Private credit making itself at home at Federal Home Loan Banks

Crowded house
In theory, insurance companies should be among the most boring investors out there. The business model requires that the company have some liquid capital on hand so it can pay out claims when needed (ideally, never, but life isn't always ideal). They should have solid, liquid, mundane balance sheets. It would not be a good idea to have a substantial amount of capital tied up in or with opaque, exotic, possibly illiquid investments.

Government-backed banks should also be among the most boring investors out there, and I'm speaking here specifically of the Federal Home Loan Banks. These are quasi-private institutions, similar to the Federal Reserve, that were chartered back in the depths of the Great Depression with the goal of supporting the housing market. Their only goal is to support the housing market. It would not be a good idea to have a substantial amount of capital tied up in or with opaque, exotic, possible illiquid investments.

Private credit is not among the most boring investors out there. Apart from crypto, private credit is one of the most frothy, exotic, excitable, and opaque segments of the capital markets.

Would you put all three of those players together? Well, they are, as our Kate Berry reports this morning. Insurance companies that are subsidiaries of private-credit firms are among the most active tappers of the FHLB system. Is that a problem? Er, no? Maybe? At the very least it's worth asking how lending to private-credit firms furthers the FHLB system's main goal of supporting the housing market, which is the question a number of consumer groups are asking. Also, I would point out that arrangements that often look super-peachy in up markets can turn into rotten fruit in down markets, and you never know for sure until you're in the down market.

Citi lights
Of course, things change. Once upon a time people thought that investment banks should never be connected to commercial banks. For 60 years that was an iron-clad law, a law that came into existence during the Great Depression, like the FHLB system. Then, during the dot-com rah-rah '90s, Sandy Weill and John Reed, the heads of Travelers Group and Citi corp, respectively, decided that stuffy laws from the 1930s weren't needed anymore. So they shoved the two companies together and basically forced the repeal of the Glass-Steagall Act.

It worked pretty well for a few years. The newly rechristened Citigroup was a banking "supermarket" that offered everything. And its stock rose sharply. Until the dot-com bust. Then it rose again. Until September 2008. And then Citi shares languished. For years. Its earnings haven't shown any appreciable trajectory, according to data from AlphaSense. It lost $28 billion in 2008 (to be fair, everybody lost money in 2008), made $10.6 billion in 2010, made $22 billion in 2021, $9 billion in 2023, and $14 billion last year. I mean, I guess people are buying the the groceries, but investors have not been enthused. Even today its stock is only a fraction of its pre-2008 price, whereas JPMorganChase is magnitudes higher than its pre-crash price.

But Citi must feel pretty good about its position because on Thursday it is holding its first investor day in four years, as our Allissa Kline reports. Jane Fraser will lay out the bank's multi-year blueprint, touching on profit targets, risk management, AI and plans for its retail branches. Will investors appreciate the special attention? We'll find out.