E410 - Saving Private Finance

0:00Hello and welcome back to podcasting this practice as I'm Dave my friends are here in him. I'm Jamie my pronouns are here in him. I'm Rob. And I'm Alistair my pronouns also here in him. Rob my good bitch what's the news? That's Kapitane good bitch to you. I just say good good bitch in Dutch. Oh that's a good crash I really know how to translate bitch into Dutch if I'm honest but like riveting sounds of typing. To translate your own mother tongue I love that.

1:01Well because bitch is more pejorative like it's like if you're just like talking about like you know fee bill dog it's a different I don't know just doesn't hit the same does it. Well I'm so much a bit of a wonderful one of the slots. Yeah anyway right well Rob's looking up a gluten frow hound or whatever the fuck it is all right well at least you use the correct honorific so shall we just kick off the episode instead. Well it's please right so we're going to do some you know dessert up front and then it's going to be a lot of pages of you know not not dessert but first you know you might have missed it last year Tesla opened a classic American diner in LA along Santa Monica boulevard you know that thing with the song that's about oh man that that place looks so fucking dire just yeah Elon Musk who is so rich he could literally do anything that he wanted fails to open a small

2:05restaurant it's a cutthroat industry sadly the bacon fries which were just bits of bacon didn't catch on so what it's weird that no one's done that before why why was it a Tesla diner because he was actually owned and operated and branded and designed by Tesla and muscle why why because car and Michelin if Michelin can do tires and also restaurant reviews then like anything's possible if you say so yeah we would be good to a restaurant that was run by fear or some shit I don't fucking know I mean I would that sounds mint actually anyway this is just bit from with 500 small plates silver two story building has a space age design in the shape of a flying saucer and features a restaurant and charging stations for electric vehicles oh well that's what I didn't catch on then oh my god some hipster bullshit is it pick a fucking lane dude

3:08Jesus Christ two movie screens what like what are you fuck I'm getting annoyed just thinking about this the problem that's that conscott is that like you know he's trying to be like all epic and right wing and shit and it's like yeah I made a diner for real like fucking Americans and all this sort of stuff but it it's also he also runs an electric car scam so he has to put charging stations outside so nobody's gonna roll call there are they and like everyone everyone drives an electric car thinks he's a twat so especially the people that drive his electric cars well this is part of the problem basically because like this is a bit more than Wikipedia two weeks after opening the restaurant reduced its menu to a smaller selection of items and limited its 24 hour service only to those charging Tesla vehicles between the hours of midnight and 6am because you know nobody was actually getting a Tesla burger at three in the morning not even in LA I mean was it also like ridiculously expensive like eight balls and still is yes yes yeah like five great guys prices but like three guys quality just just the one guy actually the clown

4:17what movies were playing in the two movie screens I'm I'm trying to think what what is the movie case of Elon Musk do you know dawn yeah maybe I guess I don't know the other thing I was really coming up with my head was triumph of the welfare oh I mean Elon Musk does strike me as the kind of guy who thinks the matrix is awesome but just because you know there are guns in it wow cool robot yeah yeah yeah cool robot yeah the diner actually had a robot inside one of the Tesla Optimus ones you know the ones that that you know fucking musk is currently sticking you know most the future of his various enterprises on was this one of the ones where it's it's the robot and it's there and it doesn't work at all or it's the the robot and there's a guy and like the Philippines making it work or it's the shit is C3 who will impression you've ever seen I think it's the first one it was just like a very basic version and it only like existed to give people like small buckets of popcorn and therefore the robot was nicknamed Optimus oh fuck you

5:22I've seen videos online of a shop somewhere in like I don't know fucking like Ohio or somewhere where rabbits give you your receipt there's like a little rabbit on the counter and it like you know knowing stamps you receipt for you when you buy something and that's way more impressive than a sheet of fucking robot that like spas popcorn all over you but yeah basically the reason I'm being all this up is that recently got hit by a meteorite no it's because Karen Palmer for the San Francisco gate just like went and had a look and like see how it's going like several months after opening I assume not well well I'm gonna quote you a little bit the real image of the Tesla diner today some eight months after it's opening is this just outside a lone staff member spent the duration of my time there slowly cleaning an empty red carpet leading up to the front door I mean I imagine that was very difficult to do with all the you know patrons queuing out queuing up outside the door in order to get their fucking six pieces of bacon or whatever it was

6:23yeah exactly it was six pieces of bacon but in a Tesla branded paper cup and you could buy it of course as epic bacon because oh fuck my life life yeah sex russia wonkel we should all just be counting off fucking blessings that he didn't call it the you can has cheeseburger restaurant or something like I mean I'm not entirely sure that wasn't on the menu I haven't looked but like it's not out of the question that that does actually exist well I'm obviously gonna look that up yeah the thing that determines whether or not this place is like hell on earth or just on merely shit is was he ever present do you know what I mean because if it's like you know when you see like gangster films and the guy from the mafia who owns the restaurants constantly going around everyone's table and like make small talk on that if he was pulling that shit then like I'm surprised people didn't burn it down when it opened it was right at the time that Elon Musk stopped doing doge so

7:23he was possibly like the most hated he's ever been among like American liberals so like you know great timing to open a restaurant in LA where people famously are not liberal yeah oh sadly I guess they are merely called Tesla burgers yeah yeah imagine though you've paid like 40 US dollars for six bits of bacon in a cup and like you know and then like a fucking grinning racist appears at your shoulder to tell you he was an Iron Man too you know all the fucking patrons all the patrons of his restaurant emailing like fucking Glein Maxwell go and deal with this well I mean he did once described the diner as quote Greece meets the Jetsons with supercharging so yeah it's not out of the question who the fuck is he trying to appeal to talking like that you can be racist to rosy the robot yeah my my my main issue with the Jetsons is that there wasn't enough Greece like surely anyone anyone who liked the Jetsons has been dead for 40 years right like

8:31they were just shit Flintstones yeah like what if the Flintstones but we took all the dinosaurs away well fuck you that's what right but have you considered that you could be a shareholder and spatially sprockets and also like I want to be the weird subtextual racism of the Jetsons so that's quite that's probably the one thing that you must have become I mean the good news of all this is apparently the plan was that this diner would be obviously being enormous success and then be like exported around the world so like you could always charge your fucking Tesla and have like the worst food in the world and I don't know epic meme as a little side gift or whatever the fuck I mean it does it does sort of seem to me that Elon Musk does have like a something of a firm grasp or that although he failed to execute on like the American psyche because you know to be an American with an electric car like imagine if you will recharging but like with burger like you know they should have what they should have done is made like sort of you know what I mean

9:37to recharge your car you just bought a new battery in a bun and then like fed it into the dodgy something with all those expired batteries but Alistair this is L.A. like the ocean is right there like you know right for a certification exactly exactly apparently the place is just like dead most days now but they are still charging for a double cheeseburger a standard portion of chips and a fountain drink 40 dollars so you know I can't believe I got the price right while I was trying to be ridiculous fuck my life yeah sadly you're not on that what famous game show so I can't hand you any prizes but yeah you did get it exactly on the money but something I get to turn the big dial with racism on it frankly that could do with going down a bit you know sorry only it bottoms out 11 and now a word from our sponsors cheese is fucking expensive subscribe to praxis castate

10:43patreon.com forward slash praxis castate right so that is enough dessert for today let us now move on you know if not swiftly but then the many pages of notes that I have taken and that I wanted to discuss today because I wanted to talk about private credit today which is one of the other you know you know how there's like the Iran war which is a disaster and AI which is a probably massive bubble and you know some other place many forms amongst the global economy can you find them all yeah so this is mainly like all of this or 90% of it comes from various reporters at the financial times but mainly Antoine Gera and Eric Platte so you know if you could afford such a thing in these diet times get a subscription to financial times so I want to read you two quotes before we get started this is from Jamie Dimon who is the head of JP Morgan probably the most powerful banker in the world and this is about the collapse of all the parts supplier first brands which was one

11:43of the majors sort of canaries in the core mine of private credit quote my antenna goes up when this bankruptcy hit I probably shouldn't say this but when you see one cockroach there's probably many more and so everyone should be forewarned about this point he said during an analyst call so you know when when the most powerful bank of the world says you know private credit full of cockroaches let's see how that's going this is the other quote I wanted to read this is from from last week in the financial times a top Goldman Sachs executive has said that the bank's clients in the private capital industry are glad that the Iran war is providing a distraction from questions over the sector's exposure to software I mean expand on expand on what you mean by exposure to software I'll get there in a bit but it is like yeah that is one of the major major problems but basically what the guy from Goldman was saying and I'm sure you know then got hit over the

12:43head with like several hammers by the SPR department was I'm actually really happy there's a war on so people don't look too much at private credit instead yeah well I hope that there's not too many investments that have been made in you know sort of the golf area so I mean it's only like a two two trillion dollar market so yeah yeah not much to worry about as opposed well at least people are just focusing on the bonds rather than the financial aspect so I thought today we would have a little excursion and sort of ask ourselves what the fuck is private credit and what the fuck is going on inside this market that makes you know people liking it to cockroaches and saying it's actually good that there's a war on so people start looking at this so a few basics up from private credit is what it says on the tin it's essentially borrowing money from the private markets to do economy stuff this is like the oldest form of credit in the world it's not new necessarily like I don't know you'll make borrowing 50 quid off you to go to the pub and then he repays you the next day that is technically a private credit transaction because it's between

13:49two individual parties I mean David Graver actually did a really interesting talk about private credit and in that it you know it predates money in the most essential sense because you know like if you say oh I need charcoal today and I'll give you like I don't know a couple of bales of fucking wall in a few months time like that's that's you know that is a perfect yes exactly so in that sense it's not new but the modern private credit industry as we understand that there's we're talking about today has grown about fivefold since 2008 for reasons we're going into the market sizes currently at around two trillion dollars today and essentially what it what it is doing it is feeling like the need for money void or you know people businesses specifically need money to do various things good and bad a lot of that used to be just like they would go to the bank to get alone but for various reasons sometimes to do with regulation but also because of the size of banking and the scale of

14:49like the major mega-backs nowadays they don't do do that anymore they go to private capital so they they'll go into the building with the big sign on it it says that says bank but they go to private credit different private credit companies and don't and they negotiate like a bespoke individualized and that gets sort of put on on the books in a good world they just pay back over time as it is supposed to be paid back and everything is sort of working fine what we're going to be talking about today is what it's not working fine so I might might get I know nothing about this but my guess is going to be that right like you have this system where like you you'll end people money and they pay it back all the time with interest and that's worked really really well for decades I mean you know it's worked really we shouldn't have it like you know what I mean because we shouldn't have money right as a thing but it's worked well for capitalism and then at some point some guy went but what if though right what if we traded those debts for magic beans and then

15:52we used the magic beans to grow beanstalk and then we went up the beanstalk and tried to kill God or something like that kind of creating or building God is part of it it's the usual story right it's like we have this we have this thing that's worked like reasonably well at what it does and then someone's just turned up gone you know I could just tip that on its side set it on fire and that would like that would go well do you know what I mean but they tell everyone that tip that over and set it on fire is actually like the new thing that everyone needs to get involved with it's the hot new tech or whatever yeah I mean many people have been struck down for their hubris but not me I'm not I'm not you principally I'm I'm built different but the main difference between public and private credit is public credit is like if you're out of no fucking Amazon or something and you go to JP Morgan and you say I want to borrow 20 billion dollars to build a data center and I don't know pollute the earth and sky somewhere in some American state you know Goldman will probably agree to make that happen for you and because you are a publicly registered company and

16:55Goldman Sachs is a bank with disclosure requirements like everybody can see what is going on and you can usually find the the terms of the deal or they will be described in broad detail right so that is visible to the market the critical and they have to they have to keep money right like banks and especially since the last time yes the economy blew up they have to keep a certain amount of money in case people don't pay back so that every house of cards doesn't come down so has someone found a way to not do that is that the problem here maybe I'm not saying fuck my life like everything old is new again yeah what if we could do without the fractional essentially the difference is is like let's say you're not not Amazon but you're some medium sized I don't know software company engine company motor parts company whatever company company you want to be if you borrow from something with the word bank written you know across the facade

17:58then there will be a record of the terms and the loans and also the regulators can have a much better look at it if you borrow from private credit which is sometimes also called shadow banking private capital management all these kinds of firms you don't neither you nor the people you're borrowing from have to like disclose all the terms of the loan because it is in private it is from individual to individual without someone with the word bank written on the top interfering shadow like what did you say shadow loans yeah shadow banking is like just a fucking terrible term isn't it you know what I mean like whenever whenever someone invents something that sounds like you would be in world of warcraft or something like that you know what I mean you go yeah that's probably complete dog shit is it right like hi I'm London Malari and I'm here to tell you about the benefits of shadow banking I mean I should say like it's not totally anything goes free for all basic like anti fraud rules like basic law still applies also to this but also you don't have to

19:03disclose nearly as much as I was saying yeah and the other main difference between this and like something like amazon borrowing money from JP Morgan is a lot of the time or at least if all goes well the people who issue the loan and the people who pay back the loan haul both sides of it until like the full loan comes to its end comes to maturation so if I loan I don't know some mid sized software company 20 million dollars I don't always sell it on I tend to keep it and just keep the interest until the 10 year five year 20 year until the full payment of the loan you know until I have my capital am I interest back in full it's a less traded market uh-huh there's also and this is the critical bit that links you know the the thing with the word bank on it with this thing that has you know has the open shadow bank drifting in you know of course the letters around the building yeah and that's a haunted mirror I assume is it it essentially yes they these are

20:06like there's an intermediary form between these two and these are names that you are probably at least like vaguely familiar with from reading the news or listening to this podcast Apollo global management blackstone black rock kkr the Carlisle group once upon a time home of john major after was prime minister of memory serves and blue owl capital these are like oh I know that one yes exactly because we have talked about them before and we will talk about them again later in more detail in this episode but if you are like but this raises an interesting question right if you're a mega bank like JP Morgan or like Barclays or whoever why are you lending to these guys rather than straight to the companies that want to borrow from them right because you know where they live yes partially yes but this from the financial times banks including JP Morgan Wells Fargo and Bank of America have all lent heavily to the private credit industry in part because regulations allow them to reserve less capital than if they were lending to the boroughs directly

21:09are they good I fucking hate the fraction that they have to reserve yes exactly what if we could just not do the thing that we have to do because if for you listen to your loyal home like if you're Bank of America and you're lending to widget code somewhere in Ohio that runs a slightly higher risk according to the regulators but if you lend it to the Carlisle group let's say then the regulators says well those guys have been around for a very long time they seem like smart cookies you don't need to hold as much capital in reserve because you between the two of you you have a better idea what's going on and therefore you don't need to hold so much capital in reserve in case the loan goes cabloui because we now expect everybody to know what they're doing unlike you doing and then deal directly with the auto parts guy out in Ohio presumably presumably like fucking you know what I mean like Elrond the shadow banker then like fucking the money to a smaller shadow company yes that like this also he can he can reserve less of the capital

22:11the fucking like thing and then they you know and just all the way down and I get the feeling this house of cards is going to collapse faster than the one with Kevin Spears you look Jamie that house that house of cards has many many layers which means it is more stable than it could ever possibly have been if there were only a couple the players you see so don't worry about the fact there are so many cards in this house of cards it means it's better it means but closer to God yeah so the other interlinkage that I mean there's a whole bunch right but the other main interlinkage that this has is like banks directly loading money to brew our capital all to call our group or blackstone or whoever the other way that this happens is let's say I'm a very high net worth individual I'm fucking Elon Musk or something I've billions to play with and I would and I but I want to like leverage that money so what I will do is I will go to

23:11JP Morgan and borrow five billion dollars you know so I only have to put a fraction in myself and then I will tell JP Morgan I want to borrow five billion to put it into the Carlyle group and then they say well your Elon Musk you're probably good for the money we will give you five billion then I give it to Carlyle so there's just an intermediary in between but that creates another fraction of the money that should be in the system actually going into the system because it's all built on faith and credit that everybody will always be able to pay each other back all the time don't worry about it yeah yeah it's it's actually a good thing when the economy is set up like some kind of real goldbergess contraption so this this raises two sort of natural pressures the first is if I'm borrowing why would I go to one of these companies rather than just like going to Buckley's or whoever well the the reason for that is because we've concentrated the banks in such like small numbers since the great financial crisis like the too big to bail banks are like mega too big to fail now is it is not so interesting for them to like go through

24:16the rigor moral of like making a bespoke loan and going through your books and doing a whole path in order to like lend you 10 million so you so you know you could pay me back over five years whereas I could just if I'm Buckley's I could just stamp out the same student loan mortgage loan over and over and over again repetitively without needing to do much like actual bespoke dealing so I don't need to so a lot of companies including like genuinely good ones that just employ a bunch of people and make a wich it's that somebody else needs need they need now are increasingly in need to go to private capital rather than public capital because public capital can't be asked with it anymore I don't know about the rest of you but I felt like in order to be involved heavily in finance you need to be cut as like a hard working kind of smart guy and like I'm just very pleased that these these guys are you know JP Morgan and all the rest have just worked so hard to dis abuse at least me and probably some some other people as well

25:17disabuses of the notion that actually doing banking involves any work whatsoever because I seem to be wanting to avoid it all together but I mean there's a lot of very smart people who work at these banks who are like creating a synthetic Rube Goldberg machines of about 50 billion moving parts and in order to understand them all you do need to be quite clever the question is of course is what your building is the contraption that you are constructing any good for anybody except you and like a couple of investors and shareholders and that is you know a question we shouldn't be answering today yeah well I say things with the system like that you can build part of it and know how your part operates and the only thing you actually need to really manage is will your parts still be slightly better than the other parts when it all falls down so the bad answer is why would I need money from these people instead of like something with the word bank written on it is crime is other things banks like a traditional bank doesn't want to lend you

26:17money because they deem you to be like a major credit risk like you don't want to open crime you did because possibly for the crime you're doing or like you know you're already teetering on the edge and like opening your books to like a something with the word bank written on it would relieve to some very awkward questions maybe you're like a startup with a lot of ideas but no money or you are your Facebook and you are in need of a shitton of money to build data centers that will definitely pay off and this is an easier way to get access to money than going through the rig and roll of chatting with JP Morgan Chase yeah I mean I mean it is it is so good like you get to a you know a level of wealth or a company gets to like you know a level of valuation and any sort of breaks that were in the system can just be like routinely ignored like you know when we're talking about Elon Musk's fucking terrible burger restaurant charging station idea like doesn't matter if that was doomed to fail from the start because it was a fucking terrible idea

27:20what matters is that Elon Musk is very rich that's it yeah it does yes so the other side of this is of course is if I'm if I have a lot of money why would I put my money into private capital rather than just the normal stocks and bond markets which is problematic but like more regulated and critically more open and the prime answer is of course there's more money in this the interest rates are way higher in private credit than they are with public credit with just buying stocks and bonds like the returns year-on-year can be as much as like 20% or something so like you will simply get way more bang for your buck also how how good is it to be investing in the stock market like you know right now when every 20 minutes someone in the white house is like manipulat enough very good if you know that you're in the way it is um as I just it's just a higher rate of term right you put your money to work you get you get 10% 15% 20% rather than six or seven from just like normal stock market trading and that you could either do that directly

28:23so I could like literally lend money if I had that much money to like some midsize company out in Ohio but the main way you do it is through investing in one of these funds associated with one of these companies blue our capital has a bunch of funds that you can invest in as does KKR as does the call out group you can just like give these people your money and they will say well we will put it in this fund you will get a certain amount of returns and in you know when the fund ends up you get all your money back and everybody walks away happy the companies that we've selected for you will theoretically have like grown prospered and paid all the money back and you know it's sort of off you go essentially but and this is critical you do commit to putting your money into those funds for the long term you cannot just call these companies and say I you know how I invested five billion in your blue our capital fund to I want all my money out tomorrow you cannot do that for reasons book I want to get into in a moment okay I it's like bet coin well

29:24you can't you can't take your money out because if you take a card from the bottom of the house bad things happened yes so what happens this is this is in in finance firms this is known as a as a illiquid or a less liquid asset liquid is sort of a fancy terms it means is this hard to shift yay or nay dollars are the most liquid thing in the world america treasuries are the most liquid thing in the world because there's always an open market the product is always the same so if you want to sell some you can sell them in like in like three seconds essentially but like a bespoke loan to some widget maker in Ohio well if I want to buy that loan off you I might want to do some due diligence I might want to do some research I need to like check out this company see if it's real and all that stuff takes time and it takes effort and you know my valuation and your valuation may not agree with each other in the end so like it's a pain in the arse to get your money out so this is kind of where you're where the trouble starts so like I want

30:26to go back and talk a little bit like use brood dog as a worked example of the of the problem here oh yeah that's a corpse I could do with some another kicking to be fair you might remember how during the episode we talked about it it was said at its peak to have been worth about two billion dollars give or take I think that was kind of the so the press release headline but that was based on the size of the investment that was made by a private equity company and a subsequent you know brief but glorious expansion for the whole thing went went bang but if you assume that it hadn't gone to shit how would you actually know the value let's say I'm invested in like this private equity company I'm investing in that and I say I want out and they need to like liquidate that loan to in order to pay me back the money that I owe so what you would have to do is first like you'd have to get some bankers and sell all the slides yes but you'd have to estimate how much the slides are worth how much the breweries worth do you sell the whole company in one to say

31:28Heineken or do you sell you know the brewery to Heineken and the pubs to weather spoons and all that because like you need to find this is this is a bespoke product so you need to disentangle the loan see how much all the parts are worth and then figure out how much it is is this is the sum of its parts actually worth two billion is it more than that less than you have to go and figure this out like piece by piece essentially company by company blocked by blog I mean this is exactly how you know meta and Tesla and all that increase the like headline value of those companies isn't it by you know getting investments for like like two two hundred billion for 10% or whatever are makes all of a sudden you've got a company that's worth two trillion and I thought ah great the system works and but this is one of the main things is like the question that becomes easy actually because you know also you have to find a buyer in a limited market for something like Brudog what if people simply aren't interested because Heineken just brought a different you know

32:32craft brewery um the agile doesn't want to get into beer anymore there's only like a limited number of players that can like buy a two billion dollar brewery on paper and it might not be worth it and the problem with that is if I'm the private equity people who put their money into Brudog I say to my clients look invest with me because we have these loans outstanding to this two billion dollar company but if it's not as worth as much as everybody says it is on paper or I have to sell it into like a bad market and worth less can I still actually get all my money at this entire system this private credit system even more than public credit relies on confidence that the valuations assigned are what they say they are and can be that's this is the really critical thing can be realized if they need to be sold it's good to actually have a credit system based entirely on vibes I mean in in in a way like credit has always been vibe based like private credit especially

33:38but like it's all it's all vibes right it's all facing credit you know that American homeowner's going to pay their mortgages back that you know fucking widget code is is for real but the problem is what if the going is not so good and what if in this market there have now been a number of like big scandals I know trash future and other podcasts have talked about first brands the American auto parts manufacturer that blew up because they were just like fucking sketches hell and probably some people are going to go to jail for fraud and it's like what if in this overheated market with high returns the people that you trusted with your money went way past finding healthy companies and started landing to maniacs and lunatics because the returns are really good what's that my rate of profit is tending to fall oh no I'm going to have to take risk here and risk your ventures nothing bad to come with this only higher returns yeah but like in returning back to the to the brood dog example right what if I don't know you're just despite having so much money and despite

34:42being invested in whatever fund it was that put its money in brood dog you like going to pubs and you notice the people are drinking less brood dog you see James what becoming an ever weirder person and you're like James bought coming up to you in the power we're like have you tried brood dog my man yes exactly what if you meet James what and five minutes after that you're like I need to be out of whatever this guy's in I probably a good idea overall but the problem is you would then go to that to the group that holds your money and you say may I cash out please may I have my chips back off the table the problem is because of the way these loans are structured and because the cap you know the people investing know that it's not so easy to sell off these companies these investment funds have have what are known as gates and they're usually set at 5% and what that means is even if you and all your friends at the same time want all their money back there is a binding clause in the contracts you sign when you give them the money that

35:43says no you can't have all your money back at the same time and the investment fund the private credit company reserves the rights to actually close withdrawals out of the out of the fund to say look we are no runs on the bank allowed yes literally what if that was a thing you could write into the contract this deals getting worse and worse so normally of the size of the poor of money that you've all chipped into let's say 20 billion dollars or something no more than 5% can be taken out at any at any time in any quarter so no more than one billion like of all the participants in total no more than one billion maybe taken out at any given time per quarter and if more than you know if people are demanding more than one billion out it gets prorated so you maybe want I don't know 500 million out another one's 500 million out and so on down the line so you only get like a percentage of what you demand out because if the fund had to like liquidate in full

36:45and like sell all its all those loans it made to broodock on the open market well then you might have the problem we were just discussing which is also because it's now a fire sale because you need to sell on a fucking hurry a lot of people won't give you a hundred cents on the dollar for the loan they will give you less and if everybody gives you less then you can't pay everybody back because it's you know it turns out that your investment was actually dog shit well that can't make sense why they've got that system because it sounds like everything because it's a stock market everyone wants to sell that's probably because bad things are happening yes so like yeah every time it's going to be dog shit as soon as anyone says so so like now if you're like a big bank or a pension fund or like just a really fucking wealthy prick it might this this stuff might sting but it might you know but it's not going to kill you like it's not going to kill you financially like you know you will just have to eat a loss and and say la vie but now some of these private finance investment firms like Blue Hour Capital for example

37:48have also created direct consumer facing funds so like you I mean it's really for high high-worth individuals but like you could be in these getting your promised 20% return but they also have the same gating function while promising people that these are at least semi-liquid pools of capital so it would be easier for you to get your money out and these were like a huge hit in the last five years this according to the financial times about two hundred billion dollars has been invested in these sort of public facing funds and the growth has been 60% year-on-year every year so like it there's a lot of money in this oh yeah I mean that's that's just that's just a possible to continue in perpetuity yeah and and the reason these funds were so popular also with like these private equity companies to make these pools of capital is because they provided some of the highest fees for the bankers involved you know like you could get just over one percent every year of the total capital invested would be yours management fees consulting fees

38:50it adds up really quick these things especially the consumer facing ones were and are incredibly like profit-making for these companies so you know even if the fund is telling you the straight truth and they're not fucking around with the value of the the loan or anything they make their money off commissions and a percentage of the value of the total fund so they have a personal and financial stake in keeping you in the fund beyond you know the fact that it's difficult to sell off your brood oak loans if you need to in a hurry so that kind of brings us back to today which is the question that I started with is why is that Goldman guy almost happy to see your war start as a diversion away from questions about these various funds why is JP Morgan Morgan in from the financial times in earlier this month limiting its lending to private credit groups and marking down the value of the loans that they have on their books and that is basically because a lot of people are now getting very worried that this two trillion dollar private credit market might not be

39:54the safe and sure bet with higher returns that it was seemingly to be over the last four or five years was one of the first things they teach you about dealing with a scam if it seems too good to be true they're absolutely right the more we'll details yeah yeah and this like this is not a part of the problem is it's it's much like the US housing market in the run up to 2008 at some point you run out of good companies to like lend money to that we'll actually pay you the money back because they're building a new widget at some point you start investing in first brand auto parts because the returns are really good did you know beforehand that it was a scam well that's currently under you know some legal disputes so I won't speculate but you know you start looking for returns that may not be what they should be and you may be like closing one eye when you'll be holding these companies because it all the incentive points towards you to make the loan take the fees rather than not do you say the other factor and this is Jamie where like you what you would

40:59all got earlier there's also the influence of AI but it comes this time in two very specific flavors okay so the first one is the negative side a lot of this lending in this private market somewhere between I've seen some estimates that it's between 10 and 15 percent of all the money in this market has gone into like mid-sized software and software as a service companies and now all of a sudden the CEOs are all saying well we don't need software anymore because we have agentic AI and I don't need my you know HR so the first question that everybody's now asking is like if I if you if my private credit fund is invested in I don't know HR payment software and now I'm reading in the paper that that's all going to be replaced by fucking you know Claude bot is the company that you've invested in actually the money still because technology has you know passed the point that's like the positive case for AI being a problem in the private credit marking the negative side of AI not working is also a problem because especially in the

42:03last two years a lot a lot a lot a lot of private credit has gone into financing data center build out uh-huh and I'm sure those investments are not under threat anywhere in the globe no no no no and let's say for example that AI is a hugely energy intensive sector that is you know driven by the demand for for you know for gas and for helium to make the chips and all that stuff and hey you're telling me this for the first time yeah yeah yeah and also maybe you're the same CEO and you've been reading some of the same stuff that we have and it turns out that rather than being the god in the machine it's going to replace all your white color workers AI is actually kind of shit and not worth it so maybe I shouldn't be in a private credit fund that's financing data center construction so on the upside and the downside there is a risk for private credit just in different aspects of the AI bubble basically I love it when it's good news good news if you're like a very

43:05short summary if the good times are maybe over because you know fucking the big wet presence started on controllable war over resources energy in the Middle East and the AI thing may not be as great as everybody's been saying or it is as great as everybody's been saying and now we're all getting a little bit worried about where our money's been and also these giant private credit companies are making these kind of opaque deals because the two the terms of private and you just have to kind of believe that everybody's done their homework what if all that is not actually as healthy and as functional as it should be as we all said on the tin in the last four or five years that it really was I mean I'm sure an accountability is just bread more safeguards into into the system to ensure that these investments are properly insured and nothing can go wrong and everyone's going to end up getting their money back if you know a char head to miss a drone flies into your fucking data center in the UAE yes so the big question at the moment is this how healthy are the

44:11underlying companies that this galaxy of private credit funds and associated debt structures have given money to and how likely are those companies to actually pay back their long term loans and if they can't how many of them have to default and kill over before there is systemic problem that causes you know these actual private credit companies and their debt structures to go bang because they can only you know they can't sell the asset to cover the withdrawals or you know the problems essentially well I've just I've just asked Claude what the risks are here and Claude says LL and my I add LMAO is that good so this is a bit from the financial times quoting the International Monetary Fund the IMF estimated earlier this year that almost half of private credit borrowers have negative free operating cash flows and so funds have to be found in other ways to avoid registering credit defaults that could obscure the borrowers true financial strength you really

45:16you really telling me that these guys just went out and lied yeah all the companies that they lent to lied yeah all they're not as much of a success as you know that there's very layers of were these people ever for real too delightful ways by the way that people are using to like obscure whether or not these these companies are going bust this is from the FT again payments in kind notes add interest to our studying loan balance so they've been given our IOUs in effect financing debt with more debt is this so that made up fucking Nvidia deal where like so much stuff was between them and opening I and so much of it was just like this kind of like we intend to at some point and no no no no no to at some point that means this is now money now this is sort of kind of what they're saying is what payment in kind notes are is the widget company that I have lent to is ringing me and say I'm sorry I can't make my quarterly

46:19interest payment because of various reasons you know either to do with scams or economy bad and what I say because this is a private credit thing and not a public credit thing is okay what will do is instead of you defaulting on the loan what if I not take your interest payment but I just take it in the form of an IOU and we stick the payment that you missed on the balance of the loan so if we just make the loan a bit bigger and you pay me back later because I still believe that you will eventually pay me back then I will take an IOU or a payment in kind note for this quarter assuming that next quarter when the total size of the loan is now bigger and therefore the interest you have to pay is also bigger but next quarter I'm I'm assuming you will still pay me back that's not just one more data center yes and sometimes that work because companies have a down quarter and they do actually pay it back and there is no problem but sometimes it doesn't work

47:24and that's you know what the IMF is saying thing not work is on the increase oh no is that good yes to finish the quote this is likely to lead to lower recovery rates when defaults happen which increases the risk that banks take take on losses despite holding senior rank death don't worry about the last bit but like it it all depends once again on sort of believing that everybody will pay this ship back over time even if you have start doing shenanigans like payment in kinds and there's like a billion of ways I there was a long really good article about the different ways that like you could fuck around with stuff like these payment in kind notes I won't go into the detail but there's like a lot of ways between the bank the private equity fund and the company itself to like swap the responsibility for the debt make it senior make it junior maybe we sell off some of the debt to like a specialist in buying distress debt maybe there's all kinds of

48:27ways to shenaniganize this thing essentially the shenanigans will continue until the economy improves yes essentially yes but the end result of this is it's not always entirely clear a whether or not there are actually going to be still dollars in these various companies if they go bankrupt and if they do go bankrupt whatever dollars are left who gets which dollar of that and who ends up holding the bag in case a series of implosions happen put it that way and this is all sort of in the the background well in the background of this there's the you know concerted efforts by bricks to try to destabilize the dollar is the you know international reserve currency you know yes well I mean what good things are on the horizon time will only tell I mean that's a very like large picture question but that is something that in the age of you know fucking second term

49:29Donald Trump is reasonable worth asking is if all this debt which is like invested in by banks and other institutions and wealthy people from around the world is all denominated in the dollar and people stop having so much faith of the dollar what happens then that's a bigger question I don't even want to touch but you could consider it you know if you want to really lie awake at night for a little bit I I wanted to make this a little bit more detail and I want to talk about one company in particular because the FT's done a lot of good reporting about it I want to talk about blue owl capital we've talked about them before these are people who have invested like a shit on money specifically in data center build out yeah the listeners love it when a character returns to the podcast yes exactly blue owl there's very much to fill Mitchell with this podcast imagine if you will a small owl colored blue driving an Ajax through global finance yes they managed about 300 billion dollars but most of that money isn't like on the actual

50:32books of the company itself it's tail up in like an insane range of different funding vehicles different pools of money different individualized loans all of which are contained within their own what are known as special purpose vehicles essentially you create a company specifically to haul a specific pool of money or a specific loan everything is like and they oversee this fleet of like special purpose vehicles they don't have 300 billion on their books it's all instantiated across like a whole range of different funds and companies and shell companies and bank accounts across the world like it's it's it's a it's a very spider's web kind of place special purpose vehicle like the Ajax yes so this ishoom is basically them trying to silo off all of this debt into different like yeah it's a limited liability yes this is a lot of it is to do with limiting liability it's also because if you are organizing a loan let's say

51:34for a data center then Blue Al doesn't like invest alone what they will do is like create they will create a vehicle to invest in the Facebook data center in Georgia or wherever and then they will say to companies you know things with the word bank on on the on the cover but also pension funds wealthy people they say we have this new special purpose vehicle that will only hold a loan to Facebook's data center on it and you can invest in this vehicle alone we run it we manage it but the liability stops inside that little chunk it doesn't or it shouldn't correlate to the larger company as a whole of that big sense so this it blew out grew super fast right so they grew from about 30 billion assets on the management in 2018 to about 300 billion in 2025 however their share price has dropped by about 51% in the last six months and they used to spend money to have money Rob that's just how the game goes and what they've also been using the value of their

52:40shares of their stock as collateral to get to loan more money from institutions that could bank on the on the card is that good it's great do not worry about it yeah just just just just visualize if you will the scene from the big short where they're poking out bits of that jenga tower you know it's all fine and like I do need to stress because like because these things are so opaque there is a decent chance it's generally a non-zero chance that a lot of these loans that blew out and its various vehicles have like written out is actually in the hands of like like I've been saying widget makers in Ohio that do actually have a good product and will pay back their loan over 10 years interesting capital so like it's not that everything these people do is fucked it's just the question is that what percentage needs to get fucked before blew out itself before an explosion in a small part of the company starts affecting the broader company if that makes sense I mean that is that is you know that's the exact mechanism of the CDO isn't it

53:41like you got all this yes really bad debt mixed in with much like well varying degrees of much better debt and then oh whoops all of these bad debts that we've got on our books have actually turned out to be hot dog shit what the fuck's happened here and then oops all all zeroes and no one's got any money anymore so this is part of how blew out got so big so quick because they got like they went like increased tenfold in span of six years and part of the reason is they they did some financial innovating this is quoting from the financial times it issued new types of bespoke loans to win business financing takeovers by new technology focus buyout shops based on non-conventional credit metrics that's non-conventional credit metrics are words that you worry you because that's like we've invented some whole new bullshit ways to like you know value this company including this is what we were talking about earlier accepting IOUs instead of cash payments on loans called payment in kind that's what we were just discussing it

54:46also on the road loans based on how quickly companies revenues were growing as opposed to its profitability oh so the fact that these data centers are just losing piles and piles of fucking cash every single day that's fine because they're spending more money than they've ever spent before take open AI right open AI says and they are right their revenue grows year on year and growing still growing quite fast because more people are paying for their AI bullshit it is in more things so like year on year they do make more money but they are also spending way more money than they are ever making so while the revenue is growing the profitability is still deeply south of zero but if you change the metrics and say well open AI is the revenue still growing every year he has some more money then it's okay whereas if you said hey open AI are you making any money should I put more money into you then the question becomes very different I mean like we I feel like we

55:50we've somewhat characterized ourselves lately by the podcast that does basic arithmetic and like these guys are that are somehow now just on the opposite end of that and they refuse to do any arithmetic by subtracting one number from another but I mean they do a lot of very clever arithmetic and they create these new conditions upon which it is okay to borrow loans like they're not stupid they can all do math they're just picking the kind of math that they would prefer to do yeah I mean you know fucking business class 101 profit equals income minus expenditure and they just they just like no done like that fuck that times you're based a 300 billion dollar investment vehicle on refusing to acknowledge the fucking basics of doing business that's fine so let's let's make it specific according to reporting again in the financial times one of blue owls credit funds one of these many vehicles that they run shit through essentially has said that it's junior debt in a

56:53software company called cornerstone on demand I had a quick look at their website they're doing like AI powered HR bullshit like if you want to I don't know or employees through a course on how to do spreadsheet magic you know they will build a bit of like learning software for your company for your employees to learn how to do that I think I have to say like I feel like HR is one of the only genuine business use cases for for AI because as we as we all well aware HR is not something that protects workers it's something that protects the interests of the business so like if you could remove stay with me the human element from human resources like that surely that's that's perfect yeah yeah so like let's let's say let's let's take the positive case then right this this company this cornerstone on the one is not full of shit they are actually building

57:55something you know we are categorically opposed to AI but they are doing some they are creating use case for this kind of software that has some whatever function to teach your employees how to fucking do PowerPoint better or whatever something along those lines like it could be a widget maker in Ohio it could be this it could be an actual thing but blue owl this credit fund that they're running saying look the the loan that we that we have the value that we estimate that it has is 90 cents on the dollar so like it's not great like it's 10% off the value that we thought they had when we issued the loan but it's still 90 cents on the dollar is not bad however catastrophic value yeah however to this report by the financial times and the company called Glendon capital management said yeah but recently a bunch of other debt in the same company called cornerstone on the month that's like a better don't worry about the details that's like a better

58:58class of debt that will pay out more and faster than what blue owl is holding recently traded at 78 cents on the dollar so this better class of debt is worth less on the open market than the worst credit that blue owl keeps on the books and says it's worth 90 there's like a significant price difference between those two and in a bad way for blue owl so the question then becomes is blue owl marking its own homework correctly or its auditors or its accountants or whoever like a scientist valuation oh you know is this actually correct it's not like you know the SEC at any point you know the the fucking federal finance instrument for the United States was giving favorable ratings to you know financial instruments that were held by private companies is it that never happened yeah and and once again there are also currently be more and more questions are

59:59being raised about the credit rating that's been given to some of these vehicles and product by the major credit rating agencies you know in in shades of something that we've never seen before and I should again say blue owl is not alone this a bit I'll quote you a bit from the financial times Glendon capital management pointed to similar disconnects in blue owl loans to KKR owned cyber security group barracuda paratoncorp a defense contractor owned by another private equity group called Farrettis capital and corn air holdings another private equity owned seller of hairdryers and the quiz not kitchen appliances among others so this is not one company where blue owl is saying the loans are worth more than you know they are on the open market this is something that's being done all over the shop I mean how close are we if it hasn't happened already to like the obvious correction that needs to happen here how far are we here well this is the mad thing this is the mad thing and this is kind of where we that we're back to where we started

1:01:02because this is private capital and because the loan terms are between you know quote unquote two individuals and not somebody with the word bank written on their forehead we don't really know because the deal structures are bespoke opaque and between two you know quote quote individuals so we don't you cannot see the loan book and all the the way these loans destruction of blue owl capital because they're a private company so you don't get to see so it's just trust me bro level stuff it is trust it is it's sort of kind of trust me bro with like the chance that everything goes entirely fucked up sideways in a way that nobody can predict because nobody is allowed to see the terms of the loans unless you're the companies like him actually involved in the thing you know yeah so a little while ago I mentioned that these like blue owl has this public facing private consumer fund that like you could invest in directly and it promised high returns with at least the idea that you could get your money out even though there is this limit or this gate on how much money could be withdrawn so in February last month blue owl permanently restricted

1:02:08how much cash investors could get out per quarter specifically this is for its blue owl capital corporation two this is one of these big funds that like that yeah I know blue owl capital this one dot exe yeah yeah yeah essentially yes this is one of these little little pools that they have that they manage but are you know I think I should say probably correctly legally distinct from the main thing that you invest in and this from the financial times would instead return investors capital in episodic payments as it sells down its assets in the coming years or quarters so like you can't get your money out today however in the coming years or quarters we will sell it off you you will probably get your money back unless let's say they were invested in something like blue blue dog and it all goes bang oh dear oh no we made a bunch of bad investments well hope you get your money back good luck yeah so obviously blue owl and note how bad this looks

1:03:10if you gate something you are giving the very strong impression that like whatever's in that fund is not actually liquid cannot be sold easily or is worth less than you have been saying that it is so like you increasingly like having to gate outgoing is as the kids say a very bad look and it makes people very very nervous so what they did to hire someone to stand out say it here and tell everyone that everything's fine or you've only got Leslie Nielsen available well I guess will have to take yes so before all this like all this gating business happened blue owl had already sold off a bunch of its other like assets on the management specifically so I had ready cash to give back to its investors this is from the financial times they sold off a quote 1.4 billion dollar portfolio including loans to 128 companies across 27 industries with 30 percent of the loans made to internet and software businesses like that HR thing we were just discussing do generate cash

1:04:10to pay off nervous investors so if you think about that that is what bought for a billion divided by 128 companies is 11 million per loan which is not huge but still across 27 industries and then the question of course becomes did blue owl really have enough experience in house to judge the worth of industries across 27 different across companies in 27 different industries like that did that makes sense is what you were doing sort of a normal you know thing which ones of them were good as we you know hypothetically say cornerstone on demand is and which one of them were you know first brand auto parts which is currently you know being sued for fraud so like I mean just I mean as a sort of said earlier like we are so adamant in our refusal to acknowledge what happened in 2008 that we are you know we passed

1:05:13the era of free money so all the all the things that these guys are now having to do is just the bonkers loony tunes ass investments that is possible to make oh look the returns are great for a while don't ask what happens after those investments turn out to be fucking dog shit because apparently for some reason the company that put slides in pubs turned out to be a bad deal yeah and like it's not just like that the company that turned that put slides in pubs and is managed by an insane bald man is like good or anything like it the problem is that like you have financial you have financialized sub financialized then sliced a retrench because in this sector also the return of collateralized debt or obligations the CDOs are back but in private credit corporate form hooray it's not just that brood dog goes back up the question becomes like in how many

1:06:13different slices and dices and trenches was brood dog debt actually held who holds it and if they if it's if it's mixed in with this this pool of other stuff can anybody actually get their money out one that going gets tough and we don't really know so the good not so question answered so the upside of at least this sale of the 1.4 billion was that it was sold at 99.7% of the stated value so like that's so far so good right as as 0.03% loss is nothing but the first question is did blue wow capital sell off like the prime quality the high level the good stuff and kept the shit on their books because they knew if they tried to sell the shit they wouldn't get 99.7 they'd get a lot less so that's question what I generally do not know the answers of that that would be so fucking funny oh the thing that was propping up these investments to make them actually like the dog shit look good we've got rid of all that yeah we've just got we've just

1:07:15got the brown slurry of financial financial instruments left police stop asking questions because I'm running out of good things to like throw one to the bonfire well the good thing Alistair is at least three of the buyers would have I mean maybe a better idea of what loans they were actually buying and whether or not they were any good this is quote from the financial times according to the filings three collateralized loan funds managed by blue owl vehicles that slice and dice assets to offer investors a different level of risk were among the buyers of the debt so among the buyers of the 1.4 billion dollars in debt of blue owl capital fund two were other asset funds managed by blue owl that's great I'm going to say partially for you know for reasons of fairness and balance because that's definitely what this podcast is blue owl would argue that those three funds are managed separately by separate people and separately legal structures

1:08:17this is an arms length sale therefore they you know they make their own independent decisions these things are not linked don't worry about it unless you want to worry about it but I would say well these guys aren't worried so I'm I'm serene you know so like in conclusion right is it time to crack open skulls feast on the goo within and you know do fucking margin call to private credit boogaloo I would say probably not you know the banks that are lending to private capital are still much stronger than they were in 2008 and genuinely and unironically a few bad loans and bad companies like first brands for example does not mean the entire sector is is shot through with bad shit but on the other hand there is this huge enormous exposure in private credit specifically to AI and then even more specifically to data center construction this is a bit from financial times again blue owl our friends backed matters 30 billion Louisiana data center venture taking a leading role in one

1:09:22of the industry's largest ever financing even of rivals including KKR and Blackstone soured on the deal concerned the giant property situated in a region described as tornado is only partially insured against a catastrophic storm partially insured yes yeah we'll we'll repaint the roof but you have to put it back on yeah well they only have tornadoes partially of the year so that's great that makes sense and I mean there's nothing going on that make like extreme weather events more likely and more severe so don't worry about it so you know we're certainly nothing calls by data centers yeah I'm doing this off the top my head so it could be wrong about this but I don't think I am the insurance cover on this 30 billion data center is 4 billion so wait so the so it would pay out 4 billion in the event of catastrophe in case of total destruction essentially yes

1:10:26and like is that good great yeah and like blue owl is not alone right because Morgan Stanley and another private credit firm called Cliffwater have also done these gates these this limits on withdrawals from some of their public facing funds and the CEO of one of Europe's largest capital private capital groups recently taught the financial times that you know default rates in private credit could double over the next few years and then we're going to find out how much of the opaque shit that's being held in the books of private credit are actually worth what they say on the tin and how many of them are brew dog a brew dog under every Christmas tree so like I don't know what like the trigger points to like a real like sort of not existential but like a crisis to the point that like you would start noticing it in like your actual daily life because it's like 2008 again because again it's opaque as fuck it could be good it could be dog shit and the only time you really know what is up is when this stuff gets sold

1:11:30yeah I mean these when these things move like it tends to you know collapse slowly and then suddenly right like yes and sort of a suppose a sort of more local I guess level like we had that with Carillion which is obviously you know that's that's one company um it you know collapses overnight because of yeah just completely failing to do business correctly again yes yes so so the so like the what and the when of when this stuff gets sold and also how much of it is in the open market at any given time matters enormously is it in times of easy credit good faith in markets everybody's having a way over time and making money you may well get 99.7% of your you know book value back and like it's a clean escape are you selling into a collapsing market with sky high energy prices for example you may well get less and once you get less what other credit instruments

1:12:35tied back things are going to feedback into the institutions with the words bank on it or pension or other things that like your average human being is like connected with like it's what are the second order effects that make this thing go from you know dumb shit to problem like large scale problem or in the words of one hedge fund manager who apparently according to the FT still owns some stock and blue owl um quote I think we are in the super early innings of the wheels coming off the cars he said uh oh or you know cork roaches or you know we're so happy there's a war on to disguise the problems that are materializing in the sector and I just want to leave you like we're going to wrap it up soon but I want to leave you with like one thing to sort of link it together with other things that we've been talking about specifically we did the patreon last week about or it's been released yesterday about the conflict in the Gulf in it with the run so you have to see this is not

1:13:35a single thing but as a very deeply intertwined thing so private credit is itself interlocked with the AI bubble because it invests so much in it both in the sense that if it's real and you know all the software companies that has invested in go boom and also if it isn't real in which case the price of energy through the roof and that might be bad for private credit um and the price of energy which is itself interlocked with the war in Iran and the closure of the homeless straight which is itself possibly interlocked with a conflict between China and Taiwan because the US Navy is no longer around to protect Taiwan and on Taiwan there's one very important factory that makes all the chips for Nvidia if the Chinese do decide to go I have no idea what not they would but if they do go and that factory gets blown up or like you know interceded with somehow then that causes the end of the AI bubble which is interlocked with private credit so there are a number of systemic problems that all hold together the dominoes have been arranged and will leave it

1:14:37in an amusing shape yes anyway that's what I kind of wanted to talk about and leave you with you know as a as a happy last thought to ponder whatever it is you're up to I hope you're having a nice day today yeah don't invest in blue owl capital I mean or do I have genuinely no earthly fucking clue if this specific company is the canary in the coal mine it doesn't seem great but again it is almost nigh on impossible to tell you with a straight face whether whether it is or not on balance of probability it's probably not great but don't invest in anything it's not that's not financial advice it's simply model advice yeah don't invest in anything except patreon.com for such praxis guests there you go the rate of return is real there yeah guaranteed month through the tons of two bonus episodes a month and discord access what more could you want yeah possibly more effort I mean works out well yeah thanks for listening you work the

1:15:48patreon streams sundays are back tux.tv for such praxis cast come join us sundays maybe more often even soon and merch available praxis cast.tv.com okay bye to you bye bye