I'm Danny Moses, host of the On the Tape podcast. As many of you know, from time to time, I have my former partners and friends, Porter Collins and Vincent Daniel, join me on the pod. When they do, we normally call that segment, 'What Are We Doing?' Well, in late August, the three of us got together and we launched 'What Are We Doing? Contrarians at the Gate' on Substack. And within that Substack, we launched a podcast called the Friday Night Dirty. And last Friday, we had our friend and best-selling author of The Big Short, Michael Lewis, join us, where we reminisced about the past, talked about the current state of the markets, and took live Q&A from our Substack members. While I had Michael Lewis as a guest on the tape several months ago, I think you'll find this conversation even more entertaining. So, please enjoy this episode of the What Are We Doing Friday Night Dirty. And if you like what you heard, please go in the show notes and subscribe to our Substack. All right, welcome to a very special edition of the Friday Night Dirty. Friday Night Dirty brought to you by the What Are We Doing Crew. I got Vincent Daniel. Next, we got Porter, Parts Unknown, and very special guest here, best-selling author Michael Lewis and friend from The Big Short and friend from everywhere else. Michael, thank you for coming in here.
Well, we're going to get into your reason that you're here. I know you're going to be here again in a few weeks and we just reconnected recently because the Big Short anniversary, the movie, the book, everything going on here. But why don't we start kind of with that, is that it's been 15 years since the book. It's been 10 years since the movie, right? And give us a little flavor for what you're doing now to kind of re-promote this and why we reconnected recently.
So it starts with the accident of the audio rights coming back to me. And I didn't actually read the book in the first place. And in just the last couple years, Pushkin, my podcast company, has gotten really good at doing audiobooks. So they're not just books, they're kind of like dramatic experiences. So he thought, I'll read it and we'll do it that way. And the reason we had the rights is what got me thinking about this. And the reason to do it was that I have felt, I don't know how you guys feel about this, I have felt like that we're still living with that event, the financial crisis, that you can point to a lot of things that are going on in the world now and say it goes back to that, including Donald Trump. So I thought what we'll do is we'll release the audiobook. People can listen to it or not, but we'll do like a podcast season on the side of it just looking at the consequences of the financial crisis, rethinking about the financial crisis again. So, to that end, as you know, I had some of my characters on and there's an episode with you three and there's another episode with Steve Eisman and Greg Lippmann, who was sort of the spider at the center of the web way back when. But then there are other things. I mean, the first episode is with Adam McKay, the movie maker, because I was, I mean, one, more people have seen the movie than read the book, but two, I was so interested, and you must be too, in how he took that and turned it into a movie. I never, I mean, I never imagined.
Do you remember one of the first things we said? So, we meet Adam McKay and the first thing I think it was Porter or Danny said, and said, 'How the hell are you going to make this thing into a movie that's going to sell?' I said that like, and just, and he goes, 'I'm going to throw a lot of eye candy at this thing.' Right. And sure as [__] he did and it worked. God bless him.
I remember when you called us and you said they're going to make this movie. I don't know how. Yeah. But they're going to make it a movie. And you told us that. So...
I read this when I read his script. I thought, 'Oh, I can kind of see it now, but only kind of.' And it was such an improbable thing. I mean, it's amazing how well it turned out given how hard it was to do. Think about what even writing it as a book. I can remember thinking there are just real big obstacles here. Getting people at the center of the whole thing was a device so diabolically complicated, it was almost inexplicable.
Was there anything in the book that you wish got translated better or didn't translate well into the movie? Because we know the things that were fact and fiction that happened, you know, the movie versus the book. The alligator chasing Porter and I, things like that. He just obviously took fourth wall stuff with people. Was there anything that you would have done differently or anything?
You know, it's funny. You know, a movie script is 8,000 words and a book is 100,000 words. So, they obviously had to leave at least 92,000 words out. And but when I looked at it, I did not think, 'Oh, they should have put that in.' I think, you know, it's funny. The book ends with you guys. Yeah. Sitting on the steps of St. Patrick's Cathedral just watching the chaos. I can remember like nobody in the taxi cabs, the streets, Lehman had just exploded, you know, and you all sitting there thinking these people don't know what's about to happen to them. I thought that was a, I might have ended the movie with that, like I ended the book. I can't remember how they ended the movie. Ended the movie with a kind of essay, I think, right? The only person going to jail was some... That's right, that's right. And the movie, and this gets so, and I thought what attracted me to it was I didn't come to it with a lot of outrage. I mean, I worked on Wall Street. I came, I didn't, I was shocked by the stupidity of the big institutions, but it was more like, I was amused by the stupidity. It wasn't like, oh, I can't believe they'll do bad things to their customers. That was, I didn't have any of that problem. So for me it was just story. It was like filled with great characters. You all were some of them. Um, for McKay it was anger. I mean, he, the movie is much angrier than the book, and he really, I think he had to work to suppress his political, the political sort of op-ed that he wanted to write. And he didn't suppress it that much, but it, you know, he had to suppress it for the sake of the story. I didn't have that much going on. So, when I watched it, I did think, well, is the tone different here? Not only is it funnier, I mean, or it's overtly comic in places. Um, but it's also, it's got this overt political purpose that the book really didn't have, right? Which is...
But Michael, we were definitely angry, right? That was a big thing about, you know, our group. I mean, they called, you know, how is America's angriest hedge fund, like...
So you were angry, I wasn't angry.
That's different, right? I mean, the characters all had different attitudes towards the thing. Yes, you were angry. I wasn't sitting there. I wasn't angry. I wasn't, that's not, wasn't, I wasn't sitting there. I was, I mean, I hate to say this, I was delighted. Like it was like, because I was just thinking of the material. I was thinking, 'Oh, this is going to be so much fun to write.'
I remember you calling it the sequel to Liar's Poker or the bookend.
The bookend, it still feels like the bookend of Liar's Poker, right? Yeah. And in fact, it isn't. There's never an end to Wall Street. So, that's a little, it's not the end of Wall Street. Um, but this business of taking the investment banks and turning them into public corporations where all this risk could be taken, but if it went wrong, the shareholders, everybody else paid for it, right? The misalignment of the incentives that started with Salomon Brothers going public, you know, whenever it was, '81, and was clearly not a bright idea, but, and in fact gave rise to the material I had for Liar's Poker. It ends in 2008. And now, I mean, yes, we have Goldman Sachs and Morgan Stanley still exist, but what's going on inside them is much less interesting. The interesting risk-taking has all been kind of squeezed out into other places, right? Sort of like a Jane Street. They're of tertiary importance. These in the risk-taking world, you know, Ares and Apollo, and they're taking one side of their business, and Jane Street and Jump and all the rest are taking another side of their business. And yeah, they make money, maybe they make lots of money, but it isn't where the best and the brightest want to go anymore.
It is amazing how since the global financial crisis, what we're still dealing, obviously with the aftereffects, with the debt on the government's balance sheet, the debt at the Federal Reserve and stuff they're still carrying. We still have the moral hazard issue. We still have all the same issues. We've never really dealt with it, right? Really haven't cleared, quote, all those assets.
You watch this more closely than I do. But what is left on the balance sheet of the Federal Reserve?
A lot of US Treasuries, a lot of mortgage-backed securities.
They still own mortgage bonds.
Not taking it off, right? Not the super exotic stuff, but they have MBS securities, which when you think about it, they're artificially yield curve control as they call it, right? So, you're keeping rates low because you need to because we just had...
I wonder what the yield curve would look like if they dumped everything.
Well, they've tried and they tapered, you know, so they tried that for a period of time. It's 6.6 trillion though, still at this point. It was 100 billion before the financial crisis.
You know, it's interesting how that institution has morphed. It's just changed. Yeah. You go back, you go back to the Great Depression and it existed, but it was so scared of its own shadow. It wouldn't even inject a lot of money into the economy just to prop up the economy in a banking crisis. And now, I mean, it got so bold. It knew, I think Bernanke, this is, we do have an episode in the podcast series along with The Big Short audiobook, but that is just on the Federal Reserve. And there's an economist, young economist named Emi Nakamura, who's, you know, she's a whiz-bang monetary economist at Pal, who is a Fed watcher. And she said in the course of the conversation that Bernanke said he was aware he was gambling with the Fed's independence, that it was such a bold step they were taking that the political consequences, the endgame might be no Fed independence. And here we are, right? I mean, it isn't...
It isn't for the same reason exactly. It isn't that, but it probably did undermine kind of the public trust of the institution in a way that makes it a little bit more likely Trump can just take it anyway.
Yeah, so we have a ton of questions. We're going to mix them in here from our studio audience, so to speak. So, John Lieberman, Ghost, the voice, why don't you come in here and ask a question and identify maybe who's asking it if that's okay.
Yes, gentlemen, we have questions lining up and lining up for Michael and for the guys. We'll start with Gary Webb. Gary asks, 'Do you guys believe that sharply higher loan modifications will be a precursor to rising delinquencies and defaults?' So that is a question for you all, but it's an interesting question.
Because that's in private, more in the private markets that we're seeing all these modifications. Porter, you want to give that one a shot? Because all they're doing is extending and pretending, right? The loan mods. So...
You know, it depends. I mean, we've seen the loan mods throughout every different crisis, right? It's in '08, they modded, you know, over the last 10 years, they've modded everything. So do I think that's new? No, I don't think that's new at all. It's just extending and pretending. Well, Michael, where you asked where the risk has gone, it's in private equity to a degree, and now they want to send all this product to retail investors, and so we got to keep modifying so it still looks good, so it holds its value. And loans are picking payment in kind instead of paying interest. And by the way, they charge fees on payment in kind, which is incredible. Um, so that's where the risk lies in the system, but it's not in the banking system, so people aren't as concerned. But Vinnie has a thesis for when it does happen, what's going to happen, Ben?
Well, they're going to bail them out.
They're going to bail them out.
The problem is that because our pension capital, endowment capital, the big capitalism now fully invested in private equity, it's too big to fail. So, you know better than anyone because you write about it all the time. Where's the regulatory arbitrage? That's where the smart money is going to heat seek. That's right. That's where they are. The Jane Streets, the private equities and the like. They get too big.
When you think private equity, what institutions do you think? You think about Apollo?
I think Apollo, Blackstone, right? And those guys and KKR. And to me, if and when the [__] hits the fan, they're going to call their friends in DC and say these pension ATMs are not going to open up Monday morning.
And they need a bailout and it's going to happen.
But I mean, I think the problem is our biggest risk, our biggest, the three of us all see the biggest risk out there is the government. It's a $37 trillion issue and it's the reason for what's going on in the economy, right? They have to fund everything short. There's so much debt. We've transferred all that debt from the public companies through COVID through now. It's all sitting at the US government. And the question is, who's going to buy that debt? The Chinese aren't really going to buy it. The Japanese probably aren't going to buy it. And so I think they're going to print the money.
So what? So I want you to tell me a story that ends in a financial crisis. Like how does it start? Is it some sort of auction failure? Is it a... what happens? Is it...
At some point, inflation that they can't disguise, right, is going to rear its ugly head again, right?
And the Fed has to tighten liquidity and raise rates.
Which raises the debt service payments.
Which creates the spiral. Right. Right. Because right now the unknown that people don't really appreciate, in my opinion, is how freaking levered the capital market system is.
Right. No one buys Treasuries just to buy Treasuries on an unlevered basis. They do basis trades at 50 to 100 to 1.
Well, not at 50 times leverage.
No, no, just by yourself. Do you buy bills or do you buy bonds?
No one's buying the long-duration bonds.
Oh, right. But for the people who are buying long duration, someone has to buy them, right?
Silicon Valley tried it. How did that work out for you? Yeah.
But so they're levered 50 to 1 so they can make a small spread. Right.
If all of a sudden volatility creeps up, right, because rates are rising, right? You create sort of a spiral.
I don't want to ruin your podcast, but the other thing I want to hear, I want to hear you tell me the story of how a crisis starts in the private equity system, in the private equity business. Like what happens? Loan failure to repay loans to these private equity lenders?
I think there's about a 99% correlation, right, in those markets to a lot of, they're all the same, you know, to a degree, right? So if you know whatever the loan-to-value is, debt-to-EBITDA coverage and things like that, without getting too wonky, but a lot of them might be in the same industry, but what it'll take will be one large asset that either fails or something that it turns...
An asset class or a particular asset. It's so big that the correlation of it would mean that the other bonds themselves also need to get marked down that are in the same sector maybe.
And then you have this kind of one-time event because you hear about from time to time.
Currency goes one way, someone gets carried out, right? Nickel goes below, you know, people get carried out, like things happen. It'll take one of those instances where some big fund is like, and then it's like, what else does that fund own? It has nothing to do, you know.
So you think Blackstone, Apollo, etc., whatever it is, you think they're too big to fail now?
Yeah. They're the new banking system.
Well, think about where a lot of the Washington appointees are coming from now. BlackRock, Blackstone, it's at Carlyle. It's no longer...
Well, it is still Goldman and JP Morgan, but private equity has sort of moved in.
The way I think it'll happen is in order for private equity to work, the investors, the LPs need distributions to come back. So you sort of create, it's a bit of a, I don't want to call it a pyramid scheme, but there is a function of, hey, I'm making money off my prior investments. I'll invest in fund 25 while you're giving me money from fund 15. Right? If all of a sudden the money from fund 15 no longer comes in the door, right? I'm not doing fund 25. Not going to do it. Right? And once you do that, then you say, 'Well, there's no price discovery.' And when do the pensioners say, 'I'm not getting any distributions.' Right? That's the way I think this...
All right, gentlemen. I'm going to jump in if you don't mind. Sorry, Porter. Porter's mouth is moving. We're going to come to Porter in a minute, but let's kind of do a lightning round because we literally have north of about 40 questions. Everybody has questions for all four of you. I'm going to start with two for Michael. The first is, the fifth risk has changed exponentially. Your thoughts? And then tangentially, Michael, reflecting 10 years later, what's the lesson that you learned from The Big Short which wasn't obvious when you wrote the book?
So I'm not sure I understand what the question was with...
The fifth risk is rearing its head again.
Yes. And I'm going back in and writing another book. I mean, the first time, I mean, when I think about Trump and the government the first time, I think, you know, he didn't think he was going to win. He was the dog who caught the bus and he didn't arrive thinking he had any kind of plan to run the government. And in fact, and what got me interested in the story in the first place, again, I'm like a story machine. I'm not looking to make political points, but in this case, I thought it was wild that this person who had zero experience running anything like a government was being handed the biggest institution on the planet. And the first thing he does right after he's elected is fire his transition team, the 525 people who are supposed to go in and learn what the hell's going on. I think it provided him with some information. Like if I said you're president, you'd panic, right? What the hell is it? What is it? I got to run this thing. What is it? What's in the Department of Agriculture? I have no idea. What are they doing? And then he turns to Chris Christie after he fires these people and says, 'Chris, we're so smart. We can learn what they do in an hour.' And I thought, well, that was just like a literary opportunity. I could go in and get all the briefings that they would have gotten from people who were sitting there with like finger sandwiches and Diet Cokes waiting to meet with somebody. And then when I started, like among the first meetings I took, I would call the people who were waiting to do it and nobody was showing up. It was with the people who ran the nuclear arsenal in the Department of Energy and it was like I was the first one who showed up to hear the briefing. That's just wild, right? So that's Trump 1. Is that the fifth risk? Is that it's like what happens? What is like using his neglect as an excuse to figure out what the government does, picking just a few departments? I think now he's come in with a plan. It's not his plan, but it is a very detailed plan and it's a radical plan and it's to dismantle the federal government and reshape it as a purely partisan political thing. It's like to weaponize it. And that means something completely different. Neglect is different from, you know, malicious.
Do you think this shutdown that we have now versus the last time, you know, the amount of people that are there trying to run the essential services that are supposed to these agencies, we're going to see some issues obviously potentially at some of these agencies just because they're not as deep as they were. DOGE came at the beginning of the year and so...
No, the big difference between the two shutdowns, you're right, he's now, this is like a bookend with his first shutdown, is that the first shutdown he didn't really, it didn't, there, he wasn't, his mind had not gone to, because the people around him, their mind had not gotten to what can we use this for. And in this case, they're talking about actually using it to fire like lots and lots of these people who were furloughed. And so it will have a, that's a radically different act. The same people will be on the job, like the people at the airport who make sure you're not... Yeah. Yeah. The TSA people will still be there, but they won't be being paid, right? So it's a question of like when they start calling in sick and I mean, you'll see a degradation of services and who knows how long it will last. That's not the big thing. The big thing is disruption of long-term projects that you don't even see. That's the big thing and the price is very, it's very hard to measure the price. But anyway, it's the, once again, I mean, just as a matter of story, the material is unbelievable. Yeah.
So the second question was about The Big Short. What happened? So I would say the single biggest lesson that I got out of The Big Short and it affected my life was the power of incentives, like what people did inside Morgan Stanley, Merrill Lynch, Citibank, that was catastrophically stupid, putting their institutions at mortal risk because they were actually paid to do it. And that if you pay people to do stupid stuff, they'll do stupid stuff. So I don't know if I ever told you guys this, but after I wrote the book, I went to my publisher and I said, 'Do you realize that our incentives are not aligned? You give me a big advance, mostly with authors, like you never see another nickel. You're not actually, you don't have an equity stake in the book and my incentive is to maximize revenues because I just get a percentage of the cover price and you're trying to make profits.' I said, 'I've just seen the power of incentives. Let's sit down and figure out how to align our incentives.' And ever since then, I've owned half the books and I don't take advances. And it was because of this book. It was because I said, I've got to be so careful. If this can happen to those people, it can happen to me. Like you got to be so careful what your incentives are because you'll be led by them.
Yeah. Yeah. It's like guys that run big funds that run $10 billion and they're clipping a 2% management fee.
Yeah. So they're going to make the money regardless. Question is, what is their incentive to create an incentive fee?
All right, John, we'll take another question. I think Porter's going to have one also. Sorry.
Yep. Don would like to know, 'How has fiscal dominance changed the way equities are priced?'
It's probably a Porter question if you want to do that.
Seems like whenever there's substance, Porter has to answer it.
Yes. Well, our friend Luke Gromen, fiscal dominance. Yeah.
The fiscal dominance thing is basically just what we were talking about before, is that the government has basically crowded out everything, right? And now we're running, you know, 6% budget deficits and, you know, everything post, I would say COVID to me, when we were running, or actually the first Trump, when he started doing, you know, tax cuts and deficit funding and tax cuts, right? And so why were we doing that? Why were we giving tax cuts and running a deficit at the same time? It makes no [__] sense, right? It's just stupidity. Just to, I don't know why.
That's why we love gold so much. Yeah.
You're just stealing from the government essentially. And, you know, we've been running deficits ever since. And I don't think we can get out of it, right? That's the thing. It's like, you know...
Inflation. Actually, the irony is you need to inflate all assets to get out of it. That's the...
No matter what administration, they have to run deficits. They can't. I mean, remember when Biden was running, like, what is he doing? Why is he running 8% budget deficits? Makes no sense. And sure enough, Trump comes in. He tries to do DOGE for about 30 seconds and flipped.
So can I ask a question? Yeah. Because we haven't been together. I know. I mean, we have not all been together in a very long time. And I don't think I've ever got to ask you what it was like. I have two questions. What it was like being written about by me. When I showed up in your office, I was amazed you all let me in. It was really nice you let me in. If you would not have let me in, I never would have written the book because you were the first people on the right side of the bed who I actually encountered. And you three and Eisman, it kind of explained to me what was going on. My brain exploded. Was it uncomfortable having me around? Was it, were you, when, after every time I left, were you all going in a room and saying, 'What the [__] are we doing talking to him?' Were you upset with the book? What? I'm curious. I want to hear your take.
Do you want to give it a crack first, Ben?
No. First off, you called me on page 10. I don't know how I know that exactly. You called me young, fit, and handsome. So after that, everything was fair game. I, you know, and I'm just going to give testament to you. You are my favorite author. So the fact that you were writing our story, right? I was...
Well, that's got to be weird.
That was, like, I couldn't believe that, like, he's going to write about us. This guy's going to write about us. So I'll speak for myself. I was more than happy to provide you the story. I felt like we were in the right. We tried to do, like, yes, we made a lot of money, but we tried to do the right thing. So for me, yeah, I wasn't that upset about or thinking like, what am I doing here? If you remember, you came in through Meredith Whitney. That's right. So it was already pre-screened. But to Vinnie's point, you were one of our...
Heroes. I mean, you've written about Wall Street, and I think from Liars Poker we had that same thought process and mentality about Wall Street anyway, right? So we had seen a bunch of stuff, and I think we were excited. And what you did — maybe you didn't know it — but you were providing information to us by the questions that you were asking us, because if you're asking certain questions, it made us think about why would Michael ask that question? Like, how much risk is really in this system? And then you would go off and come back, and you'd go off and come back. And I remember each of us would meet with you separately, right?
We rarely would the four of us sit down with you — a lot of independence, whatever. And so you would go and you'd be like to us, 'Is that someone I should talk to?' I'm like, 'Yeah, let me know what they're about.' But no, I think you actually — so there was a trust factor from the very beginning. And when you wrote the article first, I remember...
