#Apollo

What is capital?  We talk a lot about how much banks should hold and what more bank capital means to whom.  But few have said much about what regulatory capital actually is.  That’s a signal, strategic omission as private-equity firms spin a tale of capital resilience without actually having anything comparable to what banks must raise even as nonbanks take over more and more financial markets key to stability, economic equality, and macroeconomic growth.  Let nonbanks compete wherever they can, but suggestions that private equity hold more capital than banks is a whopper that cannot go unchallenged as lending migrates to these powerful firms.

In a New York Times article over the weekend, Apollo’s chief executive reiterated a point he’s made before:  that his firm’s lending activities are backed by “more Tier 1 capital” than banks are required to hold.  As the Times article then observes, the assets that “constitute” Apollo’s capital and that of other PE firms are low-risk and thus a source of “permanent capital.”  Or so it is said.

But the assets Apollo calls capital are just assets – not capital of any tier – under banking rules.  Assets they also are when one remembers how balance-sheets work.  The billion-dollar balance-sheet question is always what stands between assets and liabilities if asset valuations drop.  For banks and, indeed, anyone else with a balance sheet, that’s capital – not more assets deepening the void between assets and liabilities.

The term “permanent capital” actually derives from insurance regulation.  It …