Shadow Banking: The Once and Future Economic Apocalypse

Summary

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It Could Happen Here: “Shadow Banking — The Once and Future Economic Apocalypse”

Date: March 26, 2026
Host: Mia Wong
Guest: Molly Conger
Podcast: It Could Happen Here (Cool Zone Media/IHeartPodcasts)

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Episode Overview

In this incisive and darkly comedic episode, host Mia Wong and guest Molly Conger take listeners on a “jaunty walk” through the bewildering world of shadow banking—the opaque networks, institutions, and instruments that operate outside traditional banking regulations but underpin the global financial system. Framed as a “chronicle of collapse,” the conversation tackles how shadow banks contributed to economic disasters like the 2008 crash, why things have only gotten riskier since, and how it all boils down to “betting markets with the entire world economy.”

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Key Discussion Points & Insights

What is Shadow Banking? (02:52–07:40)

• Definition: Shadow banking refers to “financial activities facilitated by institutions other than central banks, banks, or public financial institutions” (06:07).
• Real-World Examples: Includes private equity, hedge funds, venture capital, pension funds, insurance companies, sovereign wealth funds, repo markets, broker dealers, money market mutual funds, and complex vehicles like asset-backed commercial paper conduits.
• Why It Matters: Shadow banking encompasses massive sums—more than double the assets of the traditional banking sector.
• Molly’s Reaction: “Most of those things you just said to me are fake and they make me upset.” (08:00)

How Shadow Banking Works (07:40–15:45)

• Non-Bank Financial Intermediation: The technical term for shadow banking is “non-bank financial intermediation.”
• Involvement in the Economy: These entities engage in credit creation, lending, and even deposit-taking activities, all outside conventional oversight.
• Complexity: The Federal Reserve’s chart on shadow banking is so intricate it must be printed as a 3’x4’ poster to be legible (11:18).
• Market Significance: As of 2023, non-bank financial intermediaries (NBFIs) managed $85.7 trillion in assets, nearly triple U.S. GDP (12:44).

How Banks vs. Shadow Banks Operate (19:07–24:13)

• Normal Banks:
  • Take deposits (short-term liabilities) and lend out long-term loans (maturity transformation).
  • Subject to regulation and deposit insurance (FDIC).
  • If there’s a bank run (everyone wants their money back at once), they’re partially protected by regulation and insurance.
• Shadow Banks:
  • Perform “banking shit” (i.e., maturity transformation, leverage, risk transfer, liquidity transformation) without regulation or insurance.
  • "What if you did all of the banking backwards? No one had access to the books and the government will only pay you back if the entire world economy looks like it’s going to die.” (Mia, 24:08)

Securitization, Collateral, and the Money “Burger” Analogy (28:16–46:31)

• Securitization: Turning illiquid loans (like mortgages) into tradeable securities so they can be bought, sold, and bundled—at the heart of 2008 crisis.
• “Burger Test”: Is something “liquid” enough to buy a burger with? If not, it’s “fake money” (i.e., assets that are somewhere between money and a vague promise).
• Collateral Problems:
  • Collateral (e.g., a house) is used to back loans, but in the run-up to 2008, the same collateral was used “multiple times,” making the system unstable.
  • “I can’t promise 10 guys my burger.” (Molly, 46:31)

Leveraging, Credit Default Swaps, and Finance as Gambling (50:28–63:11)

• Leverage: Banks and shadow banks borrow heavily to buy riskier (but higher-yielding) assets. Sometimes, entire companies are bought this way (“leveraged buyouts”).
• Credit Default Swaps: Bets on whether a loan (often a mortgage) will fail. Used for “insurance,” but can be purchased by anyone, turning debt into another betting market.
• Systemic Risk: Regular banks and shadow banks are deeply entwined; “It’s the same guy. He just turns his chair around and is like, ‘now I’m Shadow Bank Todd.’” (Molly, 55:15)
• Everyday Impact: When shadow banks implode, regular banks (where regular people deposit money) — like J.P. Morgan — are exposed too.

Why Is This Legal/Not a Crime? (33:02–36:01)

• Much of what crashed the economy in 2008 wasn’t technically illegal—it was enabled by loose regulation and collaboration between regular and shadow banks:
  • "Why is it not a crime?" (Molly, 33:21)
  • “Because our country is run by the bourgeoisie, Molly. That’s why it’s not a crime.” (Mia, 33:23)

The Scale and Absurdity of Modern Finance (63:11–70:19)

• Distance from Material Reality: The system has become untethered from actual goods and services—most of banking is just gambling:
  • “Nothing is real and everything is gambling.” (Molly, 63:55)
  • “This is what I would call a sort of terminal crisis stage of capitalism.” (Mia, 64:03)
• Global Impact: Shadow banking has devastated economies, particularly in the “third world” (a term itself rooted in IMF/World Bank devastation of national economies).
• New Frontiers: AI bubble, securities backed by… graphics cards? “At least the mortgage back[ed] securities, there was a house you could steal ... Graphics cards.” (Mia, 70:03)

The Power Behind the System

• Enforcement and Coercion: The system’s last line of “reality” is force—turning money into “guns” (political/military violence) to maintain order when financial collapse looms.
  • “...Behind every bank is a man with a gun.” (Mia, 66:57)

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Notable Quotes & Memorable Moments

• “Most of those things you just said to me are fake and they make me upset.” – Molly (08:00)
• “This is Calvin Ball. Fuck you. I win.” – Molly, describing finance as ever-shifting nonsense (14:29)
• “I love how much of the economy is based on guys just imagining stuff and agreeing on the thing they imagined and then trading their imaginary tokens. Like, this is pogs. Grow up.” – Molly (15:37)
• “It's nonsense, it's gibberish, they're doing fucking betting markets with the entire world economy.” – Mia (14:31)
• “I can't promise 10 guys my burger.” – Molly, explaining why collateral games go so wrong (46:31)
• “You made up this fake thing where no matter what happens, you get rich. That's cool. I would love to do that.” – Molly (61:19)
• “Nothing is real and everything is gambling.” – Molly (63:55)
• “The important lesson we learned from [destroying economies] was to do it more.” – Molly (68:04)

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Timestamps for Important Segments

• [02:52] – Episode’s main question: “What is shadow banking and why does it matter?”
• [06:38] – Core definition and initial breakdown of shadow banks’ types.
• [12:33] – Shocking scale: Shadow banking’s asset total compared to GDP.
• [14:00] – Historical connection: How shadow banking caused the 2008 crash.
• [19:07] – Burger analogy: Explaining regular banks and money.
• [23:23] – Shadow banking is “the bank, but backwards.”
• [28:16] – Securitization explained: What really happened in 2008.
• [33:02] – The blurred line (and complicity) between banks and shadow banks.
• [38:49] – “Burger test”: Liquidity and fake money.
• [46:31] – Collateral madness: "I can't promise 10 guys my burger."
• [50:28] – Leveraging explained, credit default swaps, and finance as pure gambling.
• [56:04] – Regular banks (like J.P. Morgan) implicated in shadow bank meltdowns.
• [63:55] – “Nothing is real, and everything is gambling.”
• [66:47] – The only real asset: coercive violence (“turn money into guns”).
• [68:16] – Legacy of shadow banking in undermining entire economies.
• [70:03] – New absurdities: AI and graphics card-backed securities.

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Final Takeaways

• Shadow banking refers to a world where “banking shit” is done by unregulated entities, often with even less transparency than actual banks.
• The 2008 financial crisis was just the tip of the iceberg; the shadow banking world is now even larger and riskier.
• Real and shadow banks are hopelessly entangled, and nearly everyone’s money is in some way exposed.
• “The entire world is just this now — the shit the banks were doing where you’re betting on whether the mortgage would fail — but now it’s whether, like, we’ll drop a bomb on Iran.”
• The episode closes with a bleak but empowering note: Understanding this system is the first step to seeing “how it all falls apart” and, perhaps, how things might be rebuilt.

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Transcript

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[Mia Wong]

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[Mia Wong]

Welcome to It Could Happen Here, a podcast where a bunch of incredibly convoluted and very silly financial instruments destroy the entire world economy. I am your host, Mia Wong, and with me today is someone who does not spend all of her time deep in the bowels of arcane bullshit written by different Federal Reserve boards. And that is Molly Conger, who is the. The host of the absolutely delightful. I mean, okay, I. I guess this is a who is really winning here kind of question. In terms of the things we research

[Molly Conger]

now, you spent a lot of time reading stuff written by Federal Reserve guys. I read a lot of stuff written by guys who want to kill reserve guys. Yeah.

[Mia Wong]

And.

[Molly Conger]

And you know what? I still don't know what the Federal Reserve is, and I'm not going to find out.

[Mia Wong]

You know, I. I don't actually think knowing what the Federal Reserve is, somehow

[Molly Conger]

it doesn't change anything.

[Mia Wong]

I don't think it's actually relevant to this. I mean, it kind of. It's. Obviously, it's relevant to everything, but.

[Molly Conger]

But what Mia means to say is the reason I'm here is because I don't know what the economy is, and at this point, I'm afraid to find out.

[Mia Wong]

And unfortunately, your worst fears are happening.

[Molly Conger]

Oh, don't worry. By the end of this, I will not understand.

[Mia Wong]

I am going to attempt to explain the economy. And by. By the economy, I mean shadow banking. Yeah. Also before. Before I go into this, though, you should. You should listen to weird little guys. It is. It's. It's really good. I like it. All my friends really like it.

[Molly Conger]

Thank you.

[Mia Wong]

Yeah, it's somehow a nice, comma, kind of relaxing show about Neo Nazis.

[Molly Conger]

So, yeah, it's got very chill vibes for a show about guys who are trying to, like, blow up school buses.

[Mia Wong]

Yep, yep. So, all right, you know, I'm reading this. I'm looking over this script. Miraculously, this isn't. Oh, wait, hold on. I think I cut the part where people blow up school buses. There was legitimately a segment in here that I might put back in where someone blows up a school bus.

[Molly Conger]

But what a crossover event.

[Mia Wong]

Oh, boy, oh, boy. The Saudi is really good at that shit. Turns out. Okay, okay, but let's get back to the topic at hand, which is, what is shadow banking and why does it matter to all of us, people who live in the normal, real world and not in fake finance world.

[Molly Conger]

Does it have anything to do with shadow wolves?

[Mia Wong]

Unfortunately, no.

[Molly Conger]

What about shadow facts?

[Mia Wong]

Sadly, actually, there probably is a connection between the financing for the Lord of the Rings movies and shadow banking. I'm just too tired to work it right now.

[Molly Conger]

I have dragged us off track and we haven't even gotten on track yet. What is shadow bank?

[Mia Wong]

Okay, so the good news, the good news. This is the first, it's not the last piece of good news. We're going to get this episode. But comma, the definition used by most non academics is actually definitely not that bad. There's a pretty good. It's very wishy washy because it's a congressional report. And so it's specifically not supposed to be taking a stance in either direction on anything because it's the Congressional Review Office and they're supposed to be neutral, et cetera, et cetera.

[Molly Conger]

Allegedly.

[Mia Wong]

Yeah, right. You know, and like, obviously they're not, but like, you know, it's like kind of fine congressional report on the subject. And they do the thing that all, almost everyone does, which is they go back to the definition created by the Financial Stability Board. And I'm just gonna, I'm just gonna quote that because it's not that bad. Quote financial activities facilitated by institutions other than central banks. Banks or public financial institutions.

[Molly Conger]

So it's banking that doesn't involve a bank.

[Mia Wong]

Yes.

[Molly Conger]

Canceled. I'm out. I'm out already.

[Mia Wong]

Yes.

[Molly Conger]

And they don't mean like me loaning you $20?

[Mia Wong]

No, no, no, of course not.

[Molly Conger]

They just mean unregulated banking.

[Mia Wong]

Oh, yeah.

[Molly Conger]

Which you can't legally call banking.

[Mia Wong]

I mean, you actually can legally call it banking. It's just things get weird really quickly.

[Molly Conger]

I mean, I'm not, I'm not a bank understander, but I know at least in Virginia, you can't incorporate a business that has the word bank in the title.

[Mia Wong]

I.

[Molly Conger]

Unless you are legally a bank. Because it, because that's like misleading.

[Mia Wong]

Yeah. I don't think they can legally call themselves a bank, but I guess you can call it banking activity.

[Molly Conger]

That's stupid. And I'm mad already.

[Mia Wong]

Yes. Oh, you're going to get so much more mad by the end of this. So the base definition is it's not that complicated. Right. It's something that does banking stuff that is legally not a bank. You know, and so we, we could talk about what, what kinds of things is this? Right. It's like private equity firms, it's hedge funds, it's venture capital firms.

[Molly Conger]

So it's like evil stuff that ruins the world for no reason except for like 10 guys make money.

[Mia Wong]

Yeah. But it's also, you know, pension funds, it's like insurance companies, it's sovereign wealth funds, business development companies, repo markets, broker dealers, special investment vehicles, securitization vehicles, money market mutual funds, asset backed commercial paper conduits.

[Molly Conger]

Hey, here's the thing, buddy. Most of those things you just said to me are fake and they make me upset.

[Mia Wong]

It's really bad.

[Molly Conger]

Sovereign dwell fund. Shut up. That's not, that's not a thing. I still, you know, all these, all these things are just like different ways of saying like you're poor and you're gonna die.

[Mia Wong]

Yeah. I mean the funny thing is sovereign wealth fund is like kind of a less fake one in that it's like it's all fake. Hey, this is like it's all fake. It's the. Well, it's like this is like the Kingdom of Saudi Arabia has pooled all of the money it's gotten from its like horrific crimes and put them together into one giant thing. And that's a sovereign wealth fund.

[Molly Conger]

Oh, so it's good is what you mean.

[Mia Wong]

No, I am, I am a notable. There is, by the way, a camp of people who believe that sovereign wealth funds are like a socialist thing and that you could use them to do socialism.

[Molly Conger]

I'm going to jump out the window.

[Mia Wong]

I think this is so stupid. Yeah, this is, we haven't even gotten into the nightmare stuff. So. Remember I was talking about the, the financial stability board definition in that congressional report, right. Where it's like, okay, this is a bank that does non banking stuff or a non bank that does banking stuff. Sorry.

[Molly Conger]

Oh, I guess we should say, I guess we forgot to say at the top. The reason you're explaining shadow banking to me is because we saw an article last week that what those, those not banks were putting a stop on withdrawals from their not banks. And I didn't know what that meant.

[Mia Wong]

Yeah, that's amazingly. This, this is so convoluted. We're not even going to get to that this week.

[Molly Conger]

Right. But like that's, that's why we're explaining that.

[Mia Wong]

Right. There's like, yeah, there's like, there was like a mini bank run going on with these like shadow banks.

[Molly Conger]

No stop Banks.

[Mia Wong]

Yeah. So we're going to get into how that can happen and why. But, but before we get there, we need to talk about. All right. To get a sense of the complexity of this. Right. The congressional report, like the accepted terminology for this is not shadow banks. It is, right?

[Molly Conger]

That can't be their official name. That's not their government name.

[Mia Wong]

No, it's. It's non bank financial intermediation. Now what the fuck is that? This is where this episode goes completely off the rails. Because the components of what count as intermediation are so complicated. I am not going to try to describe it until literally the end of this.

[Molly Conger]

I mean, is it like, what is Venmo officially? Like, right? Like Venmo's not a bank, but it provides like financial services.

[Mia Wong]

Actually, I. It might because it's.

[Molly Conger]

Because that's like a financial intermediary, right?

[Mia Wong]

Yeah, it might technically be a non bank. I don't know what the regulatory structure is.

[Molly Conger]

It's not legally a bank.

[Mia Wong]

Yeah, I think that technically is one

[Molly Conger]

score one for Molly.

[Mia Wong]

Yeah, but okay, so this is. This is going to get really bad. Okay, so what I first started researching this episode, right. The first thing that I click on is, is the Federal Reserve's chart of how the shadow banking sector works compared to the normal banking sector. Molly, you have seen this because I posted it as a joke in our group chat. This chart, I have like a very, very large like, it is like a big normal ass sized monitor that I like do my work on. I had to zoom in to 380% just to make out the letters that label the boxes on this chart. If you want to read it, you have to zoom in to 500%.

[Molly Conger]

That doesn't seem like a well made chart.

[Mia Wong]

No, here's the thing. It's actually really good. It's just this complicated. I learned later from a paper by Copenhagen Business school professor Audney Helgadottir. We're going to come back to Helgadottir's work a lot in this episode. But I learned from her because she has also experience seeing the same chart and going, what the is this fuck ass chart? I found out that the Federal Reserve recommends that in order to have the diagram be legible, you are supposed to print this chart as a three foot by four foot poster.

[Molly Conger]

Oh, that makes sense. Like meeting style, but like on a big easel. Put it on easel.

[Mia Wong]

Yeah, right. But like again, this is. This is a diagram that he's just labeling the parts of the system and making and making like a line that shows how stuff moves through it.

[Molly Conger]

I guess. I still don't know what we're talking about.

[Mia Wong]

Yeah. So this is what we're going to get into in a second. But first we have to talk about something Even more bleak, which is that. Oh yeah, by the way, these like non banking bank things like these, like all these like venture capital firms, all these hedge funds, all these fucking weird ghoulish banks that are not banks. Yeah. They have twice as many assets than the regular banking system.

[Molly Conger]

Oh, that doesn't seem good.

[Mia Wong]

Oh, it's about to get worse. It's about to get worse. Molly.

[Molly Conger]

That's like saying I keep 70% of the food in my house outside on the porch. Like. No, it goes in the fridge.

[Mia Wong]

Oh, it's so bad. It's so bad. So, okay, there's a pretty good congressional report that I was talking about earlier that has this terrifying quote, quote, as of 2023, the broad measure total financial assets and narrow measure assets at NBFI is this is the shadow banks reached $85.7 trillion and 22.2 trillion doll in the United States.

[Molly Conger]

But that's more than our GDP.

[Mia Wong]

That's almost three times our GDP.

[Molly Conger]

So that's a fake amount of money.

[Mia Wong]

Yes.

[Molly Conger]

That's not real at all.

[Mia Wong]

But it kind of is. Right. These compared to total financial assets of $31.1 trillion at banks in the same period. So again, this is. This is almost three times our GDP in assets that they manage or control.

[Molly Conger]

So where do you. Does the money live?

[Mia Wong]

In a whole bunch of unbelievably convoluted bullshit. Like combinations of like loans and real estate and stuff like that.

[Molly Conger]

That's not real money. So like, okay, imagine this is Schoolhouse Rock and instead of the like the singing bill, you're like a dollar bill. Like, where are you?

[Mia Wong]

We. We are about to explain this.

[Molly Conger]

Where does the money live?

[Mia Wong]

Yeah, so, okay, okay, we're. We are about one, two paragraphs away from getting to this. Or like one paragraph. Okay, so the other thing that's very important about this, and this is something Molly was kind of touching on the beginning of the episode. Maybe I should have opened with this. Yeah. These people, these are the people who, who blew up the economy in 2008.

[Molly Conger]

Well, yeah, because they, they're making stuff up.

[Mia Wong]

Yeah, it's so. It's so bullshit. Molly, you're gonna get so mad.

[Molly Conger]

This is Calvin Ball. Fuck you. I win.

[Mia Wong]

Yeah, it literally is. It's nonsense. It's gibberish. They're doing fucking betting markets with the entire world economy.

[Molly Conger]

Oh, yeah, we can all do that now.

[Mia Wong]

Yeah, it's fun. It's like we, we. We now have the power to do the shit that destroyed the entire world economy in 2008. So the thing about shadow banking and the reason why it's complicated to explain is that it's a catch all term for like a million types of institutions that do different things. Right. The commonality they have is that they're all not regulated by the banking regulation.

[Molly Conger]

Right. It's like we found a way to do financial crime that's not illegal because they forgot to make this illegal.

[Mia Wong]

Yeah. And you know, but, but the thing is it's so embedded into the system that like the US debt working is dependent on the shadow banks buying it. Like.

[Molly Conger]

Well, I don't believe in that either, so I'm good.

[Mia Wong]

Oh, it's so fake. I. Molly, I'm not even going to attempt to explain what an overnight repo purchases to you because it's the fakest thing I've ever seen where they just, they make $1 trillion exist overnight and then it stops existing at the end of the night. It's incredible.

[Molly Conger]

I love how much of the economy is based on guys just imagining stuff and agreeing on the thing they imagined and then trading their imaginary tokens. Like this is pogs. Grow up.

[Mia Wong]

Yep. This is, this, this, this is, this is unfortunately what, what our entire world is based on. It's so fun. Oh God. Okay, so what, what is actually shadow banking? I've given you the broadest definition possible, which is like again, it's the, it's doing bank shit without being a bank. But let's go back to the beginning of the term, which is where most people tend to start or get to eventually. This is from an IMF paper. Quote. The term shadow bank was coined by economist Paul McCully at a 2007 speech at the annual financial symposium hosted by the Kansas City Federal Reserve bank in Jackson Hole, Wyoming. And basically it's institutions that borrow money in the short term through money markets to finance long term loans. But they aren't banks, so they can't go through the Fed.

[Molly Conger]

They're financing loans with other loans.

[Mia Wong]

Yeah, we're gonna so from, from, from a not bank.

[Molly Conger]

Yeah, but the big loan is from a real bank and then the little loan is from a fake bank.

[Mia Wong]

Give me.

[Molly Conger]

And none of the money is real.

[Mia Wong]

Hold on, hold on. Okay, we're, we're, we're, we're, we're going to get there. We're, we're going to explain this in terms of burgers. It's gonna be okay. I believe in us.

[Molly Conger]

Perfect.

[Mia Wong]

Perfect. Yes. But the other thing he describes is, is, is. And this is from Helga daughter quote in the speech he Describes shadow banking as the whole Alphabet soup of leveraged up investment conduits, vehicles and structures. So what he's talking about specifically is these are the guys who blew up the economy in 2008. Like these specifically. This is what he's talking about. Right. These are the people who took a mortgage and then did a bunch of bullshit to it in what's called a securitization chain. They did a bunch of bullshit to it so you could give the loan to someone else. It to someone else. And this blew up the entire world economy. That's what he's talking about. He's talking about the banks that are not banks, the shadow banks that did all of this bullshit to turn like someone's mortgage into a fucking thing you could bet on.

[Molly Conger]

So selling debt is like selling the idea of future money.

[Mia Wong]

Yeah.

[Molly Conger]

And then sometimes that future money doesn't come.

[Mia Wong]

Yeah. So.

[Molly Conger]

Or doesn't exist.

[Mia Wong]

So. So, okay, I will say you do not need to understand this yet, because we haven't. We still have not started the actual explanation.

[Molly Conger]

I'm never going to.

[Mia Wong]

I believe we can do this. It's. It's not that bad. Okay.

[Molly Conger]

I'm not torturing you on purpose. I'm just.

[Mia Wong]

No, it's okay. I believe in you. So I want to mention that I'm very indebted here to the paper I mentioned earlier from Copenhagen Business school professor Adni Helgadottir, who wrote. She wrote a very good simplified explanation of this in her Review of International Political Economy article called Banking Upside down. The Implicit politics of shadow banking Expertise. But okay, as you can tell by the fact that it's called Banking Upside down, the implicit politics of shadow banking expertise. This has been. When she's simplifying it, she's simplifying it from like economist down to like a political scientist or an anthropologist can understand this. I am about to attempt to simplify this down to. A regular person can understand this. So I'm drawing on a lot of her stuff for. For the first part of this explanation. But I am. I've turned it into burgers.

[Molly Conger]

So I'll do my best. I'm being very brave.

[Mia Wong]

Okay, so a shadow bank, right? It's something that does banking shit. That's not a bank. So what do I mean by banking shit?

[Molly Conger]

That was my next question.

[Mia Wong]

Yes.

[Molly Conger]

I think we need to start with what is a bank?

[Mia Wong]

Yes. So first. So. Okay. Okay. And this is. This is. This is where we're starting here. What does a bank do?

[Molly Conger]

I put my money in it. And they hold it for me.

[Mia Wong]

So, no, actually, and this is the interesting part.

[Molly Conger]

No, they do stuff with it.

[Mia Wong]

Oh, yeah.

[Molly Conger]

They're holding onto the promise of my money.

[Mia Wong]

Yeah. So, okay, let's. Let's just. Let's just look at this for a second. So, okay, so regular people give them money to store in the bank. This is called a deposit. The bank takes your money and loans it out, right. And uses that to make more money. This is how it pays you interest, right? Is that it's. It's taking your money and it's loaning it out to other. To other people. It's buying things with it.

[Molly Conger]

That part I understand.

[Mia Wong]

Yeah. And this is obviously a cartoon image, and I know there's going to be econ people who are going to be mad at me.

[Molly Conger]

Look, if you understand, why are they listening to this? If you already know what this means, go away. This isn't for you. I'm not humiliating myself for your entertainment.

[Mia Wong]

Like, like for. For the political economy. People here, when I say stuff that might. That's like, technically kind of fuzzy, it's

[Molly Conger]

for me, the podcast idiot.

[Mia Wong]

Yeah. Like you. You understand this. Like, I'm working at the level of hamburgers here. So, like, we have to do some abstractions. So. Okay, the important thing for our purposes, right, is that there's two things here, right? There's like the deposit, the money you give them, and then there's the loans, right? And these operates on different timelines, right? You can take the deposit out at any time, at least in theory, but they can't get the money from the loan back at any time.

[Molly Conger]

Right?

[Mia Wong]

Now, this is like one of the critical things of what a bank is, is, is this timeline thing, right? It turns your. Your money, which you can take out at any time, into a different kind of thing. This loan, which can't be taken out immediately, right? And then they use that to make money. So this is called maturity transformation. This is a very simple concept they have made very complicated. This is one of the core aspects of that definition I was talking about earlier. This is one of the four things in it. But you now understand this. It's not that complicated. It's take short term, make long term, and we'll get to doing the reverse in a second.

[Molly Conger]

Oh, I don't think it works the other way.

[Mia Wong]

Yeah, it's gonna go so badly. It's gonna go so badly.

[Molly Conger]

I don't know about bank, but just generally speaking, like, in terms of time and like, how, like, material reality works, I don't think it works. The other way.

[Mia Wong]

It's not great. It's not great, Molly. It's not great. Okay, so. Okay. There is, however, a problem here, right. Which is what happens if everyone tries to get their short term money back at the same time?

[Molly Conger]

Oh, you can't. Yeah, right, because we have deposit insurance.

[Mia Wong]

Yeah, right. Because the, the banks aren't holding short term cash. What they're holding is long term loans. And those loans, like you can't pay someone a loan. Well, okay, actually this entire. The crux of this episode is they

[Molly Conger]

found a lot of money, is that they did do that.

[Mia Wong]

Yeah. Yes. And it blew up the entire world economy.

[Molly Conger]

But if I, but if I wanted 40,000 dol. Out of my. If I had a checking account with $40,000 in it.

[Mia Wong]

Yeah.

[Molly Conger]

And they gave me my neighbor's mortgage as a prom, like that wouldn't work for me.

[Mia Wong]

That wouldn't work for me. No, fuck that. No, no, no, you need, you need, you need, you need something that can buy a burger and they're not giving you that. So. Okay, this is very, very bad. If people try to do this. It is called a bank run. It is not good.

[Molly Conger]

It's bad.

[Mia Wong]

Yeah. And so this upset, this blew up the entire world economy so many goddamn times that eventually we got financial regulation. Now this, this regulation requires banks to have money that is like actual cash they can hand you, like right now on hand at all times. And the government gets to. And this is, that's a little bit simplification, but like. Yeah, that's how it works. Right?

[Molly Conger]

Like, and it's insured by the government.

[Mia Wong]

Yeah. The government will give you your money back if the bank goes under up to like a certain amount.

[Molly Conger]

$250,000 FDIC insured.

[Mia Wong]

Yep. This is, this, this, that's, that's what that means, right? The government will give you your money back. But also there's, there's a trade off to this, you know, so this is a massive benefit for the banks, right? The fact, the fact that if they go under, all of their assets will be repaid by the government. It's a massive benefit for them because it means that putting your money in the bank is like safe.

[Molly Conger]

Yeah, I love that. For me.

[Mia Wong]

Right? Yeah, it's good. Now the cost to the banks is that the feds get to see their balance sheet, right? The feds get to see what they're doing with their fucking money and they get to make sure that these banks aren't doing insane shit.

[Molly Conger]

Okay, that makes sense because they're insuring it yeah.

[Mia Wong]

And that like they're not doing like unbelievably risky awful shit. And also that they're actually holding enough money to be able to pay people out.

[Molly Conger]

Right. Okay, so far so good. I wait, I understand Bank.

[Mia Wong]

Yeah. Now shadow banking boldly asked the question okay, but what if you did all of the banking backwards? No one had access to the books and the government will only pay you back if the entire world economy looks like it's going to die.

[Molly Conger]

I feel like at that point the government should just, just step back and just.

[Mia Wong]

Here's the thing, here's the thing. Right? I, I, I, yeah, like I'm, I'm so down with this. Like yeah. I don't know it like every single one of you is gonna pay this off by working as a barista for 30 years. Like you. But the government was like nah. We want like we want capitalism to keep working.

[Molly Conger]

Make every hedge fund manager work at a Waffle House.

[Mia Wong]

Yeah, fuck em.

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[Mia Wong]

Okay, I'm gonna say something and then I'm gonna make a disclaimer. So the kind of shadow banks that did 2008 work in the opposite direction. They start with debt. They take that debt, and they turn that debt into, like, cash, Right?

[Molly Conger]

Can I do that?

[Mia Wong]

No.

[Molly Conger]

Does that work for me at my house?

[Mia Wong]

No. So, okay. And I also want to mention there's a bunch of other kinds of shadow banks. The the kind of Shadow bank that's going under right now is not really this. The kind of shadow bank that's like exploding right now is a kind of shadow bank that's like, what if, what if a bank that wasn't a bank gave a completely unregulated loan with secret terms to a corporation? And that's the one that's going under right now. But for a long, long time, the kind of shadow bank that was really important to the global economy, and this is still like a massive portion of how all of the economic system works, is these ones where you're trying to take debt and turn it into something you can trade for cash. So, okay, you take debt, right? You start off with a mortgage, okay. So these mortgages pay out over the extremely long term, right? But you want to be able to trade this mortgage for cash, right? And this is a process called securitization. Turning this mortgage into something you can sell for cash is making it into what's called a security. So now what happens, right, when it's packaged into a security, when there's a securitization process, and then like the regular bank, the regular bank sends the mortgage to the shadow bank, and the shadow bank, like, does, like, stuff and turns it into a security. And now what this means is that instead of you, who paid the mortgage owing money to the bank, you own it to the shadow bank or whoever the fuck the shadow bank sells it to. Right.

[Molly Conger]

Okay, so the real bank is involved. The real bank is involved, yes.

[Mia Wong]

Oh, yes. The real bank is making so much money off of this. Is this is why 2008 happened?

[Molly Conger]

Oh, because Wells Fargo did this with everybody's mortgage?

[Mia Wong]

Oh, yeah. Oh, yeah.

[Molly Conger]

Okay. Because I couldn't figure out. Because you said, this is how she was named. And I was like, I thought Wells Fargo did that. That's a real bank. But the real bank was shadow banking.

[Mia Wong]

The real bank figured out a way to sell their mortgages. And it's going to get much worse as we go through this. But that's. That's what causes this, right? Is like turning. Is turning these mortgages into these, like, securities and like these, like, collateralized debt obligations and these, like, special packaged bullshit that you could sell to someone. So the way I would describe this is it's like. Do you know how a bond works?

[Molly Conger]

Honestly, Mia, I do not.

[Mia Wong]

Okay, let's do this. We can do this. Okay. So the kind of bond that you are normally likely to encounter is a government bond.

[Molly Conger]

Yeah.

[Mia Wong]

Okay. So you pay the government money to buy the bond and what the bond says is at a certain point in time you hand it back to the government and they pay you more money.

[Molly Conger]

Right. It's like a promise for later.

[Mia Wong]

Yeah. Right. So it's basically a loan. But it's a loan in a form where like the government's technically like selling it. And then the other thing about bonds, right. Is if you hand the bond to someone else. Well, okay, I mean this is technically bear bonds, but like you, you, you can then give the bond to someone else. And now, and now if they give it back to the government, they get the Money in like 10 years they get the money. Right, right.

[Molly Conger]

Okay, I get that.

[Mia Wong]

And, and you can sell these things. And this is what these people are doing with mortgages.

[Molly Conger]

That's not as like secured as like a government bond. Because if I have a hundred dollar government, like if I have a hundred dollar bearers bond, I know for a fact that on the date on the bond it's going to be worth a hundred dollars.

[Mia Wong]

Yeah. They're going to pay out. Right.

[Molly Conger]

But if it's the mortgage, the government's gonna pay it. But like the mortgage guy, the person who has the mortgage, that's not.

[Mia Wong]

Yep.

[Molly Conger]

That's not real. That's not money. Nope.

[Mia Wong]

Yep.

[Molly Conger]

That's like, that's, that's a promise. But like my hand is behind my back.

[Mia Wong]

Yeah, it's, it's a shit show. And this whole process is the largest sort of. I'm not sure if that's actually the largest I would need to actually like get. I've never, I haven't seen in depth breakdown sectorally, but like none of this is real.

[Molly Conger]

You could just say whatever.

[Mia Wong]

This, this is one of the most important kind of shadow banks because in order to turn this mortgage into a security, the moment you do that, you do this by creating what's called a special purpose vehicle or someone else creates one. It's called a special purpose vehicle. Yeah, it's. It's a nightmare. It's a nightmare.

[Molly Conger]

I'm going to put this mortgage on a roller coaster.

[Mia Wong]

Ye. It's fucking ridiculous. Right. It's a special purpose vehicle. It does a loop de loop. But the moment you create one of these, the moment you create one of these like security mortgages, right. That's a shadow bank. You've created a shadow bank.

[Matt Rogers]

Right.

[Molly Conger]

Because that's not real banking, that's shadow banking.

[Mia Wong]

Yep. Because you're creating another entity that is not a bank that's doing the banking stuff.

[Molly Conger]

I thought that the banking and the shadow banking were like separate things. Right. Because it's good. The shadow banking is like, it's like, oh, they're doing non bank stuff.

[Mia Wong]

They're all in on it.

[Molly Conger]

If the bank is doing shadow banking, I would, I'm stupid, but I would call that a crime.

[Mia Wong]

This is, this is another thing that cost 2008 because a bunch of what was.

[Molly Conger]

Why is it not a crime?

[Mia Wong]

Because our country is run by the bourgeoisie, Molly. That, that's why it's not a crime.

[Molly Conger]

You're just telling me this for the first time.

[Mia Wong]

Yeah, it's bad. So, so what, what, what happened? What happened in 2008? One of the things that happened, right, is so all of these regulators are supposed to be looking at the balance

[Molly Conger]

sheets of these companies, but they're hiding stuff off the books.

[Mia Wong]

Yeah. They were hiding these things in these like special purpose vehicles, like in these like shadow banks.

[Molly Conger]

They didn't open the trunks on the special purpose vehicles.

[Mia Wong]

Yeah. So no one could see the fucking dead bodies in the trunks of the vehicles because they weren't on the balance sheet that like the government had access to.

[Molly Conger]

What's the point of the balance sheet if you don't put the whole balance on it?

[Mia Wong]

Fuck it. I don't know. And this is like legitimately, when you read the accounts of like why shadow making has exploded. And by the way it's exploded since 2008, it's like way bigger.

[Molly Conger]

Exploded like in popularity or like exploded as in like destroy.

[Mia Wong]

There's so much, there's so much more of it. There's so much more of it. Because also.

[Molly Conger]

Oh, because it went so well. It went so well in 2008 that

[Mia Wong]

now because, because here's the thing, after 2008, we got like a little tiny bit of banking regulation and the banks lost their fucking minds. And so more and more money went into all of these unhinged shadow making things.

[Molly Conger]

Okay, but so like when a toddler has a tantrum, you don't give them a billion dollars.

[Mia Wong]

When these shadow banks went under, these things were not backed by the government. The government bailed them out anyways. Yeah.

[Molly Conger]

They didn't have to do that.

[Mia Wong]

Nope.

[Molly Conger]

So they really, they learned their lesson. They really learned their lesson this time.

[Mia Wong]

Yeah. Like they bailed out these banks and they fucking sold you out. And like, you know, like one of the things that I think people have forgotten was there's this thing called robocalls during the Obama administration. Right. Part of how the financial recovery happened was that all these banks would like go to courthouses, right. And they would just repossess mortgages on mass. Oh, and they had, like, a robot that was, like, signed. It would just. It would just sign, like a blank check sign on, off on all these mortgages that were supposedly underwater. And they would just steal people's houses, People who were on top of their payments, people who like to know money. They would just take their houses. And this happened en masse. And this is like how the banks recovered was they stole everyone's houses.

[Molly Conger]

And that's to according crime, right?

[Mia Wong]

Yes. It should have been a crime. Like, it was illegal. It didn't matter, though, because everything you're

[Molly Conger]

describing to me is a crime.

[Mia Wong]

It's so nightmarish. Well, here's the thing. Most of the stuff I'm describing is not a crime. This was actually a crime.

[Molly Conger]

But why is nobody in jail?

[Mia Wong]

Because Barack Obama went up in front of these people and said, I am the only thing standing between you and the guillotines. I'm pretty sure that's a direct quote.

[Molly Conger]

And why didn't he bring the guillotine with him?

[Mia Wong]

Because he wants the capitalist system to continue.

[Molly Conger]

I mean, that's a silly question. I know who Barack Obama is.

[Mia Wong]

That's.

[Molly Conger]

I'm just upset.

[Mia Wong]

It's not good. Okay, so let's get you another question that you asked, which is, why would you do this? Why would you do this?

[Molly Conger]

Oh, to make money.

[Mia Wong]

Yes, but it's actually more complicated than that.

[Molly Conger]

Oh, okay.

[Mia Wong]

So on the one hand, these assets, you know, a mortgage does make more money than just putting your money in a bank. Right. That's like the basis of banking is that they can use your money that's sitting in the bank and getting interest, and then they make more money by spending it elsewhere.

[Molly Conger]

But. So they're just doing this because they hate us. Not just to make money.

[Mia Wong]

No, there is an actual explanation.

[Molly Conger]

There's a third reason.

[Mia Wong]

So then why would you ever have your money in a bank? Or, like, buy something like, say, if government bonds you can sell really quickly. Right. Why would you ever want that? And the reason why is something called liquidity.

[Molly Conger]

Right. You want to be able to spend the money.

[Mia Wong]

Yes.

[Molly Conger]

Rather than wait 30 years for it to get paid back.

[Mia Wong]

Yes. Liquidity is just. How easy is it to turn whatever you own into cash? Right.

[Molly Conger]

Real money. Because most of what we're talking about is not money. It's the idea of money.

[Mia Wong]

Yes. So. So liquidity is. Is. Is literally. It's the burger test. Right. Can you buy a burger with this?

[Molly Conger]

Can I eat this?

[Mia Wong]

Money is like the most liquid asset, right? Because you can, you can, you can turn this into a burger.

[Molly Conger]

Right? So liquidity is the only part of this that's actually money. Everything else is not money.

[Mia Wong]

Yeah, well, liquidity is the measure of how money is it. Basically, like, how easy is it to turn this into burger?

[Molly Conger]

Is this a special vehicle securitization? It's not real, Mia.

[Mia Wong]

No, it's fake as shit. Right? This is not that complicated. Right? If, if you, if, if it's like, like you can, you can buy a burger with $10. Yes. Right. That's liquid.

[Molly Conger]

Actually, you kind of can't these days.

[Mia Wong]

I know. I look, I look, I imagine a world where you can buy a burger for $10.

[Molly Conger]

Imagine, imagine a burger.

[Mia Wong]

Yes, imagine a burger. That's purchasable. Now what you can't buy a burger with is like the 10 bucks that a guy you work with owes you for buying him a burger.

[Molly Conger]

Depends on how well you know the burger guy.

[Mia Wong]

Yeah, but that's, that's where things get bad.

[Molly Conger]

Yeah.

[Mia Wong]

Right. Now the thing is, right, so the 10 bucks the guy you work with like, owes you, not liquid, you don't have the money in your hands. And if you want to get it from him, you have to like, go ask him for the money. And Maybe he has 10 bucks and maybe he doesn't. Right? At which point you can't get your $10 back until he has the money.

[Molly Conger]

But that, but that $10 that I am theoretically owed is an asset that I have, not a debt.

[Mia Wong]

Yes.

[Molly Conger]

Okay.

[Mia Wong]

Yes. Stupid loans. Loans are not liquid assets. Right? And they're not liquid assets because you can't get the money back like immediately.

[Molly Conger]

So I don't have $10 I can spend, but on paper I do have 10 theoretical dollars.

[Mia Wong]

Yeah, right. And this is also like most of what billionaire money is fake, right? Like most of their money is like in like a stock or some shit or like it's weird fake money.

[Molly Conger]

Like theoretically they could access this amount of money, but they don't have it. Yeah, it's not real now.

[Mia Wong]

Okay, but there is this question, so why, why would you keep your money in fake money instead of real money? And the answer is that it gives you more money back because say, say you're an asshole, right? And you're charging interest on your co worker for that burger loan, right?

[Molly Conger]

So that $10 is actually worth more than $10.

[Mia Wong]

More money. Yes.

[Molly Conger]

So the $10 that I don't have is theoretically worth $12.

[Mia Wong]

Worth more. Yeah, it's worth more than the money that you do have.

[Molly Conger]

I can get cheese on the burger.

[Mia Wong]

Yes. Right. And this is, this is like the fundamental thing of the banking system. Like one of them is that illiquid assets or like assets that you. That aren't money are worth more than money.

[Molly Conger]

I guess like when I put a small amount of my savings into a cd, that's what I'm doing. Except normal style, they're doing it weird. Yeah, basically because that's like an illiquid asset that I'm. I'm. I'm trading the ability to access that liquidity for the potential of more money later.

[Mia Wong]

Wait, sorry, when you say a cd, do you mean like a, like a physical, Like a disc? Like a cd?

[Molly Conger]

No, a cd. Like at the bank.

[Mia Wong]

Oh, like the. Yeah, yeah.

[Molly Conger]

Like the investment product.

[Mia Wong]

Yeah, sure. Yeah, yeah, sorry, I was like.

[Molly Conger]

No, I'm not talking about buying compact discs.

[Mia Wong]

I went to sleep at 5:00am this.

[Molly Conger]

I'm talking about investing. Mia. Ever heard of it?

[Mia Wong]

Wow, there's act. There's actually a really an annoying thing researching this episode because there's like. So CDOs are like a type of loan that we'll kind of get to in a bit. But there's also a tech position called cdo. It's like chief something.

[Molly Conger]

Officer Dookie. Officer. Who cares?

[Mia Wong]

Yeah, whatever the fuck, right? But like when you're trying to search for stuff that's like about CDOs, right. The other one keeps coming up. I hate it. Okay, okay. Locking in, locking in. Right.

[Molly Conger]

Lock and load.

[Mia Wong]

Now what if you both wanted more money and also the ability to buy a burger?

[Molly Conger]

I guess I would probably break one of Carl's fingers. This is the guy who owes me the $10.

[Chelsea Handler]

Carl.

[Mia Wong]

Yeah, but even then it's hard to even. That's like, like this is too hard for these people.

[Molly Conger]

I would go to Carl's house and kick him out of it.

[Mia Wong]

Well, yeah, so, but the other thing is like, you are not very rich, okay? These people, if you are really, really rich, I am talking like billionaires. Maybe like high, high class multimillionaires. Well, you can go to a shadow bank. Oh, right.

[Molly Conger]

You can get a loan based on the loan.

[Mia Wong]

No. Well, you're like. So the, the thing is that you have money, right? But you want to turn your money into more money. Like you have like actual cash, right? Like you are, you are, for example, a pension fund.

[Molly Conger]

No, I'm not.

[Mia Wong]

You have a shit ton of cash. Or imagine, imagine a pension fund. Right? This is. Okay, this is also really hard because it used to be easier to explain this because, like, we used to live in a world where people had pension funds and had mortgages, and now we no longer have pension funds or mortgages.

[Molly Conger]

I live in an apartment and I will always live in an apartment.

[Mia Wong]

Yeah. No, and so, okay, so like imagine, Imagine, imagine a pension fund, right? You. You have a shit ton of money from your members paying into the fund, but it's cash. You need to turn that cash into more money. But also you're a pension fund, so you constantly have to take money back out in order to pay the people who are retiring.

[Molly Conger]

To pay old people. Yeah.

[Mia Wong]

And this is also a thing that, like, you know, if you're just like a rich person, sometimes you want your. A lot of times you want your money in assets that are like, you can, you can turn back into real money, but also make you a shit ton of money.

[Molly Conger]

Right. They need to sort of revolve a little bit. They need to be like.

[Mia Wong]

Yeah.

[Molly Conger]

I don't know, like a jello. Like partially liquid.

[Mia Wong]

Yeah. And. And this is th, this is what the shadow banks do, right. Because the thing that you can buy is one of those mortgages. They've turned into like a security. Right. You can go buy someone else's debt, but because it's a magic security now. And these are called mortgage backed securities. And again, if you're old enough to remember. Yeah. Anything of anything about 2008, that's what blew up the whole economy is these mortgage backed securities.

[Molly Conger]

Yeah, I've heard of that. Because it was bad.

[Mia Wong]

Yep. Terrible idea.

[Molly Conger]

And so we're still doing that.

[Mia Wong]

Oh, yeah.

[Molly Conger]

Okay, good.

[Mia Wong]

I mean, it's less. Specifically the mortgage back ones are less bad. Also they've started doing it with like commercial retail loans, which is incredible.

[Chelsea Handler]

Great.

[Mia Wong]

So that's really fun. They're also doing with other unhinged that we're gonna do like next episode. And what these people are really buying aren't just these, like, you're not buying like one person's mortgage. Right, right.

[Molly Conger]

They're like pooled and like bundled.

[Mia Wong]

Yeah, yeah. They like, they bundle them all together and then you, you buy the rights to a percentage of, of the pool.

[Molly Conger]

It's not like when you sponsor like an elephant in Africa or something and they send you a picture of like a specific element.

[Mia Wong]

Yeah.

[Molly Conger]

They don't send you, they don't send you a picture of the family you're harming.

[Mia Wong]

No.

[Molly Conger]

These are the Joneses. You own their house.

[Mia Wong]

Yeah, it's, it's, it's It's a. It's a shit show. No. Well, I mean, eventually you might have to go figure out who that is because you, like, own whatever the fuck percentage of, like, the mortgages or whatever. But, like. Okay, so these are, these are just like someone else's debt that you're buying. And the people who can do this are, you know, people who have billions of dollars. It's not you, the listener. And by the way, if you, the listener, have billions of dollars lying around for some reason.

[Molly Conger]

Can I have some, please?

[Mia Wong]

Yes, please, please give me some of them so I can house, like, literally every trans woman and like, trans person. I can. I can do it. Like, please give me your billions of dollars so I can. I can achieve this goal. But like, we're talking about, you know, like, like the pension fund of California. We're talking about mega corporations, insurance companies, the kinds of things that could actually buy these. Like, you know. Now this is where we get to one of the other problems, which is that these things are not insured. So.

[Molly Conger]

Yeah.

[Mia Wong]

What do you do do in order to try to make it less risky? What do you get if you can't pay the loan back? And this is what's called collateral.

[Molly Conger]

I don't know. Swift punch in the nuts. Oh, no.

[Mia Wong]

They take your house, right? Yeah, that's supposed to be the thing. So, okay, the way that, like, shadow banking loans tend to work is that they. They have collateral, right? So you. You give them something. Or, or it's either you give them something directly or you promise. It's like if you promise to give them the thing. Yeah. And giving it to them directly is like a repo market thing. We're not really going to get into those right now. But this does. That's like. That's also a kind of shadow bank. But there's a problem, right? Which is what if the thing that you're paying, you're paying as collateral? Like, what if your house becomes worthless? And what if. What if, Molly?

[Molly Conger]

Then it's completely uninsured and there's no way to fix it because I don't even have anything to give you now,

[Mia Wong]

Molly, what if, and this is purely hypothetical, it could never happen in the real world, Molly. But what if somehow someone. Someone decided to use the same house as collateral for multiple different securities?

[Molly Conger]

Well, that could never go wrong.

[Mia Wong]

What if, Molly, they made a word for this. That is so complicated. I am not going to attempt to read it on the show. What if, Molly?

[Molly Conger]

What, is it in German or something?

[Mia Wong]

No, it's like this. Just like this. It's like the legs of my head. It's like hyper. Hyper something bullshit. Like, like. I refuse to say it because it is just like a completely like finance ghoul bullshit term they made up.

[Molly Conger]

So. But the point of, the point of collateral is that you can use it to pay off the loan if you default on the loan. And so that literally won't work more than once because once I eat the burger. Once I eat the burger, it's gone.

[Mia Wong]

Yep. And this is one of the things that happened in 2008.

[Molly Conger]

I can't promise 10 guys my burger.

[Mia Wong]

Now. Now, Molly, here's the amazing thing here, right? Because the advantage for these companies, right, is like, if you're the bank that has the mortgage, suddenly you can spin your mortgage off into like multiple securities that you can sell, right.

[Molly Conger]

It's worth 10 times more. And that's great for you.

[Serious Fun Camp Narrator]

Yes.

[Mia Wong]

And comma, we. We haven't even. Again, I just, I just described a system where these people are promising the same house to multiple people. This isn't even the extremely unfathomably reckless and greedy shit.

[Serious Fun Camp Narrator]

No, it is.

[Mia Wong]

Oh, it is. But it's not the worst of it.

[Molly Conger]

Oh, good.

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[Mia Wong]

Okay, so do you remember that quote from when I was giving the first definition of shadow banking? Right? Like I gave, I gave, I gave this quote from the guy who invented the term where he called it quote the whole Alphabet soup of leveraged up investment conduits, vehicles and structures.

[Molly Conger]

Right?

[Mia Wong]

So we've kind of talked about the conduits, vehicles and structures, right? Those are all of the shadow banks that like make the things right?

[Molly Conger]

I love the conduits, vehicles and structures. Yeah, all the acronyms.

[Mia Wong]

But what does leveraged up mean? Oh now okay, in this case it means that a bunch of these banks have taken out a shit ton of of like risky high interest loans in order to buy more of these fucking mortgages because they think they can make more money off of it.

[Molly Conger]

So they took out, they took out loans to buy these unsecured securities.

[Mia Wong]

The regular ass banks were doing this. Yeah. They, they went into debt to buy more of these shitty mortgages.

[Molly Conger]

So they took out loans to buy what are essentially unsecured loans.

[Mia Wong]

Yep. Because I thought it would make them

[Molly Conger]

more money, but there's no money involved.

[Mia Wong]

Oh, oh, oh, Molly. Oh, Molly.

[Molly Conger]

It's hypothetical money.

[Mia Wong]

It is about to get so much worse. Right. So I. Okay, so sticking with leveraging for a second. Right. You might have actually heard of something called a leveraged buyout.

[Molly Conger]

I have heard those words. And then I stopped listening.

[Mia Wong]

Yeah. So here's the thing. Leveraged buyouts are something that actually happens in the real world that does you directly, which is a whole bunch of companies that used to be like normalized companies, like died because venture capital firms, who by the way, are also shadow banks.

[Molly Conger]

Oh.

[Mia Wong]

Did this. Right. They came in, technically speaking, they did it through like risky bond purchases, but basically they did a bunch of high interest loans and then they go buy

[Molly Conger]

a company and then they like strip

[Mia Wong]

it for parts and then they try to raise the stock price of the company. Yeah. And the trip reports sell everything and, and get out. Right. That's what a leveraged buyout is. These people are sort of are doing kind of a version of that, but like they're taking on this debt in order to like buy fucking shitty underwater mortgages because they look like they're making so much money, they're taking on real

[Molly Conger]

debt to buy hypothetical debt.

[Mia Wong]

Uh huh. Oh, it's about to get so much worse.

[Molly Conger]

That doesn't seem like a good idea.

[Mia Wong]

It's about to get so much worse. So that's what like the leveraged part of that.

[Molly Conger]

I don't even know how you do that in burgers.

[Mia Wong]

I don't know. You're. You're, you're going into debt to like buy the promise of burgers in the future so you could sell those future burgers.

[Molly Conger]

Yeah, but burgers are real. The thing, we're not talking about a real thing at all.

[Mia Wong]

Well, technically, technically speaking, somewhere at the bottom of this is mortgages. However, comma, we're about to get into a kind of asset where there isn't anything behind it. And this is where the really, really, truly unhinged shit starts.

[Molly Conger]

It hasn't yet.

[Mia Wong]

Which is that these companies figured out a way to bet on whether these mortgages were going to fail or not.

[Molly Conger]

That's so tight, Mia. I fucking love that. Oh yeah. I love it. Yes.

[Mia Wong]

Yep. Yeah, this, by the way, I can't emphasize enough how unhinged this is. The mechanism they're using to do this is called a credit default swap.

[Molly Conger]

Oh, I've heard that phrase.

[Mia Wong]

This was supposed to be how they did insurance. Their mechanism for doing insurance on all of these insane loans they were doing was originally like, like, okay, I'm gonna. You're. I don't know. So you have a, you have a bank, right? The bank has given out a risky loan. So this bank goes to another bank.

[Molly Conger]

They shouldn't do that.

[Mia Wong]

And they say, hey, if this person actually pays a loan back, I will pay you money.

[Molly Conger]

Okay. So the other. So the other bank is like taking a gamble here.

[Mia Wong]

Yeah. So the other bank that's giving out the loan. Right. Gets money if the loan goes under. So in theory, they're sort of like insured against the risk. They call it like hedging. They're like, so, like, like. So theoretically it's less bad for them because now even if the loan goes under, they still get money back from that other bank.

[Molly Conger]

So the other bank is just a bookie.

[Mia Wong]

Yeah. And the other bank is betting that they are going to get it. So then. And if the loan does get paid, then that bank makes money.

[Molly Conger]

And this is legal for everyone to do?

[Mia Wong]

Yep.

[Molly Conger]

This is real banking or shadow bank? This is real bank.

[Mia Wong]

No, this is technically. Technically, actually, no, this, this is actually both. Both of them do this. Technically speaking, the instrument, like, like the actual, like credit default swap or whatever is made by the shadow banks, but then they're brought by the regular banks.

[Molly Conger]

I'm starting to think that the banks are the shadow banks and that all of this is just fake and bad.

[Mia Wong]

Like, here's the thing, here's the thing about these systems, right. Is that like a lot of the original literature on it was considering them separate. But it's like, no, like the regular banks are making their own shadow banks do these things. They're all involved in these assets. They're also investing in the shadow banks, which is the problem we're having right now.

[Molly Conger]

Right. It's like it's the same guy. He just like turns his chair around at his desk and he's like, now I'm shadow bank Todd.

[Mia Wong]

Yep. Well, and sometimes it's that some, sometimes there legitimately is just other entities they work with.

[Molly Conger]

But yeah, but there's still. It's still the bank engaging. So it's like, oh, these are non banking practices. Yeah, but the bank is doing it

[Mia Wong]

well, but here's the thing. The important part for that though is that like the non bank also can do this with other non banks.

[Molly Conger]

Even better even.

[Mia Wong]

Yeah, right. I just feel like.

[Molly Conger]

I just feel like once we're. Once we're talking about shadow banking, like the real bank should not be in the room, like, go home, Wells Fargo, you don't belong here. You're drunk.

[Mia Wong]

No, but like they're funding all of this, right?

[Molly Conger]

Like if the real bank is involved with the shadow banking, that means like, I can't opt out of being involved in this.

[Mia Wong]

Nope.

[Molly Conger]

Because they have my money.

[Mia Wong]

Yeah. You know, we were talking about that at the top that like, so some of these, like fanc banks had to like, stop their withdrawals. Oh, yeah. One of those, by the way, was J.P. morgan.

[Molly Conger]

But that's a real bank.

[Mia Wong]

Yep. They're involved in the shadow banking shit. So they are exposed to when they're like fucking $700 million loan to like a fucking. Actually, which one was the $700 million? I think a $700 million loan that went under was the one that was. To a subprime auto loan company.

[Molly Conger]

That's a bad investment.

[Mia Wong]

It's like, oh, yeah, it's so evil. It's so evil.

[Molly Conger]

Why am I trusting all of my money that I have in this world? I'm letting this guy hold on to it, who's obviously not good with fucking money.

[Mia Wong]

Well, because the FDIC is insuring it. Why are you in charge of it?

[Molly Conger]

Why are you in charge of having the money? You obviously don't make great financial decisions because you invested $700 million in subprime auto loans.

[Mia Wong]

So, Molly, this is the, this is the point where I. We need to bring debt the first 5,000 years back into this and emphasize the extent to which the financial class has always been deeply connected to the military and why it's always been deeply connected to war financing.

[Molly Conger]

I'm starting to realize that this is all very bad.

[Mia Wong]

It's very bad. It's all very bad. And this is, this is to some extent why. Right? Like part. Part of what right wing conspiracism about the financial system is, is that like, these people are like, like the right wingers. Like, these people are. There's like a baseline level of anti Semitism, like in the U.S. right. Because it is a. Is a Christian society that is just like, what. What fucking happens there. And these people are like, okay, we can channel all of the anger at like, oh my God, my fucking house got stolen by the bank. Because. Because they were betting on the mortgage to fail.

[Molly Conger]

And I still understand why that's legal.

[Mia Wong]

Yeah, well, all these right wing conspiracies do is they look at that shit and they go, oh, well, it was the Jews.

[Public Investing Platform Announcer]

And it's like.

[Mia Wong]

But no, like, fuck off. Like, these are all.

[Molly Conger]

No, it was the bag.

[Serious Fun Camp Narrator]

Yeah.

[Mia Wong]

And the other thing, and this is actually a really important thing that's not well understood here, is that like, like the actual people who run these fucking banks, the people who work at them are all fucking white Christian dipshits. This is like a real, a really like, persistent issue that everyone fucking has, which is that like one of the great successes of anti Semitism was like creating the image of the banker as a Jewish person. And no, they're not the bank. Like, I fucking went to school with these people. They're all a bunch of fucking white frat bros. They're fucking white Christian frat bros. Oh, right, you, University of Chicago, you have

[Molly Conger]

a degree in economics from the University of Chicago.

[Mia Wong]

Not from economics. I have an anthropology degree, thank you very much. I took a. Not a fucking fake degree. Like the stupid econ bullshit.

[Molly Conger]

I just say that's actually so evil to study economics in Chicago. You probably met some of the most evil people on this.

[Mia Wong]

I was just like in a dorm with them. Okay, so.

[Molly Conger]

But you saw that I know all these people.

[Mia Wong]

Yeah. And like, it is not. It is not a bunch of Jewish people. It's a. It's a bunch of Christian frat bros. Like, that's like the thing that's actually going on. There's actually a whole one day I will write the behind the bastards episode about leverage buyouts and about how like there was like a Jewish guy who kind of like, like did a lot of the inventing stuff. But him breaking into the banking thing was like a whole thing because there was so much anti Semitism because all of the banking sector was run by all of the like weird dip, like CIA, like, like wasp.

[Molly Conger]

I mean, the Mormons have a huge hedge fund.

[Mia Wong]

Yep, yep, yep, yep, yep.

[Molly Conger]

Yeah, so like the. What is it? I read an article about it. The hedge fund that the Mormons operate like, like they have their like, best and brightest finance bros. Like, you know, Mormons do their two year mission. If you're really good at finance your mission, you don't have to go to South America and like tell people about the Book of Mormon. You can work at the hedge fund as your mission.

[Mia Wong]

It's. It's a nightmare.

[Molly Conger]

I'm doing hedge funds for God.

[Mia Wong]

Yep. That's A stats of shadow bank, by the way. Yep. It's great. So, okay, okay, coming back to this again, right, so we're talking about like, what, what causes 2008 and how do these shadow banks, like, do this? And the answer is that they've turned all of these mortgages into these like, fake securities. They can, they can trade, right? They package them all together and they find out something really crucial, which is that if they throw a bunch of loans that they obviously know are going to fail together and send them to a regulatory agency. And by the way, all of these like bonds that they're issuing have like grades based on supposedly like how safe they are. And they figure out.

[Molly Conger]

I know about that.

[Mia Wong]

Yeah. And they figure out that they can send a bunch of really shitty bonds, but if they package enough shitty bonds together, they could send them to the regulators and the regulators would have, would evaluate some of them as being good. And then you could sell the good ones to your pension fund because they thought it was a good bond and it made money.

[Molly Conger]

That's just lying then.

[Mia Wong]

And then. Yes, and yes. And then, and then behind the scenes, right, all of these fucking companies, all these shadow banks, all the regular banks, they're all doing these, they're all doing these credit default swaps, right? So they're all betting on which ones of these are going to fail.

[Molly Conger]

I'm putting all of these boys in timeout. Like, I'm going to put them in the bottom of a pit.

[Mia Wong]

So evil. And they, they start, they start doing these, making these like even more complicated instruments, right? Where now what they're, what they're selling to you isn't just the package of mortgages. They're also selling you the credit default swaps with the loan. So theoretically what's happening is like they've created an instrument that regardless of what happens to the loan, you make money.

[Molly Conger]

That's not how anything works.

[Mia Wong]

No, it's bullshit. It's so obviously bullshit.

[Molly Conger]

I made up this fake thing where no matter what happens, I get rich. That's cool. I would love to do that.

[Mia Wong]

Yeah. And nobody was like, wait. Well, I mean, a couple, some people were, but like, like people didn't just be like, wait, hold on. No, obviously you can't make an asset that makes money regardless of whether the thing fails or not.

[Molly Conger]

I invented a money machine.

[Mia Wong]

Like, that's fucking ridiculous. And then eventually, yeah, it was like, no, they ran out of fucking mortgages. You know, one of the ways that the blame for this was deflected onto regular people was that they blamed the banks or, like, they blamed regular people for, like, not being able to pay the mortgages. But the thing is, by the time you get to the point where you're, like, packaging all the. You're betting on the mortgages, right? If you're a bank, even if you're the regular bank, you don't make money off of, like, someone paying their mortgage back. You make money on betting on the mortgages. So you're incentivized to just keep giving out loans. You know, won't happen because you can sell those loans off of some other dipshit and then you. And then you can bet on those loans that they're going to fail and you can make money. And that's how you make your money, because you're.

[Molly Conger]

You're not a bank anymore. You're a bookie who's cheating.

[Mia Wong]

Yep.

[Molly Conger]

I don't think that's good, Mia.

[Mia Wong]

No. This was the entire fucking financial system, and we just let these people stay in power.

[Molly Conger]

And I'm just supposed to just continue living my life like this?

[Mia Wong]

I don't know, looking at this and then. And then learning that all of these people got fucking bailed out by the government and none of them went to prison.

[Molly Conger]

And do they know they're cheating liars who are faking and making it up? Or are they, like, so high on their own supply, they're like. They're like, no, bro.

[Matt Rogers]

No.

[Molly Conger]

But this is totally gonna work. It's totally gonna work.

[Mia Wong]

Well, here's the thing. Some of them know and some of them don't because some of them believe

[Molly Conger]

that this is cool.

[Mia Wong]

Yeah. Like, some. Some of them legitimately thought that this was just going to work forever.

[Molly Conger]

Like, do they believe they're negative money backed by other fake money backed by the idea of promises of fake money? They think that's money.

[Mia Wong]

Yeah. Yep. I thought it was gonna work.

[Molly Conger]

It's not.

[Mia Wong]

It's not. Nope. And it turned out to not be any fucking money. And it blew up again. Like, entire countries. Countries were buying these. They went bankrupt.

[Molly Conger]

So, like, this is less real than a bored ape. Nft. And that's really saying something.

[Mia Wong]

It's. It's astonishing because at least the.

[Molly Conger]

At least I can look. At least I can look at the picture of the monkey. I can't look at this.

[Mia Wong]

No. Like, it. Like, you can't look at the bet you're making on whether. On whether monkey go down. Like, it's like, like, like all.

[Molly Conger]

All my apes gone.

[Mia Wong]

Yeah.

[Molly Conger]

And.

[Mia Wong]

But it's depressing because the Entire world is just this now it's the shit the banks were doing where you're betting on whether the mortgage wouldn't fail, but now it's. You're betting on whether like what day we're going to drop a bomb on Iran.

[Molly Conger]

Like nothing is real and everything is gambling.

[Mia Wong]

Yeah, yeah. And this is, you know what, what, what I would call a sort of terminal crisis stage of capitalism where like,

[Molly Conger]

because everything is so divorced from any material reality, from any good or service,

[Mia Wong]

like there is a limit to which you can run an entire economy that is purely based on gambling. Like they're just. There's a limit and we're going to hit it really soon.

[Molly Conger]

That's got, that's gonna break, right?

[Mia Wong]

Yeah, yeah, it's going to break. It's gonna break spectacularly. However, comma, I do have good news for you.

[Molly Conger]

No, you don't.

[Mia Wong]

I do. I have good news. You now actually understand what non bank financial intermediation is.

[Molly Conger]

No, I don't.

[Mia Wong]

I'm going to walk you through it. You actually do. So I'm going to quote the IMF's definition of non bank financial intermediation. All entities outside the regulated banking system that perform the core banking functions. Credit intermediation, that is taking money from savers and lending it to borrowers. The four key aspects of intermediation are maturity transformation. We know this one.

[Molly Conger]

Right.

[Mia Wong]

This is what the bank does.

[Molly Conger]

The loan gets older.

[Mia Wong]

Yeah, yeah.

[Molly Conger]

And it gets paid back over time.

[Mia Wong]

Yeah. Well it's. You turn your short term thing into a long term investment or you do the opposite.

[Molly Conger]

Opposite's not good.

[Mia Wong]

They're both kind of a disaster. But like. Yeah, yeah. The opposite is kind of how we got into this mess. There's liquidity transformation, which we know this too.

[Molly Conger]

It's turned turning money into a thing that's not money.

[Mia Wong]

Yeah, yeah. Or turning not money into thing you can buy burger with.

[Molly Conger]

Okay. Yeah.

[Mia Wong]

We got this leverage. We also know this, which is you go into a bunch of debt to buy something else. And then there's credit risk transfer, which we know that one too. It's the betting market where you're supposedly swapping the risk by. But both of you two are now betting on whether this thing is going to fail.

[Molly Conger]

So it sounds like even just like regular banking is kind of just gambling now.

[Mia Wong]

Yep, yep, yep. Well, and it's fun too. So this is the thing that used to be talked about more and isn't now. But like most of like, like the world's corporations are also basically this now like, and this has been a thing for a while, but it's like the auto manufacturers don't make their money off of cars. I mean, they sort of. Do they make some money off cars or like, most of what they make their money off of is like the Ford Finance company, which is like the auto loans thing. Oh, and then the, the auto loans thing trades a bunch of like, like, does all of this other financial bullshit to make money.

[Molly Conger]

So, like, I don't think that's a good idea.

[Mia Wong]

That's, that's what capitalism is.

[Molly Conger]

So everything, everything is fully reliant on this, like, stupid gambling bullshit. Emperors wearing no clothes, economy.

[Mia Wong]

Yep.

[Molly Conger]

And if anybody, if anybody points out that none of this is connected to a material reality, everything falls apart.

[Mia Wong]

Well, here's the thing. The thing that stops everything from falling apart is that the one thing you can do with your money is turn it into guns.

[Molly Conger]

Now I'm listening.

[Mia Wong]

And that's what stops it falling apart.

[Molly Conger]

Right, because now I'm listening.

[Mia Wong]

And this is also a sort of graverism. But it's like behind every, like, bank is a man with a gun. Because the, the reason that this money is even sort of real is that the bank can, like, you, like, the police will come get you. Right. Like, men with guns will appear and like, coerce you to pay shit. Right.

[Molly Conger]

But what if, what if instead of burger, we bought gun?

[Mia Wong]

You know? Like, this is what is broadly referred to as the social revolution. It is broadly considered a negative by the financial sector. It is broadly considered a positive by everyone the fuck else. That's not true. It's not considered a positive by, like, I guess the people who own regular businesses. And this is like the shit that, like, you know, it was kind of less unhinged back then. But like, if you go read the people who were, like, doing this shit in like, the early 1900s, if you read their writing, it's all them being like, oh, yeah, no, by the way, like, a bunch of banks just like turned the entire Ottoman Empire into like a debt peon. And now their entire economy is just dedicated to paying off these fucking loans. And this is like hideously fucking evil. Like, they're, they're all complaining about the same shit.

[Molly Conger]

And the important lesson we learned from that, the important lesson we learned from that was to do it more. More.

[Mia Wong]

Oh, yeah, yeah, yeah.

[Molly Conger]

To invent increasingly many more complicated ways of doing that.

[Mia Wong]

Yep. And like this, this is, this is why the term third world is a slur. Because instead of being a political movement, because those, the countries in the political movement that was called the third world movement, all of their economies got annihilated because they had these, like, loans whose interest rate could change. And the US jacked up all the interest rates. And so suddenly their loans were like, like the amount you had to like pay on the loans, it went from like 20% or something to like 50 or 100 or some shit. And, you know, and like, and these countries have never recovered. Like, Nigeria has never really economically recovered from the shit that happened to them. This. This is why a whole bunch of Latin America is like this too. Like, like why there's so much sort of like riding systemic poverty is that their economies were entirely transformed into machines to like, pay back these fucking debts taken out by these dictators. This is the whole fucking economy now. And, you know, there's other shadow banks that do other kind of completely unhinged shit, right? And I've been focusing this week on like, specifically the kind that blew up the economy in 2008. But there's another kind that's like blowing up the economy right now, which is called private credit, which is. I mentioned this briefly earlier, but private credit is when these like, unregulated companies that are not banks give out unregulated loans with unknown terms to other companies and then those loans go to shit. And there's a whole bunch of ways that can blow up. Including, by the way, these companies are funding a bunch of the AI bubble.

[Molly Conger]

Oh, and that's a great, great investment. It's great, you know, because much. Much like a mortgage, there's a real physical thing, like a house involved. Right? It's not just vibes.

[Mia Wong]

Oh, yeah. Oh, Molly. Molly. They. Those. I'm gonna talk about this a bit. I might have Ed Ditron on for this part of it too. Just because, like, Ed does this all the time. But like those out there selling securities that are backed by graphics cards,

[Molly Conger]

like,

[Mia Wong]

at least the more. I can't believe I'm saying this, but like, at least the mortgage back securities, like there was a house you could steal to get your money back. Graphics cards.

[Molly Conger]

All my. All my apes are gone.

[Mia Wong]

My graphics gone.

[Molly Conger]

All my apes are gone.

[Mia Wong]

Like, there's other ones that I like. It's. It's so bad. It's just. Oh, but that. That's for another time because it is late as. And we are out of here. Molly, thank you. Thank you for sitting and enduring an hour of. Of you knowing what a shadow bank is now.

[Molly Conger]

I almost know what a bank is. I'm still working on the rest of it, but I think I'm getting closer.

[Mia Wong]

I I believe in you. I I, I, I think we've made real progress today. I I don't know. Now, now, now you can kind of understand what's going on. When this sector explodes again in like

[Molly Conger]

two weeks, you'll have to explain it to me again. Then.

[Mia Wong]

I. It could happen. Here is a production of Cool Zone Media. For more podcasts from Cool Zone Media,

[Molly Conger]

Visit our website coolzonemedia.com or check us

[Mia Wong]

out on the iHeartRadio app, Apple Podcasts or wherever you listen to podcasts you can now find sources for it could Happen here, listed directly in Episode Descriptions. Thanks for listening.

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