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Hello and welcome to another episode of the Odd Lots podcast.
I'm Joe Wisenthal and I'm Tracy Allaway.
Tracy, you know, we do all these episodes about private credit and obviously hedge funds, multi strategy hedge funds in particular lately, and of course it all sort of seems to be part of a bigger story of a bunch of things that used to happen inside banks no longer happening inside banks.
Right, And this has been like a continual process ever since like the two thousand and eight financial crisis, but even before that we had like big periods of bank disintermediation, which we talked about recently on that episode with Hugh van steinas.
Totally, there's a lot going on and not all of these trends date back to the final victual crisis, but you know, this was obviously kind of an express goal. I think of the Dobb Frank regulations and just from my seed sitting here, like, yeah, it seems pretty good. Bunch of risky stuff like multi strategy hedge funds, et cetera, seems kind of risky. You can lose a lot of money. In theory, lending to random middle market companies seems like
you could lose a lot of money. It's like, yeah, it seems pretty good that it's not happening inside the banks, and maybe that's good that it's not connected directly to deposit taking institutions.
Yeah, And I think given the increases we've seen in rates over the past couple of years, the fact that like nothing really broke or exploded in the private credit market seems like a good sign. But again, it's still relatively small and it is growing very rapidly, so I think there are more questions to be asking about this particular space.
Well, you brought up something recently on an episode of Synthetic Risk Transfers where banks sort of offload some of their credit risk onto third party entities, And that's really stuck in my head, which is, you know, Okay, so these third party entities take the risk of the assets from the banks, but then that's an asset that can be levered up. And where do you get leveraged, presumably from a bank, And so I have this like.
Sort of very circular, isn't it.
Yeah, And I just have this nagging thing in my head somewhere it's like, okay, yeah, great, we moved it all off the banks. There's okay, we're not going to have another two thousand and eight. But what if the way, what if in some way it still goes back to the banks. Yea, and the risk still is there and it just sort of takes the loop out and then comes.
It goes into prime brokerage instead of the balance sheet.
That's a good way to put it. And so like I'm still like, I'm like, eh, things pretty good, but maybe maybe there are still some reasons to be concerned. Can you ever? I guess maybe we could title this episode like, can you ever really de risk the banking system?
Oh?
That's a good one, let's use that.
Okay, Well, I am really excited. We have the perfect guest on today's show, someone we've had on the podcast before and someone we've known and talked to for a long time. We're going to be speaking with Stephen Kelly, Associate director of Research at the Yale Program on Financial Stability. So, Steven, thank you so much for coming back on a lots.
Great to be back.
You know, sometimes you guys say literally the perfect guest, and so I'm old for too on that I've only gotten perfect guests.
But well, you coming, we have people who complain about when we forget to say the perfect guest, but you've kicked it up to another level and are complaining about not saying, oh, literally the perfect guest. This is a new era.
I do not think that the word perfect does not actually need any adjectives, right, because either it's perfect or it's not. It's sort of like the word when people that call something very unique. It's like either it's unique, one of a kinder, it's not. So I wouldn't take that too uh, I would agree with you. I wouldn't take that too literally.
I would agree with you if you followed your own Okay, okay, that's fair enough.
Stephen Kelly, literally the perfect guest made that correction. I just should I be like I said, Oh, everything seems fine. But are the reasons to think and we're going to get into specific so this is an incredibly broad question, but just conceptually, are there reasons to think about how these risks that migrate off of bank balance sheets find a way to migrate back onto them.
It's totally valid. I mean, this is part of the story of two thousand and eight right as there was this whole shadow banking sector and it looked like risk had moved, and really it hadn't. The banks brought everything back, first voluntarily and then involuntarily. So you're asking the exact right questions. The IMF is now asking these questions and citing odd lots. I don't know if you saw the recent Global financi Stability report citing Tracy on exactly this issue.
You talked about the synthetic risk transfers in your intro and this idea of like, okay, but are the banks really funding it? I would say, you know, to the extent we're running risk through another balance sheet. I mean, the banks really are more protected even if they are lending to a firm that's taking credit risk, because they do have that firm's capital and they have that firm's you know, alleged skill at managing these risks. And so part of the issue with all the financial crisis stuff
was a lot of it was unfunded. We can get into synthetic risk transfers, and you had that great episode about how they're different and they're funded, but broadly, Joe, yes, you're asking.
The right questions.
Wait, okay, I have a very basic question, but what is actually happening in the financial system when someone puts money into private credit. So say I'm an investor and I'm going to invest I don't know, a million dollars in some private credit fund. What happens to that million dollars?
Well, first, Tracy, you're probably taking the million dollars from an allocation towards junk bonds investment grade credit. So that's step one. I mean, the idea of like private credit is taking all these loans from banks or is eating the bank's lunch. We can put a pin in that for now, and we should come back to that. So usually that's what's happening, is this is an allocation away
from whether it's other alternatives or other corporate credit. But the reality is this is deposits move around the banking system. There's no like people talk about private credit like its deposits leaving the banking system or it's you know, deposits are going to non banks. But there is no shadow bank without a bank. Apollo has bank accounts, Blackstone has
bank accounts. When you transfer money into them, they put it in their account and then it's lent on to whomever is receiving the credit, and so you're changing the nature of the aggregate deposit franchise to the extent deposits are moving to a different kind of actor. But deposits can't leave the banking system.
So we just take it a little step further. Just to be clear, Okay, I sell some junk bonds. I decided to allocate a million dollars to an Apollo private credit fund. They lend the money. Is Apollo further leveraging that lending up to juice returns or how leveraged are these funds?
So what we're seeing is that they're increasingly so it's pretty scarce so far. And that was part of the pitch, right, is like Apollo came along in twenty twenty two when private credit was booming and said, hey, why mean you guys thought of this? We have like one times leverage, two times leverage. That's generally sort of the space that's in. But as we've sort of seen the market mature and the market grow, like, there's a good reason to lever
these things up. If you're doing effectively bank credit, which sometimes they are, there's a reason banks are ten times levered like that that's the way the funding of the system works, and that provides a whole host of other benefits to the system. But there's also a cap on how much unlevered equity is out there. If you think about what the financial system exists to do, it's to create as many financial goods for us. What we need deposits, you know, other kinds of savings on as little equity
as possible. Equity is the scarce resource and it's the input to the financial systems manufacturing process. And so you cannot recreate ten x, twelve x, fifteen x leverage from the banking system on one two x leverage in private credit. And that's the limit, you know, to your fear, Joe, that's the limit of how big this thing can grow. And we're sort of seeing that a little bit is the bigger private credit grows relative.
To the economy.
They're sort of nearing the kink on the funding curve as far as like what amount of funding is willing to be locked up as long term assets. Like the fundamental idea that like on demand par deposits can become locked up five year equity and a private credit fund is not real.
Haven't we seen some private credit funds start to look at structures where investors can take their money out as well, like instead of having the five year lockup periods, people can go in and out as they need.
Definitely, I mean, the long arc of financial history bends towards banks, and we've sort of seen private credit start to look more like banks. In One of the ways is these sort of interval funds or evergreen funds they're called. And basically these are just different types of structures that allow some amount of liquidity in the short term. And this is very very marginal steps. It's gated, it's limited,
but you know it's gated after a certain percentage. It's limited by quarter, there's a certain time interval in which you can get it. It's not deposits yet, but that's one of the ways which funds have started to bend towards a banking model in addition to leverage.
By the way, just speaking of the history of finance, is that entities try to make illiquid things a little bit more banked. Like there was a really interesting paper that came out recently from Tim Barker and Chris Hughes about the Penn Central bailout and in there, there was some talk about the history of CDs specifically and how there at one point there was this really hard lockup on them, but then entity has found ways to sort of you could liquidate and sell your right to that CD.
So they always find a way to create liquidity out of illiquidity.
Yeah, you can tronch anything with cash flows. To paraphrase reportentnerial on Meet the Parents, I mean, you can get anything out of that.
Speaking of traanging, I wanted to ask one more basic question, which is this term retranching of risk in the financial system has come up a number of times. So Hugh Vansteinas used it in a recent episode. I'm pretty sure you've used it as well in your writing. Exactly what risk is being retranched here? Like, give us an idea of what types of things end up in private credit.
I imagine a lot of it is sort of middle market stuff, stuff that, to your point earlier would have been in the junk bond market or the leverage loan market and is now going elsewhere.
Yeah, that's exactly right.
And so I mean I got this term from the GFC, the global financial crisis literature. I believe it originated with Gary Gordon Andrew metric and they used it to describe increasing haircuts in two thousand and eight. So the idea that you know, you have a triple A asset, you were haircutting at one percent, but now the market to resell that collateral is worse. You're more worried about your counterparty,
and so you're going to haircut it thirty percent. You've sort of retransh what you've decided is triple A, and a lot of that was driven by market perception of risk as well as increased market demands from our capital. What we're seeing in the banking system is a little bit of market demands and a little bit of regulatory demand. So obviously BASL three, you know, is looming next to the maturity wall, and it's sort of saying banks may
have to have more capital. The other thing is investors depositors are looking for a little more liquidity in banks than they were pre twenty twenty three. And frankly, interest rate risk at a certain point becomes credit risk, and so when rates go to five percent, banks aren't really like trying to be in the business of managing all the credit risk at five percent that they were avoiding at zero percent, and so getting out of that left tail and sort of retranching by selling things out of
the banking system is sort of the aim. So it's all those three things at once, and it makes sense for banks to lean then on prime brokerage and lending the senior layers of these funds.
Wait, this reminds me of something else I wanted to ask, which is I hear a lot about comparative advantages when it comes to private credit versus banks, in the sense that private credit might be better at managing certain loans to your point about higher interest rates? Is that true? And like, what if that comparative advantage actually look like Does it just mean the analysts that private credit firms are like pouring over the paperwork more than a bank.
Can I think that's right? And I know Joe has rude the failure of the high touch banks in twenty twenty three. You know that banks that care about their customers are the ones that failed. But what that misses is that community banks didn't fail, and those do the same thing, and those don't have the attention of the market. And that's sort of kind of part of the pitch of private credit as well. Is like, you know, we're operating under less transparency. Again, we're seeing give on that
as they've sort of been towards banks. But in theory, this is just a product and they do have some ability. It's a smaller group, sometimes as small as one to work with the lenders. We've seen lower default rates out of private credit versus their competitors and in leverage zones, but higher losses given to fault So you can multiply those two things together and come up with some lesser loss and in that case, you know, it makes sense to be allocated a private credit.
You know, what I realized a little earlier in the conversation is that I actually don't know the difference in what the shadow banks the quote shadow banks were doing prior to two thousand and eight, and how their relationship
with real banks was different than the current relationship. I mean, it's interesting because I remember, you know, one of the things that was going on, I think summer two thousand and seven or summer two thousand and eight, it was like a couple bear Sterns hedge funds, like just hedge funds that seemed like a really big deal, like seemed to be systemically important I think City had something maybe do what was the nature of those quote shadow banks
and how they actually connected to the regulated banks.
So the short version is that the nature of those is big banks with strong balance sheets like Bear Stearns and City put their name all over those shadow banks, but didn't actually have They weren't funding them themselves, they weren't actually on the balance sheet of the banks. So when pressure came in two thousand and seven and nobody knew this was going to be like a repeat of the Great Depression, City took all that stuff back on
its balance sheet to protect its reputation. Bear took one of those hedge funds on back onto its balance sheet. These banks did not have to take on this risk. But they're going, Okay, we're going to stand behind our name. We're going to stand behind our clients who thought they were buying a Bear Stearns or a City Group product. And maybe that's a risk today. I don't know, you know, Yeah, well I was just going.
To ask because you see these headlines right now now like JP Morgan is going to get into private credit and so forth, and so I get the idea that this is going to be be a separate funding vehicle be like off balance kind of sounds similar.
Yeah, I think that's totally a risk. Is there a world where, you know, Citygroup has to bail out its Apollo partnership because they put Citygroup's name all over it?
Maybe maybe Wait, that JP Morgan mentioned just reminded me of something. But a few years ago, well actually more than a few years ago, maybe in like twenty fourteen or something like that, I remember JP Morgan basically complaining that the prime brokerage business was a lot harder nowadays, and like the margins were slimmer and stuff like that.
I think that's what they said. And yeah, fast forward to twenty twenty four and it seems like prime brokerage is a moneymaker for the big banks at least what happened there.
So part of it might just be the growth of private credit. I mean, it has found a niche. I would think about it like a product, you know, Like I said, it's got this middle market like you alluded to, it's sort of got a different model and there's no reason that shouldn't exist along the spectrum of bank deposits to thirty year locked up funding to fund buried treasure expedition like it exists in that spectrum, which is kind
of an academic answer, but it's true. I mean Mark Rohan, CEO of a POLLA recently had a comedy, said, you know, we'll get competed with like crazy, and then what's the difference between public and private? And I think that's right. It arose as a product in the years. I mean it doubled between twenty twenty and twenty twenty three. We can talk about why, but now they have banking needs. Like I said, there's no shadow bank without a bank, and they have banking needs and hedge funds too.
So my takeaway so far from this conversation is that some of the questions were asked. Is not that there's like some big looming risk out there or like oh, this is a disaster waiting to happen. But mostly these are all like reasonable questions to be asking about where at some point risks could merge, or at least where regulators maybe want to think or try to get ahead
of things. What tools or specific lines of inquiry have we seen from regulators or things regulators could do, or like we want to monitor this and I know that's already you've written about this, But what are the specific mechanisms and questions and things they could do.
I mean, basically, so far, what we've seen is they've just been really annoying to banks. That's a cost, right. If you talk about why the economics of private credit makes sense, some of it is that, Okay, the market demands a lot less capital for certain risks than banking regulators, and there's some supervision attached to those capital regulations too, and so to the extent you're making supervision, you know,
just more costly. It's annoying and banks say whatever, you know, like JPM Yeah, they're doing ten billion of private credit on balance sheet. That's like they just found that in the couch cushions and they're doing it. They put out a press release so they can serve their clients. And this goes back to kind of what we're talking about Elier about what the differences between banks and private credit. Banks being more about managing a deposit franchise, private credit
being more the lending side. But really we've seen from the Bank of England, from the ECB, from the f say in Japan, from the FED, they're all starting to just probe banks about their exposure. They're lending to private credit funds and prime brokerage. Frankly, but that's step one. I mean, you hear regulators talk either one we need more authority to regulate the non banking sector like banks,
or two. You know, the conservative side is, let's be nicer with Basel three, so you don't push all this stuff into private credit. The truth is always somewhere in the middle. Right now, supervisors have just become more annoyed.
That's a good way of putting it. Wait, I have a bunch of questions. Okay, One, have you noticed any like substantial differences in supervisory approaches, Like is the BOE doing something different to the FED versus the BOJ I know you said they're all in info collection mode at the moment, but like there must be some differences.
So generally this stuff goes better in foreign countries than it does in the US, particularly the Bank of England. They have like a system wide stress test now where they simulate shocks in theory through like the whole financial system. They're big on macro prudential stuff over there in the US, like the fact that the f SoC, the Financial Stability Oversight Council hasn't designated black Rock or its kin as systemically important under a Biden administration, It'll never happen. And
I'm not saying they should have. I mean the idea is like they're not doing banking, they have no short term liabilities.
Blah blah blah.
But it just doesn't get that same reception abroad. So there's more, you know. I think it'll lean harder in Europe and elsewhere, but for right now, the US is just kind of like poking at it in the stress tests and in data collection.
By the way, you mentioned that, like one of the binding constraints in the financial system is how much money is just willing to be locked away on a permanent basis. This is really, though, where the role of insurers comes in, because this is money that people put into a pod and they theoretically expect to get all of it back maybe at some point over the course of a lifetime, it's cetera. But that really is a great source of
cash for long term money. Can you talk a little bit more about like how big that is?
Yeah, it's huge and growing. I think you're exactly right. That is sort of a sticky source of funds and if you hear Apollo talk about there a fine insurance, it sounds like it's basically unlimited. I mean, they'll say, like our limit of new private credit is finding good things to invest in, not the source of funds. And so we may see a bifurcation across the system of like do you have an ensure attached to yourself? I mean, this again goes back to sticky funny. Can you get
bank leverage? Do you have an insure attached to yourself? I mean the other thing about insurance is that it still is a savings vehicle, and so there still is a limit. You know, annuities aren't on demand.
But they always and they tried to like layer in stuff so that it looks more and more like an investment right right for time, and looks more and more like a mutual fund or something like that. And exactly so even there the other question, so we're talking about the distribution of risk across various entities, what about And I kind of think this might be a core question
from an investor perspective. I guess, the distribution of profitability and when you look at the profits that come out of prime brokerge units at banks, how do those stack up compared to the profits of traditional banking, And is there a risk that making risky loans setting aside the risk part is a profitable business And does that ultimately impair over time how much money what we call banks can make good question?
I think not.
And it goes back to the limit of funding in private credit. Okay, Like take COVID for example, in the two weeks after the pandemic really hit in March twenty twenty, banks increased their business loans by twenty five percent half a trillion dollars two weeks. They didn't go to market and issue equity, They didn't go find investors. They are able to create a posits. That a key stroke, and
that's always going to be the advantage of banks. And so, like I said, private credit, we're seeing them sort of get closer and closer to this kink on their funding curve where all of a sudden, the long term wealth lock up sources are scarcer, and frankly, we're seeing this
a little bit. Fundraising is falling in private credit, and we're seeing more institutional investors say like, we're at our alternatives allocation and now it's all the big push is retail and again talk about looking more like a bank. Like that was one of private credit's original promises to us as well. It's like, oh, this is different, this is just safe like institutional investors. Now everyone's after the retail money. How can we make a retail vehicle, How can we tap individuals etf.
They are moving into ETFs, which again is another good example of like putting a liquid wrapper on a bunch of illiquid assets.
Right.
That was the other thing is, oh, private credit doesn't mark to market once you have an ETF, And we've seen a bunch of banks and non banks start to build out their secondary trading desks for private credit. I mean it goes back to what Marc own said, eventually, what's the difference between public and private?
Just to go back to something you touched on earlier, do you get the sense that regulatory attitudes towards private credit and banks and the relationship there are starting to change in the sense that, you know, Joe and I have talked a lot about how in the aftermath of the two thousand and eight financial crisis there were deliberate efforts to shift risk into the shadow banking system. Does it feel like maybe there's some like change in the vibes, the regulatory vibes now.
Not yet.
I think regulators are looking for sure, it's a matter of do they find something. I mean, you talked about this on the episode with Huge Tracy. How when you ask a private credit investor, you say like, oh, you know, are you guys eating the bank's lunch now? And they sort of wax and wane and they say, well, it's an ecosystem and we're partners, you know, And then they go in the bathroom. Let's scream in the mirror at how embarrassing that is. Like it goes back to them
needing the banks for one and two. I think everyone's sort of happy with the status quo. The question is the direction of travel, and that's where.
The risks are.
I'm just really fascinated by this idea of like the kink and the funding curve for private credit, because I'm trying to reconcile that with this idea that at least from Apollo via all the money that they have for their insurance vehicle, it sounds like there's still plenty of money and that they don't need to go out to retail, that they don't need to make etf that they just have to find more good deals to employ all of the premiums they're collecting from insurance.
Yeah, I think, like I said, we may see some kind of bifurcation. I mean there's a question about how popular annuities remain and if rates go lower and all that stuff, and I don't have a view on that. Yeah, what we see from other private credit lenders is they're chasing retail money now because institutional investors are full on private equity, which isn't given them their money back. You know, they have hedge fund allocations, they have venture capital allocations,
and they say, hey, we're full on alternatives now. Insurance is definitely a space where more money can come and more diversification because it is so sticky and long term. But there's a limit to that, and it may be that to the partners go the spoils furnitures.
Tracy, I don't understand why doesn't every investing firm Heaven Insurance. I mean, this is like Brookshire Hathaway, right, they just collect all those premiums and they have all this money that they can invest. It seems like such a big advantage to Heaven Insurance and I know various hedge funds they have their reinsurance thing is kind of similar. It seems like such a huge advantage, Like you.
Should suggest it, Jack, we should have a make a sales pitch a deck.
Like why would you be an investor without an insurance company? I don't really get it.
The one thing I was thinking about, though, is just going back to this lack of deals point. It kind of feels like if you can't put your money in good deals, like if you can't get a big enough volume of those deals, then the temptation is presumably to try to eke out more returns from the ones you do get and apply of leverage. And that's again like where some of the risks could come from. That's not a question, that's just a point I will continue on.
Is that correct?
One thing I wanted to ask is you're obviously folks on the financial stability aspect of all of this, but I feel like there's been some macro impact from private credit as well. And if you think about, you know, financial stability is tied very much to fundamental economics, and if the economy is good, then probably you're not going to see a bunch of banks blowing up and that sort of thing. But what are you watching in terms of like the real world impact of private credit.
So there's absolutely a risk. It's almost a trope now to say, like this stuff has not seen a downturn. Private credit has not seen a downturn, and I don't know what's going to happen to it in a downturn either. So sorry, that's a terrible answer, But there obviously is like a credit crisis type of risk to this, in the same way there is for leverage lending, which you know has held up well in the past. That's maybe, you know, a good analogy. I think part of this
talk about stability. Private credit was really there to offset the bank's hung loans problem in twenty twenty two, so rates go from zero to five. Banks are sitting on a ton on billions of dollars of hung loans, most famously Twitter, and they're in the news again talk about the benefits of being private Like everybody knew Morgan Stanley had that Twitter a loan, like, so private credit was really there to take a lot of deals and they
did a lot of refinancings in twenty twenty three. That problem is sort of worked through on the bank side, and now we're seeing the banks come back, and we're seeing private credit do payment and kind modifications, do extend and pretend type things. So the sort of longer part of higher for longer, you know, it's like it goes back to what I said about interest rate risk becoming credit risk. We're sort of seeing that in private credit.
So in that sense, like it's nice that we have these two side by side systems that can sort of cushion each other, but as we've seen there increasingly becoming one.
I have one last question. It has nothing to do actually with private credit, but I figure you're here and I think you might have some thoughts on this topic. We did an episode probably about two months or so ago about stable client and we saw recently Stripe made a one point one billion dollar acquisition of a stable
coin companies. There are some I think issues related to financial stability related to stable coins, because anytime you have an asset or a product that's pegged one to one against the dollar, we all, you know, we can talk about money markets all the time, but actually have like a separate question than financial stability related to stable coins. Do you, as a researcher in how the financial system works.
Take them seriously as something that will be important for payments in the financial system going forward.
I'm going to hit you with another trope, which is that I think the tech is good, the product is not. I think this is another area where the big banks will win. I mean, it'll be it'll be a stable coin technology, but like now we don't actually experience ACCH versus you know, fed wire versus whatever else. It'll be that it's the right technology, But the ultimate question is payment in what? And you don't want the answer of that question to be USDC, like you want it to be a deposit that.
I mean, I guess. My thing is, like, you know, I actually buy kind of the argument from the stable coin advocates that like it solves a lot of problems with tech interoperability, that it could never you will never get a sort of blockchain type solution from all the big banks working together because of you know, lack of
trust or whatever it else. Like I buy that, but I guess, like I guess to your point, specifically, I don't know how big ultimately that demand will be, especially since you put it away from most payments in most
of the world, these things are pretty abstracted away. I would I don't know most I don't want to like jump to conclusions because I know there are underdeveloped banking systems, but for much of the world, for much of the wealthy world, a lot of these problems are completely seem abstracted away.
The other challenge is to go find a bunch of safe assets to invest in. You know, if you're replacing trillions of dollars of payments, you have to go find a bunch of safe facets. And that's why we run this through banks, because they don't have to find safe acets. They can back to positive.
Yeah, Stephen Kelly, thank you so much for coming on AVAS.
That was great.
You answered a bunch of questions. I think that, least in my head had been lingering for a long time.
Thanks guys.
Steven is so good. He's so clear.
Yes he is. It's always good to catch up with him. I mean, I do think like the circular nature of the leverage is obviously a concern. Again, like we're talking about relatively small volumes right now, but it feels like it could become problematic at some point.
It's interesting. I kind of forget when I think about two thousand and eight and two thousand and nine, how much of those first like tremors, I guess of the crisis. We're literally you know, non banks. And I think you know, people ever talk about those bear Sterns hedge funds that
blew up. Yeah, that was the start, but that was like really kind of I mean, there was the quant quake, what was that late two thousand and six, and that was sort of freaked the market out a little bit, But then it was really like those bear Sterns hedge funds, and then you know, you mentioned the city line and just this idea that they had these banks, they had these off balance sheet vehicles, probably for many of the reasons that you know, the same reasons that shadow banks
or private credit or multi strategy hedge funds exist today, less capital intensive vehicles, and then they felt the need to bring them on maybe for reputational reasons. I think that's like a really interesting history that gets forgotten about.
No, you're absolutely right, and money market funds as well. When they broke the book. You know, the other thing I was thinking about was just this idea of again liquid wrappers on ill liquid assets and I kind of think like the ultimate expression of shadow banking has to be someone putting an etf rapper like private credit.
It's so perfect. They always find a way to do that. They always find we're going to get the ill liquidity premium, and then we're going to still give you the liquidity. I think one of the most important points that Steven makes, and I've heard him make it before, is just this idea that the key scarcity in the financial system is cash that's willing to be locked up, right, cash that's willing to not be sold in an instant or in
a demand deposit. And so there is therefore then this natural constraint on how much, say a private credit firm could take away from the banking system, because in the end, banks, as we know, as you mentioned, are very levered. How do you recreate that leverage? How do you satisfy the financing demands of the real economy given this constraint and locked up capital. I think it's just a really important concept to keep in mind.
Yeah, all right, well, shall we leave it there.
Let's leave it there.
This has been another episode of the All Blots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.
I'm Jill Wisenthal. You can follow me at the Stalwart Fellows, Stephen Kelly at Stephen Kelly forty nine, follow our producers Carmen Rodriguez at Carman Arman, Dashel Bennett at Dashbot and Kell Brooks at Keilbrooks. Thank you to our producer Moses ONEm. More odd lags content go to Bloomberg dot com slash odd lotche We have transcripts, a blog, and a new daily newsletter and you can chat about all of these topics twenty four to seven in our discord Discord dot gg slash od.
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