Coming up on the Danny Moses Show: how the book and the movie The Big Short has impacted me both personally and professionally. And speaking of books, I sit down with best-selling author Bethany McLean, who has chronicled some of the biggest financial stories of the last several decades. We find out what she's focused on today. And of course, my Kashi picks of the week. Over 30 years of beating Wall Street, predicting the famous Big Short. Now he's here for you. This is the Danny Moses Show.
Having been a character in both the book and the movie The Big Short certainly has had its benefits, but it also has its drawbacks. Inevitably, almost every time I'm interviewed or if I'm a guest on a podcast or show, I'm introduced as Danny Moses from The Big Short. Then, there are a few standard questions that normally follow. First, is there another Big Short out there? If so, what is it and when will it happen? Secondly, do you see any similarities today to what you saw then? Next, when did you first realize that we were going to have a housing and mortgage crisis? And lastly, were you happy with how you were portrayed in the movie? And was it accurate? Let me address each of these questions.
Financial history is littered with boom and bust cycles, each with different causes and impacts on the economy. Without fail, innovative and transformative business ideas are often exploited and levered and reach a breaking point where the economic viability and early successes quickly compromise as everybody tries to get in on the action. Whether it was railroads in the late 19th century or the panic of 1907 when the viability of the US banking system was brought into question and JP Morgan himself helped rescue the system, which actually led to the creation of the Federal Reserve. It's always something. We all know about the crash of 1929 which led to the Great Depression, the oil shock in the 70s, the crash in '87, the dotcom bubble and of course the Great Financial Crisis.
While all of these events had unique catalysts, history has proven that because of human behavior, that thing might not repeat, but will often rhyme. So, is there another Big Short out there? There is something always brewing. And it's just a matter of time before the trade that everybody is in, like everything surrounding AI, gets too crowded and you start to hear things like 'this time is different' and 'valuation doesn't matter.' Tie this in with the growth in private credit, which in some cases is helping fuel that AI trade, and you can envision a form of contagion that could feed on itself if things begin to unwind.
Do I see similarities today that I saw during the GFC? Some, such as growth in private credit that was ironically fueled by financial reforms post-GFC, when banks had their hands tied and had to rein in lending, a new industry was born. As I just talked about its role in AI, private credit extends well beyond that. And because these loans don't sit in the traditional banking system, there is a belief that if things turn sour, it won't wreak havoc on the markets and the economy. Unfortunately, I don't believe this is the case. Just because the banks don't have deposits at risk this time around, doesn't mean that the knock-on effects won't be felt throughout the system. We are beginning to see some cracks. And while things still feel contained, it won't take much for the fault lines to start fracturing.
So, when did we know that the housing crisis had reached the point of no return? Well, it was a combination of things. We saw how much money Wall Street was making packaging up mortgages and selling them to fixed income investors that believed that the AAA rating from the agencies actually meant something. We saw mortgage product innovation like ARMs work their way into the subprime category, creating refinancing risk after only a few years. We saw traders on Wall Street making millions. It just felt too easy and it was all predicated on one belief: that home prices would never go down. Once Wall Street gets used to making money on a sector or a product, they will inevitably lever it up and squeeze everything out of it until there is no juice left. This was no different. It wasn't a question of if, it was always a question of when.
While it took a few years for the thesis to play out, aided by the incompetence of the regulators who were supposed to be watching, when things began to unravel, it was violent and the rest is history. So, lastly, was I happy with how it was portrayed in the movie? Well, the book was pretty much 100% accurate, but the director of the movie, Adam McKay, did take some liberties with the content and did an incredible job of making a complex topic relatable to the public. Was I chased by an alligator while visiting abandoned homes? No. Was it an accidental phone call that helped introduce us to the infamous CDO trade? Yes. Was I always obsessed with where we would be having dinner? No. But I do enjoy a good meal.
But the one thing that irked me was that Adam McKay labeled me as the optimist of the bunch. You may ask, why wouldn't you want to be labeled as an optimist? Just to clarify, I always try and be optimistic and I was confident at the time that we were on the right side of the trade, but I was extremely pessimistic about what the world might look like if things unfolded as we imagined. For better or worse, having had a front row seat to the Great Financial Crisis gave me a form of financial PTSD that always makes me look for what can go wrong with an investment before looking at what can go right. While that will certainly cause me to miss some opportunities, it gives me a level of comfort I need given the things I have seen in my time on Wall Street. And I hope I can impart some of these experiences that might help you as well.
Coming up next, if you thought The Big Short was a great book and movie that chronicled the Great Financial Crisis, I have one even better. Bethany McLean, the best-selling author of many books, including The Smartest Guys in the Room, which chronicled the collapse of Enron, as well as All the Devils Are Here about the GFC, joins me.
The Danny Moses Show is sponsored by Kashi.
The golden age of America is upon us. And our future will be bigger, better, brighter, bolder, and more glorious than ever before. Thank you. God bless you and God bless America.
Bethany, it's an honor to have you on the show. You're a prolific writer and we have a lot to get to. Any comments on whether we're entering the golden age, as Trump just said?
Well, I think it depends on how you want to define golden. I mean, lots of golden glitz, I guess, but I think there are a lot of worrisome cracks.
I agree. I think if you want to take the glass half full, you can see some good stuff. And if not, you can see some bad stuff. So, I just discussed how every crisis on Wall Street is different, but often rhymes. Let's start with the book you are best known for that you co-authored following the collapse of Enron called The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. You were writing articles and warning people well ahead of Enron's collapse. What first led you there?
So I had become a bit like you, skeptical of the conventional wisdom, because I wrote a column for Fortune called Companies to Watch, which was a stock-picking column. And I started to learn during that period that Wall Street is always selling something, right? And there aren't very many people who are going to tell you that the thing they're selling might have some really fundamental flaws. That's just not the way it works. Everybody makes money when things go up. And so in that sense, the business world is a very, very strange thing. So I started trying to get to know short sellers because I thought, well, it wasn't because I wanted to take down companies. I just was tired of being wrong and tired of not understanding the other side of the story, only to find out after I'd written a piece that I had just missed it.
So I got to know Jim Chanos, and at one point he said, 'If you can tell me how Enron makes its money, please let us know.' And I had worked in finance for a few years. At that point, I still knew how to do spreadsheets, and so I did my spreadsheets. And it was just interesting because nobody had the answer to what was a really fundamental question, which was how does Enron make its money? And you'd think that wouldn't be possible. Isn't that what all the armies of analysts were supposed to be out there doing? But Enron always spat out a number, an earnings number that was what people wanted to see. And so I think the lesson I learned from that is that if you can give the market a metric that is exactly what they want to see and that looks simple enough, people won't always look underneath that simple and appealing metric.
Agreed. And you're extremely busy these days. You're a contributing editor for Vanity Fair. I see new articles from you in the Washington Post. You co-host a podcast called Capital Isn't about what is and isn't working as it relates to capitalism. I want to play this clip here and get your reaction.
It's like people are experiencing the economy really different because of the income inequality. And you can't just say, 'Oh, GDP is going up. Oh, the stock market's going up. Everyone's doing great.' Nah. Like, it's so different for different people. Yeah. I guess the billionaires are doing great as always, but not the people who are making in the lower quintile or the lower half, the lower, honestly, the lower 80%. Bethany, I know you write a lot of articles about what's going on in the economy, the K-shaped economy. This is a little glimpse of it, obviously. Share your thoughts there if you don't mind.
So, I think that that person is exactly right. And I think it's really worrisome because this sense that the economy doesn't work for everybody risks eroding the fundamental legitimacy of capitalism. And I think some of the people who should have a broader sense of responsibility, not out of morality, but out of their own self-interest, are failing to understand that the economy is in the end not just the economy, it's our social system. It's our democracy. And if you start to erode people's trust in institutions and in the economy, you eventually really do start to erode everything. And that's not to anybody's advantage over the long term.
That said, I think AI has a potential for people not to have to care. In other words, like a conventional old corporation, you know, JP Morgan doesn't do well at some point if the rest of us stop doing well. They actually do have to care. It's in Jamie Dimon's self-interest to care about the rest of the country. I'm not sure that's true about some of the new AI companies. And I worry about that, that fundamental link between having a functioning population and the ability of some people to make billions is getting broken.
We're going to get into AI in a minute and I want to comment on that clip as well, which is I just don't see how the bottom half of the K is going to be able to catch up. And I think if the two were to meet in the middle or get close, I think the top half will come down. We're going to talk about it in a minute. So I'm sure you're always working on a new book. Can you share with us how you're allocating your time these days and get into some of the current topics which I know I just mentioned that you're focused on? I don't know if you can let the cat out of the bag or maybe what you're working on.
So, just pure chaos basically. I wish I had a plan for managing my time. I need to come up with that. I spend a lot of time on this podcast I do with Luigi Zingales at the University of Chicago called Capitalism, and we're exploring what's working in capitalism and what isn't because we view it as fundamental to our democracy. I have been, I'm writing for The Free Press and doing some pieces there, and I'm working for a startup media company called Hunterbrook and doing some investigative pieces there. I don't know that I'll ever write another book for a few years after I finish one. I say that, that was such a hideously painful process that I'm never doing it again, and then somehow I seem to get amnesia and go through the same thing all over again. But right now I'm still in the never, ever, ever phase.
Well, don't say that because you're a great writer and I'm sure something will come out of that. But so I consider you an investigative journalist and I think it's needed more than ever given kind of the lack of enforcement from the SEC and the DOJ. You just mentioned you're also helping a company who writes short reports. Tell us how we can kind of protect ourselves if the regulators aren't going to do their job and what we should rely upon to kind of get information.
Well, I think there is an enormous amount of information out there today and it is different from back in the day, even at the time of the financial crisis or definitely going back to Enron. If you were going to get exposed to people who thought differently, you had to know people and you had to dig your way in and figure out how to talk to people, and they were never on the record. Now, if you want to understand the skeptical side of things, it's everywhere. You can find it. And so the challenge then becomes sorting through the information and seeing it in the right context. And I still think that's really hard because my view is often there's a piece of it's the prism through which you see things that matters, and there's a piece of information that will come along and it's not that the piece itself is so critical, but it changes how you see everything else.
And I think you just have to be very open to changing your mind and very intellectually flexible and not dogmatic. And unfortunately that just flies in the face of human nature, which is that once we decide on a belief, god damn it, we're going to keep believing it and do everything we can to reinforce that belief. And I think you really have to fight against that.
All right, so let's touch on AI and its impact on stocks and the economy. You just wrote an essay on The Free Press titled, 'Will AI doom us all? The market can't decide.' It was in response to what is being called the Catrini memo, which was a look ahead to how things could play out in 2028.
