Lydia Jean Kot (4:01)

You can just read Matt Levine.

Michael Lewis (4:02)

I can just read Matt Levine. And he cares so much more about it than I do. He cares so much more about the intricacies of finance. The only time I cared as 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, 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 across to you.

Lydia Jean Kot (4:35)

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.

Michael Lewis (4:51)

First off, where were you during the financial crisis?

Matt Levine (4:55)

What were you doing? Okay, so when you say during the financial crisis, I was on vacation when Lehman 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 Lehman filed. And I woke up and I looked at my phone or my BlackBerry or whatever, 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.

Michael Lewis (5:37)

So you were at Goldman in a job in investment banking when all this was going down. And when. So when it is going down, at any point do you start to think, oh, my, my, I might not have a job? Of course you did have a course.

Matt Levine (5:50)

Of course. How could you not? No, it's wild. I mean, there were definitely rounds of layoffs, and I was pretty fatalistic that either I'd get laid off or I wouldn't. People on my desk got laid off. I did not get laid off.

Michael Lewis (6:02)

Did you at any point think, Goldman's not going to survive?

Matt Levine (6:07)

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. And how close we were in the scheme of things to, like, Lehman and Bear. I was on a desk. We did, like, convertible bond deals, and we did not do a deal for six or nine months. We had a. 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 2008 through March or April of 2009 was just blank. No deals happened in the market. And so I spent six months doing nothing. And I did not 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.

Michael Lewis (7:08)

Did you get a bonus at the end of 09?

Matt Levine (7:12)

I. I must have. I must have. Yeah, I did. You know, I was down a lot from the previous year, but I. We. We didn't get zeroed. Yeah.

Michael Lewis (7:22)

Did you ever find yourself on the other end of Wall street hate?

Matt Levine (7:26)

Uh, not like, personally. You know, I think that, like, Occupy Wall street occurred around the end of my time at Goldman. I think it occurred 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 that. And I. 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, look at us. Everyone hates us.

Michael Lewis (7:53)

You know who also feels like that? People who work at the irs. There's an incredible esprit de corps because they know everybody hates them, and they think what they're doing is virtuous, but they know everybody hates them, and it somehow brings them together.

Matt Levine (8:05)

I don't want to say that what we were doing was like, you know, virtuous, virtuous, but it was fine. Lloyd Blankfein says we're doing God's work.

Michael Lewis (8:12)

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.

Matt Levine (8:21)

Well, the thing 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. I mean when I was at Goldman, Goldman was in many ways like the place to be. Right. It was the place that sort of generated all the hedge fund managers that did a lot of the exciting deals 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, largely regulatory, like largely one, all the biggest investment banks like Goldman became or were bought by banks. So they became banks and they're regulated as banks. And two, they'd almost blown up. And so everyone kind of understood both regulators, but also 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. 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 Goldman made outsized profits and also the way they attracted and retained and trained risk takers. And that kind of ended and the result is that a lot of the sort of high end action that occurred at the investment banks ended up at what are, you know, the big, like today are big hedge funds or the big kind of, you know they call them alternative asset managers. Like in my day they called them private equity firms. But like you know, the like Apollos and kkrs and Blackstones got a lot more important because a lot of the kind of like aggressive go anywhere balance sheet financing that the banks used to do, the banks are afraid to do now. And these big institutions with their kind of longer term 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 Goldman. 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. 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 so much risk in 2008 that they can't do it anymore.

Michael Lewis (10:43)

We all decided these places shouldn't be doing.

Matt Levine (10:45)

Yeah.

Michael Lewis (10:46)

And because the risk gets socialized if they screw it up.

Matt Levine (10:49)

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 as I get older I become more sympathetic to, to the regulatory changes. I think one get socialized if they screw it up but then also they're so levered 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 a thin sliver of equity and a lot of very short term deposits or demand funding that can dry up overnight. And if you get anything wrong, you vanish and you leave a crater in the market. When the private credit firms are doing weird loans that 20 years ago would have been done by Goldman SSG. Those private credit firms have long term financing from annuities and they're not runnable, they won't blow up overnight. So there's a lot of stuff like that.

Michael Lewis (11:46)

They don't have depositors.

Matt Levine (11:47)

Yeah, they don't have depositors and Goldman didn't have depositors in 2007 either but they had 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 that you're up to and then you blow up. But I think like all in all the system right now feels less blow up than it was in 2007 because there is less of that short term financing against like whatever people are up to.

Michael Lewis (12:20)

When we come back from the break, Matt Levine and I talk about another consequence of the financial crisis. Bitcoin.

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Michael Lewis (14:57)

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Michael Lewis (15:04)

I'm back with Bloomberg Opinion columnist Matt Levine. All right, 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 and because the risks moved out of those firms and into other places and the status goes to where the risk is being taken and.

Matt Levine (15:25)

That'S the status revolution. It's also like substantively you get a better financial model. I think so. It's debatable, but I think so.

Michael Lewis (15:32)

Yeah, well would be the other side. I mean if you have Apollo and and Aries and 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 Citibank was doing.

Matt Levine (15:47)

The main thing that you hear on the other side is that people call the Shadow Banks, right. Like, the banks are very carefully supervised. Not, not always successfully, but there's a.

Michael Lewis (15:58)

Lot of, at least somebody's watching them.

Matt Levine (15:59)

There's a regulator who's watching the bank and telling them, don't make that loan. That's too risky. Right? Or like, in theory, that's happening with the private credit firms. They can kind of do what they want because they're much more lightly regulated because they don't have the crazy banking funding model because they're not too big to fail, because they're not, you know, their losses aren't socialized. And then, you know, people do worry that leverage is creeping back into the system because it has a habit of doing that. Right. Private credit firms do get leverage from banks. So, like, it's kind of circulating back into the banking system. And, you know, when you move away from like private credit, like some of the 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 the same thing, but they're not quite the same thing. And so people lever that trade up, you know, 30 or 100 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 at 100 times leverage. That seems risky.

Lydia Jean Kot (17:03)

Right?

Matt Levine (17:04)

Like, and there are occasions where the basis trade kind of blows up. And you know, there are academics saying the Fed should have to step in when that happens. And so it's, you know, there's, in the long run, you know, you say that like, that you socialize the risk and when the banks blow up. But like, I'm not sure that was what people thought in like 2006. I'm not sure people thought that, you know, you know, JP Morgan and Citigroup had deposit insurance and Fed access and everything. But like Morgan Stanley and Goldman and Lehman and Bear were investment banks. They were kind of more lightly regulated things. And then it turns out that when they all blow up, the sort of rational thing to do is to socialize the losses. Right. But that was not obvious. It's just what happened. Right. 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 Maybe when I asked.

Michael Lewis (17:58)

You what the financial consequences are of the, of the crisis and you said the big one you were focusing on was. I didn't think what you were going to say, what you did say. I thought you were going to say bitcoin.

Matt Levine (18:09)

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 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 powerful intermediaries who got government support, but that was peer to peer and decentralized and safe. Right. And I think that resonated with a lot of people. 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? 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? Like everything he was doing was recreating that system with crypto.

Michael Lewis (19:27)

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 and requires even more trust than the thing that it's replacing.

Matt Levine (19:39)

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. And then there's like millions more people who are like, I like this thing because it went up, right? And then that's like, much more relevant. And then so then you have. You can build the system around that. And so if people like it because it goes up, then like, offer them leverage, right? Like, offer them, 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 before the fall of FTX and ended with the fall of FTX. Really recreates 2008. Like really like beat for beat is like this is what happens when you over lever something, you know, like it stops going up and so then there's nothing, you know, holding it up because, because it's super over levered, you know, there's no regulation and there's a lot of non transparency about what is backing all of that leverage. I said to you the beginning like I was not sophisticated enough to understand the risk that Goldman was in. When I was at Goldman, like I witnessed the financial crisis from inside of Goldman, 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 2008 crisis and it was so useful and interesting to watch the crypto crisis play out because it truly just relearned the lessons of 2008. And like one thing you learn is that it's all the same thing, right? Like a financial crisis is they all look the same.

Michael Lewis (21:21)

But a difference is that in the crypto crisis that there is no government to come in.

Matt Levine (21:26)

Oh yeah, for a while there was Sam Bankman fried, 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 ftx. Right.

Michael Lewis (21:37)

So there isn't that backstop.

Matt Levine (21:40)

But also 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 a collapse of the investment banks, the banking system, that subsector of the economy could have real consequences for the real economy because the banks are the lenders that kind of like, you know, juice economic growth. Like one day maybe crypto will be that important to the economy. But like it wasn't, it's not yet. Right. So there's no government bailout because it didn't matter. Right. Like all of crypto could go to zero and nothing outside of crypto would be affected by that.

Michael Lewis (22:20)

You think that's still true now?

Matt Levine (22:21)

I think that is 90% 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 stablecoins 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 integrate it into the real financial system, the more it goes up right today. 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. 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.

Michael Lewis (23:04)

That would be sarcasm, in case you didn't pick up on it. When we return, we talk about the lessons we should have learned but didn't from 2008.

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Michael Lewis (26:21)

What lessons do you think we should have learned from the financial crisis that maybe we didn't?

Matt Levine (26:29)

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 insensitive leverage on stuff that you think is safe is the dangerous thing, right?

Michael Lewis (26:45)

Say that again in really plain English.

Matt Levine (26:47)

The problem is when you, a bank, whoever buys stuff that they think is pretty safe, they buy AAA 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 take bank deposits and use it to buy 30 year AAA mortgages because they're so safe. That is the source of all financial crises. Sometimes it's literally bank deposits. That's what a run on a bank is. But in 2008, it's mostly the Goldmans and Lehmans and Bears of the world who are not really taking bank deposits, but who are borrowing very short term in capital markets. And they're thinking, well, we have 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 you lose confidence and that short term funding goes away and you have to sell all your assets and you can't sell them, or you can only sell them at deeply discounted prices. And then you go from saying how great you are and how much money you're making to being bankrupt in hours or days. It's an extremely fast catastrophe.

Michael Lewis (28:06)

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.

Matt Levine (28:24)

But in the moment it's very hard for you to or you can't really satisfy people that everything that you own is good. But so, right, the lesson to me is very straightforward which is that runnable short term debt is the thing that causes financial crises. Can people take their money out? It's not the asset side. And so people worry a lot about risky stuff. Risky stuff is fine, everyone knows it's risky stuff. What's bad is when you're buying AAA stuff that you think is good that might really be good, right? 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. So to me the thing that like the number one lesson to take away is worry about short term funding. And I think like regulators definitely took that lesson and 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 world didn't learn that lesson, you know, and like there are a lot of other places where.

Podcast Advertiser/Host (29:24)

The.

Matt Levine (29:24)

Reason the original banking crisis was the sort of successor to the financial crisis is that the regional banks had short term funding. I mean they had deposits, right. I think people didn't appreciate, despite how obvious it seems people didn't appreciate how short term the funding of a regional bank actually was. But 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 and I think that's the wrong place to be looking.

Michael Lewis (29:50)

If you're looking for the next crisis. Where do you think the right place to look is?

Matt Levine (29:53)

Oh, I don't know. I don't want to be a crisis monger. 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? They have high Sharpe ratios, they're good at, you know, steadily grinding out profits by doing highly levered trades where they're essentially getting paid to take the other side of the market and to provide liquidity to the market. They're very well risk Managed. They're very smart. They are the places that train up the best risk takers. Now, in a way that like 20 years ago, that was the banks, right? So all this stuff, like I'm not saying they're going to have a crisis tomorrow. I'm saying like that's where a crisis would be. Right. They're huge. They're like, you know, they're central to the market, they're highly levered. And all these people, banks, hedge funds, everyone has learned, you know, they were at Goldman in 2007, 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.

Michael Lewis (30:57)

So what else, anything else popped to mind when I say financial consequences of the crisis? Consumer Financial Protection Bureau.

Matt Levine (31:04)

I mean, that's over. I don't know. I would put that in the category that's a broad sociological consequence 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 overdraft fees. And everyone's like, oh yeah, those banks, they suck. Right. And so it's easier to regulate banks. Just generally banks have less of a, the ability to get what they want. I think that is probably a consequence of the crisis. When you look at like the CFPB's mandate, I mean it has nothing to do with nothing, almost nothing to do with the financial crisis. There is this nexus of giving people mortgages they can't afford is both a bad consumer banking practice and a contributor to the financial crisis. Right. So there's that, that's an important overlap. But most of 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. I mean, the CFPB is a consequence of the crisis in the sense that people were mad at banks. And so it was a lot more tenable to do things to regulate or punish banks. But that just sort of ended for political reasons.

Michael Lewis (32:21)

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.

Matt Levine (32:28)

I'm a little interested in stablecoins. I mean like, stablecoins 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 stablecoin 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, the institutions that do risky investing are now increasingly funded with long term, locked up equity type funding. So private credit firms raise equity to make loans rather than using deposits. And then on the other side, depository stuff is invested in safer, shorter term stuff. And so classically that's money market funds, where you put money in money market fund, they put it in treasury bills, you get interest, and instead of them lending out your money to long term, they're just doing something very safe with it. And increasingly like stablecoins 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 like it, right? Because it does seem like a safer and more direct way to hold your money than holding a bank, which might be making, you know, buying mortgage crazy with it. I will tell you who doesn't like it. My impression is that who doesn't like it is the Fed. Right? Because the Fed likes the traditional banking system. They like the ability to transmit monetary policy through bank reserves. Right?

Michael Lewis (33:56)

Right.

Matt Levine (33:57)

There is this worry that we're undermining the banking system by moving a lot of what would have been deposits into something else, money market funds and stablecoins. There's an article at Bloomberg about how stablecoins are potentially an existential threat to regional banks because like regional banks, they get deposits from companies depositing your paycheck and then they use that to run their business making loans. And if stablecoins become a good payment mechanism and companies are just like, I'll give you a stablecoin instead of a direct deposit in your bank account, then JP Morgan will be fine, they'll do a stablecoin, it'll be fine. But 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. And if that's going away, then it's an existential crisis for some number of banks. And is that going away because of 2008? A little bit. You can draw that line, right? Like the mistrust in the banks and the understanding that banks take risks with your money was sort of like brought back to the forefront by the 2008 crisis. And so some of like the stablecoin stuff and the narrower banking stuff really is downstream of that. I mean, I had never Heard of the term narrow banking until 2008. Right. Like it became a thing after 2008. People said this whole system of, you know, we take deposit, we take short term money and we use it to take risky, make risky bets. Just became a lot more suspicious.

Michael Lewis (35:28)

Can you imagine a world where there are no banks?

Matt Levine (35:31)

People imagine a world where there are no banks all the time. I mean, not exactly. Right. They imagine a world where your deposits live in stablecoins, in stable coins, in treasury bills, in reserves at the Fed, right. In US Dollar digital currency, where you don't have to have a bank, your money, the Fed keeps track of your account for you. And then how do you get a mortgage? Well, lending club gives you a mortgage, or a private credit firm gives you a mortgage, or an insurance company gives you a mortgage, or Apollo gives you a. One thing that Apollo does is they run annuities and an annuity is like, we'll give you a fixed cash flow for 30 years. That's the other side of a mortgage. It makes total sense for Apollo to say we're going to make mortgages on one side and we're going to do annuities on the other side and they're going to cross perfectly. So I think it's pretty easy to imagine a world without banks. It's very hard to imagine the transition to go from the world of banks to a world without banks is going to be really. Would be really, you know, difficult for a lot of people.

Michael Lewis (36:30)

But if it happens and if that's the path we're on and that 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 the financial crisis.

Matt Levine (36:42)

I think if that happened, I put a very low probability happening. But if it happened, yes, I think, I think clearly the financial crisis would be the great catalyst for it. Because, like, by the way, I mentioned stablecoins, like stablecoins grow out of bitcoin, right? Bitcoin grows out of the financial crisis, 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.

Michael Lewis (37:03)

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 careers got their starts with the financial crisis. Because the crisis changed more than just finance. It changed polit.

Lydia Jean Kot (37:26)

Against the rules. The Big Short Companion is hosted by Michael Lewis. It's produced by me Ludy, Jean Kot and Katharine Girardot. Our editor is Julia Barton, our theme was composed by Nick Bertell, and our engineer is Hans Dale. She Special thanks to Nicole Opten Bosch, Jasmine Faustino, Pamela Lawrence and the rest of the Pushkin Audiobooks team. Against the Rules is the production of Pushkin Industries. To find more Pushkin Podcasts, listen on the iHeartRadio app, Apple Podcasts, or wherever you listen to podcasts. And if you'd like to listen ad free and learn about other exclusive offerings, don't forget to sign up for a Pushkin subscription at Pushkin FM plus or on our Apple show page. And you can get the Big Short now at Pushkin FM Audiobooks or wherever audiobooks are sold.

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Lydia Jean Kot (39:32)

Okay, only 10 more presents to wrap. You're almost at the finish line, but first.

Kraken Legal Disclaimer (39:51)

There the last one.

Lydia Jean Kot (39:54)

Enjoy a Coca Cola for a pause that refreshes.

Podcast Advertiser/Host (40:00)

This is an I Heart podcast.