Introducing: The Big Short Companion from Against the Rules: How the Financial Crisis Broke Wall Street

Summary

Podcast Summary

How to Money × Against the Rules: The Big Short Companion – "How the Financial Crisis Broke Wall Street"

Original air date: November 23, 2025
Host: Michael Lewis
Guest: Matt Levine (Bloomberg Opinion Columnist & Money Stuff creator)
Theme: The lasting financial consequences of the 2008 crisis—how Wall Street changed, where risk migrated, the emergence of Bitcoin, regulatory results, and the future of banking.

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Episode Overview

This episode is a special crossover between Michael Lewis' Against the Rules and the "How to Money" ethos, serving as a companion to The Big Short. Michael Lewis and guest Matt Levine explore how the 2008 financial crisis reshaped Wall Street, shifted the locus of risk, sparked a “status revolution” in finance, inspired Bitcoin and the rise of stablecoins, and led to evolving regulatory and market dynamics. The discussion also reflects on what we learned (and failed to learn) from the 2008 debacle, the cyclical nature of financial crises, and speculation on a future without traditional banking.

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Key Discussion Points and Insights

1. Personal Recollection of the 2008 Crisis

• Where were you when it happened?
  • Matt Levine recalls learning about Lehman Brothers' collapse while at a wedding in Napa Valley, feeling that "the world just ended" while everyone else seemed oblivious.

    “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?” – Matt Levine [05:12]

• Working at Goldman Sachs
  • Levine was in investment banking at Goldman during the crisis. He describes the uncertain atmosphere, rounds of layoffs, and a months-long period with “no deals happening.”

    “I just sat at my desk and panicked and tried to get deals to happen, and no deals happened.” – Matt Levine [06:43]

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2. Wall Street's Transformation post-2008

• Loss of Status for Big Banks
  • Top investment banks like Goldman Sachs and Morgan Stanley lost their “king of the hill” status. New elite institutions emerged: major hedge funds, alternative asset managers (Apollo, KKR, Blackstone), and high-frequency trading firms.

    “The power really shifted away from the investment banks for a bunch of reasons...” – Matt Levine [08:23]

• Change in Risk-Taking: Who Holds the Risk Now?
  • Due to regulatory changes and institutional failures, traditional banks reduced leverage and proprietary trading. Risk migrated to less regulated entities—hedge funds, private equity, “shadow banks.”

    “But it's definitely like the prestige locations on Wall street have shifted...because they can take more risk.” – Matt Levine [09:59]

• Regulatory Backdrop
  • Regulatory efforts post-2008 aimed to prevent banks’ risky activities from threatening the financial system (since banks’ failures were socialized), but left “shadow” entities with more flexibility—and risk.

    “There’s a regulator who's watching the bank... with private credit firms, they can kind of do what they want because they're much more lightly regulated...” – Matt Levine [13:32]

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3. The Shadow Banking System and New Risks

• System Stability and New Leverage
  • The migration of risk led to more stability among regulated banks; however, new kinds of risks emerge as leverage creeps into non-bank financial institutions, sometimes at extraordinary ratios.

    “...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.” – Matt Levine [12:16]

• Light Regulatory Touch and Potential Hazards
  • Concerns exist that if these large, lightly regulated institutions (e.g., multi-strategy hedge funds) were to “blow themselves up,” government might once again be forced to socialize losses, repeating 2008’s controversies.

    “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.” – Matt Levine [15:22]

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4. Bitcoin and Crypto: Children of the Crisis

• Bitcoin as Reaction to 2008
  • Bitcoin (and the broader crypto movement) draws from distrust in traditional banking fostered by the '08 crisis; Satoshi Nakamoto’s white paper references these systemic failings.

    “It seems like the pseudonymous Satoshi Nakamoto was upset by the leverage in the banking system and by the socialization of losses ... and wanted a financial system that didn’t look like that…” – Matt Levine [15:52]

• Crypto Repeats the Same Mistakes
  • Ironically, while born as an “institution-free” alternative, crypto quickly recreated intermediaries, risk, and leverage—culminating in collapses like FTX that mirror 2008’s mistakes.

    “Crypto quickly replicated a lot of the elements of the levered fractional reserve risky financial system…” – Matt Levine [16:35]
    “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.” – Matt Levine [18:43]

• No Bailout for Crypto (Yet)
  • Unlike banks, crypto collapses (so far) don’t carry systemic risk to the broader economy—so no government bailouts. However, this could change as crypto intertwines more with traditional finance.

    “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.” – Matt Levine [19:45]

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5. Lessons Learned (and Not Learned) from 2008

• Core Crisis Mechanism: Short-Term Leverage on “Safe” Assets
  • The central error: institutions think “safe” assets justify highly leveraged, short-term funding. When confidence is lost and short-term funding vanishes, even robust institutions can collapse rapidly.

    “The problem is when you, a bank, whoever buys stuff that they think is pretty safe... So we can fund it by borrowing overnight against it... That is like the source of all financial crises.” – Matt Levine [21:26]

• Misperception of Asset Quality vs. Funding Structure
  • It’s not just holding risky assets—it’s thinking you can fund long-term assets with fragile, short-term borrowing, making the system “runnable.”

    “Risky stuff is fine if everyone knows it’s risky stuff. Right. What's bad is when ... you get blown up.” – Matt Levine [23:22]

• Regulatory Shifts
  • Regulations post-crisis forced banks to hold more capital and liquidity and reduced short-term funding, but risks resurface elsewhere (e.g., regional banks, crypto).

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6. Where to Watch for the Next Financial Crisis

• Hedge Funds as the New Banks?
  • Levine points to large multi-strategy hedge funds as the likeliest locus for the next crisis: highly-levered, central to markets, reminiscent of the old banks.

    “The big four, like the multi strategy hedge funds... they're highly levered. And all these people, banks, hedge funds, everyone has learned ... but you keep turning the dial a little bit more towards risk...” – Matt Levine [24:31]

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7. Other Lasting Consequences: Regulation and Public Attitude

• Consumer Financial Protection Bureau (CFPB)
  • Although its mandate only partially stems from the crisis, the CFPB and “tough on banks” politics are downstream of public anger toward banks post-2008.

    “So it's easier to regulate banks just generally, right. Like banks have less of an ability to get what they want. I think that is broadly a consequence of the crisis.” – Matt Levine [25:47]

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8. The Future of Banking: Narrow Banks, Stablecoins, and Beyond

• Narrowing the Banking Function
  • Risk-taking is moving to institutions with long-term equity funding (private credit, hedge funds), while “banking” is becoming narrower and safer: money market funds, stablecoins, etc.

    “One thing that I write about a lot is that banking has become narrower.” – Matt Levine [27:17]

• Stablecoins as an Existential Threat to Banks
  • Stablecoins—crypto assets pegged to the US dollar, invested in government securities—threaten the traditional deposit/lending model, especially for regional banks.

    “Stablecoins are potentially an existential threat to regional banks.” – Matt Levine [29:15]

• Imagining a World Without Banks
  • Conceivable that non-banks (private equity, annuity providers) handle all long-term lending and individuals keep funds in stablecoins or digital cash—though the transition would be messy.

    "I think it's pretty easy to imagine a world without banks. It's very hard to imagine the transition." – Matt Levine [30:49]

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Notable Quotes & Memorable Moments

• On the “world ending” at Lehman’s collapse:

  “Do you not understand that the world just ended?” – Matt Levine [05:12]

• On the shifting status in finance:

  “The prestige locations on Wall street have shifted to the big hedge funds, the big asset managers, the big high frequency trading firms.” – Matt Levine [09:42]

• On financial crises:

  “A financial crisis is—they all look the same.” – Matt Levine [18:43]

• On lessons not learned:

  “Risky stuff is fine if everyone knows it’s risky stuff. Right. What's bad is when you’re buying AAA stuff that you think is good... you get blown up.” – Matt Levine [23:22]

• On stablecoins and the future:

  “Stablecoins are potentially an existential threat to regional banks.” – Matt Levine [29:15]

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Key Timestamps for Important Segments

• [05:12] Matt Levine’s personal experience during the Lehman collapse
• [08:23] How Wall Street status and risk-taking changed post-2008
• [12:22] Shift of leverage and risk into shadow banks and hedge funds
• [15:52] Bitcoin as a direct response to banking failures in 2008
• [18:43] Crypto’s 2022 crisis as a replay of 2008’s systemic failures
• [21:26 & 23:22] The real lesson of financial crises: over-leverage on “safe” assets with short-term funding
• [24:31] Potential for new crisis in large multi-strategy hedge funds
• [25:47] Public opinion and bank regulation post-crisis
• [27:17 & 29:15] Narrow banking, stablecoins, and their challenge to traditional banking
• [30:49] Speculating on a world without banks

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Overall Tone and Style

Lewis’s trademark narrative insight and wit combine with Matt Levine’s clear, analytical, and occasionally sardonic expertise. The episode moves quickly but deeply, balances jargon-free explanation with real-world anecdotes, and maintains a dry, wry sense of humor—especially regarding Wall Street’s shifting sense of self-importance and the ironies of the crypto “revolution.”

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Final Thought

This episode offers a comprehensive, nuanced look at how the aftershocks of 2008 continue to shape finance, with a clear-eyed view of innovations, regulatory reactions, and the ever-repeating patterns of risk, hubris, and crisis. Even for listeners not steeped in finance, the hosts make the story understandable—and fascinating.

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For further episodes and resources, visit the How to Money or Against the Rules podcast sites, or consult the “Big Short Companion” series for more in-depth explorations of finance, money, and risk.

Transcript

[Michael Lewis]

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[Michael Lewis]

Pushkin. I'm Michael Lewis.

And I'm Lydia Jean Kot. This is the Big Short companion podcast on against the rules and today's episode is all about the financial consequences of the 2008 recession. Michael, when you said you wanted to do this episode, what consequences were you thinking about, you know, the things that.

All kinds of things sort of pop to mind. When you look at how Wall street is now versus how Wall street was in, say, 2007, you can see that like the big investment banks, Morgan Stanley, Goldman Sachs are far less prestigious to work for. They're not getting first cut of the. Of the college graduates. 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. It's like the risk, who gets to take the risk has changed and the banks just generally have been removed from the process. That's like one thing. Another thing is like bitcoin is a response or seems to have been a response. 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. 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. Matt Levine, like, Matt Levine, from the moment he appeared on the scene and started writing his Bloomberg column, I thought, thank God he's paying attention to this. So I don't have to like, thank God 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.

You can just read Matt Levine.

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

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.

First off, where were you during the financial crisis?

[Matt Levine]

What were you doing? Okay, so when you say during the financial crisis. I was on vacation when Lehman filed. And it's such a cliche, but I. My cousin was getting married in Northern California and 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]

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

[Matt Levine]

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]

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

[Matt Levine]

You know, I was not sophisticated enough to have that thought. Over time, I have come to understand how leveraged these institutions are and were and how little of a shove it takes to push investment banks into bankruptcy and how close we were in the scheme of things to, like, Lehman and Bear. I was on a desk. We did, 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, read in the details of the deal, and it was blank from. I want to say something like September of. Of 2008 through March or April of 2009 was just blank. Like, 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]

Did you get a bonus at the end of 09?

[Matt Levine]

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

[Michael Lewis]

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

[Matt Levine]

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 it. And I kind of was like, I don't know, there was a sense that it was a little bit cool to be at a place that everyone hated so much. Right. It's like I felt like, oh yeah, look at us, everyone hates us.

[Michael Lewis]

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]

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

[Michael Lewis]

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]

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. 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. You know, largely regulatory. Like largely, you know, one, all the big, the biggest investment banks like Goldman became or were bought by banks. So they became banks and they're regulated as banks. And two, like, you know, they'd almost blown up. And so everyone kind of understood both regulators but also like the banks themselves and the shareholders understood they couldn't be as, 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, 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 the big today are big hedge funds or the big. They call them alternative asset managers. In my day they called them private equity firms. But the Apollos and kkrs and Blackstones got a lot more important because a lot of the 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]

We all decided that these places shouldn't be doing this thing because the risk gets socialized if they screw it up.

[Matt Levine]

Yeah, when I was a banker I was like, what are you talking about? Prop trading didn't cause the financial crisis. And as I get older, I become more sympathetic to the regulatory changes. I think one, the risk gets socialized if they screw it up, but then also they're so levered. 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 like the private credit firms are doing weird loans that you know, 20 years ago would be, would have been done by Goldman ssg. Like those private credit firms have long term financing from like, you know, annuities and they just, they're not runnable. Like they won't blow up overnight. Right. So there's a lot of stuff like.

[Michael Lewis]

They don't have depositors.

[Matt Levine]

Yeah, they don't have depositors and Goldman didn't have depositors in 2007 either. But like they had, you know, Right. Like overnight repo funding. And it was a really risky business model. And I think people realize that. And this is like the story of every financial crisis is like you find a way to get a lot of short term information and sensitive financing against, you know, risky stuff 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]

When we come back from the break, Matt Levine and I talk about another consequence of the financial crisis, Bitcoin. I'm back with Bloomberg opinion columnist Matt Levine. All right, so the first financial consequences is this kind of mini status revolution. On Wall street, where the people who were the top dogs are no longer the top dogs because the risks moved out of those firms and into other places. And the status goes to where the risk is being taken.

[Matt Levine]

And that's a status revolution. But it's also like, substantively you get.

[Michael Lewis]

A better financial model.

[Matt Levine]

I think so. It's debatable, but I think so. Yeah.

[Michael Lewis]

Well, what would be the other side? I mean, if you have Apollo 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]

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

[Michael Lewis]

Lot of, at least somebody's watching them.

[Matt Levine]

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 people do worry that leverage is creeping back into the system because it has a habit of doing that. Private credit firms do get leverage from banks, so it's kind of circulating back into the banking system. And when you move away from private credit, some of the stuff that banks used to do. I read about the Bezos 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, right? Like, and there are occasions where the basis trade kind of blows up. And you know, their academics saying the Fed should have to step in when that happens. And so, you know, there's, in the long run, you say that you socialize the risk when the banks blow up. But I'm not sure that was what people thought in 2006. I'm not sure. People thought that JP Morgan and Citigroup had deposit insurance and Fed access and everything, but Morgan Stanley and Goldman and Lehman and Bayer were investment banks. They were 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 could 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.

[Michael Lewis]

When I asked 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]

Yeah, I mean, bitcoin is. It's hard for me to know how directly bitcoin is a consequence of the financial crisis. I mean, it's certainly the case that 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, you know, powerful intermediaries who, like, got government support. But that was peer to peer and decentralized and safe. Right. And I think that resonated with a lot of people. 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]

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]

Because there's a thousand people who are like, oh, I love this thing, because it replaces trust in intermediaries and then there's millions more people who are like I like this thing because it went up, right? And then that's much more relevant and then so then you can build a system around that. And so if people like it because it goes up, then offer them leverage, right? Offer them trusted intermediary. And so I think that there is this 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 kind of began in the summer before the fall of FTX and ended with the fall of FTX really recreates 2008. Really 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 overlevered and 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 just 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]

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

[Matt Levine]

Oh yeah, for a while there was Sam Bankman fried, right? I mean like it was truly like people in crypto we're like, well there's no government, there's no Fed, but there is ftx, right?

[Michael Lewis]

So there isn't that backstop.

[Matt Levine]

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 because the, 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]

You think that's still true now?

[Matt Levine]

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]

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

[Matt Levine]

I do think that 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]

Say that again in really plain English.

[Matt Levine]

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 like they're so safe, right? That is like the source of all financial crises, right? Sometimes it's literally bank deposits, right? Like that's what a run on a bank is. But in 2008, it's mostly the Goldmans and Lehman's and bears of the world who are not really taking bank deposits, but who are borrowing very short term in capital markets. And they're thinking, well, you know, we have like a big diversified pool of good assets, we're good traders. So it's pretty safe for us to borrow short term to fund these long term assets. And then like you lose confidence and that short term funding goes away. You have to sell all your assets and you can't sell them or you can only sell them at deeply discounted prices. And then you go from Saying how great you are and how much money you're making to being bankrupt in hours, you know, or days. Like it's an extremely fast catastrophe.

[Michael Lewis]

So there is, there is a distinction to be made in this story between the case where the assets actually are safe and people are misperceiving them as unsafe and when they're actually not good at all. And people are correct to think that they're not worth what you paid for them.

[Matt Levine]

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, you know, short term debt is the, is the thing that causes financial crisis. Can people take their money out? Right. It's not the asset side. Right. And so people worry a lot about risky stuff. Risky stuff is fine if everyone knows it's risky stuff. Right. 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 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. And there are a lot of other places where the 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. 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.

[Michael Lewis]

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

[Matt Levine]

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 they're quite safe. They have high Sharpe ratios. They're good at 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 Colburn in 2007. Like they've learned these lessons, right. But you keep turning the dial a little bit more towards risk and then there's some chance of things going wrong.

[Michael Lewis]

So what else, anything else popped to mind? When I say financial consequences of the crisis, Consumer Financial Protection Bureau, I mean that's over.

[Matt Levine]

I don't know. I would put that in the category that's a sort of 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.

[Michael Lewis]

Right.

[Matt Levine]

And so it's easier to regulate banks just generally, right. Like banks have less of an ability to get what they want. I think that is broadly a consequence of the crisis. When you look at the CFPB's mandate, I mean it has nothing to do, 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. So that's an important overlap. But most of what the CFPB is doing is 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]

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]

I'm a little interested in stablecoins. Stablecoins are sort of a way to take risk out of the financial system, 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 like long term, locked up equity type funding. So like private credit firms raise equity to make loans, right, Rather than using deposits. And then on the other side, the depository stuff is invested in safer, shorter term stuff. And so classically that's money market funds, where you put money in a money market fund, they put it in treasury bills, you get interest, and instead of them lending out your money long term, they're just doing something very safe with it. And increasingly stablecoins are becoming that. And so this is a crypto incursion into the traditional financial system. But 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 bank, which might be making, you know, buying mortgages 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 like, the Fed likes the traditional banking system, right? They like the ability to transmit monetary policy through bank reserves, Right? Right. There is this worry that like we're undermining the banking system by moving a lot of what would have been deposits into something else, money market funds and 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 like a, a direct deposit in your bank account, then like JP Morgan will be fine. Like they'll do a stablecoin, it'll be fine. Right. But like a lot of regional banks are going to have trouble because the banking system for so long was 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? Like a little bit. You can draw that line, right? Like the mistrust in the banks and like the understanding that banks take risks with your money was sort of brought back to the forefront by the 2008 crisis. And so some of the stablecoin stuff and the narrower banking stuff really is downstream of that. I mean, I had never heard the term narrow banking until 2008. Right. It became a thing after 2008. People said this whole system of we take short term money and we use it to make risky bets, it just became a lot more suspicious.

[Michael Lewis]

Can you imagine a world where there are no banks?

[Matt Levine]

People imagine a world where there are no banks all the time. I mean, not exactly. Right. They imagine a world where your deposits.

[Michael Lewis]

Live in stable coins, in stable coins.

[Matt Levine]

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.

[Michael Lewis]

Apollo gives you a mortgage.

[Matt Levine]

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. I think it's pretty easy to imagine a world with that banks. It's very hard to imagine the transition. Right. To go from the world of banks to a world without banks is going to be really. Would be really difficult for a lot of people.

[Michael Lewis]

But if it happens, and if that's the path we're on and that narrow banking is just a step on the path to no banks, people will tell the story how it all may have just started with the financial crisis.

[Matt Levine]

I think if that happened, I put a very low probability of it happening. But if it happened, yes, I think clearly the financial crisis would be the great catalyst for it. Because by the way, I mentioned stablecoins. Stablecoins grow out of Bitcoin, right? Bitcoin grows out of the financial crisis. The sort of great flourishing of mistrust in the financial system can lead to a lot of consequences. And I think we're partly down the road to those consequences.

[Michael Lewis]

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 politics too.

Against the Rules the Big Short Companion is hosted by Michael Lewis. It's produced by me, Ludy Jean Kot and Katherine Girardot. Our editor is Julia Barton. Our theme was composed by Nick Bertell and our engineer is Hans Dale. She Special thanks to Nicole Optin Bosch, Jasmine Faustino, Pamela Lawrence and the rest of the Pushkin Audiobooks team. Against the Rules is a 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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[Michael Lewis]

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