan, who's the CEO of Apollo, who I've known for a very long time and is a very smart guy. And one thing he said to me that really stuck with me, you know, in terms of writing this book and just about human nature, is that, and this is so interesting because it's one of the flaws of the fractional banking system and, you know, borrowing short and lending long, which gets banks in trouble all the time, and that is I think we as humans feel that we don't feel comfortable and safe unless we can get our money out, you know, right away. Like that's why if you put it in the bank, then, you know, you go to the ATM machine, you can put your card in, you can push some buttons and you can get your cash. Or, you know, you can do that all day long if you want and get your cash out. If you have the app on your phone, you can push that around and take out a, you know, withdrawal. I think the point that the people at Athene make, which is pretty interesting, is, you know, in truth, we don't really need our cash on demand. And so we're foregoing, you know, a fairly meaningful return on that cash. Like if, like, you know, I have cash in my JP Morgan account and I get one basis point a year, that's what they pay me, 0.01% a year.
Well, we got to talk about that. If you're a client of ours, you get like 4.04.
And if I put my money at Marcus at Goldman Sachs, I get about four. And if you get an annuity, I don't know what it is. I don't know whether it's four or five or the yields now on a 10-year.
Like they sell, to be fair, I talked about the negatives. By the way, I notice, you know, the yields, the 10-year yields now on the indexing type, it's like six to seven over a 10-year historical. Not guaranteed, but your principal is protected.
No, they have a compelling story for sure. Yeah, what it says to me is like if JP Morgan Chase is paying you one basis point on your checking account and two basis points on your savings, and Goldman Sachs Marcus is paying you 4%, that to me is a very simple statement that's being made, which is JP Morgan Chase doesn't want your deposits, doesn't care about your deposits, would prefer if you didn't put your money in the bank with them. Goldman Sachs wants your money, wants your deposits. People who want things are willing to pay for them. People who don't want things aren't willing to pay for them. So why do I keep my money at JP Morgan Chase in that scenario? I keep some of it there because it's, you know, inertia is a very powerful force and it's just I've done that for 40 years and it's just easier at this point. But I also put money in Marcus because I can see that they want it and are willing to pay me for it. And that's, by the way, Marcus is, I basically can still get my money immediately and I get roughly 4%. So if I had an annuity or, you know, a seven-year annuity or something, I don't know what that would pay, but, you know, if I'm willing to lock up my money for that period of time, you know, and literally not get it but get the interest, then I'm going to get a much higher reward. This feeling that you got to have your fingers on your cash at all times, that is really actually a very dangerous concept financially because that's why Silicon Valley Bank went down the tubes. The people at Silicon Valley Bank, you know, who had a very glam kind of reputation for a while, you know, those people who put their money there were trigger-happy. They took their money out at the first sign of trouble. Meanwhile, the irony is that Silicon Valley Bank, the assets were invested in long-term treasuries, which, you know, I'm sure they thought was the safest thing they could possibly invest in. And they are the safest thing you can possibly invest in. But that goes to the whole problem of the structure of fractional banking. I mean, it is so flawed. It is fundamentally flawed by design. And we live with it because it really kind of blows up once every 20 years and the rest of the time is fine. As long as everybody doesn't want their money at the same time, it's always going to be fine because you put your money in the bank and there's this fiction that your money is at the bank, but of course your money is not at the bank. It never was at the bank. If it were at the bank, the bank wouldn't make any money off it. So what you like JP Morgan does, why is JP Morgan making $52 billion of net income a year? And I didn't even see what they did today in terms of their first quarter net income. I'm sure it's on track to do even more than $52 billion even in these rough markets because they're getting their raw material for free. They're paying me one basis point for my money and they're what, two plus almost three trillion of deposits, they're paying nothing for them. That is their raw material. What other business on the face of the earth pays nothing for their raw material? They pay nothing for their raw material and then they lend it out at big spreads. And so if you look at their interest income line, it's gargantuan. Of course it is because they're paying nothing for their raw material and they're lending it out and investing it or whatever the heck they do with it and they're making huge profits on that. They don't want my deposits because they're not paying anything for them, but they get them anyway.
Yeah, fantastic business.
Let's go, let's get a bank together. Let's go buy a bank, get some money.
I'll do it. That's true. I mean, what a great business, banking. It's a better business, by the way, than the annuity business because the annuity company has to have 100% reserves for those annuity deposits. So it's a totally different business model. But yeah, I'd rather own a bank than an insurance company for sure.
So I want to be clear, I am in no way equating Silicon Valley Bank with Athene, but we got into Athene and annuities and banking because of the new book coming out next year, which I want to buy and I'm sure you all will want to buy, called Apollo Unbound, kind of a behind-the-scenes look at Leon Black and Apollo. And Apollo and Athene are kind of synonymous. So I said, 'Hey, is that risky?' What I was talking about is sort of like an archaic debate in the insurance industry between people who say they want more transparency, but even still, there will not be a Silicon Valley-type experience with Athene. My question is the quality of the debt. What are they buying? Are they taking a little too much risk with retiree money? So I would say they're very different things, but just was curious on your take on there. Any thoughts on the recent bond market selloff? That kind of makes me worried more than the stock selling off. Do you worry about that?
I totally agree with you there for a number of reasons. You know, people who invest in the stock market, that by definition is risky. I mean, you know that, you know, it's money that is under no obligation to be paid back. Right, you invest it, you could lose it, and you've got no claim. Equity holders in a bankruptcy can make a fuss, and if they're represented by... I remember on several occasions when I was a bankruptcy banker at Lazard being opposite Wilbur Ross, who became Treasury Secretary and Commerce Secretary under Trump, and he was really gifted. And he would often represent the equity holders in bankruptcies where I was involved, and he managed to pick the pocket of the debtor and always get a return for the equity holders. It was a beautiful thing to watch, although I was on the opposite side of him. But normally, equity holders, you know, get wiped out. Creditors, of course, have a contractual obligation to be paid both interest and the principal back. So, you know, when the bond market, you know, you would think after, and this did happen for a day, when, you know, Trump announced his, excuse me, I think they're crazy, crazy tariffs. They have no basis in fact or theory, whatever it is that he believes. But, you know, he's the president, and he can do this apparently, apparently pretty much on his own and get everybody to try to believe that he's doing the right thing. So, and the market, the stock market tanked. There was a flight to quality. You know, the 10-year was at around 4% when he started this insanity and then went down to like 3.885%. So, you know, yields came down, price of the bond went up, so the market, the bond market rallied. And then since then, when the reality kicked in about what he's doing and how nuts it all is, bond investors just said, you know, I'm out of here, and they fled. And the yields are now at 4.5-ish percent. I mean, a major move up in a very short period of time. And, you know, that's got implications for lots of things, for corporate borrowings, for mortgage rates, for car rates, for annuities, for all, you know, all these things that are more or less tied to the 10-year Treasury. But the bigger problem always is, and I've watched this many times, and it's when credit just dries up and there's a credit freeze or a credit crunch, and credit just isn't available, you know, at any price except for, you know, the best borrowers, and then they probably have to pay more. You know, spreads have widened out. You know, spreads were at historically low levels until this tariff palooza, as I call it, started. And, you know, now if you look in the high-yield market, which, you know, I love to look at the high-yield market for what it tells you about people's feelings about risk and how their feelings about risk are changing and how much risk they're willing to take. I mean, the yields in the high-yield market shot up to eight and a half percent from around seven and a half percent before this. I mean, another huge move. You know, we saw a similar kind of huge move back in, you know, February and March of 2020 as the pandemic was rolling out that resulted in an even bigger spike upward to like 11, 12% on the average yield on a junk bond. But, you know, this is a pretty big move and beginning to be quite worrisome. You know, I noticed the Fed today is saying they'll step in if they have to. Well, you know, they had to in 2020, they had to in 2008, and, you know, frankly, if they have to again, it's pretty damn embarrassing, especially since this is a totally self-inflicted wound and doesn't have to be this way. And who knows what it's accomplishing or why. But, yeah, but these bond yields have spiked up, and that's the signal that people are getting very nervous about credit. And when investors are nervous about credit and are demanding higher yields, then issuers are basically begin to get locked out of the market. If issuers can't issue debt, then, you know, we have a credit freeze and credit crunch, and it's a virtual guarantee of a recession. So we're on the precipice now of that unless our master chief decides to reverse course on this lunatic binge he's on.
Didn't he kind of reverse course this week, though, the 90-day pause?
I mean, I think people initially thought that he was reversing course or doing something. You know, he said he would never do the pause, then he and all of his surrogates said he'd never do the pause, then he does the pause. Markets, you know, exploded, of course, upward, and then, you know, on Thursday, you know, gave most of that back, and bond yields went up again. And so I think, and he's saying, you know, we're putting 145% tariffs on our third-largest trading partner. So, you know, I don't know. It's all such a cockamamie approach. You know, again, people think there may be some validity to what he's trying to do in the long run. I don't buy this personally. You know, I think our trading relationships are just fine. You know, our, the wealth of this country has increased dramatically. Nobody's, you know, people have lost manufacturing jobs. Yes, that's true. But do people want those jobs? Even if that all came back in 10 years, are there going to be people who want to make vacuum cleaners? I don't know. You know, we are a service-oriented economy. The Economist magazine last October said that our economy was the envy of the world, and certainly not anymore. So maybe there's something to trying to bring manufacturing back. That is a 10-year thought process and analysis of cash flows and internal rates of return and return on capital and return on equity and all those sort of Wall Street finance terminologies. That's not happening anytime soon. What is happening soon is that what you buy at Walmart, since 80% of it is, you know, imported from China and elsewhere in the Far East, is, you know, going to go up dramatically relatively soon, much sooner, of course, than a new manufacturing plant is going to be built in the Midwest or anywhere else. So, you know, if he feels so strongly about these tariffs, he, you know, he's made it the number one global issue. Like he also said the other day that, you know, we got to allow, it's like a Seinfeld episode, you know, we got to allow for more flow on the showerheads, okay? And, you know, he deported a guy to El Salvador prison who should not have been deported. I mean, there's so many things that are going on that he's doing that aren't getting the attention of these tariffs because he's made it this global issue. He's raised it to like the most important issue of the day. And if this is something he feels strongly about, it would have been much better served to sort of have unilateral discussions in conference rooms that are boring and don't get any headlines or attention, that kind of happen all the time, these trade negotiations, and cut deals with these people and do it quietly and not upset both the bond market and the stock market and everybody's confidence in them.
The bond market worries me totally. That's where the big worry is. That's why everyone's going crazy now. The market's good until things break, and I don't, you know, we have that 'oh crap' moment. That's what worries me about this. Now on the tariff side, and we're going to get to your research in AI. You've done a lot of study in Wall Street and AI here. Here's what I'm thinking. AI was at a conference, Llama for... Are you a big student of AI?
I'm a little student of AI. I don't like that AI hoovers up my content for free without my permission or compensation, but other than that...
But in a service economy like you mentioned, we're predominantly service, and I agree, my point is who wants these factory jobs? Nobody. But in five or 10 years when AI replaces 90% of the service economy, those people are going to need jobs. And what about the robots that Elon is going to deploy in all these manufacturing plants? So we're all going to be farmers.
Yeah, we're bring back, make America farm again.
But how do you think... Let's talk about AI for a little bit, and we're going to talk about retirement. I don't know. I mean, I do think there is a valid point of bringing manufacturing, especially with what happened with COVID and supply chain shortages and all that. I think there's a benefit to bringing manufacturing. Also, if you read Art of the Deal, which he didn't write, I know, but he kind of takes some unreasonable position that causes people, you know, which happened, markets crash. Now he's basically caving and is going to negotiate fair deals, and he'll be lauded a hero in 90 days. I mean, except the China thing. The China thing worries me because you can't like 150% or whatever, 125% tariff, 145 sounds ridiculous. They've been around 5,000 years. They take a long-term view. You know, they're going to do fine without us. They don't pick fights. I mean, they don't start wars. If you've studied Chinese history, they think where we think quarter by quarter, they think a hundred-year plan. Everything we have, they have. But there is some truth to how they knock us off on trade deals. And I think the bigger offense to China in trade is more the intellectual property abuses. Now, I don't know if the tariffs are really the issue. It's more of the, you know, you have somebody who manufactures something in China. Why does Apple manufacture iPhones in China? Cheaper to manufacture them there because it's cheaper. They have more people. They'll work for less wages. Their costs are lower, and they send the phone over here when it's done, or we finish it here, whatever it happens. And they sell it for whatever, $750 or $1,000 bucks, whatever it is. You know, we changed all of our lives, and if it were made here, it would be $5,000. How are we disadvantaged by that? Is our pocket being picked? Are they taking advantage of us? Apple is entering into this willingly. China is entering into this willingly, and consumers are buying it willingly. I have a trade deficit with my barber.
Oh, I was going to bring up the barber.
Yeah, yeah, go with the barber example. That's a great example. I'm against tariffs. I'm a big opponent of tariffs, but bring this up because this is something people don't think about, the barber analogy.
