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Welcome to it could happen here, a podcast where I explain fake money things that are actually real. To Molly Molly, thank you so much for coming back on. I am your host, Miya Long. I'm excited to learn now long ago in a galaxy far far away. And I'm saying this because I legitimately do not remember how many weeks
ago we released the original one of this. But back in that episode where we explained shadow banking, I said that I had had to cut off the part of the episode that was the reason why I wrote it in the first place. It happens to me every week, Yes, so Coma. I've also kind of had to split some of this episode off. That will probably that will be another episode, probably with Edzeitron, whenever I have enough seconds
in my life to pull all of that together. But today we are here to talk about the actual sort of shadow bank run. I guess you would call it financial problems that caused me to write the shadow banking episode in the first place.
Oh right, why I originally asked you what shadow banking is. There's some kind of economy problem and there was like a fake run on the fake banks.
Yes, and Molly, you will be extremely unhappy to note that a big part of the reason why there was the fake run on the fank banks was that the shadow banks loaned a bunch of money to a different type of shadow bank.
I don't think they should have done that.
And that shadow bank went under. Great things are.
Happening here, but they're not FDIC insured Mia.
Nope, nope, nope, nope. So okay, this gets us back to our original definition of a shadow bank, which is that it's a bank that does banking things. That's not a bank, so it's not ensured by the FDIC. They don't have to have money on hand to make sure that they can't be a bank run on them.
Right, So they just said no more transactions please.
Yes. So what Molly is referring to is a few weeks ago. I guess maybe like a month ago. At this point, there was actually a breakthrough into the kind of mainstream ish of some stuff that I've been brewing in the financial news for a while, and that was that a bunch of companies, Morgan stan Lee and Blackrock. I think we're kind of the two biggest ones that stopped this. Although a bunch of these sort of smaller what are called private credit firms also sort of did things like this, and.
So because they're not really banks, there's no regulation that says they have to serve their customers, right, they can just say no.
Okay, So this is part of what's really a shit show. I guess let's start at the beginning. So what happened? Sorry I got as derailed. Yeah, let's run back to the specific thing we're talking about. Here is a thing called private credit, and so private credit. I'm just going to read this thing from the telerwind, which is, I don't know, the telor window is actually a decently useful thing. Where the teller window is. The FED is like I'm going to explain something to normal people. Now. The problem
is that this is still the Federal Reserve. So their explanation for normal people. By normal people, they mean like, I don't know, like dipshit day traders.
Right, normal people don't have questions about the Federal Reserve.
Yeah, So it's like this is like for people who are kind of know this stuff but are running into this like arcane subfield for the first time. So I'm just going to quote from them because I think it's an interesting place to start. Although there is no universal definition which you know things are going great when a second episode in a road talking about it, you can't
all agree what's it's so good? It's so good? Although there is no universal definition, private credit generally refers to a loan that is negotiated between a borrower and a small group of non bank lenders. These non bank financial institution lenders are typically alternative asset managers, such as private equity firms, who package loans in different investment vehicles. Other non bank financial institutions like pension funds, insurance companies, and
sovereign wealth funds then invest in those vehicles. So this is the stuff that we talked about from last episode, where okay, so you have multiple layers of shadow banks, right. You have on the one hand that the private credit firms are these these sort of groups that go in and sometimes they're just their own things. There's a bunch of different kinds of them. Private equities firms tend to have like one arm of the private equity firm that's
there like this is our shiny private credit wing. There were also these things called business development corporations which do these There are other types of them too. But basically what those companies do is they go in and they negotiate a loan with a usually a pretty long term for repayments on the loan with a company. Now, the thing about these loans is that the terms of those loans are secret from everybody.
Yeah, even the people involved.
Well when I say secret, I mean the company that's taking out the loan and the bank know how they work. No one else does. And then what happens is these are usually fairly risky loans because if you weren't doing a risky loan, you would get your money through like a normal bank. Yeah, allow you to do it normal style. Right,
this is not normal style. These are risky. And then they do the thing called securitization, which we talked about last episode, where you take a loan and do magic to it and turn it into something that someone else can buy.
Whatever happened to products and services, neo, whatever happened to products.
Well, because products and services make less money than betting on products and services. This is this is also where this is all going. So there's some real issues here with private credit.
So we're buying and selling money that isn't real. And add the absence of money that isn't real. And then so what happened when there was the run on the fake bank.
Well, that's kind of work.
Because how can you do a run on a bank if there's no money because you're not asking to get your money back out of it because there was never any money.
Well, so here's the thing. So a lot of the way that these things work sometimes like they are obviously selling the loans and packages, but a lot of the way that it works is that it does kind of work like a normal bank, which is i mean, instead of being a lender, you're like an investor, but you give them a bunch of your money and they give
it to these loan things. So it is just literally a normal bank, except it's not subject to banking regulations and it's risk here, right, So like like Apollo Capital Management or whatever, it's like you give a bunch of money to Apollo Capital Management, just like Lowal Capital whatever is like apall Global Capital is one of the big firms in this thing, and then they give that money out and loans and then you're basically just supposed to
wait because you know, remember last episode we talked about how in the way that normal bank works, Right, there's like a fundamental kind of gap right where you are putting your money in as like a short term thing that you can take out immediately, and then the bank is turning the short term money into a long term loan. Right.
It takes time for the money to grow up.
Yes, And the reason we have financial regulations is to force the banks to have money on hand so that if you need your money back, you can take it out. Now, these banks don't have this because these are shadow banks. They are the credit arms of private equity. They're fucking I don't know, they're like capital management firms.
They're like, dude, Right, So, like a normal run on the bank is like, obviously the bank doesn't have one hundred percent of all I put cash in the bank. We all put cash in the bank, and everyone wants all their cash bag. The bank doesn't have one hundred percent of that cash, You get that, right, It's like they have it invested and it hasn't. Those loans haven't matured yet and things like that. But theoretically, if all those loans matured, that bank does have all of those dollars.
But the shadow bank they're selling these same loans to multiple people. So even if everything matured properly, they don't have all of those dollars anymore. Yeah, the dollars don't all exist.
I mean, Jimmy fair, the bank's dollars also work like that because the banks are also selling their loans off.
But well, you're saying that they were using like the same mortgage to secure a bunch of different Yeah.
Right, so that's like, yeah, that's like a classic shadow banking thing. We're actually going to get back to that because they're doing an even dumber version of that now.
I'm just saying it seems like a run on the bank would be kind of inevitable even in a minor crisis, because they're not have most of the money they're pretending exists.
Yeah. Well, but okay, so I think what I would say about that is that this is also a problem for regular banks, right, Like, I don't think this is actually a structurally different crisis, like because like the crisis here is just that the money is out in loans
and they they don't have it on hands. And this is the structural crisis that the private credit people are doing, is that their money is also out on loans, so they don't have it, And a lot of these loans are like seven year loans in like very risky companies. So the money like really isn't.
There, right, because that venture capital like whatever is that's an inflated valuation. So you're talking about like almost ten billion dollars, but it isn't and it never will be and it never was.
Yeah. Well, and the other thing that's going on too, right is like these these are supposed to be risky loans, so they have a high rate.
Of return if they return.
But yes, and this is where this gets not good because so the US private credit market is one point three trillion dollars like under management. The global market is like three point five trillion dollars of assets. I'm not really going to go into the Chinese private credit market
here because that's its own episode. But the way that these that these companies deal with this is that they have these funds, right, and then the fund gives out like the loans, and they have a limit to the total amount of like the percent of the value of the fund that can be taken out at one time. And that's what's been being hit. The industry standard is supposed to be about five percent of the fund can be withdrawn per quarter, and then after that they just
shut down redemptions. And that's what you saw in the news because a bunch of companies, and some of these companies have higher limits, they're like almost like eight or nine, like the ten percent, they'll stop it at like nine roughly.
So, more than anything, shutting down redemptions is an indicator that the market has panicked, right, that the investors are spooked and they want their money back because this risky investment is now looking like a very bad choice.
Yes, but this is a real structural problem because right.
But like as a measurement of something, it's just like what we're measuring is how many investors are shitting their pants.
And there's a reason they're shitting their pants. And the reason they're shitting their pants is that basically, all of these firms have been eating a colossal amount of shit. And the reason they're eating a colossal amount of shit, I mean, some of it is very stupid. Some of them are eating shit because they gave money to like normal tech firms, but then now they're all scared they're
gonna get out competed by AI firms. Some of them have given a bunch of money Blue Owl particularly, and this is what we're gonna get into in the episode with Ed has given a lot of money to AI firms, which is a fucking nightmare. Great investment, Yeah, incredible stuff going on.
I'm sure. I'm sure that's what Ed will say. Ed will say that was a good investment.
It's so fun. It's so fun. The main thing that they've been eating shit on. And this is where this kind of hit the mainstream because a whole bunch of normal banks also ate shit on this JP Morgan ate shit on this loan. So a huge amount of money was poured into this firm called Tricolor, which we touched on briefly last episode but then didn't really talk about much about what it did. So, Okay, JP Morgan has lost one hundred and seventy million dollars.
Oh, no big deal.
Yeah, which, and it's funny. It's funny because like the JP Morgan CEO were like, yeah, we kind of atehit on this, and also their CEO gave this quote where he was like, where there's one cockroach, there's probably more, which is like an extremely normal thing for the finance kind of saying about the market.
Haven't we have an infestation of accidentally losing one hundred and seventy million dollars?
Yeah, I mean it's not great. But like in the grand scheme of things, right, like JP Morgan does have four trillion or something dollars under management.
Right, But if he's saying if there's one cockroach, there's more, Yeah, Usually if you have one cockroach, you have one hundred cockroaches. So if you have one hundred, one hundred and seventy million dollar fuck.
Ups, yes, and that's not great, right. And like Barclays, which is the very sort of like frist just British bank, which also ate shit for doing this kind of stuff. Two two thousand and eight also lost like one hundred million pounds. What's interesting about this specific one is this firm, Tricolor, is a subprime auto loan company.
Oh, that's a phenomenal business model, Molly. I. So they're responsible for the Nissan Ultima.
Yeah, this is that this is what is known as an idea that could not possibly have gone right. It's very funny because when you read the stuff from Tricolor, they're all like, oh, we're trying to like help people who are like underserved in markets who need cars.
Oh so, but here's the thing about a shitty auto loan, is you know, right, you are serving an underserved community. You are serving people with bad credit who might not otherwise be able to get a car, but you're serving them by fucking them. Yes, And this is the thing that you can tell.
Yeah, they they know that they're lying about this, right, it's just so evil. Yeah, And like this is all downstream of you know, this is all downstream with the fact that we've built our cities around cars, right, and we built our cities around cars specifically, and this is a really fun thing. We built our cities around cars specifically because we had created so much manufacturing capacity after after World War Two that like Ford and General Motors
had like pumped into that. They were like, we need a fucking way to make money off of all of this. And this is also, by the way, why we did the Marshall Plan, Like we rebuilt Europe to sell cars to them.
It's this terrible snowball of like induced demand and then dealing with that and then the fallout of that, and yeah, trying to reorganize from that.
Yeah, and we have destroyed the world with this.
It rocks. Thank you, Henry Ford.
It's so good. It's so good. We have literally like Earth is fucked because of this. This is like one of the largest engines of global climate change is the fact that we had all these fucking factories after World War Two and these companies didn't want to eat shit on them.
So now so everybody needs a car, but they can't afford one. So now we have a fake bank doing fake fucking auto loans.
Yep, yep. Who By the way, and I kind of emphasize this enough, right, The hole that we are in here is that there is in theory, if you're going to be running a market economy, there is like room in it for hey, this person has a long shot but good business idea and we need to get the money.
Sure, Like there's nothing wrong with the idea of loans.
Yeah, but if your whole.
Business model is exploiting people who need loans.
That yeah, well but this is you know, this is going one layer up from like this soubpar model loan company. Right. The problem that we're going to hit with all of these private credit firms is that they're giving loans to just this shit. Right. The things that they're giving high risk loans to aren't like interesting businesses. They're subprime auto
loan companies, and they're like weird AI data center creation companies. Right, it's like that shit, and this is where everything goes to shit because you know, and it's something that actually wasn't really reported on very much in a lot of the coverage on these companies eating shit. But like what this company was doing was they were literally doing all of the two thousand and eight stuff, right. They give out these subprime loans, which they know like a bunch
of them are going to fail. They pull them all together into these like tranches of loans, and then they sell them off doing the securitization stuff we talked about last time, and again this is literally exactly how the subprime mortgage crisis worked, except for doing it with auto loans. It seems a little bit more evil. Yeah, And they're doing this thing right. They're doing the thing that we saw with the housing loans, where the same car is
collateral for multiple of these loans. And the reason they're doing this right is that this company, Tricolor, their entire business model is trying to borrow more money from banks so that they can send out more of these shitty auto loans, so they can then sell that stuff back. And so they're also like heavily leveraged, right because they're they're taking out like every single loan they can possibly do. They're doing instruments so that they're the collateral on the
loans that they are taking. So they take that money and give out more of these shitty auto loans. The collateral on that is multiple of the shitty auto loans.
I mean, I would say it's a house of cards, but like, yeah, it's not even it's not even that it's imaginary. It's just it's like the bottom row on this house of cards is just your imagination.
Yeah, it's it's it's wildly coyote running off the cliff and he's still standing there and as long as his feet are moving, no one realizes that that like, wait, hold on, this is the this is literally the fakest thing I've ever seen. And then it goes under, and this is a shit show.
That's the only possible outcome.
The only possi way it could have gone under. It is like we've we've done this before. We all wash two thousand and eight.
But there's not like an ideal version of this where it works. This can only not work. Yeah, it's insane.
It's like, so why are we doing because there's one year where it made a billion dollars?
Right, Buying Ponzi schemes are really profitable the first year.
Right, right, That's like that's the thing, right.
It really it works out really good for the first guy.
Yeah, And like like part of what's going on here too is you know, like this is some of the stuff that caused the original bubble, but like we have this era like the the early twenty twenties and like late twenty tens that's like the zero fed inches rate era, right, where like it is basically just free to borrow money, and so there's just all of this money slashing around
that there's nothing to invest into. This fuels all sorts of just like heinous shit, right because there's suddenly just like all of these pools of capital with like nothing to invest in, and so they're investing it in like defense companies and like Palenteer and shit like that.
Is this why we got stuff like the juice ero.
Yeah, but that's like the other thing, right, is like no, but like like like the juicearo thing is like legitimately.
Venture capital was just like pouring money into stuff that was just like not fucking real. Yeah, you could juice fruit at home and.
Like like this is you know, I talked about this on a different episode about venture capital, and like the way that it's done tech fascism, right, was eventually they started putting that money into like building the material basis for like a tech fascist state, and that's what they've been doing in sort of I kind.
Of wish they stuck to their cocaine ideas, like juice ero.
Yeah, that was a better part.
It was more fun than fascist.
No, No, it's more fun than like turning every single door in every single car in San Francisco into a surveillance machine and then like going in and like basically cooing governments. And yeah, but on the sort of like pure financial end of this, you get all of these companies that are just pouring all of this money into there's those layers of this too, right. We're like, you know, if you're like like JP Morgan, which is like an actual bank, right.
Real one.
Yeah, yeah, the real one is like pouring money into these like into these like shadow banks, right, because they're they're chasing a high rate of return. And this is like what happened in two thousand and eight was like there were everyone was like, oh, these bonds have a
really high rated return. The mortgage racked securities. And now we've reached the point where I think, God where this is the most recent news from this and Molly, I'm just gonna read you the thing from Reuters quote JP Morgan, Chase, Barclays and other Wall Street banks have started trading credit default swaps linked to flagship private credit funds run by Blackstone, Apollo Global Management, and Ares Management, the Financial Times reported on Friday.
And that's a good idea for them to do.
Oh this is this is really fun because now what we're doing is they're now opening the markets to bet on these things to fail. Right.
I just I don't understand why so much of the economy is based on these bets that bad things will happen. Yeah, it's like if everything collapses, some guys are going to get so rich. If a thousand people get their cars repossessed, one guy gets so rich. Like that's not a great way to run an economy.
You know.
John mayerd Kines, a guy who is I would argue responsible for this. This is his fault for like stabilizing the capitalist economies in the middle of the Great Depression. But Canes is like a welfare state guy, but he's also a capitalist. And he has this line about how like the economy shouldn't be run by a casino to win, which I would be like, okay, Canes, but.
Like the economy is a casino.
Yeah, it's like it's like, this is your fault for not being willing to like not have a market economy, right, Like, like we could, we could achieve the dream of not having your economy be run by a casino. This is a thing that you could do. It's just that you can't.
That was a youth reason before. I don't think he realized that, like we literally do have a castell.
He kind he kind of did, right, because it's not it's not an euphemism anymore.
I'm going to necromance him and tell him about polymarket.
Oh yeah, he he he would lose his mind about polymarket. But like, like he's watching people just like betting on stocks, right, and he's watching a bunch of people.
Grab the Ouiji board and tell that bitch about college, Well this is this, this.
Is like we're going back in time and showing him Calshi and he's like, oh fuck, okay, I'm like I am now against I am now against the market as an idea. We cannot let this come to pass. But like you know, this is this is this has been like a known issue with the market as a system
for a long time. But it's a problem because in theory you could try to go through and like regulate this stuff, but like investment is just gambling to some extent, right, And when you talk to the people who believe in this stuff, they're like, well, no, you can't have stock markets without sort of equities markets, and you can't have
these things without the ability to bet on it. And I would say, okay, well don't have it then, Like I think this is a really simple solution, but you know these people like no, no, no, no. In order to mention a capitalist economy, you must it must be possible for a bunch of people to be placing bets on the companies that give money to subprime auto loan companies.
Failing, I guess that's the point where like I get off the train where you say, well, in order to maintain a capitalist economy. And I'm like, yeah, exactly, dog, I don't want to do that.
And like, this is why this is a terrible idea, Like it's it's a bad idea for first principles, and we're all living in like the nightmare healthscape of this being a bad idea.
Yeah, so the movie that's maybe that's why I can't it, because this does make some kind of sense to like an evil guy who wants it to be this way, but I don't want it to be this way.
Yeah. Well, and I very deliberately I went and I went into when I was learning economics, when I was learning political economy, from the perspective of like, okay, how do you destroy this right?
And this part, this part seems fragile.
Yeah, but it's like one of these things where it's like, Okay, this is going to break on its own.
But I guess the problem is is it does keep breaking on its own. It's just that we keep bailing it out and reconstructing it and propping up the house built on sand.
Yeah, and that's the part where you know, like this is a thing where the intervention of masses that people onto the stage of history has to happen where if you want this to not be the way that the system works when it breaks down, you have to be organized enough to be like, no, fuck this, We're not going to sacrifice all of our lives to reopen the casino. We are going to either tear the casino down or turn the casino into like housing or whatever.
So when there was this run on the fake banks and they stopped it, what happened after that? I guess because that was my original question, right, He's like, what does the run on a fake bank even look like or do?
Yeah? So basically what happened is that they just like stopped their redemptions and everyone got really really pissed off. But there's not that much they can do about it, because.
Because I'm sure that was in the terms and conditions whenever they signed up to do financial crimes together.
Yeah. And what's been happening now though, is that this is this has been spreading kind of panic about just I don't know, they would call it like the asset class in general.
Oh, like maybe it wasn't a good idea to invest all your money into this fake product.
No, it was. It was in fact a terrible idea and this is this is, this is I think why.
We're the've mismanaged your client's funds.
Yeah, and this is I think why we're starting to get the like blackrock fucking credit default swaps right, because the market is being like, oh, hey, all these people are pissed off about the fact that we designed our unhinged private credit shadow banking system in such a way that you can't get your money out of it. What do you recapitalized on that by letting people bet on it? And that's that's good. So right now we're in this kind of limbo world and this is this is this
is the entire global economy, right. Everyone is sitting here pretending like the apocalypse isn't happening. And that's the basis of the entire economy.
I mean, what am I supposed to do about it?
Yeah? But it's like, you know, but there's's there's a difference between you and us doing this and the people who have all of the money in the world who are sitting there pretending that like there's like some very easy way out of this war that we're that we're waging as Lebron right, And then it's not going to just keep going even though there's no good way to get a ceasefire. And you know, like no one, no one in charge of the US has any idea what
they're doing. They're they're they're in some ways, they're they're doing the strategy they did in like the lockdown phase of the pandemic, where they're.
Just waiting for it to burn itself out.
Yeah, where they're like, Okay, well we're going to ask for a bunch of money. But when you do that with the global economy, yeah, right, And like I had a friend who described it as like the fundamental problems that these people are incentivized to just think that everything will keep going right for them because.
It has because eventually it will right, They'll be fine.
Yeah, But like eventually there's a point where that runs out, and when it hits there's going to be this sort of chilling discovery that like, oh yeah, the entire last like fifteen years of their sort of being an economy has been this like weird tech capitalist mirage. And once that fails, we, I guess we're already in the time of monsters.
So whoo oh, I don't have any other marketable skills. We kind of can't collapse. I'm a podcaster.
Yeah, well this has been it could happen here.
Did I learn anything?
I don't know. Honestly, this is just they're doing it all again and it's even dumber this time. God.
Yeah, at least there were houses last time. Now there's not even a no.
Now there's a proper shitty auto loans Mollie, where can people find your very very lovely show.
You can find me wherever you get your podcast. You can subscribe to my show, Weird Little Guys. It's fun, you'll like it. Yeah, I'm in the middle of a series right now about a segregationist attorney who loved the Confederacy so much that he built a twenty five foot tall Confederate monument out of old bathtubs. It's fun, you'll love it.
Does he blow up a school bus? This is fine.
No, But he did go to YMCA Night YMCA Night Law School, which is a night law school through the YMCA in Nashville, so that he could get better at doing segregation. Like he wasn't the lawyer. And then in mid life he was like, I want to go to law school at night so he could do busing cases. So he could take bussing cases, so he didn't blow any buses up, but he did blow up a lot of people's lives. Correat, how about that great anyway, check out Little Guys.
Yeah, and if you want to stop there from being both weird little guys and also having our economy be run on betting on funny money, go like organize a union, or like join your local affinity group, or start doing food not bombs, or do what a literal literally literally do anything.
Because we do nothing, we will continue to live in the world of the segregation lawyer who builds statues out of bathtubs, and also the subprime auto loan defaults.
At least go outside and take a walk.
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