In 1989 a federal regulator let a savings and loan count a certificate as capital. It was worth nothing, and everyone who signed it knew it. A few years later the same regulator declared it worthless, and overnight the thrift went from well-capitalized to one the government could padlock on any morning. Rod Dubitsky was inside it. He called the certificate phantom capital.
He is watching the same instrument today, on the balance sheets of the life insurers behind millions of American annuities, at something like a hundred times the size. That thread runs through the whole conversation, and it is where we open the show.
Rod is the closest thing markets have to a control group. His first day on a mortgage desk was Black Monday, October 1987. He worked the savings-and-loan wreckage from inside the regulator. He was at Moody’s when the instrument that would take down the world was invented two desks away, and he was the Credit Suisse analyst whose downgrade call ran a year ahead of the agencies. Same method each time: build the data nobody else would, then take apart the model everyone else trusted on faith.
We walk his whole career and land on what he and I are both staring at now, private credit, the insurers holding it, and the manufactured capital underneath.
A FEW THINGS YOU’LL HEAR
* The mortgage desk that opened the same morning the market crashed.
* The rating agency where he watched single-B bonds turn into AAA on a different floor, for five times the fee.
* The line he has repeated for twenty years: the absence of loss is not the absence of risk.
* The meeting where a trader begged him not to scare AIG, and he did.
* Twelve bonds rated AAA while the loans underneath them had already defaulted.
* Why he thinks there are no A-rated insurers left, only B through F.
* Why this one is bigger than 2008, and why being early feels exactly like being wrong.
Late in the conversation he says the people running this would have bought the Dodgers with your money if they could. I just wrote about two insurers that did.
Watch the whole thing. Ideally right before bed, then send it to anyone who needs to sleep well.
❧ ❧ ❧
For those who prefer YouTube:
A companion to the first episode of the Mispriced Assets Podcast, in conversation with Rod Dubitsky. The judgments here about particular insurers and rating agencies are often shared but our own respectively, drawn from the episode and from our published research; the firms named would contest them and are entitled to. Dubitsky writes at The People’s Economist. None of this is investment advice.
Get full access to Mispriced Assets at mispricedassets.substack.com/subscribe
