Apollo has borrowed over $15bn from the Federal Home Loan Bank (FHLB) of Des Moines, one of 11 privately owned but government-sponsored banks. On March 25th the private-markets giant made its first appearance in an annual league table of institutions receiving FHLB loans, coming in at number seven. (JPMorgan Chase was top; five smaller banks made up the balance.)
The firm is not an obvious candidate for government subsidies, even if they involve implicit guarantees instead of cash, and still less for largesse funnelled through a bank. After all, the best argument in favour of private credit—the lending done by Apollo and its peers—is its distance from banks with flighty funding backstopped by the state.
What is going on? FHLBs were created during the Depression to increase homeownership by lending against housing assets. Since the market assumes they would not be allowed to fail, they borrow at rates similar to America’s Treasury. Of their $1.2trn in total borrowing, more than half comes from money-market funds (MMFs). FHLBs dole out loans to the banks and insurers that own them. During crises, they provide liquidity. To Apollo they offer cheap funding for Athene, its enormous life-insurance arm based in Des Moines.
This strange state of affairs reflects the recent history of FHLBs. The failure of Washington Mutual, a bank, in 2008 deprived FHLB Seattle of its largest customer and compounded bad investments in mortgage-backed securities. In 2015 FHLB Seattle merged with its Iowan cousin. FHLB Des Moines is now, improbably, the largest of the FHLBs.
During the global financial crisis of 2007-09 an MMF holding Lehman Brothers’ debt “broke the buck”, lowering its share-price value from the $1 investors thought was safe and causing panicked redemptions. Regulation subsequently pushed MMFs away from lending to banks and towards government-backed debt, including FHLB debt, which now comprises 11% of MMF assets. During the turmoil of 2023, when banks’ borrowing from FHLBs spiked, some 40% of deposits fleeing banks for MMFs were recycled back to them this way.
Stringent banking rules were another result of the financial crisis, clearing the way for rapid growth in private-credit firms, including Apollo, as they seized market share from their now-constrained rivals. Athene sells more annuities, a retirement product, than any other American insurer. It invests the funds in private debt, often originated by Apollo itself.
One conclusion from these post-crisis tales is that the impact of financial regulation is about as predictable as the stockmarket. Another might be that the smartest people on Wall Street have found a way to dupe Main Street and compromise financial stability. Is that right?
Herbert Hoover, of dam fame, set up FHLBs to help ordinary folk and Apollo is the top dog in an industry frequently accused of doing the opposite. Regulators talk disapprovingly of the growth of insurers’ “non-traditional liabilities” (anything but selling insurance). FHLB lending to banks has fallen since 2023, and borrowing by life insurers has risen to $160bn, a record. The market for funding-agreement-backed notes, another type of debt, is also running hot.
Yet the reality is more complex. Although lending to Apollo does little to advance the FHLBs’ “mission” of supporting housing finance, nor do most of their operations. There is little evidence that life insurers’ embrace of debt is making them vulnerable to runs, as it did during the financial crisis.
Some propose torturing the FHLB system into closer alignment with its original purpose, by altering its membership or lifting the share of profits earmarked to support affordable housing. Instead, it should be put out of its misery altogether. There are better ways to implement housing policy. Any cog in the financial system that relies so much on implicit government guarantees is a faulty one. Besides, in a crisis, the option of FHLB funding may postpone the moment at which troubled banks turn to the Federal Reserve for help, worsening the eventual clear-up.
The Trump administration is considering plans to privatise Fannie Mae and Freddie Mac, the mortgage buyers that were placed in conservatorship during the financial crisis. Ending FHLB privileges would not yield a similar cash prize. But it might appeal to the president’s apparent appetite to slash state involvement in markets—while also making them safer. ■
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