November 25, 2025 • 32 mins
We’re sharing another podcast we think you’ll enjoy, The Big Short Companion from Against the Rules, hosted by fellow Pushkin podcast host 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 (00:45) on Apple Podcasts, Spotify or wherever you get your Podcasts.
Find The Big Short: Inside the Doomsday Machine (00:10) on Apple Books or wherever you get your audiobooks.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:15):
Pushkin.
Speaker 2 (00:18):
Hey, it's Jacob.
Speaker 3 (00:20):
One of my all time favorite books about finance is
The Big Short by Michael Lewis. You may well already
know this book or the movie that was made of
the book. It's about the two thousand and eight financial crisis,
and it's a great story. It's really funny, it's really smart.
You learn a lot. And I'm talking about it now
(00:40):
because Pushkin has just released a new audiobook version of
The Big Short, read by Michael Lewis himself, and to
go along with the release of the audiobook, Michael has
done a bunch of interviews that are airing on his
podcast Against the Rules. He talks to Adam McKay, the
director of the movie version of The Big Short, talks
to a bunch of the real life finance people who
(01:02):
are in the book in the movie, and he also
talks to Matt Levine. Matt Levine used to be a
bit anchor himself and writes about finance now and is
one of my favorite writers working today, and so I'm
very happy to play for you now this conversation between
Michael Lewis and Matt Levine where they talk about a
lot of the ways that Wall Street has changed since
(01:24):
the financial crisis.
Speaker 2 (01:32):
I'm Michael Lewis and.
Speaker 4 (01:33):
I'm Lady Jinkott. 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 5 (01:50):
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 less
prestigious to work for. They're not getting first cut of
the college graduates. You can see that a whole new
(02:11):
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
(02:32):
been a response. The guy who created it, we 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 the back end
of the financial crisis. I just wanted to isolate the
financial consequences and talk to someone who knows more about
this than I do.
Speaker 2 (02:48):
See what we thought.
Speaker 5 (02:49):
Matt Levine 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, I can just like I mean,
I could come back in and dip into Wall Street
every now and then for big narratives, but then I
don't have to monitor it in.
Speaker 2 (03:10):
The same way because he basically does it for me.
Speaker 4 (03:13):
You can just read matt Levine.
Speaker 5 (03:14):
I can just read matt Levine, and he's 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,
(03:36):
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 2 (03:46):
Across to you.
Speaker 4 (03:48):
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 2 (04:03):
First off, where were you during the financial crisis?
Speaker 4 (04:07):
What were you doing?
Speaker 1 (04:08):
Okay, so when you say during the financial crisis, I
was on vacation when Leman filed. And 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,
(04:30):
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 (04:49):
So you were at Goldman in a job in investment banking.
Speaker 5 (04:52):
All this was going down, and so when it is
going down, at any point do you start to think,
oh my my, I might not have a job.
Speaker 2 (05:00):
Of course you did have You did have.
Speaker 1 (05:02):
Course, of course, how could you not? No, it's wild.
I mean there were definitely rounds of like off sudden.
Speaker 4 (05:08):
You know.
Speaker 1 (05:08):
I was pretty f 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 2 (05:14):
Did you any point think Goldman's not going to survive?
Speaker 1 (05:19):
You know, I was not sophisticated enough to have that thought.
Over time, I have come to understand how 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
(05:42):
did like convertible bond deals and we did not do
a deal for six or nine months. We had a
master file where you 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
(06:04):
April 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 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 2 (06:20):
Did you get a bonus at the end of O nine,
I must have.
Speaker 1 (06:26):
I must have. Yeah, I did, you know? I was
down a lot from the previous year, but we didn't
get hear it. Yeah.
Speaker 5 (06:34):
Did you ever find yourself on the other end of
Wall Street hate?
Speaker 1 (06:38):
Uh?
Speaker 5 (06:38):
Not?
Speaker 1 (06:38):
Like personally, you know, I think that's like Occupy Wall
Street occurred around the end of my time at Goldman,
I think occur 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,
(07:02):
look at us, everyone hates us.
Speaker 5 (07:05):
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.
Speaker 2 (07:14):
But they know everybody hates them, and it somehow brings
them together.
Speaker 1 (07:17):
I don't want to say that what we were doing
was like, you know, virtuous, virtuous, but it was fine,
you know, led blank friends as they're doing God's work.
Speaker 5 (07:24):
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 1 (07:33):
Well. The thing that I most that I personally experienced
the most, that I'm 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
HEDGELINND managers that like did a lot of the exciting deals.
(07:54):
That was sort of the center of Wall Street. 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 Colban 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.
(08:17):
And so everyone kind of understood both regulators but also
like the banks themselves and the shareholders understood that 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
(08:39):
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 occurd at the investment banks
ended up at what are you know, the big like
today are big hedge funds or the big kind of
(09:03):
you know, they call them alternative asset managers, like in
my day they called them private equity firms, but like
you know, the Likers 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
(09:24):
institutions with their kind of longer term 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 Golbvin. 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.
(09:44):
These are all places that are kind of like closer
to the center of the action because they can take
more risk. And the banks took someone's risk in two
thousand and eight that they can't do it anymore.
Speaker 5 (09:55):
We all decided that these places shouldn't be doing this
because the risk gets socialized if they screw it up.
Speaker 1 (10:01):
Yeah, you know, it's 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 I like
it all. 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 as it was practiced by the big investment
(10:23):
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
(10:44):
you know, twenty years ago it would have been done
by Goldman 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 2 (10:58):
They don't have depositors, Yeah, they.
Speaker 1 (11:00):
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
(11:20):
that you're up to, and then you blow up. But
I think, like, all in all, 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 5 (11:32):
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. All right,
so the first financial consequences is this kind of mini
(11:55):
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 1 (12:06):
And that's a status revolution. And it's also like substantively.
Speaker 2 (12:11):
You get a better financial model.
Speaker 1 (12:12):
I think. So it's debatable, but I think.
Speaker 2 (12:14):
So, yeah, well, what would be the other side.
Speaker 5 (12:16):
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 1 (12:30):
The main thing that you hear on the other side
is that people call those shadow banks, right, like, the
banks are very carefully supervised, not always successfully, but there's
a lot of.
Speaker 2 (12:41):
At least somebody's watching them.
Speaker 1 (12:42):
There's a regulator 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 biking
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,
(13:04):
private credit firms do get leverage from banks, so like
it's kind of circulating back into the system. And you know,
when you move away from like private credit, like some
of the stuff 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 are almost
(13:25):
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. That seems risky,
(13:46):
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 two thousand and six,
(14:07):
I'm not sure people thought that. You know, you know,
Jimmy Morgan and City Group had deposit insurance and FED
access enter in 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, But that
(14:29):
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 5 (14:39):
Maybe when I asked you what the financial consequences are
of the of the crisis and you said the big
when you were focusing on was I didn't think what
you were going to say what you did say.
Speaker 2 (14:50):
I thought you were going to say bitcoin.
Speaker 1 (14:52):
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
(15:13):
the socialization of losses in the banking system, and wanted
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.
(15:34):
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.
(15:55):
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 5 (16:10):
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 and recreates institutions and intermediaries. It
requires even more trust than the thing that it's replacing,
because there's like, you know, a.
Speaker 1 (16:23):
Thousand people who like are like, oh I love this
thing because it doesn't you know, it 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 it, you can build a system
around that. And so if people like it because it
goes up, then like offer them leverage, right, like offer them, uh,
(16:44):
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 the summer
(17:05):
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 about
(17:28):
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 Golbman, 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
(17:49):
it was so useful and interesting to watch the 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 5 (18:03):
But a difference is that in the crypto crisis that
there is no government to come in.
Speaker 1 (18:09):
Oh yeah, for a while there was Sam Bankman freight, right,
I mean like it was it was truly like people
in crypto were like, well, there's no government, there's no FED,
but there is.
Speaker 2 (18:17):
FTX, right, so there isn't that backstop.
Speaker 1 (18:22):
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
(18:45):
like you know, juice economic growth. Like one day maybe
crypto will be that important to the economy, but like
it wasn't that it's not yet, right, so there's no
government ballot 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 2 (19:02):
You think that's still true now?
Speaker 1 (19:04):
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 is this race to
integrate crypto into the real financial system. Some of that
is because the more you integrated into the real financial system,
(19:26):
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 (19:47):
That would be sarcasm in case you didn't pick up
on it.
Speaker 5 (19:50):
When we return, we talk about the lessons we should
have learned but didn't from two thousand and eight. What
(20:10):
lessons do you think we should have learned from the
financial crisis that maybe we didn't.
Speaker 1 (20:17):
I do think that, you know, I have a very
conventional view of what happened and what financial crises are,
which is that it's short term information and sensitive leverage
on stuff that you think is safe is the dangerous thing.
Speaker 2 (20:33):
Right to say that again't really plain English.
Speaker 1 (20:36):
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
(20:59):
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 crises, right. Sometimes it's literally
bank deposits right, like's that's what a run on a
bank is. But in two thousand and eight, it's mostly
you know, the Goldmans and Lemons and Bears of the
world who are not really taking bank deposits but who
(21:19):
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 short term to fund these long term assets.
And then like you lose confidence and that short term
funding goes away. You have to sell all your assets
and you can't sell them, or you can only sell
(21:40):
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 an extremely fast catastrophe.
Speaker 5 (21:54):
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 1 (22:12):
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
(22:36):
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
(22:57):
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 crypto the world didn't learn that lesson, you know,
and like there are a lot of there are places
where you know, like the reason the original banking crisis
was the sort of successor to the financial crisis is
that the regional banks are short term funding, right, I
(23:20):
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 are They're much more worried about who private credit
is is investing in risky stuff. And I think that's
like the wrong place to be.
Speaker 2 (23:38):
Looking if you're looking for the next crisis. Where do
you think the right place to look at this? Oh?
Speaker 1 (23:41):
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 have a good they
(24:02):
have like high sharp ratios. They're good at, like, you know,
steadily grinding out profits by doing highly levered trades where
there's ventially 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,
(24:23):
So all this 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 4 (24:28):
Right.
Speaker 1 (24:28):
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 2 (24:46):
So what else? Anything else popped in mind?
Speaker 5 (24:47):
When I say financial consequences of the crisis Consumer Financial
Protection Bureau.
Speaker 1 (24:53):
I mean that's over.
Speaker 4 (24:56):
Ye.
Speaker 1 (24:57):
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, those banks, they suck, right,
(25:17):
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 CFPB'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
(25:39):
banking 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. Right. I mean the
CFPP is a consequence of the crisis in the sense
that people were mad at banks, and so it was
(25:59):
a lot more tenable to do things to regulate or
punish banks. But that just sort of ended for reasons.
Speaker 5 (26:10):
So I wanted to pick your brain on just this subject,
and I think it sounds like I picked your brain clean,
unless there's something else you would like to say.
Speaker 1 (26:17):
I'm a little interested in stable clins. 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 cuin
that basically invested in treasury bills. Right. One thing that
I write about a lot is that banking has become narrower.
And what that means is that on the one hand,
(26:38):
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 on the other side,
the depository stuff is invested in safer, shorter term stuff,
(26:59):
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 is like
a crypto incursion into the traditional financial system. But also
people also a lot of people, politicians, crypto people really
(27:23):
like it, right, because it does seem like a safer,
a more direct way to hold your money than 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 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
(27:46):
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 article in
at Bloomberg about how stable coins are potentially an existential
threat to regional banks because like regional banks, they get
(28:07):
deposits from like you know, companies the positing 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 like I'll give you a stable
coin instead of like a direct deposit in your bank account,
then like JP Morgan will be fine, Like they'll do
a stable colin It'll be fine. Right, But like a
lot of regional banks are going to have trouble because
(28:28):
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 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
(28:50):
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 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,
Like it became a thing after two thousand and eight,
people said this whole system of of you know, we
take to we take short term money, and we use
(29:12):
it to take risky make risky bets. It just became
a lot more suspicious.
Speaker 2 (29:16):
Can you imagine a world where there are no banks?
Speaker 1 (29:19):
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 2 (29:26):
In stable coins, stable.
Speaker 1 (29:27):
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.
Speaker 2 (29:48):
Or apollollow.
Speaker 1 (29:50):
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
(30:11):
to go from the world of banks to a world
of that banks isn't going to be really would be
really you know difficult for a lot of people.
Speaker 5 (30:18):
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 1 (30:30):
I think if that happened, I put a very low
probably happening. But if it happened, yes, I think. I
think clearly the financial crisis would be the great catalystort
because like by the way I mentioned stablekins, like stable coins,
grat a bitcoin right, bitcoin gros 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 5 (30:52):
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 4 (31:14):
Against the rules, The Big Short Companion is hosted by
Michael Lewis. It's produced by me ludyjan 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 Lawrence and
(31:37):
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 at pushkin dot fm,
(32:00):
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 (00:18):
Hey, it's Jacob.
Speaker 3 (00:20):
One of my all time favorite books about finance is
The Big Short by Michael Lewis. You may well already
know this book or the movie that was made of
the book. It's about the two thousand and eight financial crisis,
and it's a great story. It's really funny, it's really smart.
You learn a lot. And I'm talking about it now
(00:40):
because Pushkin has just released a new audiobook version of
The Big Short, read by Michael Lewis himself, and to
go along with the release of the audiobook, Michael has
done a bunch of interviews that are airing on his
podcast Against the Rules. He talks to Adam McKay, the
director of the movie version of The Big Short, talks
to a bunch of the real life finance people who
(01:02):
are in the book in the movie, and he also
talks to Matt Levine. Matt Levine used to be a
bit anchor himself and writes about finance now and is
one of my favorite writers working today, and so I'm
very happy to play for you now this conversation between
Michael Lewis and Matt Levine where they talk about a
lot of the ways that Wall Street has changed since
(01:24):
the financial crisis.
Speaker 2 (01:32):
I'm Michael Lewis and.
Speaker 4 (01:33):
I'm Lady Jinkott. 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 5 (01:50):
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 less
prestigious to work for. They're not getting first cut of
the college graduates. You can see that a whole new
(02:11):
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
(02:32):
been a response. The guy who created it, we 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 the back end
of the financial crisis. I just wanted to isolate the
financial consequences and talk to someone who knows more about
this than I do.
Speaker 2 (02:48):
See what we thought.
Speaker 5 (02:49):
Matt Levine 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, I can just like I mean,
I could come back in and dip into Wall Street
every now and then for big narratives, but then I
don't have to monitor it in.
Speaker 2 (03:10):
The same way because he basically does it for me.
Speaker 4 (03:13):
You can just read matt Levine.
Speaker 5 (03:14):
I can just read matt Levine, and he's 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,
(03:36):
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 2 (03:46):
Across to you.
Speaker 4 (03:48):
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 2 (04:03):
First off, where were you during the financial crisis?
Speaker 4 (04:07):
What were you doing?
Speaker 1 (04:08):
Okay, so when you say during the financial crisis, I
was on vacation when Leman filed. And 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,
(04:30):
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 (04:49):
So you were at Goldman in a job in investment banking.
Speaker 5 (04:52):
All this was going down, and so when it is
going down, at any point do you start to think,
oh my my, I might not have a job.
Speaker 2 (05:00):
Of course you did have You did have.
Speaker 1 (05:02):
Course, of course, how could you not? No, it's wild.
I mean there were definitely rounds of like off sudden.
Speaker 4 (05:08):
You know.
Speaker 1 (05:08):
I was pretty f 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 2 (05:14):
Did you any point think Goldman's not going to survive?
Speaker 1 (05:19):
You know, I was not sophisticated enough to have that thought.
Over time, I have come to understand how 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
(05:42):
did like convertible bond deals and we did not do
a deal for six or nine months. We had a
master file where you 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
(06:04):
April 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 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 2 (06:20):
Did you get a bonus at the end of O nine,
I must have.
Speaker 1 (06:26):
I must have. Yeah, I did, you know? I was
down a lot from the previous year, but we didn't
get hear it. Yeah.
Speaker 5 (06:34):
Did you ever find yourself on the other end of
Wall Street hate?
Speaker 1 (06:38):
Uh?
Speaker 5 (06:38):
Not?
Speaker 1 (06:38):
Like personally, you know, I think that's like Occupy Wall
Street occurred around the end of my time at Goldman,
I think occur 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,
(07:02):
look at us, everyone hates us.
Speaker 5 (07:05):
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.
Speaker 2 (07:14):
But they know everybody hates them, and it somehow brings
them together.
Speaker 1 (07:17):
I don't want to say that what we were doing
was like, you know, virtuous, virtuous, but it was fine,
you know, led blank friends as they're doing God's work.
Speaker 5 (07:24):
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 1 (07:33):
Well. The thing that I most that I personally experienced
the most, that I'm 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
HEDGELINND managers that like did a lot of the exciting deals.
(07:54):
That was sort of the center of Wall Street. 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 Colban 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.
(08:17):
And so everyone kind of understood both regulators but also
like the banks themselves and the shareholders understood that 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
(08:39):
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 occurd at the investment banks
ended up at what are you know, the big like
today are big hedge funds or the big kind of
(09:03):
you know, they call them alternative asset managers, like in
my day they called them private equity firms, but like
you know, the Likers 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
(09:24):
institutions with their kind of longer term 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 Golbvin. 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.
(09:44):
These are all places that are kind of like closer
to the center of the action because they can take
more risk. And the banks took someone's risk in two
thousand and eight that they can't do it anymore.
Speaker 5 (09:55):
We all decided that these places shouldn't be doing this
because the risk gets socialized if they screw it up.
Speaker 1 (10:01):
Yeah, you know, it's 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 I like
it all. 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 as it was practiced by the big investment
(10:23):
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
(10:44):
you know, twenty years ago it would have been done
by Goldman 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 2 (10:58):
They don't have depositors, Yeah, they.
Speaker 1 (11:00):
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
(11:20):
that you're up to, and then you blow up. But
I think, like, all in all, 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 5 (11:32):
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. All right,
so the first financial consequences is this kind of mini
(11:55):
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 1 (12:06):
And that's a status revolution. And it's also like substantively.
Speaker 2 (12:11):
You get a better financial model.
Speaker 1 (12:12):
I think. So it's debatable, but I think.
Speaker 2 (12:14):
So, yeah, well, what would be the other side.
Speaker 5 (12:16):
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 1 (12:30):
The main thing that you hear on the other side
is that people call those shadow banks, right, like, the
banks are very carefully supervised, not always successfully, but there's
a lot of.
Speaker 2 (12:41):
At least somebody's watching them.
Speaker 1 (12:42):
There's a regulator 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 biking
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,
(13:04):
private credit firms do get leverage from banks, so like
it's kind of circulating back into the system. And you know,
when you move away from like private credit, like some
of the stuff 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 are almost
(13:25):
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. That seems risky,
(13:46):
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 two thousand and six,
(14:07):
I'm not sure people thought that. You know, you know,
Jimmy Morgan and City Group had deposit insurance and FED
access enter in 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, But that
(14:29):
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 5 (14:39):
Maybe when I asked you what the financial consequences are
of the of the crisis and you said the big
when you were focusing on was I didn't think what
you were going to say what you did say.
Speaker 2 (14:50):
I thought you were going to say bitcoin.
Speaker 1 (14:52):
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
(15:13):
the socialization of losses in the banking system, and wanted
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.
(15:34):
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.
(15:55):
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 5 (16:10):
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 and recreates institutions and intermediaries. It
requires even more trust than the thing that it's replacing,
because there's like, you know, a.
Speaker 1 (16:23):
Thousand people who like are like, oh I love this
thing because it doesn't you know, it 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 it, you can build a system
around that. And so if people like it because it
goes up, then like offer them leverage, right, like offer them, uh,
(16:44):
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 the summer
(17:05):
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 about
(17:28):
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 Golbman, 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
(17:49):
it was so useful and interesting to watch the 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 5 (18:03):
But a difference is that in the crypto crisis that
there is no government to come in.
Speaker 1 (18:09):
Oh yeah, for a while there was Sam Bankman freight, right,
I mean like it was it was truly like people
in crypto were like, well, there's no government, there's no FED,
but there is.
Speaker 2 (18:17):
FTX, right, so there isn't that backstop.
Speaker 1 (18:22):
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
(18:45):
like you know, juice economic growth. Like one day maybe
crypto will be that important to the economy, but like
it wasn't that it's not yet, right, so there's no
government ballot 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 2 (19:02):
You think that's still true now?
Speaker 1 (19:04):
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 is this race to
integrate crypto into the real financial system. Some of that
is because the more you integrated into the real financial system,
(19:26):
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 (19:47):
That would be sarcasm in case you didn't pick up
on it.
Speaker 5 (19:50):
When we return, we talk about the lessons we should
have learned but didn't from two thousand and eight. What
(20:10):
lessons do you think we should have learned from the
financial crisis that maybe we didn't.
Speaker 1 (20:17):
I do think that, you know, I have a very
conventional view of what happened and what financial crises are,
which is that it's short term information and sensitive leverage
on stuff that you think is safe is the dangerous thing.
Speaker 2 (20:33):
Right to say that again't really plain English.
Speaker 1 (20:36):
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
(20:59):
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 crises, right. Sometimes it's literally
bank deposits right, like's that's what a run on a
bank is. But in two thousand and eight, it's mostly
you know, the Goldmans and Lemons and Bears of the
world who are not really taking bank deposits but who
(21:19):
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 short term to fund these long term assets.
And then like you lose confidence and that short term
funding goes away. You have to sell all your assets
and you can't sell them, or you can only sell
(21:40):
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 an extremely fast catastrophe.
Speaker 5 (21:54):
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 1 (22:12):
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
(22:36):
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
(22:57):
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 crypto the world didn't learn that lesson, you know,
and like there are a lot of there are places
where you know, like the reason the original banking crisis
was the sort of successor to the financial crisis is
that the regional banks are short term funding, right, I
(23:20):
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 are They're much more worried about who private credit
is is investing in risky stuff. And I think that's
like the wrong place to be.
Speaker 2 (23:38):
Looking if you're looking for the next crisis. Where do
you think the right place to look at this? Oh?
Speaker 1 (23:41):
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 have a good they
(24:02):
have like high sharp ratios. They're good at, like, you know,
steadily grinding out profits by doing highly levered trades where
there's ventially 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,
(24:23):
So all this 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 4 (24:28):
Right.
Speaker 1 (24:28):
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 2 (24:46):
So what else? Anything else popped in mind?
Speaker 5 (24:47):
When I say financial consequences of the crisis Consumer Financial
Protection Bureau.
Speaker 1 (24:53):
I mean that's over.
Speaker 4 (24:56):
Ye.
Speaker 1 (24:57):
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, those banks, they suck, right,
(25:17):
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 CFPB'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
(25:39):
banking 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. Right. I mean the
CFPP is a consequence of the crisis in the sense
that people were mad at banks, and so it was
(25:59):
a lot more tenable to do things to regulate or
punish banks. But that just sort of ended for reasons.
Speaker 5 (26:10):
So I wanted to pick your brain on just this subject,
and I think it sounds like I picked your brain clean,
unless there's something else you would like to say.
Speaker 1 (26:17):
I'm a little interested in stable clins. 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 cuin
that basically invested in treasury bills. Right. One thing that
I write about a lot is that banking has become narrower.
And what that means is that on the one hand,
(26:38):
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 on the other side,
the depository stuff is invested in safer, shorter term stuff,
(26:59):
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 is like
a crypto incursion into the traditional financial system. But also
people also a lot of people, politicians, crypto people really
(27:23):
like it, right, because it does seem like a safer,
a more direct way to hold your money than 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 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
(27:46):
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 article in
at Bloomberg about how stable coins are potentially an existential
threat to regional banks because like regional banks, they get
(28:07):
deposits from like you know, companies the positing 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 like I'll give you a stable
coin instead of like a direct deposit in your bank account,
then like JP Morgan will be fine, Like they'll do
a stable colin It'll be fine. Right, But like a
lot of regional banks are going to have trouble because
(28:28):
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 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
(28:50):
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 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,
Like it became a thing after two thousand and eight,
people said this whole system of of you know, we
take to we take short term money, and we use
(29:12):
it to take risky make risky bets. It just became
a lot more suspicious.
Speaker 2 (29:16):
Can you imagine a world where there are no banks?
Speaker 1 (29:19):
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 2 (29:26):
In stable coins, stable.
Speaker 1 (29:27):
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.
Speaker 2 (29:48):
Or apollollow.
Speaker 1 (29:50):
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
(30:11):
to go from the world of banks to a world
of that banks isn't going to be really would be
really you know difficult for a lot of people.
Speaker 5 (30:18):
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 1 (30:30):
I think if that happened, I put a very low
probably happening. But if it happened, yes, I think. I
think clearly the financial crisis would be the great catalystort
because like by the way I mentioned stablekins, like stable coins,
grat a bitcoin right, bitcoin gros 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 5 (30:52):
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 4 (31:14):
Against the rules, The Big Short Companion is hosted by
Michael Lewis. It's produced by me ludyjan 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 Lawrence and
(31:37):
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 at pushkin dot fm,
(32:00):
Slash Plus or honor Apple show page. And you can
get the big Short now at pushkin dot Fm, Slash
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