Speaker 1: I am the son of immigrants and have son of
Speaker 1: immigrant energy, which means I just save everything. I tend
Speaker 1: to not really spend that much money because I'm saving
Speaker 1: for the rainy day that we all know is going
Speaker 1: to come. But there are a lot of signs pointing
Speaker 1: to the economy taking a potential left turn. Here the
Speaker 1: report card that tracks how the economy is doing, it's
Speaker 1: called the Leading Economic Index has been falling for months.
Speaker 1: Big banks like UBS are saying there's a high chance
Speaker 1: of a recession soon. And then you have economists who
Speaker 1: individually are sort of like, oh, the odds are like
Speaker 1: fifty to fifty within the next year. But at the
Speaker 1: same time, fewer houses are being built, companies are hiring less.
Speaker 1: There's obviously an affordability crisis in major cities, but in
Speaker 1: plenty of places around the country. And that's why we're
Speaker 1: here today. And instead of instead of scaring you further,
Speaker 1: I thought, why not talk to somebody who actually knows
Speaker 1: and has written about the two thousand and eight financial
Speaker 1: crisis and can help us understand whether we're headed for
Speaker 1: a new one.
Speaker 2: You know, it's funny.
Speaker 3: I don't live my life in fear of a financial crash.
Speaker 3: So I'm not thinking, oh, it's always this way, but
Speaker 3: because you.
Speaker 2: Have gold under your bed, that well actually do a
Speaker 2: little bit, just a little bit.
Speaker 1: Here we go again, again, again, again. This is here
Speaker 1: we Go Again, a show where we take today's trends
Speaker 1: and headlines and then ask why does history keep repeating itself?
Speaker 1: I'm Calpin, here we go.
Speaker 2: I'm here, Michael cal So.
Speaker 1: Let me brag a little bit about the person across
Speaker 1: from me. I'm a big fan of Michael Lewis. Michael
Speaker 1: Lewis is one of those rare people who can take
Speaker 1: really complicated, insane things like Wall Street creed or baseball
Speaker 1: statistics and them digestible in like a page turning. This
Speaker 1: is a thriller sort of a way. He's written books
Speaker 1: like The blind Side and The Big Short. The Big
Speaker 1: Short just got re released as an audiobook, which Michael
Speaker 1: narrates for the very first time. He's got a podcast
Speaker 1: about trust in modern life. It's called Against the Rules.
Speaker 1: So basically, I'm nerding out hard because I love complicated
Speaker 1: things that can be distilled down for like a nerdy
Speaker 1: dummy like me, and I'm fortunate enough to get to
Speaker 1: ask him the question that's been on my mind. Are
Speaker 1: we going to live through another two thousand and eight
Speaker 1: financial crisis?
Speaker 2: I hope not?
Speaker 1: But then who can I actually trust with my money?
Speaker 2: So? What are we doing? What is this? Tell me something?
Speaker 1: I remember Michael the first time I saw Moneyball, and
Speaker 1: obviously I'm a big fan of the big short and
Speaker 1: my first question was, all, how do I get cast
Speaker 1: in this? Because there are hell of shady brown guys
Speaker 1: in the finance world, many of whom are now in prison.
Speaker 1: I'm trying to get life rights to some of these stories. Also,
Speaker 1: I'm from New Jersey, so if we want to talk
Speaker 1: about like shady guys in the finance world, I know
Speaker 1: some of them, having grown up with County. But I'm
Speaker 1: a big fan. I appreciate you being here. In prepping
Speaker 1: to talk to you, I thought about two thousand and
Speaker 1: eight financial crisis, and sort of after it, I learned
Speaker 1: that an old friend of mine at the time, pretty
Speaker 1: good college friend, had been directly involved in the following way.
Speaker 1: He was selling subprime mortgages for one of those big companies.
Speaker 1: And so, I, you know, I was a little bit
Speaker 1: on my soapbox, I think like most of us were,
Speaker 1: and I wanted to learn what it was like to
Speaker 1: cause that much harmed to vulnerable people. And I think
Speaker 1: maybe part of the problem was I asked it in
Speaker 1: that way, and I was kind of reminded of how
Speaker 1: naive I am sometimes, because this guy's answers were basically
Speaker 1: that he and everyone else knew that what they were
Speaker 1: doing was wrong all along. He couldn't resist all the
Speaker 1: bonuses and the new clients that he was getting by
Speaker 1: selling these subprime mortgages. Everything turned to shit. These guys
Speaker 1: basically just shrugged and said oh well and moved on
Speaker 1: to a different job. And then when all was said
Speaker 1: and done, there were like zero consequences for him and
Speaker 1: kind of anybody in his position, with the exception of
Speaker 1: maybe like losing my respect, which I don't think he
Speaker 1: cared to found much to begin with. But that's always
Speaker 1: bothered me because aside from the sheer moral outrage, there
Speaker 1: was this huge lack of consequences, and I just sort
Speaker 1: of was thinking, like, you know what, what's stopping these
Speaker 1: people from doing this kind of shit again? So namely,
Speaker 1: I thought maybe we'd open it.
Speaker 2: Can stop? Can I stop your yes?
Speaker 1: Please please?
Speaker 3: I want to unpack that little anecdote. So when you
Speaker 3: encounter him and he explains what he's doing, is still
Speaker 3: peak craze or is it after the fact.
Speaker 1: It's after the fact.
Speaker 2: So's it's all collapsed.
Speaker 1: It has all collapsed.
Speaker 2: Yes, And the fact that you say, you know, people just.
Speaker 3: I think people are bewildered by the idea of selling
Speaker 3: subpower mortgages because you think, as your homeowners take out mortgages,
Speaker 3: the idea of these things being pedled like you're trying
Speaker 3: to persuade people to take out alone and that as
Speaker 3: an act of sales to people who already have dicey
Speaker 3: credit right there, there's like, like, what is this?
Speaker 2: It's not intuitive?
Speaker 1: No, and this was this is what kind of enraged me.
Speaker 1: Is like, you know, I mean the son of immigrants
Speaker 1: who whose immigration story is very different. My parents both
Speaker 1: speak English, they're multi lingual. They moved to the United
Speaker 1: States with advanced degrees. So when I hear stories of like, oh,
Speaker 1: somebody didn't know what they were signing, my first reaction
Speaker 1: is well, boo fucking who, Like who told you not
Speaker 1: to read all the paperwork? But then you talk to
Speaker 1: guys like this who are literally peddling something saying like Oh,
Speaker 1: don't worry about it. I'm your friend. Don't worry about
Speaker 1: the fine print. Knowing that these people are going to
Speaker 1: default on their mortgages at some point, but that there
Speaker 1: was a bonus in it for him was insane to me.
Speaker 3: And there's you know, there there's a eons of habit
Speaker 3: baked into the minds of the consumer, and it's a
Speaker 3: bit like it's a bit like junk food.
Speaker 2: Like that, you you know, baked into our brains.
Speaker 3: A scarcity so that anything you get thrown at you,
Speaker 3: I'll just take more and more and more and more.
Speaker 2: And the idea that.
Speaker 3: Someone's going to give you a loan that you shouldn't take,
Speaker 3: it's a little hard to get your mind around that.
Speaker 3: You're thinking, like, well, if they're lending it to me,
Speaker 3: they know what they're doing. You know that I should
Speaker 3: It means I should do it. So my first reaction
Speaker 3: when I started to hear the story of the subprime
Speaker 3: crisis back when I was working on the Big Short
Speaker 3: was like, well, you know, people shouldn't borrow money they
Speaker 3: can't repay. It was less sympathetic. The more I dug
Speaker 3: into it, the more predatory it all felt. And that's
Speaker 3: not to let everybody off the hook. But you were
Speaker 3: right to be outraged by.
Speaker 2: Your friend's behavior.
Speaker 3: It was just where high finance met the working class,
Speaker 3: that border, where someone was who understood these things was
Speaker 3: actually peddling them to someone who didn't.
Speaker 2: Was maybe the ugliest part of the whole event.
Speaker 1: So what I was going to say was, if you like,
Speaker 1: let's say we went back to two thousand and six
Speaker 1: leading up to two thousand and eight, as if I
Speaker 1: was like a five year old, what are some indicators
Speaker 1: that we could see as like normal people that were
Speaker 1: heading towards this crash in two thousand and eight.
Speaker 3: It's funny I asked the same question of all my
Speaker 3: characters back in the day, and just recently re asked
Speaker 3: them for the podcast I'm doing alongside The Big Short,
Speaker 3: And I said just that.
Speaker 2: I actually said, like an eight year old or a
Speaker 2: seven year old.
Speaker 3: And Steve Eisman, who was played by Steve Steve Correll
Speaker 3: in the movie, looked at me. He said, you can't
Speaker 3: explain this to a five year old, He said, you
Speaker 3: can explain this to I, haven't we start with.
Speaker 2: A twenty year old?
Speaker 1: Yeah?
Speaker 2: Fine, great, but okay, no, I'll do my Yeah. So
Speaker 2: five year old's a little rough. But can can we
Speaker 2: be a little older? Yeah? Please? Can me a little older?
Speaker 1: You picked the age twenties.
Speaker 3: I'll pick the age, but I'll just try My mother
Speaker 3: an eighty eight year old. So what happens here? Your
Speaker 3: friend was selling subprime mortgages, and which is a weird idea, right,
Speaker 3: you have to get your mind around that. He's run
Speaker 3: around looking for people who probably shouldn't borrow the money
Speaker 3: to borrow the money to buy a house. And your
Speaker 3: friend is only doing that because your friend is not
Speaker 3: going to sit there with the loan. Your friend isn't
Speaker 3: lending you that person the money himself. He's not going
Speaker 3: to sit there. He's going to lose any money if
Speaker 3: if those that person eventually defaults, as they turned out
Speaker 3: likely to do. So what your friend is doing is
Speaker 3: acting on behalf of some bigger mortgage lender who will
Speaker 3: then take the loans and hand them off to I
Speaker 3: mean there'll be sometimes multiple stages, but a big Wall
Speaker 3: Street firm eventually and a city group, a merrill lynch,
Speaker 3: a goldman's axe who will put them all in a
Speaker 3: big pot. All these loans and the pot you know
Speaker 3: what's coming into that pot is mortgage payments from all
Speaker 3: these people who bought the houses, and that can be
Speaker 3: turned into a bond, you know, It's just like that
Speaker 3: looks like a bond, so they can sell it off
Speaker 3: as pieces of paper in this pool of mortgages. Now
Speaker 3: who ends up owning it? That at the time was
Speaker 3: one of the great mysteries. This stuff went all over
Speaker 3: the world, and in fact, some of the big Wall
Speaker 3: Street banks end up keeping a lot of it on
Speaker 3: their books stupidly.
Speaker 2: But along the way.
Speaker 3: The big point is the person making the loan is
Speaker 3: not exposed in any way. The person's physically doing it.
Speaker 3: They have no incentive for the loan to be a
Speaker 3: smart loan, incentive to generate as many of the loans
Speaker 3: as possible. They also have an incentive because these loans,
Speaker 3: you know, the general characteristics of the loan are evaluated
Speaker 3: by the people who are taking the loans off the
Speaker 3: hands of that person who lent the money. So the
Speaker 3: fight the credit scores. How much money do they put down?
Speaker 3: All that stuff they would make a loan riskier or
Speaker 3: less risky. They have an incentive to lie about that
Speaker 3: or game it in some way. So what happens there's
Speaker 3: a chain. This loan gets passed through several hands and
Speaker 3: eventually ends up being held by some investor in the
Speaker 3: form of a bond. But along the way, in various ways,
Speaker 3: the risk gets disguised, and along the way it gets
Speaker 3: packaged into these big and big black boxes, and the
Speaker 3: boxes get harder and harder to see inside of, so
Speaker 3: that it takes superhuman sort of analytical research diligence to
Speaker 3: figure out what the hell of the loans are behind
Speaker 3: the bonds, and that in fact, the characters are the
Speaker 3: big short one of them. Anyway, you know, he distinguished
Speaker 3: himself of actually going into the black box and seeing,
Speaker 3: oh my god, there's a stripper. There's a stripper in
Speaker 3: Las Vegas with twenty seven houses. You know, it's that
Speaker 3: kind of thing. So what makes it possible is one
Speaker 3: the neediness at the bottom of the chain, the neediness
Speaker 3: of the person who is borrowing the money in.
Speaker 2: The first place, the desires.
Speaker 3: As one of my characters put it, this market was
Speaker 3: totally a reflection of the working class Americans inability to
Speaker 3: live up to their expectations, and financial expectation is that
Speaker 3: their salaries were not meeting and.
Speaker 2: This sort of filled the hole, so it starts there.
Speaker 2: Then it's like your.
Speaker 3: Friends immorality, willingness to to exploit, to make these loans
Speaker 3: people wh shouldn't have them, the willingness of the whole
Speaker 3: financial system, the big banks to disguise the risk in
Speaker 3: the loans and their ability is subsequently to pedal these
Speaker 3: loans in the form of bonds to like German investors.
Speaker 1: That's what you mean when you say stuff went all
Speaker 1: over the world.
Speaker 3: It went all over the world. And part of the
Speaker 3: reason there's a crisis is that no one knows how
Speaker 3: much of it there is or who's got it. So
Speaker 3: it's like you can't nobody trust anybody at that moment.
Speaker 2: It's like, are you bankrupt too? Are you not?
Speaker 1: A big date when Lehman Brothers went bankrupt was September fifteenth,
Speaker 1: two thousand and eight. For somebody who does what you do, like,
Speaker 1: is that a date where you remember what you were doing,
Speaker 1: remember what you were thinking, or did things follow that
Speaker 1: showed you the gravity of that day.
Speaker 2: I was already into the book I was.
Speaker 3: I was already reporting the big short when bear Stearns
Speaker 3: went down in whatever February. I didn't remember the dates.
Speaker 3: I locked in on it. I started to kind of
Speaker 3: kick around and talk to people. I can't remember where
Speaker 3: I was when Lehman went down. And you know what's
Speaker 3: funny is not only can I not remember where I was,
Speaker 3: I remember vividly where my characters were, who I cared about.
Speaker 3: I started to live this through my characters. And there
Speaker 3: was a scene that I thought was going to end
Speaker 3: the movie, and it ended the book where these characters
Speaker 3: there were. The firm was called Front Point Partners. It
Speaker 3: was an obscure hedge fund that mainly traded in stocks.
Speaker 3: Had figured out that all the Wall Street firms were
Speaker 3: making this mistake and made this big bet against the
Speaker 3: subprime mortgage market. And they were so disoriented by being
Speaker 3: proved so right that it wasn't just they were going
Speaker 3: to get rich, but maybe the whole world was going
Speaker 3: to come down, Like it was just a little unclear
Speaker 3: at that moment whether you know, capitalism was going to survive.
Speaker 2: Kind of thing. It was that it felt that dire
Speaker 2: to them.
Speaker 3: They were so aware of just how badly behaved the
Speaker 3: financial system had been. They imagined a cataclysm even greater
Speaker 3: than the one that occurred, and.
Speaker 2: They all wandered the streets. There were four of them.
Speaker 2: They wandered the streets of Manhattan and converged on.
Speaker 3: Saint Patrick's Cathedral and sat on the steps and just
Speaker 3: watched the people like they were ghosts, passing them by,
Speaker 3: and say, those people do not know what's about to
Speaker 3: hit them. So when I think about that day, I
Speaker 3: wasn't there. You know, they just told me about this.
Speaker 3: It's their experience that pops to mind.
Speaker 1: What was the result of that financial crash for people
Speaker 1: in your lives? Like I obviously know this guy who
Speaker 1: was selling some mortgages, and I had friends who you know,
Speaker 1: lost money in retirement or money that they had saved
Speaker 1: up for their kids college. But did any of your
Speaker 1: neighbor's friend's family lose jobs houses? Did you see anyone
Speaker 1: on the news that you knew that you were researching?
Speaker 1: Like what was that impact like for you?
Speaker 3: But you know what actually popstimized nothing that I was.
Speaker 3: So I was reading the news of other people's people.
Speaker 3: I didn't know their tragedies. It wasn't hard to imagine them.
Speaker 3: I had old colleagues on Wall Street whose careers went
Speaker 3: up in flames and in some cases kind of unjustifiably,
Speaker 3: you know, it was a funny thing I worked. I
Speaker 3: worked at Solomon Brothers in the nineteen eighties, you know,
Speaker 3: in the Stone Age, but that as it happened.
Speaker 2: This is one of the reasons I got I took
Speaker 2: an interest in the story.
Speaker 3: Is I was there basically when the mortgage bond market
Speaker 3: was being invented by Solomon Brothers.
Speaker 2: Uh huh.
Speaker 3: So I saw, you know, Frankenstein's monster be created, and
Speaker 3: now I was watching the monster come back and eat everybody,
Speaker 3: and the people who had created the monster knew what
Speaker 3: the monster was capable of.
Speaker 1: Were everyone's reactions like that? Like, I assume you called
Speaker 1: a lot of these people up, like the idea of that,
Speaker 1: oh shit, we were the ones that created this. Was
Speaker 1: that across the board or or by the way, is
Speaker 1: this truly one of those like there are five puppeteers
Speaker 1: at the top type of situation and they're acknowledging it,
Speaker 1: but everybody at the deputy level is pretending they had
Speaker 1: nothing to do with it.
Speaker 2: So here's the weird thing. Maybe it's not so weird.
Speaker 3: You know how it's easy to confess to something that
Speaker 3: you actually didn't. It's not that damning to confess to
Speaker 3: Oh I work too hard. Oh, I care too much,
Speaker 3: my biggest too, I loved you, I love too well,
Speaker 3: it's not quite that. But no one was going to
Speaker 3: prosecute Louis Ranieri for creating the mortgage bond. No one
Speaker 3: was going to no one was probably going to completely
Speaker 3: buy he was really responsible for someone taking the mortgage
Speaker 3: bond and doing awful things with it.
Speaker 2: So there's something a little disingenuous about taking.
Speaker 3: The blame for the whole thing when you're not to.
Speaker 3: And the people who were to blame this answer your question.
Speaker 3: They were people inside the Wall Street firms in two
Speaker 3: thousand and six to two thousand and eight who really
Speaker 3: really should have taken the blame. And none of those
Speaker 3: people got up and said, oh I'm sorry.
Speaker 1: No for any of them, Right, you just said nobody's
Speaker 1: nobody's going after that that top guy. But for any
Speaker 1: of them, the top guy or anybody in the middle,
Speaker 1: did they actually technically do anything illegal.
Speaker 2: It's a really good question.
Speaker 3: And I have a friend, the writer Michael Kinsley, who
Speaker 3: always says the scandal isn't what's illegal, it's what's legal.
Speaker 3: A large part of the story of the crisis is
Speaker 3: it's scandalous how much of this was legal, Like how
Speaker 3: much you could define print got you off the hook
Speaker 3: because it was immoral. It's you know, the idea that
Speaker 3: for example, Goldman Sachs could conspire with John Paulson, short
Speaker 3: seller who wanted to bet against subprime mortgages, to create
Speaker 3: billions and billions of dollars of side bets on the
Speaker 3: very worst mortgage bonds they created, so so so paulse
Speaker 3: could bet they were going to go bad. And these
Speaker 3: are just like it's just like it's a you can
Speaker 3: think of it as like replicating the worst loans to
Speaker 3: infinity and injecting those things into the financial system. So
Speaker 3: getting other people Germans or whoever to take the other
Speaker 3: side of that bet.
Speaker 2: Now maybe that's legal, it is legal. It's horrible.
Speaker 3: It's like because you're essentially introducing pollution, are a poison
Speaker 3: into the financial system, and so you can take a
Speaker 3: little profit off of it.
Speaker 2: People who know more than I do would tell you
Speaker 2: that people.
Speaker 3: In firms hid or ignored reports of how bad.
Speaker 2: The mortgages were so no one would know.
Speaker 3: So that, you know, is that fraud. Maybe you could
Speaker 3: get people on fraud. It was hard if you go
Speaker 3: if you rewind the tape at the very beginning.
Speaker 2: You may not.
Speaker 3: You know, I don't know sure this is even in
Speaker 3: the book, and my memory of it is going to
Speaker 3: be a little fuzzy. But bear Sterns had a fund
Speaker 3: that was attached to bear Sterns that went down, and
Speaker 3: it went down because they.
Speaker 2: Were actually they owned a lot of this stuff.
Speaker 3: US prosecutors tried to put the people who ran that
Speaker 3: fund in jail, and the trial was in New Jersey
Speaker 3: and this was early early financial crisis, and not only
Speaker 3: did they fail, but the jur there were jurors quoted
Speaker 3: in the newspaper afterwards saying, can you get me the
Speaker 3: number of those guys from barristers? I wanted them to
Speaker 3: I think have I wanted to invest my money for.
Speaker 3: So there was such a there was such a There
Speaker 3: was such an at the very beginning, they were prosecutors
Speaker 3: who were embarrassed trying to kind of like prosecute this thing,
Speaker 3: and it was hard, it was so complicated. So the
Speaker 3: answer is, I don't I'm sure people broke the law. Basically,
Speaker 3: no one went to jail. In retrospect, the whole society
Speaker 3: would have been better off if they've been at least
Speaker 3: an attempt to prosecute the very topic there wasn't.
Speaker 1: Yeah, so then if there was no attempt made to
Speaker 1: prosecute and it sounds like if you know, okay, you
Speaker 1: did all these fifty things wrong that caused this massive,
Speaker 1: awful global collapse, but technically the only thing we could
Speaker 1: get you on is fraud, then that makes me wonder
Speaker 1: all of the conversations about how fragile the economy is
Speaker 1: again today, are there systems in place to prevent another
Speaker 1: crash in the way you just described it? And if so,
Speaker 1: what are they? What are they responsible for? Putting a
Speaker 1: check in? And it did the current administration dissolve any
Speaker 1: of them? Like did they exist post two thousand and eight?
Speaker 1: But then over the political spectrum have they been kind
Speaker 1: of watered down themselves?
Speaker 3: So there is a deathless problem in the financial system always,
Speaker 3: and it gets worse the more complicated it gets, and
Speaker 3: the financial system gets it's more and more complicated, And
Speaker 3: the problem is that people get paid more to take
Speaker 3: more risk, and the best way to get paid more
Speaker 3: for taking more risk is disguise the risk you're taken
Speaker 3: and not actually take the risk yourself. The system is
Speaker 3: always looking to hide the risk. So part one of
Speaker 3: the answers to you this question you just asked, is so, yes,
Speaker 3: things that systems were put in place, constraints were put
Speaker 3: in place, and specifically the banks were neutered. They can't
Speaker 3: take the same kind of risk that those banks, you know,
Speaker 3: City Group, Maryland, Morgan Stanley, Bank of America, that they
Speaker 3: have more capital and they're not allowed to roll the
Speaker 3: bones in the way they roll the bones way back
Speaker 3: when they're much more boring. Places they themselves are unlikely
Speaker 3: to be the place where the risk gets hidden.
Speaker 2: However, the risk still wants to be taken.
Speaker 1: Yeah, and I feel like they know the people taking
Speaker 1: the risk.
Speaker 3: And yeah, they know the people getting the risk, and
Speaker 3: they're getting more and more involved. The place where the
Speaker 3: risk is being taken are places that you maybe or
Speaker 3: even just barely conscious of.
Speaker 2: The place is called Apollo and Blackstone.
Speaker 1: These are all private equity.
Speaker 3: They're all private so they're all they're all way outside
Speaker 3: regulatory framework that top stops the banks from So it's
Speaker 3: like you squeeze the orange and the juice went outside,
Speaker 3: and the juices outside and it's floating or it's sloshing
Speaker 3: around and it's hard to know.
Speaker 2: I mean I had someone tell me the other day.
Speaker 2: I mean someone who.
Speaker 3: Watches these places closely that Blackstone areas Apollo, who are
Speaker 3: now making they have trillions of dollars and loans they're
Speaker 3: making there used to be That's not what they used
Speaker 3: to do, the especially doing banking outside the banking system,
Speaker 3: told me that they've these are the institutions that are
Speaker 3: now too big to fail.
Speaker 2: By too big to fail.
Speaker 3: I mean that if they were to fail, the government
Speaker 3: would come in and backstop them so that anybody who's
Speaker 3: got money in them won't lose their money. And we
Speaker 3: don't know exactly how it's going to go down, but
Speaker 3: the risk that they're terrified of is that it's the
Speaker 3: financial next oneancial crisis starts there. I do not know
Speaker 3: if that's true. Uh huh, I just I do know that,
Speaker 3: you know, people follow their incentives in the financial system,
Speaker 3: and if you can find ways to get paid short
Speaker 3: term for taking.
Speaker 2: A lot of risk that won't go bad for a while,
Speaker 2: people will do that.
Speaker 3: And the risk goes bad when the risk goes bad,
Speaker 3: and between now and then, people make a lot of money.
Speaker 2: I mean, this is why these things go in cycles.
Speaker 3: It's partly memory and partly it takes a little while
Speaker 3: for the financial system to figure out how to hide
Speaker 3: the risk again.
Speaker 1: But so if people are making money in the short term,
Speaker 1: then who's losing money in the long term when something.
Speaker 3: Collapses, Well, if the collapse occurs in an institution that's
Speaker 3: too big to vail, the first approximation is the taxpayer
Speaker 3: their government comes in. It's more complicated than that. Let's
Speaker 3: take a single simple example. There was a trader at
Speaker 3: Morgan Stanley in the run up to the financial crisis
Speaker 3: who I think was paid fifty million dollars in bonuses
Speaker 3: for his supposedly clever trades in the subprime mortgage more
Speaker 3: he was effectively long in the market, effectually owns subprime
Speaker 3: mortgage bonds.
Speaker 2: More complicated than that, but roughly so.
Speaker 3: When his trades go bad and Morgan Stanley loses on
Speaker 3: his trades ten billion dollars, first place, it's Morgan Stanley's shareholders.
Speaker 3: Second place, it's any taxpayer of funds that come in
Speaker 3: to bail out Morgan Stanley. But he never got he
Speaker 3: never had to give his bonus back.
Speaker 1: That's crazy.
Speaker 3: It's crazy. So it's crazy. So that's the problem. Where's
Speaker 3: the in New Jersey where they all.
Speaker 1: Go to see? This is what did I say when
Speaker 1: I opened? I knew plenty of people growing up who
Speaker 1: were who were shady as hell, and it wasn't just
Speaker 1: the mafia ties.
Speaker 2: No, you got to you got to find all us
Speaker 2: in New Jersey. Yeah. New Jersey's is filled with characters.
Speaker 1: That's a very diplomatic way of putting here.
Speaker 3: Probably gambling on sports. I don't know what he's doing,
Speaker 3: So they're just The problem is incentives. People follow their incentives,
Speaker 3: and a really complicated system starts to generate screwed up
Speaker 3: incentives and people do screwed up things.
Speaker 1: Can I just want to very simply try to recap
Speaker 1: something that you said to make sure I understood it
Speaker 1: properly that I was curious what laws have changed to
Speaker 1: make sure that the same thing doesn't happen as what
Speaker 1: happened in two thousand and eight. And you're saying that
Speaker 1: all of the risk then went to private equity, which
Speaker 1: means there's zero oversight. So we've collectively decided as a
Speaker 1: society that instead of putting proper checks and balances to
Speaker 1: prevent the system from repeating those mistakes, we're just going
Speaker 1: to make it so that nobody can see what those
Speaker 1: mistakes are. Is that correct?
Speaker 2: That's not a bad way of putting it.
Speaker 1: That's fucking crazy.
Speaker 3: It's it's a little more complicated than that. It wasn't
Speaker 3: just it's not just private equity, but it is true.
Speaker 3: It is crazy. On the other hand, let me argue
Speaker 3: against myself a moment.
Speaker 2: Well, I do think.
Speaker 3: Where this all starts for me, where the financial crisis starts,
Speaker 3: is when these bank these investment banks, acts and Solomon
Speaker 3: Brothers and Morgan Stanley and so on in the eighties
Speaker 3: and early nineties go from being private partnerships to being
Speaker 3: public corporations. Because it is true that when they're private partnerships,
Speaker 3: the people who own them are the employees, and it's
Speaker 3: they're exposed. They don't want to do really stupid things
Speaker 3: when they're exposed.
Speaker 1: They're exposed in what way?
Speaker 2: What does that mean?
Speaker 3: Well, so if Lehman Brothers when it went down, had
Speaker 3: not been a public corporation, it had been back what
Speaker 3: it used to be, it was owned by the employees,
Speaker 3: all those you know, Dick Fold and all the people
Speaker 3: who own ran that place, would have not only lost
Speaker 3: all the money in the place they would lost their houses.
Speaker 3: You know, they would have been they would have had
Speaker 3: unlimited liability for the things that happened there.
Speaker 2: They wouldn't have behaved that way.
Speaker 3: They wouldn't have taken this risk, this catastrophic risk for
Speaker 3: short term return, because they knew that when the catastrophic risk,
Speaker 3: they would have sensed it. When things went bad, they
Speaker 3: were on the hook. So I do like that structure,
Speaker 3: and that structure in some ways, I think Wall Street
Speaker 3: has been remoralized in that jump trading in Jane Street
Speaker 3: and Citadel. These are all private companies and if they
Speaker 3: go bad, if they do really stupid things, the people
Speaker 3: who run them are going to feel a lot of pain.
Speaker 3: So I think they'll behave more intelligently. The big private
Speaker 3: equity firms, I think most of them are there are
Speaker 3: their public companies, so we in that case, So the
Speaker 3: ones who are doing all this banking, this kind of
Speaker 3: I don't know what you call it shadow banking or
Speaker 3: whatever you call it, they're actually making the loans and
Speaker 3: trillions of dollars loans. They have the same problem as
Speaker 3: the old banks did going to the financial crisis, and
Speaker 3: it is essentially, you know, one there's a phrase that
Speaker 3: people use on Wall Street, regulatory arbitrage, which just means
Speaker 3: moving the risk to places where the regulators.
Speaker 2: Can't see it. Geez the word for it. And so yeah,
Speaker 2: so I mean that's that's what's going on. That's what's
Speaker 2: going on.
Speaker 1: Does this moment that we're living in, like right now,
Speaker 1: does that feel different than any of the other moments
Speaker 1: that we've lived through or are people always scared that
Speaker 1: we're headed towards a financial crash?
Speaker 2: You know, it's funny.
Speaker 3: I don't live my life in fear of a financial crash,
Speaker 3: so I'm not thinking, oh, it's always this way.
Speaker 1: But because you have gold under your bed, well.
Speaker 2: Yeah, I actually do a little bit, just a little bit.
Speaker 2: But the it's it always.
Speaker 3: Feels different, right What feels different now to me is
Speaker 3: in an alarming way. The reason we endured the financial
Speaker 3: crisis without social collapse, without depression, without thirty percent unemployment,
Speaker 3: without like political chaos, all the rest was we had
Speaker 3: these institutions, the Federal Reserve, the Treasury, Federal Reserve especially,
Speaker 3: and the independence of the Federal Reserve, its ability to
Speaker 3: be the grown up in the room. And I used
Speaker 3: that with this word carefully, but the trusted institution. No
Speaker 3: one really doubted in two thousand and eight that the
Speaker 3: federal government, the US federal government had the wherewithal to
Speaker 3: backstop all the risk, to come in and say, all
Speaker 3: these banks made all these shitty loans. They're all going
Speaker 3: to go to business, but we're going to be able
Speaker 3: at the banks. So the banks are going to be
Speaker 3: calmed down. Everybody, don't pull your money out of the banks.
Speaker 3: The banks can continue to do their business as they
Speaker 3: always do their business.
Speaker 2: We're good for it.
Speaker 3: And the Federal Reserve bought trillions of dollars of mortgages,
Speaker 3: you know, they took the loans off the books of
Speaker 3: the banks. Turns out they made a lot of money
Speaker 3: doing it. I mean they bought them at distress prices,
Speaker 3: so it all worked out. But the premise of this
Speaker 3: whole resolution was the existence of a trusted grown up
Speaker 3: whose credit no one doubted. We are now in a
Speaker 3: situation where we have an administration that is dying to
Speaker 3: get its hand on the Federal Reserve and essentially eliminate
Speaker 3: all trust in it, which is what will happen if
Speaker 3: they get their hands on it, like make it politicize
Speaker 3: the institution and our federal government's finances seem uncontrollable, and
Speaker 3: so what happens if there's a financial crisis without a
Speaker 3: trusted adult's that's what feels different.
Speaker 2: Like if people run.
Speaker 3: For gold or bitcoin or whatever, the next time things
Speaker 3: start collapsing, will the promise of the US government to
Speaker 3: bail everybody out stop them? Like say, oh, okay, I
Speaker 3: believe that, Yeah, yeah, I do want hold these dollars
Speaker 3: that you're going to print gazillions more of. Yeah, yeah,
Speaker 3: I really do believe the Federal Reserve is going to
Speaker 3: is to calm everything down. And I just I just,
Speaker 3: you know, it's it's not we've reached a point where
Speaker 3: those institutions can't function, but they've been really weakened. And
Speaker 3: I just don't know how a financial crisis plays out
Speaker 3: without an institution that you trust.
Speaker 1: The trust part of it, I'm so curious about. I
Speaker 1: think about this a lot also, not just by the
Speaker 1: way government institutions, but all of these legacy institutions that
Speaker 1: I think people are questioning, right, your newspaper, your you know,
Speaker 1: I'm a biased artist, First Amendment advocate all of the
Speaker 1: everything from you know, Biden and Harris's crackdown on college
Speaker 1: campuses for free speech, right up to Jimmy Kimmel getting
Speaker 1: taken off the air for free speech. Like there are many,
Speaker 1: many multifaceted sides to that conversation, but a lot of
Speaker 1: it distills down into do we trust ABC and Disney?
Speaker 1: Do we trust the New York Times?
Speaker 2: Yeah?
Speaker 1: What are we trusting these institutions? So it's not just government.
Speaker 1: So I'm curious, like when you wake up every morning,
Speaker 1: where do you go for your information? Who do you trust?
Speaker 1: Who do you trust with your money? Like the like
Speaker 1: you know gold jokes aside, are you in residential? Are you?
Speaker 3: It wasn't a joke for me too? No, I know,
Speaker 3: So I will tell you. I'll tell you what do
Speaker 3: I do? How do I live this way? Where do
Speaker 3: I place my trust? I do not share Americans seemingly
Speaker 3: complete distrust of media. It is amazing how untrusted the
Speaker 3: media is in our country right now.
Speaker 2: I've written for the New York Times and the New
Speaker 2: Yorker and.
Speaker 3: All these places, and I know there are referees who
Speaker 3: are there to make sure you're not just making stuff up,
Speaker 3: you know, And having said that, this is an important point.
Speaker 3: I can remember when I first became aware of the news.
Speaker 3: I mean, like it as a thing that you just
Speaker 3: didn't take on faith. And it was when I was
Speaker 3: at Solomon Brothers when all of a sudden I was
Speaker 3: doing something that was in the news. I was in
Speaker 3: the Solomon Brothers training program and a New York Times
Speaker 3: magazine writer came through and wrote about our training program.
Speaker 2: And then I was twenty three or years old.
Speaker 3: I was, you know, basically a kid, and I looked
Speaker 3: at and I thought, well, it's not it's.
Speaker 2: Not completely wrong when she wrote. But it was like
Speaker 2: it wasn't completely right. She missed it shouldn't have it. It
Speaker 2: wasn't that she had an angle. It was just that
Speaker 2: she didn't know very much. You know. She was there
Speaker 2: and talked to a couple of people.
Speaker 3: So then a penny drop for me, Well, if this
Speaker 3: is true of something I know about, what about all
Speaker 3: these things.
Speaker 2: I don't know about.
Speaker 3: If I'm reading about the Arab Israeli conflict, what's the
Speaker 3: likelihood that they've got that anymore?
Speaker 2: Right?
Speaker 3: And so assume the persons more or less trying to
Speaker 3: do their best and has some bias, and sometimes they
Speaker 3: reveal their bias, but mainly it's just like the nature
Speaker 3: of news gathering is pretty shallow, so how getting out
Speaker 3: of How do I live my life? So I hold
Speaker 3: it all kind of loosely.
Speaker 2: But I read the New York Times. I glance at
Speaker 2: the Washington Post. I read the Wall Street.
Speaker 3: Journal, you know, very useful to me because it's coming
Speaker 3: from a completely different spaces.
Speaker 2: The Financial Times they just sort of like they're Switzerland.
Speaker 3: They don't they like they're looking at what's going on
Speaker 3: in America, like they're looking at Mars.
Speaker 2: And that's very helpful. So those are newspapers.
Speaker 3: I let all kinds of podcasts and stuff in I graze,
Speaker 3: I get more, more sources, less deeply. In the last
Speaker 3: ten years, I've not read the New York Times as
Speaker 3: deeply as I read the New York Times twenty years ago.
Speaker 1: And it's much shorter now anyway.
Speaker 2: And my money where I do? Where do I keep money?
Speaker 1: Where do you keep your money? So who do you trust?
Speaker 3: Schwab huh very important. They don't take big positions themselves.
Speaker 3: They were notably like they were not in trouble during
Speaker 3: the financial crisis. JP Morgan, As I figure that in fact,
Speaker 3: I don't know. I got to say I don't understand why.
Speaker 2: Anybody keeps more than you know.
Speaker 3: Whatever the deposit insurance now is at a local bank,
Speaker 3: at a regional bank. It's their handful of banks that
Speaker 3: are implicitly federally guaranteed, like too big to Fail, and JB.
Speaker 3: Morgan is the biggest and the best run and a
Speaker 3: little bit out of the country, like not a lot,
Speaker 3: but a little bit out of the country. And that's
Speaker 3: a I lived in London when I started my writing career,
Speaker 3: and so I had to have a bank account.
Speaker 2: I just kept that bank account in London.
Speaker 1: Oh cool, Okay.
Speaker 3: But what I invest in in my weak moments, I
Speaker 3: will very occasionally buy a stock of a company, of
Speaker 3: an actual company.
Speaker 2: It's almost always a mistake.
Speaker 3: I get lucky and don't I never know enough to
Speaker 3: actually I know, I know, I don't know more than
Speaker 3: the market and I and I get excited about something
Speaker 3: and I ignore the fact that I don't know. Mainly
Speaker 3: index funds and Berkshire Hathaway, which is a kind of
Speaker 3: index fund.
Speaker 2: It's a big fund. And then gold.
Speaker 3: So I have a friend who runs money, who was
Speaker 3: a high school friend. He became a libertarian, he became
Speaker 3: an iron Randian. I lost track of him until the
Speaker 3: financial crisis. I heard he was working for bear Stearns.
Speaker 3: I was worried about him. I call him up and
Speaker 3: he's got this excited tone of his voice, even though
Speaker 3: I haven't talked in twenty years.
Speaker 2: It's like we was yesterday. It goes, Michael, Mike, I can't talk.
Speaker 3: I'm and I said, I'm just worried about you, and
Speaker 3: he goes, no, no, no, I'm sure he had a fund
Speaker 3: outside of Bear that bear Stearns funded, and he made
Speaker 3: the big short. He made the trade, and he gave
Speaker 3: me a little lecture ten years ago about the debasement
Speaker 3: of the currency and the history of currency debasement, and
Speaker 3: it so spooked me that I just thought, Okay, I'm
Speaker 3: gonna buy some gold. So I actually bought some gold,
Speaker 3: and it's gone up and up and up. And I
Speaker 3: can't recommend it really, except that.
Speaker 1: It's worked for people who are listening. Why specifically gold
Speaker 1: because your friend told you to or because there was
Speaker 1: something else.
Speaker 3: So the argument is gold has no intrint really, it's
Speaker 3: not worth thirty six hundred dollars.
Speaker 2: Announced it's use value.
Speaker 3: The argument is it has social trust. You can't explain
Speaker 3: why or how it got this, but it is ingrained
Speaker 3: in us, in human beings, to believe this thing is
Speaker 3: valuable and to run to it when all else doesn't work,
Speaker 3: and every he agrees to do it, even if they
Speaker 3: aren't conscious of it. And so when things go really bad,
Speaker 3: it's going to go up. And there's saying why you.
Speaker 3: I mean, it's just it's got a history. But I
Speaker 3: do feel I got to say, I don't feel completely
Speaker 3: comfortable with my holding. I bought into this idea that
Speaker 3: my friend sold me, sold me over an afternoon.
Speaker 2: I thought.
Speaker 3: Part of what I was thinking is will be a
Speaker 3: fun way to keep in touch with him, is I'll
Speaker 3: buy some of it and we will be talking about it.
Speaker 3: And then it just started going up so fast I
Speaker 3: forgot about my friend and thought about, wow, I.
Speaker 2: Got a bunch of gold. So that's what happened.
Speaker 1: I'm going to ask you a couple of rapid fire
Speaker 1: trust questions. Do you trust the following?
Speaker 2: Can we do one to ten? Or is it yes
Speaker 2: or not?
Speaker 1: Sure? You could do one to ten? Yeah, one of
Speaker 1: ten's great. Do you trust the front page of the
Speaker 1: New York Times?
Speaker 2: Eight? The front page?
Speaker 3: Yeah, I mean the New York Times generally eight seven
Speaker 3: and a half eight. In these times, people have been
Speaker 3: run out of New York Times for being wrong thinking
Speaker 3: in the last ten years. You can't you know the
Speaker 3: James Bennett episode.
Speaker 2: That kind of stuff.
Speaker 3: Printing something that offended other people gets people fired.
Speaker 2: That's outrageous. So that that is that has caused my
Speaker 2: trust in the New York Times to decline.
Speaker 1: That's well said. Okay, what about the front page of
Speaker 1: the New York Times style section.
Speaker 2: Ah, that's stuff. That's ten baby, there it is.
Speaker 3: And by the way, ten being in the most asked me,
Speaker 3: it doesn't really ask me to trust it.
Speaker 1: It's critical for an idiot like me who has no
Speaker 1: sense of style and is trying to learn because I.
Speaker 2: Trust, don't do that.
Speaker 3: Don't do not figure out which colored T shirt to
Speaker 3: wear or whether you can wear shorts in the winter
Speaker 3: from you.
Speaker 2: Don't don't do that.
Speaker 1: Okay, Street tacos in Los Angeles four Ooh, hard to start.
Speaker 3: I have a very sensitive stomach and I've had some
Speaker 3: bad experiences.
Speaker 1: Okay, that's fair. I would do I would do it
Speaker 1: in an eight point five or nine. But if it's a
Speaker 1: stomach issue, I.
Speaker 2: Get it's a stomach issue.
Speaker 1: Okay, then let's move on to hot dogs. Hot dogs
Speaker 1: at Yankee Stadium.
Speaker 2: Oh god, five, I'm sorry.
Speaker 3: It's and it's just and it's it's also just like,
Speaker 3: as I've gotten older, the appeal of the hot dog
Speaker 3: has declined, and it's declining.
Speaker 2: It won't it's asymptotically. I don't think it will go
Speaker 2: to zero.
Speaker 3: But it went from oh, this is a natural thing
Speaker 3: that a human being should eat to I really I
Speaker 3: feel the same way about pop tarts.
Speaker 2: Like if if if like someone from.
Speaker 3: Outer green little green man from outer space, came down
Speaker 3: and stared at this thing, would he yet identify it
Speaker 3: as a food? And it probably not? And there's probably
Speaker 3: a good reason for that.
Speaker 1: Okay, social security.
Speaker 3: A six and a half seven, and that is just
Speaker 3: it's going to be inflated away.
Speaker 2: I mean, the value of that. I think the value
Speaker 2: of the benefits will be eroded.
Speaker 3: I don't think the population will put up with it
Speaker 3: just being taken away, because people have it in their
Speaker 3: head as I paid for this, that's my money. It
Speaker 3: just so, I mean, you can print, always print more dollars,
Speaker 3: so we'll get some of.
Speaker 2: It, but not what you'd hope for.
Speaker 1: Congress.
Speaker 2: I mean, I got to ask trust to do what.
Speaker 3: I mean, I could ten in some ways in one
Speaker 3: another is it's here's the conundrum, the thing that I
Speaker 3: can't get out of my head about Congress. If you
Speaker 3: go in and spend time with the individuals, as I've
Speaker 3: actually i've done recently, I always come away feeling good
Speaker 3: about the people. I always come away feeling bad about
Speaker 3: their circumstances, like the situation.
Speaker 2: And so I come.
Speaker 3: Away thinking, it isn't the actual people we're putting in
Speaker 3: there that's the problem. It's the situation we put them in.
Speaker 3: So the things about the structure of the institution that
Speaker 3: are catastrophically bad. So I actually kind of trust the people,
Speaker 3: like when I meet them and spend time with them,
Speaker 3: but I know that the institution is going to end
Speaker 3: up in a not a good place.
Speaker 2: So anyway to ten, if you put this to the
Speaker 2: American public, you get a one.
Speaker 1: Yeah, three, Okay, Well my last my last two trust
Speaker 1: things were gold and you're weed guy, And I know
Speaker 1: how you feel about gold.
Speaker 2: You know I gold eight. But my we guy.
Speaker 3: So I have never taken a single hit. I never
Speaker 3: I've never even tried marijuana, and you just do edibles. Eventually,
Speaker 3: I'll probably come around edibles. Friends tell me like they'll
Speaker 3: change my life, but I have not, so I don't
Speaker 3: have a view of my we guy. All right, So
Speaker 3: there's a level, not a we guy. So I default
Speaker 3: to trust. So we'll say ten. I trust my week
Speaker 3: guy ten.
Speaker 2: Because it cost me. It costs me nothing to trust him.
Speaker 1: Awesome, Thank you for your time, Michael, all Right, totally fun.
Speaker 1: Here we go again as a production of iHeart Podcasts
Speaker 1: and snap Fu Media in association with New Metric Media.
Speaker 1: Executive producers are me Calpen ed Helms, Mike Falbo, Melissa Martino,
Speaker 1: Andy Kim, Pat Kelly, Chris Kelly, and Dylan Fagan. Meghan
Speaker 1: tan Is our producer and writer. Dave Shumka is our
Speaker 1: producer and editor. Our consulting producer is Romin Borsolino. Tory
Speaker 1: Smith is our associate producer. Theme music by Chris Kelly,
Speaker 1: logo by Matt Gosson, Legal review from Daniel Welsh, Caroline
Speaker 1: Johnson and Megan Halson. Special thanks to Glenn Bassner, Isaac Dunham,
Speaker 1: Adam Horn, Lane Klein, and everyone at iHeart Podcasts, but
Speaker 1: especially Will Pearson, Carrie Lieberman and Nikki Etour. Thanks for listening. Everybody,
Speaker 1: tell your friends, write a review. All of this helps.
Speaker 1: I appreciate you listening, and until we go again, I'm
Speaker 1: Calpen