November 22, 2025 • 31 mins
We’re sharing another podcast we think you’ll enjoy, The Big Short Companion from Against the Rules, hosted by bestselling author Michael Lewis. The Big Short is now 15 years old and to mark the occasion, Lewis narrated a new audiobook version of The Big Short and is looking back on how the 2008 financial crisis still affects the world today. To make sense of Wall Street’s hangover from the crash described in The Big Short, Lewis calls up Matt Levine, author of the Money Stuff newsletter for Bloomberg Opinion. He’s also a former investment banker who was working at Goldman Sachs during the market crisis of 2008. He and Lewis talk about Bitcoin, bank regulation, and new forms of risk-taking—all ways Wall Street has changed since the crisis. Find The Big Short Companion from Against the Rules wherever you get podcasts and The Big Short audiobook wherever you get audiobooks.
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Episode Transcript
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Speaker 1 (00:08):
Pushkin.
Speaker 2 (00:16):
I'm Michael Lewis and I'm Lady Jean Coott.
Speaker 3 (00:18):
This is the big short companion podcast on Against the Rules,
and today's episode is all about the financial consequences of
the two thousand and eight recession. Michael, when you said
you wanted to do this episode, what consequences were you
thinking about?
Speaker 2 (00:34):
You know, the things that all kinds of things sort
of popped to mind. When you look at how Wall
Street is now versus how Wall Street was in say,
two thousand and seven, you can see that like the
big investment banks Morgan Stanley, Goldman, Sachs are far or
less prestigious to work for. They're not getting first cut
of the college graduates. You can see that a whole
(00:55):
new set of institutions Jane Street, Citadel, Jump Trading have
arisen to take risk that previously we're in the investment banks.
It's like the risk who gets to take the risk
has changed and the banks just generally have been removed
from the process. That's like one thing. Another thing is
like Bitcoin is a response, or it seems to have
(01:16):
been a response. The guy who created it wed no
one knows who he actually is, but who calls himselves
to Toshi made it very clear that it was a
response to the mistrust he felt on.
Speaker 1 (01:25):
The back end of the financial crisis.
Speaker 2 (01:27):
I just wanted to isolate the financial consequences and talk
to someone who knows more about this than I do.
Speaker 1 (01:32):
See what we thought. Matt Levine.
Speaker 2 (01:34):
Like matt Levine from the moment he appeared on the
scene and started writing his Bloomberg column, I thought, thank God,
he's paying attention to this, so I don't have to, Like,
thank god that I can just like I mean, I
could come back in and dip into Wall Street every
now and then for big narratives, but that I don't
have to monitor it in.
Speaker 1 (01:54):
The same way because he basically does it for me.
Speaker 2 (01:57):
You can, I can just read matt Levine. He cares
so much more about it than I do. Like he
cares so much more about the intricacies of finance. The
only time I cared is much about finance as matt
Levine was when I was actually working in it, and
then I was engrossed. But since then I have a
hard time caring. Sometimes he makes me care about it,
(02:20):
but I know he's also like, if it's interesting, he
will find it and point it out, and so I
can be a little lazy about it. I'm just going
to use his energy to get them.
Speaker 1 (02:30):
Across to you.
Speaker 3 (02:31):
I'm really excited to hear that conversation. Matt Levine is
a columnist for Bloomberg Opinion and host of the newsletter
and podcast Money Stuff. His conversation with Michael Lewis is
coming right up.
Speaker 1 (02:47):
First off, where were you during the financial crisis? What
were you doing?
Speaker 4 (02:52):
Okay, so when you say during the financial crisis, I
was on vacation when Lehman filed, it's you know, it's
such a cliche, but my cousin was getting married in
northern California and I was. I was in Napa actually
the day that Leman filed, and I woke up and
I looked at my phone or my BlackBerry or whatever,
(03:14):
and I saw that Lehman had filed. And I was stunned.
And I did the thing that everyone talks about, which
is I went outside to get coffee and everyone was
walking around being completely normal, and I had the thought
of like, what, like, do you not understand that the
world just ended? Because I was, you know, during the
financial crisis, I was working at Goldman as an investment banker.
Speaker 2 (03:33):
So you were at Goldman in a job in investment banking.
All this was going down and when so, when it
is going down, at any point do you start to think,
oh my my, I might not have a job.
Speaker 1 (03:44):
Of course you did have. You did have.
Speaker 4 (03:46):
Of course, of course how could you not? No, it's wild.
I mean there were definitely rounds of like off sudden.
You know, I was pretty fatalistic that, you know, either
it'd get laid off or I wouldn't. People on my
desk got laid off. I did not get laid off.
Speaker 1 (03:58):
Did you at any point? Sake? Goldman's not going to survive.
Speaker 4 (04:03):
You know, I was not sophisticated enough to have that thought.
Over time, I have come to understand how leveraged these
institutions are and were, and how little of a shove
it takes to push investment banks into bankruptcy, and how
close we were in the scheme of things to like
Lehman and Bear. I was on a desk we did
(04:26):
like convertible bond deals and we did not do a
deal for six or nine months. We had a master
file where it's like a spreadsheet where every time anyone
in the market did a deal in our sector, we
would like write in the details of the deal, and
it was blank. From I want to say, something like
September of two thousand and eight through March or April
(04:48):
of two thousand and nine was just blank, Like no
deals happened in the market. And so I spent six
months doing nothing and I did not you know, take
a long lunches or have vacation. I just sat at
my desk and panicked and tried to get deals to happen,
and no deals happened.
Speaker 1 (05:04):
Did you get a bonus at the end of O nine?
Speaker 4 (05:08):
I must have. I must have. Yeah, I did, you know,
I was down a lot from the previous year, but
we didn't get here it.
Speaker 2 (05:17):
Yeah. Did you ever find yourself on the other end
of Wall Street hate?
Speaker 4 (05:22):
Uh? Not, like personally, you know, I think that's like
Occupy Wall Street occurred around the end of my time
at Goldman, I think a little after I left, and
I would go and be interested in it, but like
I could see on TV hate for Goldman, but like
I never personally experienced it, and I kind of was like,
I don't know, there was a sense that it was
a little bit cool to be at a place that
everyone hated so much. It's like I felt like, oh, yeah,
(05:46):
look at us, everyone hates us.
Speaker 2 (05:49):
You know who also feels like that, people who work
at the irs. There's an incredible spread of corps because
they know everybody hates them and they think what they're
doing is virtuous, but they know everybody hates them and
so brings them together.
Speaker 4 (06:01):
I don't want to say that what we were doing
was like, you know, virtue is virtuous, but it was fine.
You know, led Blank find sns were doing God's work.
Speaker 2 (06:08):
I want to hear your thoughts about the consequences in
the financial industry of the crisis, what came out of
it that's still with us.
Speaker 4 (06:17):
Well. The thing that I most that I personally experienced
the most, that I personally most interested in, perhaps is
just a shift in in who does stuff in the
financial industry. I Mean, when I was at Goldban, Goldman
was in many ways like the place to be right.
It was the place that sort of generated all the
hedge fund managers that like did a lot of the
exciting deals. That was sort of the center of Wall Street.
(06:40):
And after the financial crisis, the power really shifted away
from the investment banks for a bunch of reasons, you know,
largely regulatory, like largely you know, one, all the big
the biggest investment banks like GOLBN became or were bought
by banks, so they became banks and they were regulated
as banks. And two, like you know, they'd almost blown up.
(07:01):
And so everyone kind of understood, both regulators but also
like the banks themselves and the shareholders understood they couldn't
be as levered and as sort of short term funded
as they had been in two thousand and seven. And
so the banks got much more careful about their balance
sheets and they could do fewer trades, but also the
regulators kind of prohibited them from doing a lot of
the prop trading that was the way that places like
(07:23):
Goldman made outsize profits, and also the way they attracted
and retained and trained risk takers, and that kind of ended.
And the result is that a lot of the sort
of high end action that occurred at the investment banks
ended up at what are you know, the big like
today are big hedge funds or the big kind of
(07:47):
you know, they call them alternative asset managers, like in
my way they called them private equity firms. But like
you know, the like Apollos and kkrs and Blackstones got
a lot more important because a lot of the kind
of like aggressive go anywhere balance sheet financing that the
banks used to do, the banks are afraid to do now,
and these big institutions with their kind of longer term
(08:11):
balance sheets can do that now. And so like, I
don't want to say no one wants to work at
Goldman anymore. I still have a fondness for Goldvin. People
still want to work at Golvin, but it's definitely like
the prestige locations on Wall Street have shifted to the
big hedge funds, the big asset managers, the big high
frequency trading firms. These are all places that are kind
of like closer to the center of the action because
(08:33):
they can take more risk. And the banks took so
Mu's risk in two thousand and eight that they can't
do it anymore.
Speaker 2 (08:39):
We all decided that these places shouldn't be doing it
because the risk gets socialized if they screw it up.
Speaker 4 (08:45):
Yeah, you know, it's I've become When I was a banker,
I was like, what are you talking about? Prop trading
didn't cause the financial crisis, And as I get older,
I become more sympathetic to the regulatory changes. I think
one the risk gets socialized if they screw it up.
But then also they are so levered, Like banking is
a business model, but also investment banking is as a
(09:05):
as it was practiced by the big investment banks in
two thousand and seven, is such a levered business model
where you have like a thin sliver of equity and
a lot of very short term you know, deposits or
demand funding that can drive up overnight and if you
get anything wrong, like you vanish and you like leave
a crater in the in the market. When like the
private credit firms are doing weird loans that you know,
(09:28):
twenty years ago it would have been done by Golban SSG.
Like those private credit firms have long term financing from
like you know, annuities, and they just they're not runnable,
like they won't blow up overnight, right, So there's a
lot of stuff like that.
Speaker 1 (09:42):
They don't have depositors, Yeah, they.
Speaker 4 (09:44):
Don't have depositors, And Goldman didn't have depositors in two
thousand and seven either, but like they had you know, right,
like overnight repo funding and it was a really risky
business model and I think people realize that. And this
is like the story of every financial crisis is like
you find a way to get a lot of short
term information and sensitive financing against you know, risky stuff
(10:04):
that you're up to, and then you blow up. But
I think, like all in all of the system, right now,
it feels less blow up of Ale than it was
in two thousand and seven because there is less of
that short term financing against like whatever people are up to.
Speaker 2 (10:16):
When we come back from the break, Matt Levine and
I talk about another consequence of the financial crisis Bitcoin.
I'm back with Bloomberg opinion columnist Matt Levine.
Speaker 1 (10:34):
All right, so the.
Speaker 2 (10:36):
First financial consequences is this kind of mini status revolution
on Wall Street where the people who were the top
dogs are no longer the top dogs, and because the
risks moved out of those firms and into other places,
and the status goes to where the risk is being taken.
Speaker 4 (10:50):
And that's a status revolution. It's also like substantively.
Speaker 1 (10:55):
You get a better financial model.
Speaker 4 (10:56):
I think. So it's debatable, but I think.
Speaker 1 (10:58):
So, yeah, Well would be the other side.
Speaker 2 (11:00):
I mean, if you have Apollo and areas in these
places who have long term funding against their long term loans.
That does seem like a more stable thing than what
Goldman was doing or even what City Bank was doing.
Speaker 4 (11:14):
The main thing that you hear on the other side
is that people call the shadow banks, right, like, the
banks are very carefully supervised, not always successfully, but there's
a lot of.
Speaker 1 (11:24):
At least somebody's watching them.
Speaker 4 (11:26):
There's a regulart who's watching the bank and telling them,
don't make that loan, that's too risky, right, or they
can theory that's happening with the private credit firms. They
can kind of do what they want because they're much
more lightly regulated because they don't have the crazy banking
funding model, because they're not too big to fail because
they're not you know, their losses aren't socialized. And then
you know, people do worry that leverage is creeping back
into the system because it has a habit of doing that, right,
(11:48):
private credit firms do get leverage from banks, so like
it's kind of circulating back into the banking system. And
you know, when you move away from like private credit,
like some of the of that banks used to do.
You know, I read about the basis trade, which is
you buy treasury bonds and you sell treasury futures and
it's a very very very low risk trade because those
(12:09):
are almost the same thing, but they're not quite the
same thing. And so people lever that trade up, you know,
thirty or one hundred times, And that used to be
a thing that banks do, and now it's a thing
that like, you know, the Citadels and Millenniums of the
world do. And you know, people definitely look around and say,
these things are much more lightly regulated than the old
banks were, and they're running out a hundred times leverage.
(12:29):
That seems risky, right, like, and there are occasions where
the basis trade kind of blows up, and you know,
they're academic saying the FED should have to step in
when that happens, and so you know, there's in the
long run, you know, you say that, like you socialize
the risk when when the banks blow up. But like,
I'm not sure that was what people thought in like
(12:49):
two thousand and six, I'm not sure people thought that.
You know, you know, Jimmie Morgan and City Group had
deposit insurance and FED access and everything, but like Morgan,
Stanley and Goldman and Lehman and Bear were investment banks.
They were kind of more lightly regulated things, and then
it turns out that when they all blow up, the
sort of rational thing to do is to socialize the losses. Right,
(13:11):
But that was not obviously, It's just what happened, right,
And so you can imagine that happening again with you know,
if the big hedge funds that had become so central
to the financial system find a way to blow themselves up, like, well,
those losses get socialized.
Speaker 2 (13:23):
Maybe when I asked you what the financial consequences are
of the of the crisis and you said the big
win you were focusing on was I didn't think what
you were going to say what you did say.
Speaker 1 (13:34):
I thought you were going to say bitcoin.
Speaker 4 (13:36):
Yeah, I mean bitcoin is is. It's hard for me
to know how how directly bitcoin is a consequence of
the financial crisis. I mean, it's certainly the case that
like the Bitcoin white paper references the financial crisis that
it seems like the pseudonymous Satoshi Nakamoto was, you know,
upset by the leverage in the banking system and by
(13:57):
the socialization of losses in the banking system and want
a financial system that didn't look like that, that wasn't
fractional reserve banking that wasn't risky, that wasn't based on
you know, powerful intermediaries who like got government support, but
that was peer to peer and decentralized and safe, right,
And I think that resonated with a lot of people.
(14:18):
There's a like countercultural element to crypto and bitcoin where
people got into it in part because they didn't trust
the banking system. But I don't want to overstate that,
because crypto quickly replicated a lot of the elements of
the levered, fractional reserve, risky financial system as you well know, right.
(14:39):
I mean, like, if you look at the career arc
of Sam Bankman, Freed, like no part of what he
was doing was a reaction to the risky financial system
and traditional finance, right, Like everything he was doing was
recreating that system with crypto.
Speaker 2 (14:53):
One of the many ironies of crypto is that it
seems to be born out of mistrust of institutions and intermediaries,
and then it goes recreates institutions and intermediaries. It requires
even more trust than the thing that it's replacing, because.
Speaker 4 (15:06):
There's like, you know, a thousand people who like are like, oh,
I love this thing because it doesn't you know, replaces
trust in intermediaries, and then there's like millions more people
are like I like this thing because it went up, right,
and then that's like much more you know relevant then
and then so then you have you can build a
system around that. And so if people like it because
it goes up, then like offer them leverage, right, like
(15:27):
offer them, uh, you know, trusted intermediary. And so I
think that there is this like like cultural connection between
crypto and mistrust in the financial system, but that is
only a very small part of the actual phenomenon of crypto.
The crypto winter that you know, kind of began in
(15:49):
the summer before the fall of FTX and under with
the fall of FTX really recreates two thousand and eight,
like really like beat for beat is like this is
what happens when you overlever something, you know, like it
stops going up and so then there's nothing you know,
holding it up because because it's super overlevered and you know,
there's no regulation and there's a lot of non transparency
(16:12):
about what is backing all of that leverage. I said
to you in the beginning, like I was not sophisticated
enough to understand the risk that Golbyn was in when
I was at Goldman, like, I witnessed the financial crisis
from inside of Goldban, but I didn't like understand it
because I was like working my job, you know. But
then as I became a financial journalist, I became more
of a student of the two thousand and eight crisis,
and it was so useful and interesting to watch the
(16:37):
crypto crisis play out because it truly just relearned the
lessons of two thousand and eight. And like, one thing
you learn is that it's all the same thing, right,
like a financial crisis, is that they all look the same.
Speaker 2 (16:47):
But a difference is that in the crypto crisis that
there is no government to come in.
Speaker 4 (16:53):
Oh yeah, for a while there was Sam Bankman free it, right,
I mean like it It was truly like people in
crypto were like, well, there's no government, there's no FED,
but there is.
Speaker 1 (17:01):
FTX, right, so there isn't that backstop.
Speaker 4 (17:06):
But like, but also, you know, the other big difference
is that the reason there's that backstop in two thousand
and eight is that there is a widespread and I
think pretty justified fear that like a collapse of you know,
the investment banks, the banking system, like that subsector of
the economy could have like real consequences for the real
economy because the banks are the lenders that kind of
(17:29):
like you know, juice economic growth. Like one day maybe
crypto will be that important to the economy of it,
like it wasn't that it's not yet, right, so there's
no government balot because it didn't matter, right, Like all
of crypto could good as zero and nothing outside of
crypto would be affected by that.
Speaker 1 (17:46):
You think that's still true now?
Speaker 4 (17:48):
I think that is ninety percent true now. I think
that crypto people are working very very hard to change that, right.
I mean you look at like the integration of stable
coins into the traditional financial system. You look at you know,
the crypto treasury companies, Like there's this race to integrate
crypto into the real financial system. Some of that is
because the more you integrated into the real financial system,
(18:10):
the more it goes up right today, But some of
it is like the more you integrate into the real
financial system, the better your odds of getting a bailout
if something goes wrong. You could have like a broad
view of crypto. That's like crypto is finding the sort
of last sucker to buy your crypto assets and like
the US taxpayer being the last sucker is like a
really good backstop.
Speaker 2 (18:31):
That would be sarcasm in case you didn't pick up
on it. When we return, we talk about the lessons
we should have learned but didn't from two thousand and eight.
(18:53):
What lessons do you think we should have learned from
the financial crisis that maybe we didn't.
Speaker 4 (19:01):
I do think that, you know, I have a very
conventional view of what happened and what financial crisis are,
which is that it's short term information and sensitive leverage
on stuff that you think is safe is the dangerous thing.
Speaker 1 (19:16):
Right say to say that again't really plain English.
Speaker 4 (19:20):
The problem is when you a bank whoever buys stuff
that they think is pretty safe. They buy triple A
rated mortgage bonds or whatever, right, and they're like, well,
this stuff is really safe, so we can fund it
by borrowing overnight against it. We can like take bank
(19:43):
deposits and use it to buy thirty year triple A
mortgages because like they're so safe. Right, That is like
the source of all financial crisis.
Speaker 1 (19:51):
Right.
Speaker 4 (19:51):
Sometimes it's literally bank deposits, right, Like that's that's what
a run on a bank is. But in two thousand
and eight, it's mostly you know, the Goldmans and and
Lemons and Bears of the world who are not really
taking bank deposits, but who are borrowing very short term
in capital markets, and they're thinking, well, you know, we
have like a big diversified pool of good assets. We're
good traders, so it's pretty safe for us to borrow
(20:15):
short term to fund these long term assets. And then like,
you lose confidence and that short term funding goes away
and you have to sell all your assets and you
can't sell them or you can only sell them at
deeply discounted prices, and then you go from saying how
great you are and how much money you're making to
being bankrupt in hours, you know, or days, like it's
(20:35):
an extremely fast catastrophe.
Speaker 2 (20:38):
So there is there is a distinction to be made
in this story between the case where the assets actually
are safe and people are misperceiving them as unsafe, and
when they're actually not good at all and people are
correct to think that they're not worth what you paid
for them.
Speaker 4 (20:56):
But in the moment, it's very hard for you to
you know, or you can't like really satisfy people that
everything that you own is good, but so right, Like,
the lesson to me is very straightforward, which is that
runnable you know, short term debt is is the thing
that causes financial crisis. Can people take their money out? Right?
It's not the asset side, right, And so people worry
a lot about risky stuff. Risky stuff is fine if
(21:20):
everyone knows it's risky stuff, right. What's bad is when
you're buying triple a stuff that you think is good
that might really be good, right, I mean, like what's
bad is that you know there's marked and market losses
and you have short term funding and you get blown up.
So to me, the thing that like the number one
lesson to take away is worry about short term funding.
And I think the regulators definitely took that lesson, and
(21:41):
banks are now much more required to have much more capital,
they have much more liquidity, they're much less short term funded.
But the cryptoi world didn't learn that lesson, you know,
and like there are a lot of other places where
you know, like the reason the original banking crisis was
the sort of successor of the financial crisis is that
(22:02):
the regional banks are short term funding, right, I mean,
they had deposits right. I think people didn't appreciate, despite
how obvious it seems, people didn't appreciate how short term
the funding of a regional bank actually was. But like nowadays,
people are much more worried about the asset side, and
they're much more worried about OOHO private credit is is
investing in risky stuff, and I think that's like the
wrong place to be looking if.
Speaker 1 (22:23):
You're looking for the next crisis. Where do you think
the right place to look at?
Speaker 4 (22:25):
Oh, I don't know. I don't want to be a
crisis longer. I do think that I want to be clear,
I'm not saying this is where the next crisis is.
But I do think that the big hedge funds are
really interesting, right, the Big four, like the multi strategy
hedge funds. They do a lot of the businesses that
banks used to do. They're very levered, and they have
this profile of like they're quite safe, right, Like they
(22:45):
have a good they have like high sharp ratios. They're
good at, like, you know, steadily grinding out profits by
doing highly levered trades where they're essentially getting paid to
take the other side of the market and to provide
liquidity to the market. They're very well risk managed, they're
very smart. They are the places that train up the
best risk takers now in a way that like twenty
years ago that was the banks, right, So all this
(23:07):
stuff like I'm not saying they're gonna have a crisis
to where I'm saying, like, that's where a crisis would be.
Speaker 3 (23:12):
Right.
Speaker 4 (23:12):
They're huge, They're like, you know, they're central to the market,
they're highly levered, and all these people banks hedgehos. Everyone
has learned you know, they're at Golden in two thousand
and seven, like they've learned these lessons, right, but you know,
you keep turning the dial a little bit more towards
risk and then like there's some chance of things going wrong.
Speaker 1 (23:30):
So what else? Anything else popped in mind?
Speaker 2 (23:31):
When I say financial consequences of the crisis Consumer Financial
Protection Bureau.
Speaker 4 (23:37):
I mean that's over.
Speaker 3 (23:40):
Ye.
Speaker 4 (23:40):
I don't know, like I would put that in the
category Like that's like a a sort of broad sociological
consequence of the of the financial crisis is that the
big banks lost status. Now you can go to Congress
and say banks should not be able to charge you know,
overdraft fees, and everyone's like, oh yeah, banks, they suck, right,
(24:01):
and so it's easier to regulate banks just generally, right,
Like banks have less of ability to get what they want.
I think that is broadly a consequence of the crisis.
When you look at like the cfpp's mandate, I mean,
there's nothing to do, there's nothing almost nothing to do with
the financial cris There is this nexus of giving people
mortgages they can't afford is both a bad consumer banking
(24:23):
practice and a you know, contributor to the financial crisis. Right,
So like there's that that's an important overlap. But most
of the CFPB is doing is like finding banks for
doing things that probably improve the stability of the banking
system by extracting money from consumers.
Speaker 3 (24:38):
Right.
Speaker 4 (24:38):
I mean the CFPP is a consequence of the crisis
in the sense that people were mad at banks, and
so it was a lot more tenable to do things
to regulate or punish banks. But that just sort of
ended for political reasons.
Speaker 2 (24:54):
So I wanted to pick your brain on just this subject,
and I think it sounds like I picked your brain clean.
In less there's something else you would like to say.
Speaker 4 (25:01):
I'm a little interested in stable colins, and I mean,
like stable coins, are sort of a way to take
risk out of the financial system. Like instead of having
your money at a bank, which could invest it in
weird stuff, you have your money in this thing, a
stable coin that basically invested in treasury bills.
Speaker 1 (25:15):
Right.
Speaker 4 (25:16):
One thing that I write about a lot is that
banking has become narrower. And what that means is that
on the one hand, the institutions that do risky investing
are now increasingly funded with like long term locked up
equity type funding, so like private credit firms raise equity
to make loans, right, rather than using deposits. And then
(25:36):
on the other side, the depository stuff is invested in safer,
shorter term stuff, and so like classically that's money market funds,
where like you put money in money market fund they
put it in like treasury bills, you get interest, and
instead of them lending out your money long term, they're
just doing something very safe with it. And increasingly, like
stable coins are becoming that, right, And so like this
(25:58):
is like a cryptod encourage into the traditional financial system.
But also people also a lot of people, politicians, Kyrto
people really like it, right because it does seem like
a safer, a more direct way to hold your money
then holding on a bank, which might be making you know,
buying mortgage decrees with it. I will tell you who
doesn't like it. My impression is that who doesn't like
(26:19):
it as the FED, right, because like the FED likes
the traditional banking system, right, they like the ability to
transmit monetary policy through bank reserves, right right. There is
this worry that like we're undermining the banking system by
moving a lot of what would have been deposits into
something else, money market funds and stable coins. There's an
(26:42):
article in at Bloomberg about how stable coins are potentially
an existential threat to regional banks because like regional banks,
they get deposits from like you know, companies depositing your paycheck,
and then they use that to like run their business
making loans. And if stable coins become a good payment
mechanism and companies are just say I'll give you a
stable colin instead of like a direct deposit in your
(27:03):
bank account, then like JP Morgan will be fine, Like
they'll do a stable coin, It'll be fine. Right, But
like a lot of regional banks are going to have
trouble because the banking system for so long was the
sort of sleight of hand, of like, we take deposits
that you think are super safe and we use them
to make risky investments. And if that's going away, then
it's an existential crisis for some number of banks. And
(27:26):
is that going away because of two thousand and eight?
Like a little bit you can draw that line, right,
Like the mistrust in the banks and like the understanding
that banks take risks with your money like was sort
of like you know, brought back to the forefront by
the two thousand and eight crisis, And so some of
like the stable coin stuff and the narrower banking stuff
really is downstream of that. I mean, I had never
heard the term narrow banking until two thousand and eight, right,
(27:48):
Like it became a thing after two thousand and eight,
people said this whole system of you know, we take
we take short term money and we use it to
take make risky bets just became a lot more suspicious.
Speaker 1 (28:00):
Can you imagine a world where they're no banks?
Speaker 4 (28:03):
People imagine a world with their no banks all the time,
I mean not exactly right. They imagine a world where
your deposits live.
Speaker 1 (28:10):
In stable coins, stable.
Speaker 4 (28:11):
Coins, in treasury bills, in reserves, at the FED, right,
and US dollar you know, digital currency where like you
don't have to have a bank, you just your money,
Like the FED keeps track of your account for you,
you know. And then how do you get a mortgage? Well,
you know, like lending Club gives you a mortgage, or
like you know, a private credit fram gives you a mortgage,
or an insurance company gives you a mortgage, or Apollo Gillow.
(28:34):
You know. One thing that Apollo does is they run annuities, right,
And an annuity is like we'll give you, you know,
a fixed cash flow for thirty years. Like that's the
other side of a mortgage, right. It makes total sense
for Apollo to say, we're gonna make mortgages on one side,
we're gonna do a newdies on the other side, and they're
gonna cross perfectly, right. So it's I think it's pretty
easy to imagine a world without banks. It's just it's
very hard to imagine the transition, right, Like, like to
(28:55):
go from the world of banks to a world with
that banks isn't going to be really would be really
you know difficult throw a lot of people.
Speaker 2 (29:02):
But if it happens, and if that's the path we're
on and then narrow banking is just a step on
the on the path to no banks. People will tell
the story how it all may have kind of just
started with a financial crisis.
Speaker 4 (29:14):
I think if that happened, I put a very low
probably out happening, But if it happened, yes, I think.
I think clearly the financial crisis would be the great
catalyst because like by the way I mentioned stablekins, like
stablekinds grat a bitcoin, right, bitcoin gross out of the
financial crisis are right, like the sort of like great
flourishing of mistrust in the financial system can lead to
a lot of consequences, and I think we're, like, you know,
partly down the road to those consequences.
Speaker 2 (29:36):
That was Bloomberg opinion columnist Matt Levine. Next week, we're
wrapping up this Big Short Companion series by talking with
two people whose political career has got their starts with
a financial crisis, because the crisis changed more than just finance,
It changed politics too.
Speaker 3 (29:58):
Against the rules, The Big Short Companion is hosted by
Michael Lewis. It's produced by me Ludy jan Kott, and
Catherine Girardeau. Our editor is Julia Barton. Our theme was
composed by Nick Burtel and our engineer is Hans Dale.
She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela
(30:20):
Lawrence and the rest of the Pushkin Audiobooks team. Against
the Rules is the production of Pushkin Industries. To find
more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts
or wherever you listen to podcasts, and if you'd like
to listen ad free and learn about other exclusive offerings,
don't forget to sign up for a Pushkin Plus subscription
(30:42):
at pushkin dot fm, Slash Plus or honor Apple show page.
And you can get the big Short now at pushkin
dot fm, Slash Audio Books, or wherever audiobooks are sold.
Pushkin.
Speaker 2 (00:16):
I'm Michael Lewis and I'm Lady Jean Coott.
Speaker 3 (00:18):
This is the big short companion podcast on Against the Rules,
and today's episode is all about the financial consequences of
the two thousand and eight recession. Michael, when you said
you wanted to do this episode, what consequences were you
thinking about?
Speaker 2 (00:34):
You know, the things that all kinds of things sort
of popped to mind. When you look at how Wall
Street is now versus how Wall Street was in say,
two thousand and seven, you can see that like the
big investment banks Morgan Stanley, Goldman, Sachs are far or
less prestigious to work for. They're not getting first cut
of the college graduates. You can see that a whole
(00:55):
new set of institutions Jane Street, Citadel, Jump Trading have
arisen to take risk that previously we're in the investment banks.
It's like the risk who gets to take the risk
has changed and the banks just generally have been removed
from the process. That's like one thing. Another thing is
like Bitcoin is a response, or it seems to have
(01:16):
been a response. The guy who created it wed no
one knows who he actually is, but who calls himselves
to Toshi made it very clear that it was a
response to the mistrust he felt on.
Speaker 1 (01:25):
The back end of the financial crisis.
Speaker 2 (01:27):
I just wanted to isolate the financial consequences and talk
to someone who knows more about this than I do.
Speaker 1 (01:32):
See what we thought. Matt Levine.
Speaker 2 (01:34):
Like matt Levine from the moment he appeared on the
scene and started writing his Bloomberg column, I thought, thank God,
he's paying attention to this, so I don't have to, Like,
thank god that I can just like I mean, I
could come back in and dip into Wall Street every
now and then for big narratives, but that I don't
have to monitor it in.
Speaker 1 (01:54):
The same way because he basically does it for me.
Speaker 2 (01:57):
You can, I can just read matt Levine. He cares
so much more about it than I do. Like he
cares so much more about the intricacies of finance. The
only time I cared is much about finance as matt
Levine was when I was actually working in it, and
then I was engrossed. But since then I have a
hard time caring. Sometimes he makes me care about it,
(02:20):
but I know he's also like, if it's interesting, he
will find it and point it out, and so I
can be a little lazy about it. I'm just going
to use his energy to get them.
Speaker 1 (02:30):
Across to you.
Speaker 3 (02:31):
I'm really excited to hear that conversation. Matt Levine is
a columnist for Bloomberg Opinion and host of the newsletter
and podcast Money Stuff. His conversation with Michael Lewis is
coming right up.
Speaker 1 (02:47):
First off, where were you during the financial crisis? What
were you doing?
Speaker 4 (02:52):
Okay, so when you say during the financial crisis, I
was on vacation when Lehman filed, it's you know, it's
such a cliche, but my cousin was getting married in
northern California and I was. I was in Napa actually
the day that Leman filed, and I woke up and
I looked at my phone or my BlackBerry or whatever,
(03:14):
and I saw that Lehman had filed. And I was stunned.
And I did the thing that everyone talks about, which
is I went outside to get coffee and everyone was
walking around being completely normal, and I had the thought
of like, what, like, do you not understand that the
world just ended? Because I was, you know, during the
financial crisis, I was working at Goldman as an investment banker.
Speaker 2 (03:33):
So you were at Goldman in a job in investment banking.
All this was going down and when so, when it
is going down, at any point do you start to think,
oh my my, I might not have a job.
Speaker 1 (03:44):
Of course you did have. You did have.
Speaker 4 (03:46):
Of course, of course how could you not? No, it's wild.
I mean there were definitely rounds of like off sudden.
You know, I was pretty fatalistic that, you know, either
it'd get laid off or I wouldn't. People on my
desk got laid off. I did not get laid off.
Speaker 1 (03:58):
Did you at any point? Sake? Goldman's not going to survive.
Speaker 4 (04:03):
You know, I was not sophisticated enough to have that thought.
Over time, I have come to understand how leveraged these
institutions are and were, and how little of a shove
it takes to push investment banks into bankruptcy, and how
close we were in the scheme of things to like
Lehman and Bear. I was on a desk we did
(04:26):
like convertible bond deals and we did not do a
deal for six or nine months. We had a master
file where it's like a spreadsheet where every time anyone
in the market did a deal in our sector, we
would like write in the details of the deal, and
it was blank. From I want to say, something like
September of two thousand and eight through March or April
(04:48):
of two thousand and nine was just blank, Like no
deals happened in the market. And so I spent six
months doing nothing and I did not you know, take
a long lunches or have vacation. I just sat at
my desk and panicked and tried to get deals to happen,
and no deals happened.
Speaker 1 (05:04):
Did you get a bonus at the end of O nine?
Speaker 4 (05:08):
I must have. I must have. Yeah, I did, you know,
I was down a lot from the previous year, but
we didn't get here it.
Speaker 2 (05:17):
Yeah. Did you ever find yourself on the other end
of Wall Street hate?
Speaker 4 (05:22):
Uh? Not, like personally, you know, I think that's like
Occupy Wall Street occurred around the end of my time
at Goldman, I think a little after I left, and
I would go and be interested in it, but like
I could see on TV hate for Goldman, but like
I never personally experienced it, and I kind of was like,
I don't know, there was a sense that it was
a little bit cool to be at a place that
everyone hated so much. It's like I felt like, oh, yeah,
(05:46):
look at us, everyone hates us.
Speaker 2 (05:49):
You know who also feels like that, people who work
at the irs. There's an incredible spread of corps because
they know everybody hates them and they think what they're
doing is virtuous, but they know everybody hates them and
so brings them together.
Speaker 4 (06:01):
I don't want to say that what we were doing
was like, you know, virtue is virtuous, but it was fine.
You know, led Blank find sns were doing God's work.
Speaker 2 (06:08):
I want to hear your thoughts about the consequences in
the financial industry of the crisis, what came out of
it that's still with us.
Speaker 4 (06:17):
Well. The thing that I most that I personally experienced
the most, that I personally most interested in, perhaps is
just a shift in in who does stuff in the
financial industry. I Mean, when I was at Goldban, Goldman
was in many ways like the place to be right.
It was the place that sort of generated all the
hedge fund managers that like did a lot of the
exciting deals. That was sort of the center of Wall Street.
(06:40):
And after the financial crisis, the power really shifted away
from the investment banks for a bunch of reasons, you know,
largely regulatory, like largely you know, one, all the big
the biggest investment banks like GOLBN became or were bought
by banks, so they became banks and they were regulated
as banks. And two, like you know, they'd almost blown up.
(07:01):
And so everyone kind of understood, both regulators but also
like the banks themselves and the shareholders understood they couldn't
be as levered and as sort of short term funded
as they had been in two thousand and seven. And
so the banks got much more careful about their balance
sheets and they could do fewer trades, but also the
regulators kind of prohibited them from doing a lot of
the prop trading that was the way that places like
(07:23):
Goldman made outsize profits, and also the way they attracted
and retained and trained risk takers, and that kind of ended.
And the result is that a lot of the sort
of high end action that occurred at the investment banks
ended up at what are you know, the big like
today are big hedge funds or the big kind of
(07:47):
you know, they call them alternative asset managers, like in
my way they called them private equity firms. But like
you know, the like Apollos and kkrs and Blackstones got
a lot more important because a lot of the kind
of like aggressive go anywhere balance sheet financing that the
banks used to do, the banks are afraid to do now,
and these big institutions with their kind of longer term
(08:11):
balance sheets can do that now. And so like, I
don't want to say no one wants to work at
Goldman anymore. I still have a fondness for Goldvin. People
still want to work at Golvin, but it's definitely like
the prestige locations on Wall Street have shifted to the
big hedge funds, the big asset managers, the big high
frequency trading firms. These are all places that are kind
of like closer to the center of the action because
(08:33):
they can take more risk. And the banks took so
Mu's risk in two thousand and eight that they can't
do it anymore.
Speaker 2 (08:39):
We all decided that these places shouldn't be doing it
because the risk gets socialized if they screw it up.
Speaker 4 (08:45):
Yeah, you know, it's I've become When I was a banker,
I was like, what are you talking about? Prop trading
didn't cause the financial crisis, And as I get older,
I become more sympathetic to the regulatory changes. I think
one the risk gets socialized if they screw it up.
But then also they are so levered, Like banking is
a business model, but also investment banking is as a
(09:05):
as it was practiced by the big investment banks in
two thousand and seven, is such a levered business model
where you have like a thin sliver of equity and
a lot of very short term you know, deposits or
demand funding that can drive up overnight and if you
get anything wrong, like you vanish and you like leave
a crater in the in the market. When like the
private credit firms are doing weird loans that you know,
(09:28):
twenty years ago it would have been done by Golban SSG.
Like those private credit firms have long term financing from
like you know, annuities, and they just they're not runnable,
like they won't blow up overnight, right, So there's a
lot of stuff like that.
Speaker 1 (09:42):
They don't have depositors, Yeah, they.
Speaker 4 (09:44):
Don't have depositors, And Goldman didn't have depositors in two
thousand and seven either, but like they had you know, right,
like overnight repo funding and it was a really risky
business model and I think people realize that. And this
is like the story of every financial crisis is like
you find a way to get a lot of short
term information and sensitive financing against you know, risky stuff
(10:04):
that you're up to, and then you blow up. But
I think, like all in all of the system, right now,
it feels less blow up of Ale than it was
in two thousand and seven because there is less of
that short term financing against like whatever people are up to.
Speaker 2 (10:16):
When we come back from the break, Matt Levine and
I talk about another consequence of the financial crisis Bitcoin.
I'm back with Bloomberg opinion columnist Matt Levine.
Speaker 1 (10:34):
All right, so the.
Speaker 2 (10:36):
First financial consequences is this kind of mini status revolution
on Wall Street where the people who were the top
dogs are no longer the top dogs, and because the
risks moved out of those firms and into other places,
and the status goes to where the risk is being taken.
Speaker 4 (10:50):
And that's a status revolution. It's also like substantively.
Speaker 1 (10:55):
You get a better financial model.
Speaker 4 (10:56):
I think. So it's debatable, but I think.
Speaker 1 (10:58):
So, yeah, Well would be the other side.
Speaker 2 (11:00):
I mean, if you have Apollo and areas in these
places who have long term funding against their long term loans.
That does seem like a more stable thing than what
Goldman was doing or even what City Bank was doing.
Speaker 4 (11:14):
The main thing that you hear on the other side
is that people call the shadow banks, right, like, the
banks are very carefully supervised, not always successfully, but there's
a lot of.
Speaker 1 (11:24):
At least somebody's watching them.
Speaker 4 (11:26):
There's a regulart who's watching the bank and telling them,
don't make that loan, that's too risky, right, or they
can theory that's happening with the private credit firms. They
can kind of do what they want because they're much
more lightly regulated because they don't have the crazy banking
funding model, because they're not too big to fail because
they're not you know, their losses aren't socialized. And then
you know, people do worry that leverage is creeping back
into the system because it has a habit of doing that, right,
(11:48):
private credit firms do get leverage from banks, so like
it's kind of circulating back into the banking system. And
you know, when you move away from like private credit,
like some of the of that banks used to do.
You know, I read about the basis trade, which is
you buy treasury bonds and you sell treasury futures and
it's a very very very low risk trade because those
(12:09):
are almost the same thing, but they're not quite the
same thing. And so people lever that trade up, you know,
thirty or one hundred times, And that used to be
a thing that banks do, and now it's a thing
that like, you know, the Citadels and Millenniums of the
world do. And you know, people definitely look around and say,
these things are much more lightly regulated than the old
banks were, and they're running out a hundred times leverage.
(12:29):
That seems risky, right, like, and there are occasions where
the basis trade kind of blows up, and you know,
they're academic saying the FED should have to step in
when that happens, and so you know, there's in the
long run, you know, you say that, like you socialize
the risk when when the banks blow up. But like,
I'm not sure that was what people thought in like
(12:49):
two thousand and six, I'm not sure people thought that.
You know, you know, Jimmie Morgan and City Group had
deposit insurance and FED access and everything, but like Morgan,
Stanley and Goldman and Lehman and Bear were investment banks.
They were kind of more lightly regulated things, and then
it turns out that when they all blow up, the
sort of rational thing to do is to socialize the losses. Right,
(13:11):
But that was not obviously, It's just what happened, right,
And so you can imagine that happening again with you know,
if the big hedge funds that had become so central
to the financial system find a way to blow themselves up, like, well,
those losses get socialized.
Speaker 2 (13:23):
Maybe when I asked you what the financial consequences are
of the of the crisis and you said the big
win you were focusing on was I didn't think what
you were going to say what you did say.
Speaker 1 (13:34):
I thought you were going to say bitcoin.
Speaker 4 (13:36):
Yeah, I mean bitcoin is is. It's hard for me
to know how how directly bitcoin is a consequence of
the financial crisis. I mean, it's certainly the case that
like the Bitcoin white paper references the financial crisis that
it seems like the pseudonymous Satoshi Nakamoto was, you know,
upset by the leverage in the banking system and by
(13:57):
the socialization of losses in the banking system and want
a financial system that didn't look like that, that wasn't
fractional reserve banking that wasn't risky, that wasn't based on
you know, powerful intermediaries who like got government support, but
that was peer to peer and decentralized and safe, right,
And I think that resonated with a lot of people.
(14:18):
There's a like countercultural element to crypto and bitcoin where
people got into it in part because they didn't trust
the banking system. But I don't want to overstate that,
because crypto quickly replicated a lot of the elements of
the levered, fractional reserve, risky financial system as you well know, right.
(14:39):
I mean, like, if you look at the career arc
of Sam Bankman, Freed, like no part of what he
was doing was a reaction to the risky financial system
and traditional finance, right, Like everything he was doing was
recreating that system with crypto.
Speaker 2 (14:53):
One of the many ironies of crypto is that it
seems to be born out of mistrust of institutions and intermediaries,
and then it goes recreates institutions and intermediaries. It requires
even more trust than the thing that it's replacing, because.
Speaker 4 (15:06):
There's like, you know, a thousand people who like are like, oh,
I love this thing because it doesn't you know, replaces
trust in intermediaries, and then there's like millions more people
are like I like this thing because it went up, right,
and then that's like much more you know relevant then
and then so then you have you can build a
system around that. And so if people like it because
it goes up, then like offer them leverage, right, like
(15:27):
offer them, uh, you know, trusted intermediary. And so I
think that there is this like like cultural connection between
crypto and mistrust in the financial system, but that is
only a very small part of the actual phenomenon of crypto.
The crypto winter that you know, kind of began in
(15:49):
the summer before the fall of FTX and under with
the fall of FTX really recreates two thousand and eight,
like really like beat for beat is like this is
what happens when you overlever something, you know, like it
stops going up and so then there's nothing you know,
holding it up because because it's super overlevered and you know,
there's no regulation and there's a lot of non transparency
(16:12):
about what is backing all of that leverage. I said
to you in the beginning, like I was not sophisticated
enough to understand the risk that Golbyn was in when
I was at Goldman, like, I witnessed the financial crisis
from inside of Goldban, but I didn't like understand it
because I was like working my job, you know. But
then as I became a financial journalist, I became more
of a student of the two thousand and eight crisis,
and it was so useful and interesting to watch the
(16:37):
crypto crisis play out because it truly just relearned the
lessons of two thousand and eight. And like, one thing
you learn is that it's all the same thing, right,
like a financial crisis, is that they all look the same.
Speaker 2 (16:47):
But a difference is that in the crypto crisis that
there is no government to come in.
Speaker 4 (16:53):
Oh yeah, for a while there was Sam Bankman free it, right,
I mean like it It was truly like people in
crypto were like, well, there's no government, there's no FED,
but there is.
Speaker 1 (17:01):
FTX, right, so there isn't that backstop.
Speaker 4 (17:06):
But like, but also, you know, the other big difference
is that the reason there's that backstop in two thousand
and eight is that there is a widespread and I
think pretty justified fear that like a collapse of you know,
the investment banks, the banking system, like that subsector of
the economy could have like real consequences for the real
economy because the banks are the lenders that kind of
(17:29):
like you know, juice economic growth. Like one day maybe
crypto will be that important to the economy of it,
like it wasn't that it's not yet, right, so there's
no government balot because it didn't matter, right, Like all
of crypto could good as zero and nothing outside of
crypto would be affected by that.
Speaker 1 (17:46):
You think that's still true now?
Speaker 4 (17:48):
I think that is ninety percent true now. I think
that crypto people are working very very hard to change that, right.
I mean you look at like the integration of stable
coins into the traditional financial system. You look at you know,
the crypto treasury companies, Like there's this race to integrate
crypto into the real financial system. Some of that is
because the more you integrated into the real financial system,
(18:10):
the more it goes up right today, But some of
it is like the more you integrate into the real
financial system, the better your odds of getting a bailout
if something goes wrong. You could have like a broad
view of crypto. That's like crypto is finding the sort
of last sucker to buy your crypto assets and like
the US taxpayer being the last sucker is like a
really good backstop.
Speaker 2 (18:31):
That would be sarcasm in case you didn't pick up
on it. When we return, we talk about the lessons
we should have learned but didn't from two thousand and eight.
(18:53):
What lessons do you think we should have learned from
the financial crisis that maybe we didn't.
Speaker 4 (19:01):
I do think that, you know, I have a very
conventional view of what happened and what financial crisis are,
which is that it's short term information and sensitive leverage
on stuff that you think is safe is the dangerous thing.
Speaker 1 (19:16):
Right say to say that again't really plain English.
Speaker 4 (19:20):
The problem is when you a bank whoever buys stuff
that they think is pretty safe. They buy triple A
rated mortgage bonds or whatever, right, and they're like, well,
this stuff is really safe, so we can fund it
by borrowing overnight against it. We can like take bank
(19:43):
deposits and use it to buy thirty year triple A
mortgages because like they're so safe. Right, That is like
the source of all financial crisis.
Speaker 1 (19:51):
Right.
Speaker 4 (19:51):
Sometimes it's literally bank deposits, right, Like that's that's what
a run on a bank is. But in two thousand
and eight, it's mostly you know, the Goldmans and and
Lemons and Bears of the world who are not really
taking bank deposits, but who are borrowing very short term
in capital markets, and they're thinking, well, you know, we
have like a big diversified pool of good assets. We're
good traders, so it's pretty safe for us to borrow
(20:15):
short term to fund these long term assets. And then like,
you lose confidence and that short term funding goes away
and you have to sell all your assets and you
can't sell them or you can only sell them at
deeply discounted prices, and then you go from saying how
great you are and how much money you're making to
being bankrupt in hours, you know, or days, like it's
(20:35):
an extremely fast catastrophe.
Speaker 2 (20:38):
So there is there is a distinction to be made
in this story between the case where the assets actually
are safe and people are misperceiving them as unsafe, and
when they're actually not good at all and people are
correct to think that they're not worth what you paid
for them.
Speaker 4 (20:56):
But in the moment, it's very hard for you to
you know, or you can't like really satisfy people that
everything that you own is good, but so right, Like,
the lesson to me is very straightforward, which is that
runnable you know, short term debt is is the thing
that causes financial crisis. Can people take their money out? Right?
It's not the asset side, right, And so people worry
a lot about risky stuff. Risky stuff is fine if
(21:20):
everyone knows it's risky stuff, right. What's bad is when
you're buying triple a stuff that you think is good
that might really be good, right, I mean, like what's
bad is that you know there's marked and market losses
and you have short term funding and you get blown up.
So to me, the thing that like the number one
lesson to take away is worry about short term funding.
And I think the regulators definitely took that lesson, and
(21:41):
banks are now much more required to have much more capital,
they have much more liquidity, they're much less short term funded.
But the cryptoi world didn't learn that lesson, you know,
and like there are a lot of other places where
you know, like the reason the original banking crisis was
the sort of successor of the financial crisis is that
(22:02):
the regional banks are short term funding, right, I mean,
they had deposits right. I think people didn't appreciate, despite
how obvious it seems, people didn't appreciate how short term
the funding of a regional bank actually was. But like nowadays,
people are much more worried about the asset side, and
they're much more worried about OOHO private credit is is
investing in risky stuff, and I think that's like the
wrong place to be looking if.
Speaker 1 (22:23):
You're looking for the next crisis. Where do you think
the right place to look at?
Speaker 4 (22:25):
Oh, I don't know. I don't want to be a
crisis longer. I do think that I want to be clear,
I'm not saying this is where the next crisis is.
But I do think that the big hedge funds are
really interesting, right, the Big four, like the multi strategy
hedge funds. They do a lot of the businesses that
banks used to do. They're very levered, and they have
this profile of like they're quite safe, right, Like they
(22:45):
have a good they have like high sharp ratios. They're
good at, like, you know, steadily grinding out profits by
doing highly levered trades where they're essentially getting paid to
take the other side of the market and to provide
liquidity to the market. They're very well risk managed, they're
very smart. They are the places that train up the
best risk takers now in a way that like twenty
years ago that was the banks, right, So all this
(23:07):
stuff like I'm not saying they're gonna have a crisis
to where I'm saying, like, that's where a crisis would be.
Speaker 3 (23:12):
Right.
Speaker 4 (23:12):
They're huge, They're like, you know, they're central to the market,
they're highly levered, and all these people banks hedgehos. Everyone
has learned you know, they're at Golden in two thousand
and seven, like they've learned these lessons, right, but you know,
you keep turning the dial a little bit more towards
risk and then like there's some chance of things going wrong.
Speaker 1 (23:30):
So what else? Anything else popped in mind?
Speaker 2 (23:31):
When I say financial consequences of the crisis Consumer Financial
Protection Bureau.
Speaker 4 (23:37):
I mean that's over.
Speaker 3 (23:40):
Ye.
Speaker 4 (23:40):
I don't know, like I would put that in the
category Like that's like a a sort of broad sociological
consequence of the of the financial crisis is that the
big banks lost status. Now you can go to Congress
and say banks should not be able to charge you know,
overdraft fees, and everyone's like, oh yeah, banks, they suck, right,
(24:01):
and so it's easier to regulate banks just generally, right,
Like banks have less of ability to get what they want.
I think that is broadly a consequence of the crisis.
When you look at like the cfpp's mandate, I mean,
there's nothing to do, there's nothing almost nothing to do with
the financial cris There is this nexus of giving people
mortgages they can't afford is both a bad consumer banking
(24:23):
practice and a you know, contributor to the financial crisis. Right,
So like there's that that's an important overlap. But most
of the CFPB is doing is like finding banks for
doing things that probably improve the stability of the banking
system by extracting money from consumers.
Speaker 3 (24:38):
Right.
Speaker 4 (24:38):
I mean the CFPP is a consequence of the crisis
in the sense that people were mad at banks, and
so it was a lot more tenable to do things
to regulate or punish banks. But that just sort of
ended for political reasons.
Speaker 2 (24:54):
So I wanted to pick your brain on just this subject,
and I think it sounds like I picked your brain clean.
In less there's something else you would like to say.
Speaker 4 (25:01):
I'm a little interested in stable colins, and I mean,
like stable coins, are sort of a way to take
risk out of the financial system. Like instead of having
your money at a bank, which could invest it in
weird stuff, you have your money in this thing, a
stable coin that basically invested in treasury bills.
Speaker 1 (25:15):
Right.
Speaker 4 (25:16):
One thing that I write about a lot is that
banking has become narrower. And what that means is that
on the one hand, the institutions that do risky investing
are now increasingly funded with like long term locked up
equity type funding, so like private credit firms raise equity
to make loans, right, rather than using deposits. And then
(25:36):
on the other side, the depository stuff is invested in safer,
shorter term stuff, and so like classically that's money market funds,
where like you put money in money market fund they
put it in like treasury bills, you get interest, and
instead of them lending out your money long term, they're
just doing something very safe with it. And increasingly, like
stable coins are becoming that, right, And so like this
(25:58):
is like a cryptod encourage into the traditional financial system.
But also people also a lot of people, politicians, Kyrto
people really like it, right because it does seem like
a safer, a more direct way to hold your money
then holding on a bank, which might be making you know,
buying mortgage decrees with it. I will tell you who
doesn't like it. My impression is that who doesn't like
(26:19):
it as the FED, right, because like the FED likes
the traditional banking system, right, they like the ability to
transmit monetary policy through bank reserves, right right. There is
this worry that like we're undermining the banking system by
moving a lot of what would have been deposits into
something else, money market funds and stable coins. There's an
(26:42):
article in at Bloomberg about how stable coins are potentially
an existential threat to regional banks because like regional banks,
they get deposits from like you know, companies depositing your paycheck,
and then they use that to like run their business
making loans. And if stable coins become a good payment
mechanism and companies are just say I'll give you a
stable colin instead of like a direct deposit in your
(27:03):
bank account, then like JP Morgan will be fine, Like
they'll do a stable coin, It'll be fine. Right, But
like a lot of regional banks are going to have
trouble because the banking system for so long was the
sort of sleight of hand, of like, we take deposits
that you think are super safe and we use them
to make risky investments. And if that's going away, then
it's an existential crisis for some number of banks. And
(27:26):
is that going away because of two thousand and eight?
Like a little bit you can draw that line, right,
Like the mistrust in the banks and like the understanding
that banks take risks with your money like was sort
of like you know, brought back to the forefront by
the two thousand and eight crisis, And so some of
like the stable coin stuff and the narrower banking stuff
really is downstream of that. I mean, I had never
heard the term narrow banking until two thousand and eight, right,
(27:48):
Like it became a thing after two thousand and eight,
people said this whole system of you know, we take
we take short term money and we use it to
take make risky bets just became a lot more suspicious.
Speaker 1 (28:00):
Can you imagine a world where they're no banks?
Speaker 4 (28:03):
People imagine a world with their no banks all the time,
I mean not exactly right. They imagine a world where
your deposits live.
Speaker 1 (28:10):
In stable coins, stable.
Speaker 4 (28:11):
Coins, in treasury bills, in reserves, at the FED, right,
and US dollar you know, digital currency where like you
don't have to have a bank, you just your money,
Like the FED keeps track of your account for you,
you know. And then how do you get a mortgage? Well,
you know, like lending Club gives you a mortgage, or
like you know, a private credit fram gives you a mortgage,
or an insurance company gives you a mortgage, or Apollo Gillow.
(28:34):
You know. One thing that Apollo does is they run annuities, right,
And an annuity is like we'll give you, you know,
a fixed cash flow for thirty years. Like that's the
other side of a mortgage, right. It makes total sense
for Apollo to say, we're gonna make mortgages on one side,
we're gonna do a newdies on the other side, and they're
gonna cross perfectly, right. So it's I think it's pretty
easy to imagine a world without banks. It's just it's
very hard to imagine the transition, right, Like, like to
(28:55):
go from the world of banks to a world with
that banks isn't going to be really would be really
you know difficult throw a lot of people.
Speaker 2 (29:02):
But if it happens, and if that's the path we're
on and then narrow banking is just a step on
the on the path to no banks. People will tell
the story how it all may have kind of just
started with a financial crisis.
Speaker 4 (29:14):
I think if that happened, I put a very low
probably out happening, But if it happened, yes, I think.
I think clearly the financial crisis would be the great
catalyst because like by the way I mentioned stablekins, like
stablekinds grat a bitcoin, right, bitcoin gross out of the
financial crisis are right, like the sort of like great
flourishing of mistrust in the financial system can lead to
a lot of consequences, and I think we're, like, you know,
partly down the road to those consequences.
Speaker 2 (29:36):
That was Bloomberg opinion columnist Matt Levine. Next week, we're
wrapping up this Big Short Companion series by talking with
two people whose political career has got their starts with
a financial crisis, because the crisis changed more than just finance,
It changed politics too.
Speaker 3 (29:58):
Against the rules, The Big Short Companion is hosted by
Michael Lewis. It's produced by me Ludy jan Kott, and
Catherine Girardeau. Our editor is Julia Barton. Our theme was
composed by Nick Burtel and our engineer is Hans Dale.
She special thanks to Nicole opten Bosch, Jasmine Faustino, Pamela
(30:20):
Lawrence and the rest of the Pushkin Audiobooks team. Against
the Rules is the production of Pushkin Industries. To find
more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts
or wherever you listen to podcasts, and if you'd like
to listen ad free and learn about other exclusive offerings,
don't forget to sign up for a Pushkin Plus subscription
(30:42):
at pushkin dot fm, Slash Plus or honor Apple show page.
And you can get the big Short now at pushkin
dot fm, Slash Audio Books, or wherever audiobooks are sold.
Hosts And Creators
Joel Larsgaard
Matthew Altmix
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