AI transcript
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0:01:04 Pushkin.
0:01:08 Hey, it’s Jacob.
0:01:14 One of my all-time favorite books about finance is The Big Short by Michael Lewis.
0:01:19 You may well already know this book or the movie that was made of the book.
0:01:22 It’s about the 2008 financial crisis.
0:01:24 And it’s a great story.
0:01:25 It’s really funny.
0:01:26 It’s really smart.
0:01:27 You learn a lot.
0:01:36 And I’m talking about it now because Pushkin has just released a new audiobook version of The Big Short read by Michael Lewis himself.
0:01:43 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.
0:01:48 He talks to Adam McKay, the director of the movie version of The Big Short.
0:01:53 Talks to a bunch of the real-life finance people who are in the book and the movie.
0:01:56 And he also talks to Matt Levine.
0:02:03 Matt Levine used to be a banker himself and writes about finance now and is one of my favorite writers working today.
0:02:09 And so I’m very happy to play for you now this conversation between Michael Lewis and Matt Levine,
0:02:14 where they talk about a lot of the ways that Wall Street has changed since the financial crisis.
0:02:21 I’m Michael Lewis.
0:02:23 And I’m Lydia Jean-Cott.
0:02:26 This is The Big Short companion podcast on Against the Rules.
0:02:31 And today’s episode is all about the financial consequences of the 2008 recession.
0:02:38 Michael, when you said you wanted to do this episode, what consequences were you thinking about?
0:02:47 You know, the things, 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, 2007.
0:02:54 You can see that, like, the big investment banks, Morgan Stanley, Goldman Sachs, are far less prestigious to work for.
0:02:57 They’re not getting first cut of the college graduates.
0:03:09 You can see that a whole new set of institutions, Jane Street, Citadel, Jump Trading, have arisen to take risk that previously were in the investment banks.
0:03:10 It’s like the risk.
0:03:12 Who gets to take the risk has changed.
0:03:16 And the banks just generally have been removed from the process.
0:03:17 That’s, like, one thing.
0:03:22 Another thing is, like, Bitcoin is a response, or seems to have been a response.
0:03:32 The guy who created it, no one knows who he actually is, but who calls himself Satoshi, made it very clear that it was a response to the mistrust he felt on the back end of the financial crisis.
0:03:38 I just wanted to isolate the financial consequences and talk to someone who knows more about this than I do to see what he thought.
0:03:49 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.
0:04:01 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 the same way because he basically does it for me.
0:04:03 You can just read Matt Levine.
0:04:04 I can just read Matt Levine.
0:04:09 And he cares so much more about it than I do.
0:04:12 Like, he cares so much more about the intricacies of finance.
0:04:18 The only time I cared as much about finance as Matt Levine was when I was actually working in it.
0:04:20 And then I was engrossed.
0:04:24 But since then, I have a hard time caring sometimes.
0:04:25 He makes me care about it.
0:04:30 But I know he’s also, like, if it’s interesting, he will find it and point it out.
0:04:32 And so I can be a little lazy about it.
0:04:36 I’m just going to use his energy to get them across to you.
0:04:38 I’m really excited to hear that conversation.
0:04:44 Matt Levine is a columnist for Bloomberg Opinion and host of the newsletter and podcast Money Stuff.
0:04:48 His conversation with Michael Lewis is coming right up.
0:04:56 First off, where were you during the financial crisis?
0:04:56 What were you doing?
0:04:57 Okay.
0:05:04 So when you say during the financial crisis, I was on vacation when Lehman filed.
0:05:06 And it’s, you know, it’s such a cliche.
0:05:10 But my cousin was getting married in Northern California.
0:05:16 And I was in Napa, actually, the day that Lehman filed.
0:05:19 And I woke up and I looked at my phone or my BlackBerry or whatever.
0:05:21 And I saw that Lehman had filed.
0:05:22 And I was stunned.
0:05:25 And I did the thing that everyone talks about, which is I went outside to get coffee.
0:05:28 And everyone was walking around being completely normal.
0:05:33 And I had the thought of, like, what, like, do you not understand that the world just ended?
0:05:37 Because I was, you know, during the financial crisis, I was working at Goldman as an investment banker.
0:05:42 So you were at Goldman in a job in investment banking when all this was going down.
0:05:48 And so when it is going down, at any point, do you start to think, oh, my, I might not have a job?
0:05:50 Of course.
0:05:51 You did have the thought.
0:05:51 Of course.
0:05:52 Of course.
0:05:53 How could you not?
0:05:55 No, it’s wild.
0:05:56 I mean, there were definitely rounds of layoffs.
0:06:01 You know, I was pretty fatalistic that, you know, either I’d get laid off or I wouldn’t.
0:06:02 People on my desk got laid off.
0:06:03 I did not get laid off.
0:06:07 Did you at any point think Goldman’s not going to survive?
0:06:12 You know, I was not sophisticated enough to have that thought.
0:06:25 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.
0:06:29 And how close we were in the scheme of things to, like, Lehman and Bear.
0:06:30 I was on a desk.
0:06:32 We did, like, convertible bond deals.
0:06:36 And we did not do a deal for six or nine months.
0:06:43 We had a master file where you – it was 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.
0:06:55 And it was blank from, I want to say, something like September of 2008 through March or April of 2009 was just blank.
0:06:57 Like, no deals happened in the market.
0:07:01 And so, I spent six months doing nothing.
0:07:04 And I did not, you know, take long lunches or have vacation.
0:07:08 I just sat at my desk and panicked and tried to get deals to happen and no deals happened.
0:07:11 Did you get a bonus at the end of 2009?
0:07:15 I must have.
0:07:16 I must have.
0:07:17 Yeah, I did.
0:07:19 You know, I was down a lot from the previous year.
0:07:22 But we didn’t get zeroed.
0:07:26 Did you ever find yourself on the other end of Wall Street hate?
0:07:28 Not, like, personally.
0:07:33 You know, I think that, like, Occupy Wall Street occurred around the end of my time at Goldman.
0:07:35 I think it occurred a little after I left.
0:07:37 And I would go and be interested in it.
0:07:40 But, like, I could see on TV hate for Goldman.
0:07:42 But, like, I never personally experienced it.
0:07:44 And I kind of was like – I don’t know.
0:07:48 There was a sense that it was a little bit cool to be at a place that everyone hated so much.
0:07:52 It’s like – I felt like, oh, yeah, look at us.
0:07:53 Everyone hates us.
0:07:56 You know who also feels like that?
0:07:57 People who work at the IRS.
0:08:01 There’s an incredible esprit de corps because they know everybody hates them.
0:08:04 And they think what they’re doing is virtuous, but they know everybody hates them.
0:08:06 And it somehow brings them together.
0:08:10 I don’t want to say that what we were doing was, like, you know, virtuous, virtuous.
0:08:11 But it was fine.
0:08:12 You know, Lloyd Blankfrank says we were doing God’s work.
0:08:19 I want to hear your thoughts about the consequences in the financial industry of the crisis.
0:08:22 What came out of it that’s still with us?
0:08:33 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 who does stuff in the financial industry.
0:08:38 I mean, when I was at Goldman, Goldman was in many ways, like, the place to be, right?
0:08:45 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.
0:08:51 And after the financial crisis, the power really shifted away from the investment banks for a bunch of reasons.
0:09:00 So, you know, largely regulatory, like, largely, you know, one, all the biggest investment banks like Goldman became or were bought by banks.
0:09:02 So, they became banks and they were regulated as banks.
0:09:06 And two, like, you know, they’d almost blown up.
0:09:15 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 2007.
0:09:21 And so, the banks got much more careful about their balance sheets and they could do fewer trades.
0:09:36 But also, the regulators kind of prohibited them from doing a lot of the prop trading that was the way that places like Goldman made outsized profits and also the way they attracted and retained and trained risk takers.
0:09:37 And that kind of ended.
0:09:54 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, you know, they call them alternative asset managers.
0:09:56 Like, in my day, they called them private equity firms.
0:10:11 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.
0:10:17 And these big institutions with their kind of longer-term balance sheets can do that now.
0:10:21 And so, like, I don’t want to say no one wants to work at Goldman anymore.
0:10:23 I still have a fondness for Goldman.
0:10:33 People still want to work at Goldman, 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.
0:10:39 These are all places that are kind of, like, closer to the center of the action because they can take more risk.
0:10:44 And the banks took so much risk in 2008 that they can’t do it anymore.
0:10:49 We all decided that these places shouldn’t be doing that kind of thing because the risk gets socialized if they screw it up.
0:10:55 Yeah, you know, it’s – I’ve become – when I was a banker, I was like, what are you talking about?
0:10:57 Prop trading didn’t cause the financial crisis.
0:11:00 And as I get older, I become more sympathetic to the regulatory changes.
0:11:03 I think, one, the risk gets socialized if they screw it up.
0:11:06 But then also, they’re so levered.
0:11:22 Like, banking as a business model, but also investment banking as it was practiced by the big investment banks in 2007 is such a levered business model where you have, like, a thin sliver of equity and a lot of very short-term deposits or demand funding that can dry up overnight.
0:11:28 And if you get anything wrong, like, you vanish and you, like, leave a crater in the market.
0:11:41 When, like, the private credit firms are doing weird loans that, you know, 20 years ago would have been done by Goldman SSG, like, those private credit firms have long-term financing from, like, you know, annuities.
0:11:44 And they just – they’re not runnable.
0:11:45 Like, they won’t blow up overnight.
0:11:46 Right.
0:11:47 So, there’s a lot of stuff like that.
0:11:48 They don’t have depositors.
0:11:49 Yeah, they don’t have depositors.
0:11:52 And Goldman didn’t have depositors in 2007 either.
0:11:55 But, like, they had, you know, like, overnight repo funding.
0:11:58 And it was a really risky business model.
0:12:10 And I think people realized 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 that you’re up to and then you blow up.
0:12:20 But I think, like, all in all, the system right now feels less blow-up-able than it was in 2007 because there is less of that short-term financing against, like, whatever people are up to.
0:12:27 When we come back from the break, Matt Levine and I talk about another consequence of the financial crisis, Bitcoin.
0:12:45 And as the number one podcaster, iHeart’s twice as large as the next two combined.
0:12:48 So, whatever your customers listen to, they’ll hear your message.
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0:13:12 Asking really strong questions is a superpower.
0:13:17 You want to show up with something radically different and how they’ve grown companies to incredible heights.
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0:13:47 I’m back with Bloomberg Opinion columnist, Matt Levine.
0:13:49 All right.
0:13:57 So, the 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.
0:14:01 Because the risks moved out of those firms and into other places.
0:14:04 And the status goes to where the risk is being taken.
0:14:06 And that’s a status revolution.
0:14:08 It’s also like substantively.
0:14:10 You get a better financial model.
0:14:10 I think so.
0:14:12 It’s debatable, but I think so, yeah.
0:14:13 Well, what would be the other side?
0:14:21 I mean, if you have Apollo and Aries and these places who have long-term funding against their long-term loans,
0:14:26 that does seem like a more stable thing than what Goldman was doing or even what Citibank was doing.
0:14:31 The main thing that you hear on the other side is that people call those shadow banks, right?
0:14:35 Like, the banks are very carefully supervised.
0:14:38 Not always successfully, but there’s a lot of…
0:14:39 At least somebody’s watching them.
0:14:42 There’s a regulator who’s watching the bank and telling them, don’t make that loan.
0:14:43 That’s too risky, right?
0:14:44 Or, like, in theory, that’s happening.
0:14:49 With the private credit firms, they can kind of do what they want because they’re much more lightly regulated
0:14:52 because they don’t have the crazy banking funding model, because they’re not too big to fail,
0:14:54 because they’re not, you know, their losses aren’t socialized.
0:15:01 And then, you know, people do worry that leverage is creeping back into the system because it has a habit of doing that, right?
0:15:04 Private credit firms do get leverage from banks.
0:15:07 So, like, it’s kind of circulating back into the banking system.
0:15:14 And, you know, when you move away from, like, private credit, like, some of the stuff that banks used to do,
0:15:19 you know, I read about the basis trade, which is you buy treasury bonds and you sell treasury futures.
0:15:24 And it’s a very, very, very low-risk trade because those are almost the same thing, but they’re not quite the same thing.
0:15:28 And so, people lever that trade up, you know, 30 or 100 times.
0:15:30 And that used to be a thing that banks do.
0:15:34 And now it’s a thing that, like, you know, the citadels and millennials of the world do.
0:15:40 And, you know, people definitely look around and say these things are much more lightly regulated than the old banks were.
0:15:43 And they’re running at 100 times leverage.
0:15:44 That seems risky, right?
0:15:47 Like, and there are occasions where the basis trade kind of blows up.
0:15:51 And, you know, there are academics saying the Fed should have to step in when that happens.
0:15:59 And so, you know, there’s – in the long run, you know, you say that, like, you socialize the risk when the banks blow up.
0:16:04 But, like, I’m not sure that was what people thought in, like, 2006.
0:16:11 I’m not sure people thought that, you know – you know, JP Morgan and Citigroup had deposit insurance and FedEx and everything.
0:16:15 But, like, Morgan Stanley and Goldman and Lehman and Bayer were investment banks.
0:16:18 They were kind of more lightly regulated things.
0:16:25 And then it turns out that when they all blow up, the sort of rational thing to do is to socialize the losses, right?
0:16:27 But that was not obvious.
0:16:28 It’s just what happened, right?
0:16:36 And so you can imagine that happening again with, you know, if the big hedge funds that have become so central to the financial system find a way to blow themselves up, like, will those losses get socialized?
0:16:37 Maybe.
0:16:47 When I asked you what the financial consequences are of the crisis and you said the big one you were focusing on was, I didn’t think you were going to say what you did say.
0:16:48 I thought you were going to say Bitcoin.
0:16:50 Yeah.
0:16:55 I mean, Bitcoin is – it’s hard for me to know how directly Bitcoin is a consequence of the financial crisis.
0:17:25 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 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.
0:17:29 But that was peer-to-peer and decentralized and safe, right?
0:17:31 And I think that resonated with a lot of people.
0:17:39 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.
0:17:53 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?
0:18:03 I mean, like, if you look at the career arc of Sam Bankman-Fried, like, no part of what he was doing was a reaction to the risky financial system in traditional finance, right?
0:18:07 Like, everything he was doing was recreating that system with crypto.
0:18:13 One of the many ironies of crypto is that it seems to be born out of mistrust of institutions and intermediaries.
0:18:16 And then it goes and recreates institutions and intermediaries.
0:18:19 It requires even more trust than the thing that it’s replacing.
0:18:25 Because 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 and intermediaries.
0:18:29 And then there’s, like, millions more people who are, like, I like this thing because it went up, right?
0:18:31 And then that’s, like, much more, you know, relevant.
0:18:35 And then so then you have – you can build a system around that.
0:18:39 And so if people like it because it goes up, then, like, offer them leverage, right?
0:18:43 Like, offer them, you know, a trusted intermediary.
0:18:53 And so I think that there is this, like, cultural connection between crypto and mistrust in the financial system.
0:18:58 But that is only a very small part of the actual phenomenon of crypto.
0:19:08 The crypto winter that, you know, kind of began in the summer before the fall of FTX and ended with the fall of FTX really recreates 2008.
0:19:17 Like, really, like, beat for beat is, like, this is what happens when you over-lever something, you know, like, it stops going up.
0:19:21 And so then there’s nothing, you know, holding it up because it’s super over-levered.
0:19:27 And, you know, there’s no regulation and there’s a lot of non-transparency about what is backing all of that leverage.
0:19:34 I said to you at the beginning, like, I was not sophisticated enough to understand the risk that Goldman was in when I was at Goldman.
0:19:40 Like, I witnessed the financial crisis from inside of Goldman, but I didn’t, like, understand it because I was just, like, working my job, you know?
0:19:45 But then as I became a financial journalist, I became more of a student of the 2008 crisis.
0:19:55 It was so useful and interesting to watch the crypto crisis play out because it truly just relearned the lessons of 2008.
0:19:58 And, like, one thing you learn is that it’s all the same thing, right?
0:20:00 Like, a financial crisis, they all look the same, right?
0:20:06 But a difference is that in the crypto crisis, that there is no government to come in.
0:20:07 Oh, yeah.
0:20:08 For a while, there was Sam Bankman free, right?
0:20:15 I mean, like, it was truly, like, people in crypto were like, well, there’s no government, there’s no Fed, but there is FTX.
0:20:17 Right.
0:20:19 So there isn’t that backstop.
0:20:39 But, like, but also, you know, the other big difference is that the reason there’s that backstop in 2008 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.
0:20:46 Because the banks are the lenders that kind of, like, you know, juice economic growth.
0:20:53 Like, one day, maybe crypto will be that important to the economy, but, like, it wasn’t, it’s not yet, right?
0:20:55 So there’s no government bailout because it didn’t matter, right?
0:20:59 Like, all of crypto could go to zero and nothing outside of crypto would be affected by that.
0:21:01 You think that’s still true now?
0:21:04 I think that is 90% true now.
0:21:08 I think that crypto people are working very, very hard to change that, right?
0:21:12 I mean, you look at, like, the integration of stable coins into the traditional financial system.
0:21:16 You look at, you know, the crypto treasury companies.
0:21:20 Like, there is this race to integrate crypto into the real financial system.
0:21:25 Some of that is because the more you integrate it into the real financial system, the more it goes up, right, today.
0:21:32 But some of it is, like, the more you integrate it into the real financial system, the better your odds of getting a bailout if something goes wrong.
0:21:39 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.
0:21:43 And, like, the U.S. taxpayer being the last sucker is, like, a really good backstop.
0:21:47 That would be sarcasm in case you didn’t pick up on it.
0:21:51 When we return, we talk about the lessons we should have learned but didn’t from 2008.
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0:22:41 You want to show up with something radically different.
0:22:44 And how they’ve grown companies to incredible heights.
0:22:47 The greatest rewards always come from the greatest risks.
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0:23:05 Find Masters of Scale on Apple Podcasts, Spotify, YouTube, or wherever else you get podcasts.
0:23:21 What lessons do you think we should have learned from the financial crisis that maybe we didn’t?
0:23:30 I do think that, you know, I have a very conventional view of what happened and what financial crises are,
0:23:39 which is that it’s short-term information and sensitive leverage on stuff that you think is safe is the dangerous thing, right?
0:23:41 Say that again in really plain English.
0:23:51 The problem is when you, a bank, whoever, buys stuff that they think is pretty safe.
0:23:55 They buy AAA-rated mortgage bonds or whatever, right?
0:23:57 And they’re like, well, this stuff is really safe.
0:24:03 So we can fund it by borrowing overnight against it.
0:24:10 We can, like, take bank deposits and use it to buy 30-year AAA mortgages because, like, they’re so safe, right?
0:24:14 That is, like, the source of all financial crises, right?
0:24:16 Sometimes it’s literally bank deposits, right?
0:24:18 Like, that’s what a run on a bank is.
0:24:25 But in 2008, it’s mostly, you know, the Goldman’s and Lehman’s and Baer’s of the world who are not really taking bank deposits
0:24:29 but who are borrowing very short-term in capital markets.
0:24:33 And they’re thinking, well, you know, we have, like, a big diversified pool of good assets.
0:24:34 We’re good traders.
0:24:39 So it’s pretty safe for us to borrow short-term to fund these long-term assets.
0:24:43 And then, like, you lose confidence and that short-term funding goes away.
0:24:48 You have to sell all your assets and you can’t sell them or you can only sell them at deeply discounted prices.
0:24:57 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.
0:25:00 Like, it’s an extremely fast catastrophe.
0:25:18 So 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.
0:25:26 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.
0:25:34 But so, right, like, the lesson to me is very straightforward, which is that runnable, you know, short-term debt is the thing that causes financial crises.
0:25:36 Can people take their money out, right?
0:25:37 It’s not the asset side, right?
0:25:40 And so people worry a lot about risky stuff.
0:25:43 Risky stuff is fine if everyone knows it’s risky stuff, right?
0:25:49 What’s bad is when you’re buying AAA stuff that you think is good that might really be good, right?
0:25:56 I mean, like, what’s bad is that, you know, there’s mark-to-market losses and you have short-term funding and you get blown up.
0:26:01 So to me, the thing that, like, the number one lesson to take away is worry about short-term funding.
0:26:07 And I think, like, regulators definitely took that lesson and banks are now much more required to have much more capital.
0:26:08 They have much more liquidity.
0:26:09 They’re much less short-term funded.
0:26:26 But the crypto 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 to the financial crisis is that the original banks had short-term funding, right?
0:26:27 I mean, they had deposits, right?
0:26:34 And 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.
0:26:41 But, like, nowadays people are much more worried about the asset side and they’re much more worried about, ooh, private credit is investing in risky stuff.
0:26:44 And I think that’s, like, the wrong place to be looking.
0:26:48 If you’re looking for the next crisis, where do you think the right place to look is?
0:26:48 Oh, I don’t know.
0:26:50 I don’t want to be a crisis monger.
0:26:58 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?
0:27:02 The big four, like the multi-strategy hedge funds, they do a lot of the businesses that banks used to do.
0:27:03 They’re very levered.
0:27:08 And they have this profile of, like, they’re quite safe, right?
0:27:09 Like, they have a good, they have, like, high-sharp ratios.
0:27:20 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.
0:27:21 They’re very well risk-managed.
0:27:22 They’re very smart.
0:27:29 They are the places that train up the best risk-takers now in a way that, like, 20 years ago, that was the banks, right?
0:27:33 So all this stuff, like, I’m not saying they’re going to have a crisis tomorrow.
0:27:34 I’m saying, like, that’s where a crisis would be, right?
0:27:35 They’re huge.
0:27:38 They’re, like, you know, they’re central to the market.
0:27:39 They’re highly levered.
0:27:44 And all these people, banks, hedge funds, everyone has learned, you know, they were at Goldman in 2007.
0:27:45 Like, they’ve learned these lessons, right?
0:27:51 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.
0:27:56 So what else, anything else pop to mind when I say financial consequences of the crisis?
0:27:58 Consumer Financial Protection Bureau.
0:28:00 I mean, that’s over.
0:28:03 I don’t know.
0:28:05 Like, I would put that in the category.
0:28:14 Like, that’s, like, a sort of broad sociological consequence of the financial crisis is that the big banks lost status.
0:28:21 Now you can go to Congress and say, banks should not be able to charge, you know, overdraft fees.
0:28:23 And everyone’s like, oh, yeah, those banks, they suck, right?
0:28:27 And so it’s easier to regulate banks, just generally, right?
0:28:30 Like, banks have less of an ability to get what they want.
0:28:34 I think that is probably a consequence of the crisis.
0:28:37 When you look at, like, the CFPB’s mandate, I mean, there’s nothing to do with them.
0:28:39 There’s nothing, almost nothing to do with the financial crisis.
0:28:49 There is this nexus of giving people mortgages they can’t afford is both a bad consumer banking practice and a, you know, contributor to the financial crisis, right?
0:28:49 So, like, there’s that.
0:28:50 That’s an important overlap.
0:29:00 But most of what the CFPB is doing is, like, fining banks for doing things that probably improve the stability of the banking system by extracting money from consumers, right?
0:29:05 I mean, the CFPB is a consequence of the crisis in the sense that people were mad at banks.
0:29:09 And so it was a lot more tenable to do things to regulate or punish banks.
0:29:16 But that just sort of ended for political reasons.
0:29:18 So I wanted to pick your brain on just this subject.
0:29:23 And I think it sounds like I picked your brain clean, unless there’s something else you would like to say.
0:29:25 I’m a little interested in stable coins.
0:29:29 I mean, like, stable coins are sort of a way to take risk out of the financial system.
0:29:38 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, right?
0:29:41 One thing that I write about a lot is that banking has become narrower.
0:29:53 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.
0:29:58 So, like, private credit firms raise equity to make loans, right, rather than using deposits.
0:30:05 And then on the other side, the, like, depository stuff is invested in safer, shorter-term stuff.
0:30:12 And so, like, classically, that’s money market funds, where, like, you put money in a money market fund, they put it in, like, treasury bills, you get interest.
0:30:17 And instead of them lending out your money long-term, they’re just doing something very safe with it.
0:30:20 And increasingly, like, stable coins are becoming that, right?
0:30:24 And so, like, this is, like, a crypto incursion into the traditional financial system.
0:30:29 But also people, also a lot of people, politicians, crypto people, really like it, right?
0:30:38 Because it does seem like a safer, more direct way to hold your money than holding it in a bank, which might be making, you know, buying mortgage securities with it.
0:30:43 I will tell you who doesn’t like it, my impression is that who doesn’t like it is the Fed, right?
0:30:47 Because, like, the Fed likes the traditional banking system, right?
0:30:51 They like the ability to transmit monetary policy through bank reserves, right?
0:30:51 Right.
0:31:04 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.
0:31:11 There’s an article at Bloomberg about how stable coins are potentially an existential threat to regional banks.
0:31:18 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.
0:31:29 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.
0:31:29 Like, they’ll do a stable coin.
0:31:30 It’ll be fine, right?
0:31:42 But, like, a lot of regional banks are going to have trouble because the banking system for so long was this sort of sleight of hand of, like, we take deposits that you think are super safe, and we use them to make risky investments.
0:31:48 And if that’s going away, then it’s an existential crisis for some number of banks.
0:31:50 And is that going away because of 2008?
0:31:51 Like, a little bit.
0:31:52 You can draw that line, right?
0:32:02 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 2008 crisis.
0:32:07 And so some of, like, the stable coin stuff and the narrower banking stuff really is downstream of that.
0:32:10 I mean, I had never heard of the term narrow banking until 2008, right?
0:32:12 Like, it became a thing after 2008.
0:32:22 People said this whole system of, you know, we take short-term money and we use it to make risky bets just became a lot more suspicious.
0:32:25 Can you imagine a world where there are no banks?
0:32:28 People imagine a world where there are no banks all the time.
0:32:29 I mean, not exactly, right?
0:32:32 They imagine a world where your deposits live.
0:32:33 In stable coin.
0:32:37 In stable coins, in treasury bills, in reserves, at the Fed, right?
0:32:41 In U.S. dollar, you know, digital currency where, like, you don’t have to have a bank.
0:32:44 You just, your money, like, the Fed keeps track of your account for you, you know?
0:32:46 And then how do you get a mortgage?
0:32:50 Well, you know, like, a lending club gives you a mortgage.
0:32:52 Or, like, you know, a private credit firm gives you a mortgage.
0:32:54 Or an insurance company gives you a mortgage.
0:32:56 Apollo gives you a mortgage.
0:32:59 Apollo, you know, one thing that Apollo does is they run annuities, right?
0:33:03 And an annuity is, like, we’ll give you, you know, a fixed cash flow for 30 years.
0:33:04 Like, that’s the other side of a mortgage, right?
0:33:08 It makes total sense for Apollo to say, we’re going to make mortgages on one side,
0:33:11 and we’re going to do annuities on the other side, and they’re going to cross perfectly, right?
0:33:15 So, I think it’s pretty easy to imagine a world without banks.
0:33:17 It’s just, it’s very hard to imagine the transition, right?
0:33:21 Like, to go from the world of banks to a world without banks is going to be really,
0:33:24 would be really, you know, difficult for a lot of people.
0:33:27 But if it happens, and if that’s the path we’re on,
0:33:31 and that narrow banking is just a step on the path to no banks,
0:33:36 people will tell the story how it all may have kind of just started with the financial crisis.
0:33:39 I think if that happened, I would put a very low probability of that happening.
0:33:44 But if it happened, yes, I think clearly the financial crisis would be the great catalyst for it.
0:33:46 Because, like, by the way, I mentioned stable coins.
0:33:47 Like, stable coins grow out of Bitcoin, right?
0:33:49 Bitcoin grows out of the financial crisis, right?
0:33:53 Like, the sort of, like, great flourishing of mistrust in the financial system
0:33:55 can lead to a lot of consequences.
0:33:57 And I think we’re, like, you know, partly down the road to those consequences.
0:34:01 That was Bloomberg Opinion columnist Matt Levine.
0:34:04 Next week, we’re wrapping up this Big Short Companion series
0:34:08 by talking with two people whose political careers got their starts with the financial crisis.
0:34:11 Because the crisis changed more than just finance.
0:34:14 It changed politics, too.
0:34:24 Against the Rules, the Big Short Companion is hosted by Michael Lewis.
0:34:28 It’s produced by me, Lurijin Kot, and Catherine Girardot.
0:34:31 Our editor is Julia Barton.
0:34:34 Our theme was composed by Nick Bertel.
0:34:36 And our engineer is Hans Dale Shi.
0:34:40 Special thanks to Nicole Optenbosch,
0:34:41 Jasmine Faustino,
0:34:43 Pamela Lawrence,
0:34:45 and the rest of the Pushkin Audiobooks team.
0:34:49 Against the Rules is a production of Pushkin Industries.
0:34:51 To find more Pushkin podcasts,
0:34:53 listen on the iHeartRadio app,
0:34:55 Apple Podcasts,
0:34:56 or wherever you listen to podcasts.
0:34:59 And if you’d like to listen ad-free
0:35:01 and learn about other exclusive offerings,
0:35:04 don’t forget to sign up for a Pushkin Plus subscription
0:35:07 at pushkin.fm slash plus
0:35:09 or on our Apple Show page.
0:35:11 And you can get the Big Short now
0:35:14 at pushkin.fm slash audiobooks
0:35:18 or wherever audiobooks are sold.
0:35:28 On Masters of Scale,
0:35:31 iconic leaders reveal how they’ve beaten the odds.
0:35:34 Asking really strong questions is a superpower.
0:35:37 You want to show up with something radically different
0:35:40 and how they’ve grown companies to incredible heights.
0:35:43 The greatest rewards always come from the greatest risks.
0:35:44 That’s hit the gas.
0:35:46 Airbnb, Zillow, Microsoft,
0:35:47 Liquid Death, and more.
0:35:50 Hear from the founders who’ve changed the game.
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0:00:24 On Masters of Scale, iconic leaders reveal how they’ve beaten the odds.
0:00:28 Asking really strong questions is a superpower.
0:00:33 You want to show up with something radically different and how they’ve grown companies to incredible heights.
0:00:36 The greatest rewards always come from the greatest risks.
0:00:37 That’s hit the gas.
0:00:40 Airbnb, Zillow, Microsoft, Liquid Death, and more.
0:00:43 Hear from the founders who’ve changed the game.
0:00:46 It’s anything but business as usual.
0:00:53 Find Masters of Scale on Apple Podcasts, Spotify, YouTube, or wherever else you get podcasts.
0:01:04 Pushkin.
0:01:08 Hey, it’s Jacob.
0:01:14 One of my all-time favorite books about finance is The Big Short by Michael Lewis.
0:01:19 You may well already know this book or the movie that was made of the book.
0:01:22 It’s about the 2008 financial crisis.
0:01:24 And it’s a great story.
0:01:25 It’s really funny.
0:01:26 It’s really smart.
0:01:27 You learn a lot.
0:01:36 And I’m talking about it now because Pushkin has just released a new audiobook version of The Big Short read by Michael Lewis himself.
0:01:43 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.
0:01:48 He talks to Adam McKay, the director of the movie version of The Big Short.
0:01:53 Talks to a bunch of the real-life finance people who are in the book and the movie.
0:01:56 And he also talks to Matt Levine.
0:02:03 Matt Levine used to be a banker himself and writes about finance now and is one of my favorite writers working today.
0:02:09 And so I’m very happy to play for you now this conversation between Michael Lewis and Matt Levine,
0:02:14 where they talk about a lot of the ways that Wall Street has changed since the financial crisis.
0:02:21 I’m Michael Lewis.
0:02:23 And I’m Lydia Jean-Cott.
0:02:26 This is The Big Short companion podcast on Against the Rules.
0:02:31 And today’s episode is all about the financial consequences of the 2008 recession.
0:02:38 Michael, when you said you wanted to do this episode, what consequences were you thinking about?
0:02:47 You know, the things, 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, 2007.
0:02:54 You can see that, like, the big investment banks, Morgan Stanley, Goldman Sachs, are far less prestigious to work for.
0:02:57 They’re not getting first cut of the college graduates.
0:03:09 You can see that a whole new set of institutions, Jane Street, Citadel, Jump Trading, have arisen to take risk that previously were in the investment banks.
0:03:10 It’s like the risk.
0:03:12 Who gets to take the risk has changed.
0:03:16 And the banks just generally have been removed from the process.
0:03:17 That’s, like, one thing.
0:03:22 Another thing is, like, Bitcoin is a response, or seems to have been a response.
0:03:32 The guy who created it, no one knows who he actually is, but who calls himself Satoshi, made it very clear that it was a response to the mistrust he felt on the back end of the financial crisis.
0:03:38 I just wanted to isolate the financial consequences and talk to someone who knows more about this than I do to see what he thought.
0:03:49 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.
0:04:01 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 the same way because he basically does it for me.
0:04:03 You can just read Matt Levine.
0:04:04 I can just read Matt Levine.
0:04:09 And he cares so much more about it than I do.
0:04:12 Like, he cares so much more about the intricacies of finance.
0:04:18 The only time I cared as much about finance as Matt Levine was when I was actually working in it.
0:04:20 And then I was engrossed.
0:04:24 But since then, I have a hard time caring sometimes.
0:04:25 He makes me care about it.
0:04:30 But I know he’s also, like, if it’s interesting, he will find it and point it out.
0:04:32 And so I can be a little lazy about it.
0:04:36 I’m just going to use his energy to get them across to you.
0:04:38 I’m really excited to hear that conversation.
0:04:44 Matt Levine is a columnist for Bloomberg Opinion and host of the newsletter and podcast Money Stuff.
0:04:48 His conversation with Michael Lewis is coming right up.
0:04:56 First off, where were you during the financial crisis?
0:04:56 What were you doing?
0:04:57 Okay.
0:05:04 So when you say during the financial crisis, I was on vacation when Lehman filed.
0:05:06 And it’s, you know, it’s such a cliche.
0:05:10 But my cousin was getting married in Northern California.
0:05:16 And I was in Napa, actually, the day that Lehman filed.
0:05:19 And I woke up and I looked at my phone or my BlackBerry or whatever.
0:05:21 And I saw that Lehman had filed.
0:05:22 And I was stunned.
0:05:25 And I did the thing that everyone talks about, which is I went outside to get coffee.
0:05:28 And everyone was walking around being completely normal.
0:05:33 And I had the thought of, like, what, like, do you not understand that the world just ended?
0:05:37 Because I was, you know, during the financial crisis, I was working at Goldman as an investment banker.
0:05:42 So you were at Goldman in a job in investment banking when all this was going down.
0:05:48 And so when it is going down, at any point, do you start to think, oh, my, I might not have a job?
0:05:50 Of course.
0:05:51 You did have the thought.
0:05:51 Of course.
0:05:52 Of course.
0:05:53 How could you not?
0:05:55 No, it’s wild.
0:05:56 I mean, there were definitely rounds of layoffs.
0:06:01 You know, I was pretty fatalistic that, you know, either I’d get laid off or I wouldn’t.
0:06:02 People on my desk got laid off.
0:06:03 I did not get laid off.
0:06:07 Did you at any point think Goldman’s not going to survive?
0:06:12 You know, I was not sophisticated enough to have that thought.
0:06:25 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.
0:06:29 And how close we were in the scheme of things to, like, Lehman and Bear.
0:06:30 I was on a desk.
0:06:32 We did, like, convertible bond deals.
0:06:36 And we did not do a deal for six or nine months.
0:06:43 We had a master file where you – it was 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.
0:06:55 And it was blank from, I want to say, something like September of 2008 through March or April of 2009 was just blank.
0:06:57 Like, no deals happened in the market.
0:07:01 And so, I spent six months doing nothing.
0:07:04 And I did not, you know, take long lunches or have vacation.
0:07:08 I just sat at my desk and panicked and tried to get deals to happen and no deals happened.
0:07:11 Did you get a bonus at the end of 2009?
0:07:15 I must have.
0:07:16 I must have.
0:07:17 Yeah, I did.
0:07:19 You know, I was down a lot from the previous year.
0:07:22 But we didn’t get zeroed.
0:07:26 Did you ever find yourself on the other end of Wall Street hate?
0:07:28 Not, like, personally.
0:07:33 You know, I think that, like, Occupy Wall Street occurred around the end of my time at Goldman.
0:07:35 I think it occurred a little after I left.
0:07:37 And I would go and be interested in it.
0:07:40 But, like, I could see on TV hate for Goldman.
0:07:42 But, like, I never personally experienced it.
0:07:44 And I kind of was like – I don’t know.
0:07:48 There was a sense that it was a little bit cool to be at a place that everyone hated so much.
0:07:52 It’s like – I felt like, oh, yeah, look at us.
0:07:53 Everyone hates us.
0:07:56 You know who also feels like that?
0:07:57 People who work at the IRS.
0:08:01 There’s an incredible esprit de corps because they know everybody hates them.
0:08:04 And they think what they’re doing is virtuous, but they know everybody hates them.
0:08:06 And it somehow brings them together.
0:08:10 I don’t want to say that what we were doing was, like, you know, virtuous, virtuous.
0:08:11 But it was fine.
0:08:12 You know, Lloyd Blankfrank says we were doing God’s work.
0:08:19 I want to hear your thoughts about the consequences in the financial industry of the crisis.
0:08:22 What came out of it that’s still with us?
0:08:33 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 who does stuff in the financial industry.
0:08:38 I mean, when I was at Goldman, Goldman was in many ways, like, the place to be, right?
0:08:45 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.
0:08:51 And after the financial crisis, the power really shifted away from the investment banks for a bunch of reasons.
0:09:00 So, you know, largely regulatory, like, largely, you know, one, all the biggest investment banks like Goldman became or were bought by banks.
0:09:02 So, they became banks and they were regulated as banks.
0:09:06 And two, like, you know, they’d almost blown up.
0:09:15 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 2007.
0:09:21 And so, the banks got much more careful about their balance sheets and they could do fewer trades.
0:09:36 But also, the regulators kind of prohibited them from doing a lot of the prop trading that was the way that places like Goldman made outsized profits and also the way they attracted and retained and trained risk takers.
0:09:37 And that kind of ended.
0:09:54 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, you know, they call them alternative asset managers.
0:09:56 Like, in my day, they called them private equity firms.
0:10:11 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.
0:10:17 And these big institutions with their kind of longer-term balance sheets can do that now.
0:10:21 And so, like, I don’t want to say no one wants to work at Goldman anymore.
0:10:23 I still have a fondness for Goldman.
0:10:33 People still want to work at Goldman, 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.
0:10:39 These are all places that are kind of, like, closer to the center of the action because they can take more risk.
0:10:44 And the banks took so much risk in 2008 that they can’t do it anymore.
0:10:49 We all decided that these places shouldn’t be doing that kind of thing because the risk gets socialized if they screw it up.
0:10:55 Yeah, you know, it’s – I’ve become – when I was a banker, I was like, what are you talking about?
0:10:57 Prop trading didn’t cause the financial crisis.
0:11:00 And as I get older, I become more sympathetic to the regulatory changes.
0:11:03 I think, one, the risk gets socialized if they screw it up.
0:11:06 But then also, they’re so levered.
0:11:22 Like, banking as a business model, but also investment banking as it was practiced by the big investment banks in 2007 is such a levered business model where you have, like, a thin sliver of equity and a lot of very short-term deposits or demand funding that can dry up overnight.
0:11:28 And if you get anything wrong, like, you vanish and you, like, leave a crater in the market.
0:11:41 When, like, the private credit firms are doing weird loans that, you know, 20 years ago would have been done by Goldman SSG, like, those private credit firms have long-term financing from, like, you know, annuities.
0:11:44 And they just – they’re not runnable.
0:11:45 Like, they won’t blow up overnight.
0:11:46 Right.
0:11:47 So, there’s a lot of stuff like that.
0:11:48 They don’t have depositors.
0:11:49 Yeah, they don’t have depositors.
0:11:52 And Goldman didn’t have depositors in 2007 either.
0:11:55 But, like, they had, you know, like, overnight repo funding.
0:11:58 And it was a really risky business model.
0:12:10 And I think people realized 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 that you’re up to and then you blow up.
0:12:20 But I think, like, all in all, the system right now feels less blow-up-able than it was in 2007 because there is less of that short-term financing against, like, whatever people are up to.
0:12:27 When we come back from the break, Matt Levine and I talk about another consequence of the financial crisis, Bitcoin.
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0:13:47 I’m back with Bloomberg Opinion columnist, Matt Levine.
0:13:49 All right.
0:13:57 So, the 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.
0:14:01 Because the risks moved out of those firms and into other places.
0:14:04 And the status goes to where the risk is being taken.
0:14:06 And that’s a status revolution.
0:14:08 It’s also like substantively.
0:14:10 You get a better financial model.
0:14:10 I think so.
0:14:12 It’s debatable, but I think so, yeah.
0:14:13 Well, what would be the other side?
0:14:21 I mean, if you have Apollo and Aries and these places who have long-term funding against their long-term loans,
0:14:26 that does seem like a more stable thing than what Goldman was doing or even what Citibank was doing.
0:14:31 The main thing that you hear on the other side is that people call those shadow banks, right?
0:14:35 Like, the banks are very carefully supervised.
0:14:38 Not always successfully, but there’s a lot of…
0:14:39 At least somebody’s watching them.
0:14:42 There’s a regulator who’s watching the bank and telling them, don’t make that loan.
0:14:43 That’s too risky, right?
0:14:44 Or, like, in theory, that’s happening.
0:14:49 With the private credit firms, they can kind of do what they want because they’re much more lightly regulated
0:14:52 because they don’t have the crazy banking funding model, because they’re not too big to fail,
0:14:54 because they’re not, you know, their losses aren’t socialized.
0:15:01 And then, you know, people do worry that leverage is creeping back into the system because it has a habit of doing that, right?
0:15:04 Private credit firms do get leverage from banks.
0:15:07 So, like, it’s kind of circulating back into the banking system.
0:15:14 And, you know, when you move away from, like, private credit, like, some of the stuff that banks used to do,
0:15:19 you know, I read about the basis trade, which is you buy treasury bonds and you sell treasury futures.
0:15:24 And it’s a very, very, very low-risk trade because those are almost the same thing, but they’re not quite the same thing.
0:15:28 And so, people lever that trade up, you know, 30 or 100 times.
0:15:30 And that used to be a thing that banks do.
0:15:34 And now it’s a thing that, like, you know, the citadels and millennials of the world do.
0:15:40 And, you know, people definitely look around and say these things are much more lightly regulated than the old banks were.
0:15:43 And they’re running at 100 times leverage.
0:15:44 That seems risky, right?
0:15:47 Like, and there are occasions where the basis trade kind of blows up.
0:15:51 And, you know, there are academics saying the Fed should have to step in when that happens.
0:15:59 And so, you know, there’s – in the long run, you know, you say that, like, you socialize the risk when the banks blow up.
0:16:04 But, like, I’m not sure that was what people thought in, like, 2006.
0:16:11 I’m not sure people thought that, you know – you know, JP Morgan and Citigroup had deposit insurance and FedEx and everything.
0:16:15 But, like, Morgan Stanley and Goldman and Lehman and Bayer were investment banks.
0:16:18 They were kind of more lightly regulated things.
0:16:25 And then it turns out that when they all blow up, the sort of rational thing to do is to socialize the losses, right?
0:16:27 But that was not obvious.
0:16:28 It’s just what happened, right?
0:16:36 And so you can imagine that happening again with, you know, if the big hedge funds that have become so central to the financial system find a way to blow themselves up, like, will those losses get socialized?
0:16:37 Maybe.
0:16:47 When I asked you what the financial consequences are of the crisis and you said the big one you were focusing on was, I didn’t think you were going to say what you did say.
0:16:48 I thought you were going to say Bitcoin.
0:16:50 Yeah.
0:16:55 I mean, Bitcoin is – it’s hard for me to know how directly Bitcoin is a consequence of the financial crisis.
0:17:25 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 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.
0:17:29 But that was peer-to-peer and decentralized and safe, right?
0:17:31 And I think that resonated with a lot of people.
0:17:39 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.
0:17:53 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?
0:18:03 I mean, like, if you look at the career arc of Sam Bankman-Fried, like, no part of what he was doing was a reaction to the risky financial system in traditional finance, right?
0:18:07 Like, everything he was doing was recreating that system with crypto.
0:18:13 One of the many ironies of crypto is that it seems to be born out of mistrust of institutions and intermediaries.
0:18:16 And then it goes and recreates institutions and intermediaries.
0:18:19 It requires even more trust than the thing that it’s replacing.
0:18:25 Because 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 and intermediaries.
0:18:29 And then there’s, like, millions more people who are, like, I like this thing because it went up, right?
0:18:31 And then that’s, like, much more, you know, relevant.
0:18:35 And then so then you have – you can build a system around that.
0:18:39 And so if people like it because it goes up, then, like, offer them leverage, right?
0:18:43 Like, offer them, you know, a trusted intermediary.
0:18:53 And so I think that there is this, like, cultural connection between crypto and mistrust in the financial system.
0:18:58 But that is only a very small part of the actual phenomenon of crypto.
0:19:08 The crypto winter that, you know, kind of began in the summer before the fall of FTX and ended with the fall of FTX really recreates 2008.
0:19:17 Like, really, like, beat for beat is, like, this is what happens when you over-lever something, you know, like, it stops going up.
0:19:21 And so then there’s nothing, you know, holding it up because it’s super over-levered.
0:19:27 And, you know, there’s no regulation and there’s a lot of non-transparency about what is backing all of that leverage.
0:19:34 I said to you at the beginning, like, I was not sophisticated enough to understand the risk that Goldman was in when I was at Goldman.
0:19:40 Like, I witnessed the financial crisis from inside of Goldman, but I didn’t, like, understand it because I was just, like, working my job, you know?
0:19:45 But then as I became a financial journalist, I became more of a student of the 2008 crisis.
0:19:55 It was so useful and interesting to watch the crypto crisis play out because it truly just relearned the lessons of 2008.
0:19:58 And, like, one thing you learn is that it’s all the same thing, right?
0:20:00 Like, a financial crisis, they all look the same, right?
0:20:06 But a difference is that in the crypto crisis, that there is no government to come in.
0:20:07 Oh, yeah.
0:20:08 For a while, there was Sam Bankman free, right?
0:20:15 I mean, like, it was truly, like, people in crypto were like, well, there’s no government, there’s no Fed, but there is FTX.
0:20:17 Right.
0:20:19 So there isn’t that backstop.
0:20:39 But, like, but also, you know, the other big difference is that the reason there’s that backstop in 2008 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.
0:20:46 Because the banks are the lenders that kind of, like, you know, juice economic growth.
0:20:53 Like, one day, maybe crypto will be that important to the economy, but, like, it wasn’t, it’s not yet, right?
0:20:55 So there’s no government bailout because it didn’t matter, right?
0:20:59 Like, all of crypto could go to zero and nothing outside of crypto would be affected by that.
0:21:01 You think that’s still true now?
0:21:04 I think that is 90% true now.
0:21:08 I think that crypto people are working very, very hard to change that, right?
0:21:12 I mean, you look at, like, the integration of stable coins into the traditional financial system.
0:21:16 You look at, you know, the crypto treasury companies.
0:21:20 Like, there is this race to integrate crypto into the real financial system.
0:21:25 Some of that is because the more you integrate it into the real financial system, the more it goes up, right, today.
0:21:32 But some of it is, like, the more you integrate it into the real financial system, the better your odds of getting a bailout if something goes wrong.
0:21:39 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.
0:21:43 And, like, the U.S. taxpayer being the last sucker is, like, a really good backstop.
0:21:47 That would be sarcasm in case you didn’t pick up on it.
0:21:51 When we return, we talk about the lessons we should have learned but didn’t from 2008.
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0:23:21 What lessons do you think we should have learned from the financial crisis that maybe we didn’t?
0:23:30 I do think that, you know, I have a very conventional view of what happened and what financial crises are,
0:23:39 which is that it’s short-term information and sensitive leverage on stuff that you think is safe is the dangerous thing, right?
0:23:41 Say that again in really plain English.
0:23:51 The problem is when you, a bank, whoever, buys stuff that they think is pretty safe.
0:23:55 They buy AAA-rated mortgage bonds or whatever, right?
0:23:57 And they’re like, well, this stuff is really safe.
0:24:03 So we can fund it by borrowing overnight against it.
0:24:10 We can, like, take bank deposits and use it to buy 30-year AAA mortgages because, like, they’re so safe, right?
0:24:14 That is, like, the source of all financial crises, right?
0:24:16 Sometimes it’s literally bank deposits, right?
0:24:18 Like, that’s what a run on a bank is.
0:24:25 But in 2008, it’s mostly, you know, the Goldman’s and Lehman’s and Baer’s of the world who are not really taking bank deposits
0:24:29 but who are borrowing very short-term in capital markets.
0:24:33 And they’re thinking, well, you know, we have, like, a big diversified pool of good assets.
0:24:34 We’re good traders.
0:24:39 So it’s pretty safe for us to borrow short-term to fund these long-term assets.
0:24:43 And then, like, you lose confidence and that short-term funding goes away.
0:24:48 You have to sell all your assets and you can’t sell them or you can only sell them at deeply discounted prices.
0:24:57 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.
0:25:00 Like, it’s an extremely fast catastrophe.
0:25:18 So 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.
0:25:26 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.
0:25:34 But so, right, like, the lesson to me is very straightforward, which is that runnable, you know, short-term debt is the thing that causes financial crises.
0:25:36 Can people take their money out, right?
0:25:37 It’s not the asset side, right?
0:25:40 And so people worry a lot about risky stuff.
0:25:43 Risky stuff is fine if everyone knows it’s risky stuff, right?
0:25:49 What’s bad is when you’re buying AAA stuff that you think is good that might really be good, right?
0:25:56 I mean, like, what’s bad is that, you know, there’s mark-to-market losses and you have short-term funding and you get blown up.
0:26:01 So to me, the thing that, like, the number one lesson to take away is worry about short-term funding.
0:26:07 And I think, like, regulators definitely took that lesson and banks are now much more required to have much more capital.
0:26:08 They have much more liquidity.
0:26:09 They’re much less short-term funded.
0:26:26 But the crypto 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 to the financial crisis is that the original banks had short-term funding, right?
0:26:27 I mean, they had deposits, right?
0:26:34 And 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.
0:26:41 But, like, nowadays people are much more worried about the asset side and they’re much more worried about, ooh, private credit is investing in risky stuff.
0:26:44 And I think that’s, like, the wrong place to be looking.
0:26:48 If you’re looking for the next crisis, where do you think the right place to look is?
0:26:48 Oh, I don’t know.
0:26:50 I don’t want to be a crisis monger.
0:26:58 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?
0:27:02 The big four, like the multi-strategy hedge funds, they do a lot of the businesses that banks used to do.
0:27:03 They’re very levered.
0:27:08 And they have this profile of, like, they’re quite safe, right?
0:27:09 Like, they have a good, they have, like, high-sharp ratios.
0:27:20 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.
0:27:21 They’re very well risk-managed.
0:27:22 They’re very smart.
0:27:29 They are the places that train up the best risk-takers now in a way that, like, 20 years ago, that was the banks, right?
0:27:33 So all this stuff, like, I’m not saying they’re going to have a crisis tomorrow.
0:27:34 I’m saying, like, that’s where a crisis would be, right?
0:27:35 They’re huge.
0:27:38 They’re, like, you know, they’re central to the market.
0:27:39 They’re highly levered.
0:27:44 And all these people, banks, hedge funds, everyone has learned, you know, they were at Goldman in 2007.
0:27:45 Like, they’ve learned these lessons, right?
0:27:51 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.
0:27:56 So what else, anything else pop to mind when I say financial consequences of the crisis?
0:27:58 Consumer Financial Protection Bureau.
0:28:00 I mean, that’s over.
0:28:03 I don’t know.
0:28:05 Like, I would put that in the category.
0:28:14 Like, that’s, like, a sort of broad sociological consequence of the financial crisis is that the big banks lost status.
0:28:21 Now you can go to Congress and say, banks should not be able to charge, you know, overdraft fees.
0:28:23 And everyone’s like, oh, yeah, those banks, they suck, right?
0:28:27 And so it’s easier to regulate banks, just generally, right?
0:28:30 Like, banks have less of an ability to get what they want.
0:28:34 I think that is probably a consequence of the crisis.
0:28:37 When you look at, like, the CFPB’s mandate, I mean, there’s nothing to do with them.
0:28:39 There’s nothing, almost nothing to do with the financial crisis.
0:28:49 There is this nexus of giving people mortgages they can’t afford is both a bad consumer banking practice and a, you know, contributor to the financial crisis, right?
0:28:49 So, like, there’s that.
0:28:50 That’s an important overlap.
0:29:00 But most of what the CFPB is doing is, like, fining banks for doing things that probably improve the stability of the banking system by extracting money from consumers, right?
0:29:05 I mean, the CFPB is a consequence of the crisis in the sense that people were mad at banks.
0:29:09 And so it was a lot more tenable to do things to regulate or punish banks.
0:29:16 But that just sort of ended for political reasons.
0:29:18 So I wanted to pick your brain on just this subject.
0:29:23 And I think it sounds like I picked your brain clean, unless there’s something else you would like to say.
0:29:25 I’m a little interested in stable coins.
0:29:29 I mean, like, stable coins are sort of a way to take risk out of the financial system.
0:29:38 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, right?
0:29:41 One thing that I write about a lot is that banking has become narrower.
0:29:53 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.
0:29:58 So, like, private credit firms raise equity to make loans, right, rather than using deposits.
0:30:05 And then on the other side, the, like, depository stuff is invested in safer, shorter-term stuff.
0:30:12 And so, like, classically, that’s money market funds, where, like, you put money in a money market fund, they put it in, like, treasury bills, you get interest.
0:30:17 And instead of them lending out your money long-term, they’re just doing something very safe with it.
0:30:20 And increasingly, like, stable coins are becoming that, right?
0:30:24 And so, like, this is, like, a crypto incursion into the traditional financial system.
0:30:29 But also people, also a lot of people, politicians, crypto people, really like it, right?
0:30:38 Because it does seem like a safer, more direct way to hold your money than holding it in a bank, which might be making, you know, buying mortgage securities with it.
0:30:43 I will tell you who doesn’t like it, my impression is that who doesn’t like it is the Fed, right?
0:30:47 Because, like, the Fed likes the traditional banking system, right?
0:30:51 They like the ability to transmit monetary policy through bank reserves, right?
0:30:51 Right.
0:31:04 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.
0:31:11 There’s an article at Bloomberg about how stable coins are potentially an existential threat to regional banks.
0:31:18 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.
0:31:29 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.
0:31:29 Like, they’ll do a stable coin.
0:31:30 It’ll be fine, right?
0:31:42 But, like, a lot of regional banks are going to have trouble because the banking system for so long was this sort of sleight of hand of, like, we take deposits that you think are super safe, and we use them to make risky investments.
0:31:48 And if that’s going away, then it’s an existential crisis for some number of banks.
0:31:50 And is that going away because of 2008?
0:31:51 Like, a little bit.
0:31:52 You can draw that line, right?
0:32:02 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 2008 crisis.
0:32:07 And so some of, like, the stable coin stuff and the narrower banking stuff really is downstream of that.
0:32:10 I mean, I had never heard of the term narrow banking until 2008, right?
0:32:12 Like, it became a thing after 2008.
0:32:22 People said this whole system of, you know, we take short-term money and we use it to make risky bets just became a lot more suspicious.
0:32:25 Can you imagine a world where there are no banks?
0:32:28 People imagine a world where there are no banks all the time.
0:32:29 I mean, not exactly, right?
0:32:32 They imagine a world where your deposits live.
0:32:33 In stable coin.
0:32:37 In stable coins, in treasury bills, in reserves, at the Fed, right?
0:32:41 In U.S. dollar, you know, digital currency where, like, you don’t have to have a bank.
0:32:44 You just, your money, like, the Fed keeps track of your account for you, you know?
0:32:46 And then how do you get a mortgage?
0:32:50 Well, you know, like, a lending club gives you a mortgage.
0:32:52 Or, like, you know, a private credit firm gives you a mortgage.
0:32:54 Or an insurance company gives you a mortgage.
0:32:56 Apollo gives you a mortgage.
0:32:59 Apollo, you know, one thing that Apollo does is they run annuities, right?
0:33:03 And an annuity is, like, we’ll give you, you know, a fixed cash flow for 30 years.
0:33:04 Like, that’s the other side of a mortgage, right?
0:33:08 It makes total sense for Apollo to say, we’re going to make mortgages on one side,
0:33:11 and we’re going to do annuities on the other side, and they’re going to cross perfectly, right?
0:33:15 So, I think it’s pretty easy to imagine a world without banks.
0:33:17 It’s just, it’s very hard to imagine the transition, right?
0:33:21 Like, to go from the world of banks to a world without banks is going to be really,
0:33:24 would be really, you know, difficult for a lot of people.
0:33:27 But if it happens, and if that’s the path we’re on,
0:33:31 and that narrow banking is just a step on the path to no banks,
0:33:36 people will tell the story how it all may have kind of just started with the financial crisis.
0:33:39 I think if that happened, I would put a very low probability of that happening.
0:33:44 But if it happened, yes, I think clearly the financial crisis would be the great catalyst for it.
0:33:46 Because, like, by the way, I mentioned stable coins.
0:33:47 Like, stable coins grow out of Bitcoin, right?
0:33:49 Bitcoin grows out of the financial crisis, right?
0:33:53 Like, the sort of, like, great flourishing of mistrust in the financial system
0:33:55 can lead to a lot of consequences.
0:33:57 And I think we’re, like, you know, partly down the road to those consequences.
0:34:01 That was Bloomberg Opinion columnist Matt Levine.
0:34:04 Next week, we’re wrapping up this Big Short Companion series
0:34:08 by talking with two people whose political careers got their starts with the financial crisis.
0:34:11 Because the crisis changed more than just finance.
0:34:14 It changed politics, too.
0:34:24 Against the Rules, the Big Short Companion is hosted by Michael Lewis.
0:34:28 It’s produced by me, Lurijin Kot, and Catherine Girardot.
0:34:31 Our editor is Julia Barton.
0:34:34 Our theme was composed by Nick Bertel.
0:34:36 And our engineer is Hans Dale Shi.
0:34:40 Special thanks to Nicole Optenbosch,
0:34:41 Jasmine Faustino,
0:34:43 Pamela Lawrence,
0:34:45 and the rest of the Pushkin Audiobooks team.
0:34:49 Against the Rules is a production of Pushkin Industries.
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0:35:18 or wherever audiobooks are sold.
0:35:28 On Masters of Scale,
0:35:31 iconic leaders reveal how they’ve beaten the odds.
0:35:34 Asking really strong questions is a superpower.
0:35:37 You want to show up with something radically different
0:35:40 and how they’ve grown companies to incredible heights.
0:35:43 The greatest rewards always come from the greatest risks.
0:35:44 That’s hit the gas.
0:35:46 Airbnb, Zillow, Microsoft,
0:35:47 Liquid Death, and more.
0:35:50 Hear from the founders who’ve changed the game.
0:35:53 It’s anything but business as usual.
0:35:55 Find Masters of Scale on Apple Podcasts,
0:35:57 Spotify, YouTube,
0:36:00 or wherever else you get podcasts.
0:36:06 This is an iHeart Podcast.
0:36:08 Guaranteed human.
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.
See omnystudio.com/listener for privacy information.
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