I regularly speak to people, still managing money and many of them say that they don't recall the time when they've been as confused as currently. One of my kind of axioms of financial analysis is that growth is bad in FADS. One thing we learned from the financial crisis back in 2008-2009 is that the biggest source of risk is emanates from the place where you're not looking, increasingly mass affluent investors. Who in many cases have been put into these funds by advisors and there are various incentive structures around that? Who probably shouldn't have read the small print? Don't assume that there's no correlation. Often, correlations will spike when you least expect them. After watching Access Returns, the channel that makes complex investing ideas simple enough to actually use or better questions, lead to better decisions. I'm joined today by the author and creator of what has to be the must read financial plumbing newsletter in all of finance. That's a comment. He's been on fire lately with private credit. Some tech company takes and yeah, we might even talk insurance, which only he can make insurance as interesting as he does. Here in author of the net interest newsletter on substack, Mark Rubensstein. Welcome to Access Returns. Times map. Great to join you. Straight to the deep end before your World Cup visits, you can be critical of the FAD, I think, for a little bit longer. They said that private credit redemption risks are limited and manageable. You've been writing about for a while. What do you think the FADS seeing? Why are they saying it? What are they missing? It's reminiscent isn't it or subprime being maintained. But they know that. So they are not going to be making as bold a statement, having not done the work. And I think on this occasion, what they are saying is that the amount of money ultimately that's invested in private credit on terms that limit redemption is. It is tiny in the context of the overall financial system. And the fact that these gates are in place, that these redemption limits are in place, it creates headline risk, it creates reputation risk for the providers. And we can talk a little bit about that potential liability risk for the providers. We can talk about that. But it serves a purpose which is unlike deposits. You cannot get a run on the private credit thumb and therefore the risk is largely mitigated. Now, if the holders of these private credit funds or institutions, then who has? Right? Or big enough to read the small print, they are big enough to withstand redemption gates. The question that what kind of makes it a bit more topical over the past couple of years is that a lot of the holders of those funds are increasingly retail investors. At least not at least affluent investors. They're no longer just high net worth but increasingly mass affluent investors. In many cases we put into these funds by advisors and there are various incentive structures around that who probably shouldn't have read the small print but more likely outsourced it to the financial advisor and have ended up locked in these funds that they now may want to be getting out of. And although it kind of feels watertight from a legal perspective, the, you can see, I mean, we'll go on and talk about below our, which was one of the first private credit firms to put up gates. You can see the impact has had on their share price and on their reputation and on the financial flexibility of their owners of their founders who in at least two cases, put up stock in Blue Al as collateral for loans. Stobbed pride collapsed. That created some problems for them. So they're all knock on effects. They're not systemic. They're not the sorts of things that the Fed should get involved in but they do create questions and at the margins they represent risks. So you did go quite deep on Blue Al. Let's spend some time just talking about, let's talk about the firm. Let's talk about the gates. Let's talk about the request for 40% liquidity, putting up the five, the investment. Give us kind of like the history of what's going on there. Why this is such an interesting place to do such a deep dive at this time. Blue Al, Blue Al, Blue Al is an interesting company. It's not an old company. Few of these private credit firms are old Apollo, which is arguably the pioneer, goes back to early 1990s. Blue Al was a lot newer than that. He came to the market in the form of a SPAC merger back in 2021. It was slammed together with a GP stakes company called Dial, which we weren't going to in now, but it takes stakes in other alternative asset management companies. I'm like marriage of convenience really. These two companies had no common ground. They both operated in the alternative space, but disparate parts of it. But through the merger, they became large enough to come to the market at virus back transaction. They've been publicly traded in 2021. Blue Al runs a number of private credit vehicles. It runs some business development companies, BDCs that are not traded. And it runs some that are traded, publicly traded BDCs. The underlying fundamentals of those two types of structure are that dissimilar, except for one important difference, which is that publicly traded ones ham a stock price and ham and often do trade at a discount to net asset value. So lots of closed end vehicles that are publicly traded, famously Bill Ackman runs a closed end fund listed in London. New York as well. They traded discounts to net asset value for various reasons that reflect the market's perception or the underlying value or the stakes held within that fund. And as well, there might be some supply demand dynamics in that. And also the market might take a view of future fees, which it will discount. So frequently these vehicles trade at a discount to net asset value. And that reflects the market clearing price for those for the bundle of assets. The privately traded business development companies, they trade by appointment. And the provider acts as the intermediary. And they will trade often on a quarterly basis, but net asset value. And so Blue Al's got a kind of problem. It's got some vehicles out there which trade a discount, some trade a net asset value. It saw a big surge in redemption requests for its privately traded business development company, company called Blue Al Capital Court 2. They don't have the most interesting names. These are BDCs. Blue Al Capital Court 2 saw a huge surge in redemption. And it's a promise to meet 5% of those reductions. And so what it did back in February of this year was it agreed to fund 30% pound to its holders by selling some of its assets. It was able to fund that. And then it told investors to sit tight and wait for the rest. So rather than stick with its quarterly tendering schedule, management agreed to return capital as and when it could. So that's what it did. Opportunistically, another fund run by Boaz, Weinstein, Samber, Cayman and said, "Well, you know, we'll end up."
privately for anyone who wants to get out at a discount to net asset value, but it didn't receive sufficient demand to proceed with that. So that's what's been going on, blowout, and it's become almost post-a-child for the problems faced by private credit today. Take us back because I'm interested in you've been covering financial since we established this in our intentional investor conversation the 90s. Yeah. That one. So you've been following and tracking financials broad breaststroke at a global level for a couple of years now. Take me through just like the emergence of private credit. Take me through 2008 sort of like forward and what's gone on with lending and trying to make the system safer, make this operate better. Give me some background context on this. So the rules changed in 2009, 2010. And the objective of the whole sway of new rules that was introduced by numerous rating tribodies was to protect the banking system, which had been at the epicenter of the crisis in 2008. So capital requirements were raised, liquidity requirements were introduced, whole series of new rules that hampered the flexibility through which banks could operate. As a result of that, many activities that banks had previously conducted, flowed outside of the regular banking sector. So I'm private credit is one of those. But it is just more. So another of the features of the post crisis financial landscape has been the rise of trading companies like Jane Street, which recently reported earnings for 2025 that exceeded the earnings or any of the market's businesses for any of the major Wall Street firms. In fact, if you slap together some of those Wall Street firms, Jane Street exceeded even the combined revenues of some of those firms. Citadel securities as well, some of the large multi manager hedge funds have taken on a lot of the activities, a lot of the arbitrage hedging activities. We'll talk about a treasury basis for us later, but a lot of those activities that investment banks traditionally used to do. And were prevented from doing as a result of new guidelines and regulations that came in post at crisis. So, Millennium, Citadel, hedge funds, and so on and so forth. Exchanges too, exchanges of ground, they do clearing activities now, again as a result of new laws that were introduced post 2008 2009. So what you've seen is an increase in the addressable market for exchanges, stock exchanges, multi manager hedge funds, trading companies, and private credit companies. And for private credit, the regulatory arbitrage, if you like, was simply that they don't have to put up the same amount of capital to bank a loan to a small mid-market company as a bank would have done. In fact, banks were actually additionally limited. Quite well known, the constraints around capital and liquidity, but they were explicitly limited on lending they could do above a certain ratio of EBITDA. And so a lot of the more leveraged lending activities flowed out of the banking system into private credit. And so private credit grew, grew because of a grew in addition because at the same time as everything I've just mentioned, you also had as a result of low interest rates, a thirst for yield, and private credit was able to provide that. So, you know, whenever I look at new asset classes, I always look at supply and demand, and what the equilibrium is. And with private equity, you had a surge of supply, because private equity was able to intermediate assets that banks were no longer economically able to process. But also demand from end investors looking for yield. And so private equity surged. These days, people talk about it in its purest sense, maybe $1.6 trillion of assets, but more broadly defulled, over $3 trillion of assets, a lot of which has grown since 2008. When we think about this, split off parallel track with the traditional finance industry, is it right or wrong to think about the traditional banks and the private space, especially within private lending and private credit? Competitors, collaborators, how do we think about the tracks that these each run on? Yeah, I mean, yeah, what the word often uses frenemies, they are both competitors and collaborators. So private credit, private equity too, the private credit couldn't really exist independently of the regulated banking sector. Private credit relies on additional leverage increasingly so provided by the banks. So the banks talk about and many of the banks are actually now set up their own private credit vehicles on the basis that customers should be able to choose between cheaper bank loan or the certainty, the appeal to a company of private credit is it can be underwritten more quickly in size compared with the traditional process or banks indication. So a company may choose to pay a slightly higher spread for the certainty of private credit. And so JP Morgan, for example, issues private credit directly of its own ballot sheet, but they also lend to private credit companies. JP Morgan itself has spoken about 160 billion dollars of lending to private credit type vehicles of its own ballot sheet. And overall, the banking sector loans to private credit more broadly non-depository financial institutions is what they would call them has grown like fivefold since only past 10 years, kind of 16% per annum over the past 10 years. So banks underpin some of the lending that goes on in private credit. And you mentioned right at front, you know, the Fed's not worried about the redemption risks. Other regulators are worried about this risk. So recently, deputy governor of the Bank of England talked about the risk of leverage. She calls it the the "neya cake" that you've got private credit, which is they've got companies. In some cases, it's a there are three layers here. There's a company that's making loans. There's private credit lending to that company. And then there's banks lending to the private credit vehicle. Now in most cases, there's just two layers, but in some cases, public credit lends to the to the non-bank financial intermediary system itself, in which case you get three layers of credit. So Sarah Breeden, who's the deputy governor of the Bank of England, she is concerned about this risk of leverage. You know, one thing we learned from the financial crisis back in 2008, 2009 is that the biggest source of risk is emanates from the place what way you're not looking. So it's important to look at. Were you not monitoring and often credit can be made more opaque, often intentionally through these kinds of layer cake structures. Apart from just the traditional finance industry, we also have insurance on the margin here too. And you've been putting it pointing this out. So like not just the banks, the insurance companies, and what their relationship is back to private credit. You explained what that is, why this is of interest. And I should say before I come to that, I should say just on the prior point that there was a case really recently, which has blown this kind of layer cake structure out into the open, which is HSBC, one of the largest banks in the world, announced
with its earnings, with its first quarter earnings, it was taking a 400 million up-pound charge of because of exposure to a private credit company called Appless owned by Apollo used to be owned by CreditSwiss, which in turn was making loans to a company called MFS, which did mortgage loans, kind of non-standardized mortgage loans, largely in the UK. Now, the awesome fraud here, and the proprietor of MFS is being investigated on allegations of double pledging his collateral, but that flowed all the way back through MFS into HSBC. HSBC thought that they were being protected by two things. They were being protected, worn by a high loan to value. Ratio, in their case, they were lending it, 80% loan to value, which actually wasn't high enough. In most cases, they were going to back leverage bank lending to private credit vehicles. They're doing it at maybe 75% of its first loan, 60%, 65% of its more junior. And they also thought they were getting the benefit of diversification. Again, a lot of finance comes back to some basic actions, some little risk management comes back to some basic rules. Don't grow too quickly. Don't fight the last battle. Look for the risk where no one else is looking. That was something we just mentioned. But another one is diversification. And don't assume that there's no correlation. HSBC thought it was getting a lot of diversification benefits, but actually, HATLAS, and BNN to HSBC, allegedly, was overexposed to MFS and had a very large exposure to that one. One credit and ultimately that one risk. There was concentration risk there as well. So that's just, sorry, going back to the prior question. This is so important because, and I'm glad you brought this in there because I was going to bring this up later too. This is the interconnectedness of this, like this layer cake is really across the entire financial sector. And it's really important to understand what this is because this people are building for folios or thinking about their own layers of diversification. If you're not already thinking about the interconnectedness, or connectedness here, it creates other problems later. So take me to insurance because this is another spot where people probably aren't thinking about what the connection is between insurance company financials and the rest of the financial sector with this common thread in private credit. Yeah, insurance is interesting. Now, there's nothing new about insurance taking credit risk. In fact, going back 100 years to the 1920s and 1930s, a lot of the commercial real estate lending activities that occurred in the United States were supported by large insurance companies. Life insurance companies specifically, which had long-term liabilities, that were able to match into long-term assets and a commercial real estate project would exactly fit that bill. There's nothing unusual about it. Again, another feature, all post-crisis 2008/2009, is that Apollo was really the pioneer here. They went looking for long-term assets. There was a fallout in the fixed annuity market. They started picking up exposure to fixed annuities. Through acquisition, they ceded their own company called Athene. Athene then grew through further acquisitions. They did it in Europe as well as in the US through another company. They've continued to grow. Apollo is now one of the largest annuity providers in the US, if not in the world, out of Japan. The company argues that those liabilities are well matched for its traditional business-cut model of finding long-term private assets. There's a lot of baritone that. What has happened more recently, though, is the lines of the current evolution to this line has begun to blur. A lot of the insurance companies, traditionally insurance companies, are not essentially regulated as banks in the US and insurance companies are regulated on a state-by-state basis. There's some competitiveness there. In addition, a lot of insurance is conducted outside out of Kamuda or the Cayman, where there are different regulatory structures still. There are a number of late risks that have emerged. One of which is that. Some of these have been identified by regulators. The Bank of England has flagged this up. The IMF has flagged this up. The Financial Stability Board has flagged this up. But increasingly, it's not clear and we call our run on an insurance company. But increasingly, which is the defense that's often put up by the private credit providers, after Silicon Valley bank. Suffer to run in 2023. A pollo rushed out a presentation to investors identifying the fundamental differences between its business model and that of a traditional bank. That's all fine. But again, if something grows very, very quickly, questions will be raised. And these insurance assets have accumulated very quickly. And so, questions are being raised. In addition, around overlap between the origination side of the business and the distribution side of the business, that is conducted through the insurance. So, in many cases, insurance companies will end up owning assets that have been originated by their private credit owner. And that can raise questions around incentives. Because you've got multiple stakeholders here. You've got the insurance policy holder. You've got the insurance company. You've got the private credit originator. In some cases, they're also doing private equity. So, maybe credit is being issued out of companies that all private equity portfolio companies themselves owned by the same or raw to market by the same firm. In many cases, you've got cross-shallings between all of these entities. You've got, you know, and again, I go back to history when looking at investment banks and potential couplets. And so, a lot of these potential couplets are currently under scrutiny by regulators. And it is a source of latent risk. Inside of this, how much do we think about how much it's grown in the last couple of years versus how much it grew post financial crisis? Because it seems like it's not just the three-layer cake. Yeah. This is a whole web. And it's pretty dense. And it's not a lot of people understand. It hence the regulatory interest. But then there's also the explosion in the amount of assets that are in this space. How much do we think about how quickly it's evolved in the last even just a few years versus what it was in say 2015? Yeah, that's exactly right. So, we've seen an acceleration in the rate of growth. Growth from 2009 to maybe 2020 was contained. A lot of that was due to low interest rates. We've had lower interest rates since 2022. We actually, I talked about Silicon Valley Bank. We haven't, I think, had you known in 2020 that rates would still be where they are currently? I think. And increased at the speed that they did back in 2022. I think.
commentators might have thought more things would have broken. The Silicon Valley bank, and we've seen a few cop roaches, mostly related to fraud, might first brands, like MFS, which I've just mentioned. But we haven't seen that much break yet. And that's a big question, Mark. And we've seen an acceleration in the rate of growth, since maybe 2020. We saw massive flood of liquidity hit the market in 2020, which has had a whole range of consequences, many of which were still working through. But we have mitigating factors, economic growth. We've had mitigating factors. We haven't seen a credit cycle. We can come on and talk about some of the US banks, first quarter results, and what they reflect of the credit cycle. We're going on now 15, 16 years since 2000. Credit losses actually peaked. There was a lag between market discounting of a credit cycle. And the peak in losses, losses peaked in 2010. The market fully discounted that in 2009. But losses peaked in 2010. So we're going on now 16 years. This is a low credit cycle. I didn't recall actually that kind of elongated period. Prior to that, where we did have any kind of credit cycle. But it's being mitigated. It was mitigated. First, final interest rates. Then by liquidity that hit the market in 2020. Now by-- there's a kind of an AI boom. Various other factors as well. But yeah, it's building up. It's building up a Louis Blank falling who navigated Goldman Sachs, the CEO, through the crisis, exceptionally well. He was on the road recently marketing his memoir, which is the useful book to read. And he talks about-- he quits the godfather. He talks about the mattresses. And he says he quits. He says when Michael Cullioni is being explained to him, this content of the mattress is that has to happen every five years just to draw out the bad blood. And we haven't seen that in credit markets. And that in and of itself presents a reason. Kind of fascinating. And it goes with the going to the mattresses thing and completely avoids the forest fire and us until everything. Yeah. The stuff they've learned not to say. Right. What's next? Good pun. You brought up banks and bank earnings. And I think this is part of where it's interesting to hear your brain on this. Looking at specifically at bank stocks and their earnings. They have to address all this stuff because it's just enough in the headlines. But they also are doing the normal earnings pony show and pointing at what's good and what's working and what's the not event. What's your read? We're recording this May of 2026. So obviously nothing has broken yet. Officially. What's your read on bank earnings? What they're saying? How they're describing this? What people might want to look closer at with any banks they hold? So they all on their recent hoodie shows talked about this dichotomy between consumer confidence, which is at an all time left. Michigan surveys are reflecting levels of consumer confidence below anything we've seen and who they've been surveying since the 75 years they've been doing it. Below global financial crisis which we've spoken about. Below all of the shocks of the 1980s below even the COVID period. It's unclear why that is. You know the UK we talked about a cost of living crisis that's been going on since 2021. There are inflationary pressures in the US and elsewhere even when inflation has come down the rate of inflation has come down. Crisis inevitably have been have been sticky. And so maybe that just deflates consumer confidence. You would think and historically there was a pretty correlation here that would have an impact on consumer spending and on consumer delicacies and it hasn't. You know and all of the CEOs of the banks addressed this point on their calls. People talking about Jamie Diamond. He is a great one to quote but Bill Demchek who is the CEO of PNC. Is used to work that Jamie Diamond. He's he's a great one to quote. He's you know if you're looking for. Be looking for people in the industry with their figure on their pulse. Kind of worth just listening to everything they say. Mark Rowan at Apollo is one. Jamie Diamond is one. Because everyone else listens to him. But Bill Demchek is another. And he said you know when he looks through the spending patterns, growth and savings, activity levels, loan growth, everything he sees in his day to day business. It's almost a complete odds with the surveys he's seeing on confidence. So there is a dichotomy there. Icon explain it. They can explain it. Bank of America is now so large that they really do have a window into the economy. You know it's customer spend full point for $1 trillion a year through wire transfers, credit cards, debit cards, all of their other payments mechanisms. They see everything. You know I'm now seeing spending up 5% year on year, which has come with the same as it has been for the past few years. They're seeing the same delinquencies, point low, they're not seeing an uptake into linkancies. Have it is kind of looking okay. And that's trying to corporate side as well, outside of some of the fraud related events like NFS, which I just be see something from that we spoke about. Talk for just a minute more about Bill Demchek. And just leaders in their ability to communicate these, those things. Because I think what's interesting about what you pointed out with him is acknowledging the dichotomy. And I know we're seeing this from a number of people too. But when you see a leader both acknowledging and commenting on a dichotomy that they don't understand, what signal is that giving you? Maybe with the old portfolio manager had on, but just in general, you've been looking at this space so long. That's a good question. You know what they say? I don't know. That's always well-fledged to me. Because they're trained not to say I don't know. JPMT is very good at that. They. Um. And the flip side, those people, these people are not. You know, I remember when a bunch of them were hauled up in front of the banking committee on the hill in DC in 2008, 2009. And they were addressed as being, you know, captains of the industry, masters of the universe. That cease to be the case a long time ago. They don't have the credibility anymore that they used to. Um. The tech CEOs do. Um, they'd be the banking CEOs and be used to them by the tech CEOs. And I think one of the problems is, you know, one of the things I like looking at as an analyst is the post-mortem reports after a crisis. You know, you pull down. When the newspapers are no longer talking about Silicon Valley Bank, you know, in kind of December of 2023, it was old news. And then the Fed and the FDIC, they put out a post-mortem report. Um, when credit Swiss put out a post-mortem report after it suffered huge losses on Oceagos. These things are worth reading because they tell you and they're written objectively, often with, um, through third party council. They tell you what's going on below the hood. And they skip the shit out of me because what they, what they show you is that what you thought you knew at the time, you knew nothing. That I went. What was going on under the hood that Silicon Valley Bank at the end of 22 and going into January of February 23 when the stock was trading at a premium to if tangenable value when in every analyst on the street was recommending it as a buy. And it was, you know, held up as a poster child for how growth can look in the financial system and the financial systems play on the innovation economy. They were subjects to a number of reviews by. There's a funny thing. So actually this is quite interesting because I don't know how well known this is. So, you know, the concept of the inside of the information is very well understood.
financial markets and the SEC pleases it very strictly. But makes an exemption in the banking system uniquely for confidential supervisory information CSI where the Federal Reserve or any of the supervisory bodies, any of the regulators might be insinied a bank asking questions probing and that's known to the board. It certainly knows the executives, but they cannot make that public. And so it supersedes the CSU requirement around insider information and market abuse and revealing information that is put into stock prices. And that was going on. Silicon Valley Bank, the beginning of 2023, they were subject to a number of reviews, nobody knew about it, not least the analysts who were rating it a buy, not least the investors who were valuing it and a premium to tandem with what value. And when you learn about this after the fact, as I say, it scares the shit out of you, because you say one else don't you know, what don't I know today about what's going on inside J. B. Morgan, what's going on inside even PNC. Now, when you have CEOs that convey credibility and both of those do, you could you can make peace with that. But in many cases, that's not the case. And it's actually why the bank executive trades are discount to the market on a price-earning basis. Let's switch lanes for a minute. I want to talk about this idea of what you've wrote about Revolut, did I say it right? We all have Revolut analysis. So this quest to build the world's first truly global bank, which I think is a both fascinating concept and fascinating for to hear somebody like you unpack and maybe start start stuff here. Take me back to when the visa executive told the angel investor not to back them. It's good story, right? So start there. Yeah, there's great storage. So I was sitting in a room with a venture capitalist. Actually more an angel investor didn't have institutional money behind him. He wrote checks for his personal account. And we were, I could have background in financial services. I'm interested in financial technology. We were talking about some of the FinTech plays that he was currently backing. And he introduced me to this company called Revenue founded by Russian immigrant to Lutton. He previously traded derivatives at Lehman Brothers and Krelis Whiss. And he'd gone off in 2013 to found a new company which he launched in 2015 called Revenue, which promised to which provided travelers with a prepaid debit code that they could travel with. Are in order to spend in local currency without getting slammed or foreign exchange fees the way MX and all the traditional credit called companies were at the time but still to an extent charging them. So he introduced me to this thing. He kind of opened up his laptop. He showed me the management view of the dashboard which was showing number of users, frequency of use, growth, everything was going in the right direction. But he shared, it's quite an interesting story this because it kind of reflects the the prevalence of gut over analytics in finance. He said as Polish due diligence, he called a contact of his very very senior executive at visa in Europe to ask him what he thought. And the visa executive was highly dismissive. You know, well, it's kind of a small segment of the overall credit card, Ladsgate, banks or credit con issuers, they could eradicate this business just by changing their pricing overnight. Don't invest it, it won't work. I did gut prevailed and he invested it anyway. He put in tens of thousands of dollars that investment today, $2.5 billion. Now, I don't know, I mean, there are some angel investments which come close. Paul Graham, a wise, wise coordinator, has made many, you know, in stride, in open AI and various others. But he's hatched to be out there. And so, and as they, the company is now worth, this is revenue. They've now got 70 million customers that don't just do credit card spending for tourists. They are, they've got ambitions to be a super app. And they compete with banks in multiple markets. And they are, they've received funding from soft bank, tiger, all the large VC, I have been crossing the funds. They're looking for an IPO. I mean, I don't know if it's going to be 2007. They've talked about maybe 20, 28. The number out there is 200 billion. And that's largely because the CEO in a kind of Tesla type of practice gets incentivized for hitting that valuation, 200 billion dollars. But look, you know, SpaceX can IPR 1.75 trillion. Then, I don't know, evaluations. Land anymore. So, yeah, that's it. It's a little bit disingenuous that they say, as per your intro, then they want to be the world's first global bank city, tried it and failed HSBC, tried it and failed, but revenue to level cost model. So, maybe they can succeed. It's just so interesting to me. The I'm calling it diversity, not to put on the diversification hat on this, but it's interesting inside of the sector. It's that you can have a business growing like this. And I don't think it's a household name. I don't think everybody knows what this is unless you have either friends who travel a lot or especially international travelers who have been exposed to this story. Everyone in Ireland knows it. They have a 75% share of Irish adults. And that's largely, it was a very concentrated market. One of the features post financial crisis in Ireland is that five, six banks became two and revenue moved into that to provide an alternative provider of financial services to Irish consumers. You're right. The core point is absolutely right. Another place I want to take you to while we start from time. Actually, I should say as well, this is also interesting. You know, we talked about growth and one of my kind of axioms of financial analysis is that growth is bad in fads. Either because on the asset side, you are giving away credit to cheaply or and this was a case of Silicon Valley bank because even if you're growing on the liability side, you still got it back with assets and any form of asset growth at scale will are now in some bad apples or some deterioration because underwriting takes time and can't often be done at scale. And revenue was, revenue fell victim to that as well. So revenue wasn't classified as a bank, wasn't nice as a bank. I grew very quickly, ran into some problems around its audit and around its systems. And then when it wanted to become a bank was so large that the Bank of England, which would be its primary regulator and never in its history, we passed to license and I think that large. And so it took years to a long, long time and revenue had to rebalance between growth at all costs. You know, can move fast and break things, the tech mindset, the more prudent banking mindset, which is, you know, shit, we need to invest less in marketing and more in compliance and operations. And so that's what they did in the talk time, two times we adjust. So another place I want to take you to, the Golden Age of Arbitrage, this idea, and I know we've brought a Jane Street, you've written about them Glen Corrieve, talked about lots of these different businesses that operate in these interesting places, explain what the Golden Age of Arbitrage is, what this concept is to you. Yeah, so I picked it up often FT or PED piece, where the author was talking about commodities principally.
and that in a environment of geopolitical fragmentation in a world which is becoming more multipolar. The price of an asset locally is not necessarily consistent with why it might trade globally. And this was the case historically, you know, historically financial markets were created to and created a lot of profits for those that were able to exploit differences between price of gold in New York State and the price of gold in London. And a lot of information technology was to the benefit of all financial services. You know that, you know, Reuters originally distributed news through carry-opidians. You know, historically the advantage of being able to convey information quickly through carry-opidians, through telegraph, through the telephone, through the internet, through microwaves between Chicago and New York, which is fueled the race to lay down that infrastructure was fueled by latency or bedrage in high frequency trading. So a lot of the progress we've made in information technology, we can be grateful for the financial system for funding initially or for finding the killer act for the first use cases for historically. That's what that's always been the case. And the oil pen was talking about in an oil very specifically being in the context of the closure of the straight of hormones, very different rates for a barrel of oil, galoverly at the moment. And it comes to me, you also see this in the dichotomy between private assets and public assets. That public assets are now all but large to be mitigated very quickly. Private assets don't, we will be spoke before, for example, about business development corporations. Now you could argue, we didn't talk about this at the time, that one of the reasons for the increase in redemptions at blow out is because on the screen, it trades in the asset value. But on another screen, you can buy a publicly traded business development company for 20% discount in that asset value. So why wouldn't you redeem one the private asset and buy public asset to lock in all else being equal that 20% gap? And as private expands, you'll see more of that. So I don't know if it's a golden age or such, but you're seeing more opportunities for arbitrage. And that's reflected to in the earnings of those that started off at least as arbitroges like Jane Street, but increasingly, I think what you see in this is true in history as well, is that you know, one of the things that invest the banks in 2008 is they can almost outgrew their footprint. They optimized for how much they could pay their employees. And as compensation expectations rose each year, beyond that which the industry could contain, they had to increase leverage, find new product sources in order to meet that compensation requirement. And I haven't written this up yet, but arguably you've seen some of that Jane Street, that Jane Street employees have outgrown the market that pure arbitrage can sustain. And in order to meet, because you know, think about finances, people, they want this was certainly true to investment banks, you know, your number every year, your bonus every year was a function of two things. Whatever announcement the industry was getting paid, it was also what you paid last year. And was this expectation that there would be a escalator or earnings that would go over time? And if arbitrage in its pure centers, no no no no, it was a state net, then you got to move the envelope. And that means taking more risk. That means that means no more zero risk trades. Lord Blankflinger spoke about him earlier, talks about in his book, he talks about J. Aron, which is the gold arbitrage company he used to work for that was bought by Goldman Sachs. And he talks about this, he talks about how the founder or J. Aron and his son didn't want to take any quality risk whatsoever. But over time, there was some leakage and the company and the investment banks subsequently and Jane Street today, more leakage taking on more the proprietary trading risk. Could be over seconds, could be over minutes, could be over days, actually in any case, it's now over years because they're actually making venture capital investments alongside the traditional arbitrage activities that they did. It's amazing to think about these things like as they scale up and how that scale in that growth, like you said before, growth can be a negative word that be gets the fragility when we get away from these core businesses. Yep. Let's go out on what's one thing about the state of banking right now that you think is most misunderstood. So think about your peers, think about how they talk about the space. What do you think is the least understood or the most un-miss understood part of the finance sector today? As I can broadly, it's fine. I think there's a playbook. I think people are still obsessed by the '08 '09 playbook. And every time there's a wobble in markets, people pull down that playbook, they sell the backs. And it's frustrating to like to build them, Jamie Diamond, who we've spoken about. Probably you need a generation to, you need people, you, we can't get in there, right? You need nobody in finance to any more. Remember 2008, 2009, not to reach for that playbook anymore. Get it, we're actually getting that. It's not time to go. And I mean, I would hazard that majority, more than 50% or people, you know, I would be fairly confident. More than 50% of people working at finance today were not around, were not beyond college in '08, 2009. So you need a generation, you turn over a generation, no longer to remember. I think, and I think it's frustrating for them because I think they think maybe COVID was the proof. They think that Silicon Valley was the proof. But we haven't had a recession. We spoke about this before. We haven't had a credit cycle. So they need that as the proof. So that's kind of misunderstood. But there is risk in the system. You know, I'd be worried about, I'd be worried about government bonds. I think there's a lot of, to a degree, yeah, I'd be worried about government bonds and some of the risk that's building up there, the margin of bars of government bonds today or some of these non-bank financial institutions, something regulators and policymakers looking at. So it is all risked out there, but they're not necessarily on banks, balance sheets. One more. With the dust off the old fund manager hat and think this way, if you were still in a long short position managing a fund or being part of a fund that ran like a long short strategy right now, do you think how would you be looking at this market here, part way through 2026? How would you be thinking about financials? And I'm thinking about this for, if you're an allocator, if you're an advisor, if you're somebody else watching at home, you're doing the portfolio yourself, like what would a long short manager think about the finance sector right now, where they'd want exposure, where they'd be like, I'm betting on the other direction and not even involved. The market overlord is diffusing, right? I'm people I speak to. A gate, you know, a tide or bad news. This will quite well rehearse, but I gave the time to bad news at the market just a power ahead and many explain it away.
through market structure, role of passive, for example, more retail investors. Obviously AI has a huge influence on market internals right now and allocations. So it's just really confusing. Against that, financials become kind of questionable. So against that, financials, they never save haven because that playbook is still there to be pulled down. And Europe, Europe in particular, I would say, Europe, we've seen this huge divergence between US and Europe over many years. Like a lot of trends, so many trends have accelerated over the past few years. We spoke about this in the context of private credit growth, but just the AI trade, US and US is Europe. Anything that was totally along in a linear fashion on a chart has just tipped up over the past couple of years. And US versus Europe is another example of that. And Europe's North Banners, people think we've spoken about revenue, probably that are listening to US, doesn't really matter where they're list. Deep mind is a UK company listed in the US inside of Google alphabet. We talked about Jane Street, one of its largest competitors lies under the radar company called XTX, which is London based. Level is another, all is another could be one of the biggest beneficiaries of a change. I mean, it again traded in the US could be a beneficiary of changing free float rules that NASDAQ is introducing for its indices recently. So a lot of innovation in Europe is not that bad. And so yeah, I would say long show Europe versus the US, financials versus the market. Mark, you're still one of my favorite minds in this space. This just confirms it further. Where should we send people to bug you on the internet? I write a weekly subset, cool net interest best place to find me and you can communicate directly with me is through that net interest.com. Make sure you check it out. Even if you're not directly investing in financial names or you feel removed from the space really, you don't have to be as concerned with it. Mark is the source of information for how the plumbing in this works. And then now to think about both public and private securities in this space, he'll always learn something even if it's tracking the evolution of Apple between anyone getting into today in the payment system and whatnot. You'll learn more about the markets through this lens than you will in most other places. Thank you so much for coming on excess of transport. Mark. Thank you. Matt, I really appreciate it. Like, comment, subscribe, all the things below and we are out. Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the excess returns network at excessforturnspod.com. If you have any feedback or questions, you can contact us at
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