Insurance Is Where the Money Is

One basic weird thing about the financial industry is that it consists of a lot of big pots of money that you can buy for less money than is in the pot. Occasionally there are stories about how a pharmaceutical or tech company is trading for below the value of its cash and marketable securities, and how weird and shocking that is, but it is absolutely the norm in the banking and insurance industries. JPMorgan Chase & Co. has a stock-market valuation of about $342 billion, but it has something like $600 billion of cash and cash-like investments and another $675 billion of trading assets and investment securities.1 American International Group has a stock-market valuation of about $37.6 billion, but it owns something like $240 billion of bonds.2 If you could buy all the stock of JPMorgan or AIG, you’d immediately control a much larger pool of money than you spent for the stock.

This is not a magical free lunch or a scam; it is just another way of saying that the financial industry, compared to more normal industries, tends to operate with a lot of leverage. Banks have a lot of money, much of it invested in relatively liquid financial assets, but most of that money is borrowed (from depositors, etc.) and will eventually have to be paid back. Insurance companies have a lot of money, much of it invested in relatively liquid financial assets, but most of that money comes from insurance policyholders and will eventually have to be paid back. The banks and insurance companies are just holding all that money in trust for someone else. That’s what a financial institution is; it’s a business that holds money for other people.