Private Ratings.
Overall liquidity.
“Most mornings I learn more from New Items than I do from all of the traditional papers I read combined.” — Michael Blair, former presiding partner, Debevoise & Plimpton.
1. Columbia Business School Research Paper:
The rise of private markets has placed a growing volume of opaque debt securities onto the balance sheets of regulated financial institutions. The risk assessment of these assets is increasingly outsourced through private ratings, which are disclosed only to the issuer and select investors rather than disseminated publicly. We show that private ratings systematically understate credit risk and depress required capital. Focusing on the U.S. life insurance sector, we document a ten-fold increase in the use of private ratings since 2018, predominantly in opaque securities and concentrated among large and PE-owned insurers. Within the same rating, privately rated bonds are twice as likely to impair than publicly rated bonds, yet are downgraded less often, not more. A conservative counterfactual implies that eliminating this gap would increase the required capital charges on insurers’ bond holdings by $4.5 billion per year. However, the gap disappears for bonds that also carry a public rating. Exploiting a 2021 regulatory reform, we provide evidence consistent with insurers strategically using private ratings for capital relief. We also show that regulation cannot fully substitute for market discipline: the regulator’s own internal assessment is more conservative but capacity-constrained, and disclosure reforms do not close the gap. Our results suggest that while regulation can require that credit be rated, it cannot provide the market discipline that makes a rating informative. (Source: papers.ssrn.com. The paper has not been peer-reviewed)
2. US life insurers held about $807 billion of the most illiquid kind of fixed-income instruments last year, according to a new study by Moody’s Corp., raising concern about overall liquidity and concentration of assets in the sector. Such holdings reached 20% of the life insurance industry’s $4 trillion fixed-income portfolio at the end of 2025, up from 18% the year before, according to the report released Monday. The securities used for those calculations bore private-letter ratings, didn’t carry a formal rating assigned by a third-party firm or couldn’t be valued with observable market prices. (Source: bloomberg.com)
3. Goldman Sachs and JPMorgan are exploring ways to trade on the cost of computing power, according to people familiar with the matter. That includes trading futures contracts tied to rental prices for graphics processing units, among the scarcest resources of the AI boom, which exchanges plan to list later this year. The discussions show how the hundreds of billions of dollars pouring into data centers and chips are reshaping financial markets. For banks financing the AI buildout, futures could provide a way to manage the risk of a compute glut down the road and help their clients hedge their own compute needs. (Source: theinformation.com)
4. Anthropic’s Mythos Preview can now turn newly disclosed software vulnerabilities into working exploits in hours instead of weeks, according to new Anthropic research shared first with Axios. AI’s ability to find new bugs has been getting most of the attention. But Anthropic’s findings suggest advanced models may be just as effective at rapidly weaponizing flaws that defenders already know about. That could dramatically shrink the “patch gap” between a vulnerability’s disclosure and widespread patching. (Sources: axios.com, red.anthropic.com)
