Systemic Risks in the Banking Sector

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Once upon a dismal day, Bob's ice cream van looked gloomy and gray. Although he had big ambitions, his socials lacked creative vision. That bad. Maybe vampid epitaph? I have an idea. Bob launched Canva and got into gear. Create the video in the vampire team and make it the funniest amen. It went viral. Bob's business, I revive all. Now imagine what your dreams can become when you put imagination to work at canva..com Today's number 77. That's how many people are in Ireland's Navy Reserve, one of the smallest in the world. Here's an Irish joke. What's the difference between an Irish wedding and an Irish funeral. One less drunk. If money is evil, then that building is hell. Show those up! Welcome to Prof G Markets. I'm Ed Elson. It is March 26th. Let's check in on yesterday's market vit als. The major indices swung through the day but ended the session in the green, oil declined, treasury yields fell, and finally Meta and Google shares were little changed after the companies were found liable of negligence in the social media addiction tri al. Okay, what else is happen ing? The Iran war is shining a spotlight on insider trading, and Washington may be at the center of it. On Monday morning, roughly one and a half billion dollars in SP futures were purchased, and $192 million in oil futures were sold. That was five minutes before President Trump announced that productive conversations with Tehran were underway. The position netted $60 million minutes after the truth. Social Post, Senator Chris Murphy called it, quote, mind-blowing corruption, and asked publicly whether Trump, a family member or a White House staffer, was behind the trade. Meanwhile, the FT separately flagged $580 million in crude oil futures that traded 14 minutes before the announcement. Okay, here to help us untangle what is going on here. We're speaking with Anthony Scaramucci, the founder and managing partner of Skybridge Capital. Anthony, thank you for joining us. Please, I know you have thoughts. Well it's first of all it's great, it's great to be on so but I want to add to that if you don't mind. So April 2nd, 2025, Liberation Day. They put trades on that got short the market prior to the announcement. You know, when Trump came down from Mount Evil like Orange Moses with the big tablets. Okay. They got short the market prior to that divul divulgement. A week later, prior to Trump saying he's pulling back the tariffs, there was going to be a 90-day moratorium, they got long the market. Okay, on October the 10th, about an hour before the tweet went out related to the rare earth minerals and the fight that he was starting with China, they got short the market, they got short the crypto market. So this is another example of it, but it's been very consistent throughout the administration. Tens of millions, if not hundreds of millions of dollars are being made. And, you know, so much so that the head of the enforcement area that's supposed to police this stuff, she resigned last week because she said she can't get the agency focus on this. Now we sent Martha Stewart and so you're young yet I. think you know who she is. I watched the documentary, so I know for your younger viewers, uh, she had forty-five thousand dollars of profits that she had a disgorge, and she spent five months in a pre federal prison because they caught her quote unquote insider trading. This is hundreds of millions of dollars. Okay, but there's a bigger problem here for the American people, uh, and that is this is rampant. Trump has taken it exponential with his team. Uh but do you know who a r a Democratic representative is, Kelly Morrison? So Kelly Morrison bought Saronic Technologies, a name I didn't know, but she bought seronicnolog Teiesch, which is an autonomous warship company, nine days after the beginning of the war with Iran, right as the Navy was awarding Saronic contracts. Her office said that her portfolio is managed by a blind trust and an investment manager, and she had no prior knowledge. But government watchdogs said, hey, whoa, this is a pretty clear conflict of interest. So what I I'm here to tell your viewers and listeners, Trump has gone exponential, but Nancy Pelosi, she's traded her account better than any hedge fund manager that I've ever met in my life, myself included. You picked the biggest edge fund managers. Uh, but it's not just her, it's bipartisan. Okay, so they're running rampant in Washington with the corruption. As an American, I'm embarrassed by it. As an American, I would like it to stop. The insider trading at the Congress level is legal. The insider trading at the Trump level is probably not legal because it's not Trump himself doing it, but it's people close to him that are actually doing it. And that probably makes it illegal. So so here's two things I would say very quickly. Thing number one, if you're a young kid, if you're the younger version of me, growing up in the 1970s, Professor Galloway, growing up in the 1970s, we had hope on our side and aspiration. I'm not saying there wasn't corruption, Ed, in the country, but it was veiled. It wasn't this big. It wasn't this dramatic. And when you have corruption like this at this scale, if you're a young kid, if you're a young Scott Galloway, a young Anthony Scaramucci, you're looking up and you're seeing a concrete ceiling. You're saying, okay, oh my God, there's there's a two tiered system, there's one tier for those guys, a different tier for us. We're never gonna make it. And it creates a tremendous amount of cynicism in a society. So I'm heartbroken by it. Uh and but nothing's gonna happen. And they're gonna they're gonna make some more tweets and trade the oil markets. You know, somebody got short oil before the president's announcement yesterday, where he said we're getting this big gift from uh Iran. And it turned out I guess one of the Thai tankers was able to pass through the Straight of Hormuz as a sign of good faith, which was uh I I'm so glad you mentioned all of the previous instances that this has happened because it seems that everyone is focused on look at the insider trading as it relates to Iran. And then my mind goes back to yes, exactly, Liberation Day, when we seemed to see the same thing. Then the post-Liberation Day taco. Uh, we've seen this constantly over and over again. As you say, it's happened on both sides, but the level with which it has been uh I guess shameless. The fact that they don't seem to care at all. The fact that the the the kids are investing in these drone companies as well before we go and launch these attacks on Iran. Combined with the fact, as you also mentioned, you made all the points that I that I hoped you would make, which is the SEC director has left because she tried to investigate this stuff and she got scolded by her bosses. And we saw similar things with uh with the DOJ as well. And so I guess the question becomes: I mean, how bad has this gotten? And do you think that people are properly recognizing this? Because I see what's happening. This is like the greatest corruption we've ever seen, or at least that I'm I'm aware of. That to me is like it i's a cut above uh just regular political gripes. This seems to me like this is a serious issue that I don't know, that people need to at least vote on or at least consider voting on. So the woman that you're referring to is her name is Margaret Ryan. Okay, she was just with with the SEC for many years. Uh and she basically resigned under protest uh because she said that she cannot get any enforcement of any of these actions. And by the way, these are easy to tag and these are easy to deo geo center the tag So it I think that's reprehensible. But I want to take you back because you said this is the worst corruption ever. We had the Teapot Dome scandal, unbelievable corruption, but those people got prosecuted. That was at the turn of the century, the 1800s into the 1900s. We had the ABBSCAM case when I was in high school. This is back in the nineteen eighties, where two congressmen were caught on a bribe, okay, where the FBI had a wire on them and they got caught saying, Oh yeah, give us that money and we'll change our position on this policy inside the inside the government. And they got caught. So the point I'm making, we have corruption in the country. We have political corruption, banking corruption, all sorts of corruption. But attached to that corruption was some level of law enforcement and some level of justice. I'm not saying it's perfect, but at least there was a supposition in the countries, oh wow, do something wrong like that, that bald face, there will be repercussions. And that repercussion, Ed, creates a deterrent for people. Yeah. Do you see what I mean? Like I'm gonna I'm gonna be speaking at the 90 second Y with a guy who uh wore got caught insider trading. He wore a wire for the federal government and he stopped a huge insider trading ring in the two thousand six, seven, and eight time period on Wall Street. That stuff is over. Okay, and so it makes the markets unfair. It makes the pricing in the market manipulative, and it's giving a license to these people to do what they want. Yeah. And and you know, look, the flip side is, you know, the congressmen are gonna say you're paying me $180,000 a year, I can't afford to live, and so I'm going to enrich myself by doing this. And the I want to make this last point because I need your listeners to hear this. We have this thing called Citizens United, which means people can give unlimited donations to the congressman, right? All political candidates, all policies, unlimited donations. So here's what's going on. The Congress has a 14% approval rating. It's slightly above Kim El Jong, the North Korean dictator. However, the individual congressman has a 95% incumbent rate. So their narrative to their people is who cares, man? I'm going to do whatever the hell I want. The money's coming in from big food, big pharma, big business, big wealthy. I'm going to get re-elected. And so what are we trading today? What information am I going to get? You know how many times a congressman has bought defense stocks the day before, two days before the contract is announced that the appropriations is going to that defense contractor? I mean, it is staggering, and it is sad, and it is tragic, and it's very unfair to the American people. Aaron Powell My my question to you before we let you go, I mean, you you're in the politics game, or at least you're a political commentator, you have been in politics. Um I mean, this to me seems like it could be the issue going into the midterms and perhaps for the presidential election as well, that I mean, you there are certain issues that are political issues. There are certain things that are cultural. There are issues with DEI. There are, you know, some people believe that tariffs are a good idea. Some people think it's a bad idea. But this issue seems to be so brazen and so criminal that it makes me believe that this is probably going to be the ultimate issue. And that is the issue of corruption and insider trading and profiting off of being elected into a position of power. As someone who's, you know, in politics, do you think that that will transpire? So I don't. And it should, but I don't. Let me tell you, let me give a quick history. Peter Schweitzer wrote about this insider trading stuff in 2012. Sixty minutes did a big story on it. And the Congress said, Oh, we're going to pass something called the 2012 Stock Act, which prohibited the use of non-public information for trading. And so there was an eight-month period of time where the Congress was handcuffed and they couldn't trade. Then by voice vote, at they didn't want to go out of the floor because they didn't be seen on C SPAN. By voice vote, they called in and said, Let's put it back in. Wow. Okay, we're gonna vote on putting it back in. Yes, we're voting and putting it back in. So now fast forward, it's fourteen years later. And the last fourteen years they've been running this racket. So Chris Murphy, you mentioned him earlier in the program, he's a senator from Connecticut. He's trying to come up with something now that's called the No Bets Act. Okay. And he's basically trying to say if uh we can stop the prediction markets, make it illegal to bet on assassination And by the way, if it does pass for political purposes leading into the midterms, as soon as the midterms are over it, they're gonna vote back to get it put put it back on. I'm just telling what these guys do. This is why people don't like them. Exactly. It's very it's very depressing. We could talk about it for hours, but I've got to let you go. Anthony Scaramucci, founder and managing partner of Skybridge Capital. Anthony, always appreciate it. Thank you. Thank you. Real pleasure to always be on with you, man. Thank you . After the break, alarm bells sound off in private credit. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia. com. Support for the show comes from factor. Eating healthy requires time, effort, and commitment. The problem? You don't have any of that. So what do you do? Starve? No? 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Make healthier eating easier with fac tor. This is advertiser content brought to you by Virgin Atlanta again. A couple weeks back. I got you a birthday gift, not to pat myself on the back, but it was a pretty good one. It was indeed. You surprised me with Virgin Atlantic upper-class tickets to London. So uh tell us all about it. It was pretty incredible. From the moment I exited that upper class cabin, I have to tell you, I felt like a VIP. Anything I needed, a drink, snack, assistance with the seats. Flat seats. Flat seats. That's the case. Flat seats. Exactly. Had the four-course meal, got my champagne, very delicious, enjoyed the food. And the journey home? The journey home was great. I went to the Virgin Atlantic LHR Clubhouse. That's the Heathrow Clubhouse. Heathrow Clubhouse was awesome. Got myself a coffee, headed over to the meditation pod that they call the soma dome. Kind of felt like a sort of spaceship where you relax and and uh think think nice thoughts. So I did that for a little bit. Then we went over to the wing, which are these acoustically sealed booths where you could do some work uh you could even record a podcast I didn't do that but maybe I should have it was a very enjoyable experience. So Ed the real question here is what are you planning to get me for my birth day? See the world differently with Virgin Atlantic. Flying should be more than just transport. It is part of the adventure. Go to VirginAtlantic.com to learn more. Tickets and lounge access provided by Virgin Atlanti c. It's the family and friends event at Shoppers Drug Mart. Get 20% off almost all regular priced merchandise. Two days only. Tuesday, March 31st and Wednesday, April 1st. Open your PC Optimum app to get your coupon . We're back with ProfG Markets. Private credit is in crisis and investors are rushing for the exits. Aries Management and Apollo both capped withdrawals at 5% this week after redemption requests came in at more than 11%. That means investors got back less than half of what they asked for. Meanwhile, Moody's downgraded a fund run by KKR and a future standard to junk status on Monday, saying the fund's asset quality had worsened more than its peers. The latest wave of fear wiped out more than $10 billion in market cap from Aries, Apollo, Blackstone, and KKR on Tuesday, and here to tell us what is going on here, what is driving this turmoil in the private credit market. We are speaking with Steve Eisman, the legendary big short investor, also host of the real Eisman Playbook. Steve, thank you very much for joining us again on ProfT Markets. We wanted to have you on to talk about this because you were the guy who was telling us about this just a few weeks ago, uh, when we had you on that Friday episode, and things seem to have gotten uh even worse. So just remind us what is happening in the private credit markets and what we've learned here. So the you know, the funny thing is that uh for my podcast, uh I do this weekly ra p that I put out every Friday, and every week for the last probably two months, I'm speaking about private credit, and I just am using for your viewers, you know, I start writing the rap when I wake up Monday, and I do work every single day. And so for the last several weeks, the way it's been right written and it goes, and then there was some more bad news about private credit on Monday, blah, blah, blah. And then I wake up Tuesday and then I add a paragraph. And on Tuesday, blah, blah blah. And on Wednesday. And so it's absolutely relentl Yes. So l let me let's take a step back. Um there are two issues here. They're related, but they're not exactly the same. Uh the two issues are um should private credit have been sold to retail? Right. And we're s I I think the answer to that question is mostly no. And we're suffering the ramifications of that right now. And the second issue, which is related, is are we starting a credit cycle in private credit? And how bad is it going to be? So well let me address the first question first and then we'll get to the second question. Because that's every piece of news that you hear is related to that. You know, private credit funds were originally created for institutional m oney. And that makes a lot of sense because you're talking about long-term illiquid loans, and institutions know what they're getting. They're getting a higher yield in exchange for less liquidity, and that's fine. Um after private credit basically sold their funds to every single institution on planet Earth, they looked around and they said, okay, now who do we sell it to? And they said, Let's sell it to reta il. The problem is that with retail, you have to create l liquid ity. So what they did was they created mostly what I like to call the illusion of liquidity or semi-liquidity. Now all this was disclosed. There' nsone of this is illegal. Um, so no one's going to jail for this. You know, this was all disclosed in the prospectuses. Whether the retail investors actually understood what they were getting into, you know, who knows? But no question it was adequately disclosed . All these funds have quarterly cap s in their documents. Most of the funds are have a 5% quarterly redemption cap. Some have seven, but most have five. And so what's been happening is as for the last year the news on private credit has gotten steadily worse and we could talk about, you know, where that's happened. And so the redemption notices are universally coming in now above the 5% cap. And with the exception of Blackstone in the most recent quarter, which did honor a 7.9% redemption notice, even though the cap is 5%. Everybody else has just honored the cap. That's part one. Part two is that we have not had a credit cycle in the United St ates since the great financial crisis. And that has bred a tremendous amount of complacency amongst lenders. And we are overdue for a credit cycle. And traditionally, if you you know if you know anything about lending history, um, whenever there is a credit cycle, the place that it takes place almost one hundred percent of the time is the asset class that grew the most. So in the great financial crisis, the asset class that grew the most was subprime mortgages, and that blew up the most. Since the great financial crisis, the banks have not had much loan growth at all. Um, all the loan growth has really been in private credit. Private credit ten years ago was a 300 billion per year market, and now it's close to a two trillion per year market. So you're starting to see cracks in credit. This KKR fund got downgraded by Moody's. By the way, the rating agencies are always very slow. If if the rating agencies are downgrading it, you know it's that's a real problem. You know it's problem. Because if even the rating agencies admit there's a problem Yes. Um so you have one downgrade of a of a fund, because it's it's non-acruals were too high. I think they were five and a half percent, which is probably the highest in the industry . There's asset back lending, and then call it other . The biggest category is direct lending and then asset back lending. Direct lending, which gets the most press, 80% of that business is basically, private credit lending money to private equity to buy companies. What makes this sort of incestuous is that most private credit funds are run by private equity companies. So in a sense, what you have is private equity raising money in its private credit funds to lend to itself to go buy the companies that it wants to buy. If that sounds circular, it's only because it is. So 80% of private credit is related to that. Now between two thousand and eighteen and two thousand and twenty-two, private equity went on a buying binge of software companies Yep. Now that looked like a great decision because, you know, for the last 30 years, the best place in tech to be was in software. You know, you have the with the SaaS model software as a I think it's called software as a service model where you pay monthly. So everybody loads that because it's so easy to model. Software companies have done exceptionally well as technology has grown, and they want on a buying bench. So apparently, about 25% of all direct lend ing is in software companies that were bought between 2018 and 2022. N ow, those companies were bought when interest rates were considerably lower than they're where they are today. A lot of that happened during COVID. And about 11% of those loans are going to need to be refinanced next year. And another 20% are going to be refined to be refinanced the year after that. And if they are refinanced at all, they're gonna be refinanced at considerably higher interest rates. So that's a problem. And some of them may not be refinanced at all because people are lit literally freaking out about the impact of AI on software. As I'm sure you've told your viewers many, many times, and I've told mine. Yes. So what's hap and then there was a piece of news today that I thought was very interesting, which it was not in the direct lending world, it was in the um assetback world. Um Barclays put out a press release, I don't know if it's a press release or was it a Bloomberg story, probably I think it was a Bloomberg story, that Barclays has dramatically pulled back from making asset back loans to small to medium-sized companies. So it'll only make asset back loans to large corporates. This is what this is what happens at the beginning of a credit cycle. The news gets bad. People start to worry about losses , underwriting standards start to tighten, certain borrowers are cut off, and lending gets tight. Yes. And when that happ ens, more often than not, but not all the time, you go into a recession. Private credit is now big enough, and it is has been the entire growth engine of lending for the last 10 years, that if private credit starts to get very, very tight, that's gonna hurt our economy a lot. So I think that is the big question for uh regular investors, because I mean we we saw what happened when that credit cycle occurred in two thousand eight, people got crushed, it was just t total chaos. And everyone knows about your role in that story. It's not gonna be as bad as that. Yeah, everybody's gotta calm down. I mean we'll we'll talk about that. If if if there's a recession it'll be a recession. It's not gonna be I I I yes feel very strongly it won't be a financial crisis. Which is it which is an important point because that is where the mind goes to. That's where the mind goes because of PTSD. Yes But it does seem I mean when you think about the dynamics here, uh if I could just try to like simplify really what's happening, it's almost like this this big uh a huge amount of leverage was built up on top of these software acquisitions. And now that everyone has decided actually maybe those acquisitions weren't such a good idea, suddenly it means that the lending that was built on top of those acquisitions was an even worse idea. Those could get totally wiped out. And and and the dynamics. Well the equity get the equity gets wiped out first. Yes. So how yeah, and here's the problem with analyzing this. It would be nice to know, you know, what is the average, you know, for the your typical one of these software companies. You know, let's say I'll I'll just make up a number. Let's say 100 million dollars was lent to buy this company. That's the deb t. How much is the equity? Is is there a hundred million in equity? Is there ten million in equity? Uh I don't know. And these companies aren't disclosing it. So, you know, if there's a lot of equity there, then maybe the lenders are protected. Just the equity gets wiped out or real or really or hurt very, very, very badly right um but we don't know because we don't have enough data and in that dynamic what you have is as as we've discussed here these withdrawal uh requirements that are becoming more and more discussed in the news, which has the feeling of a bank run. It's like, oh no, I'm not so confident anymore. I want to take my money out. And the banks say, no, you can't take your money out, which makes people even more more anxious. They want to keep taking the money out. Yes. Which is kind of the problem. And in the case of a regular bank, the people who are trying to take their money out are regular people. Yes. In the case of the private credit markets, it seems that it's mostly not regular people, but also kind of regular people because as you say, they open it up to retail. Well, it's retail. It's people with four or one Ks, it's people with brokerage accounts. It it's not it's not I would say low it's not lower middle class people. Right. It's people with money who are upset that they can't get their money back. I'd be ups I'd be upset too. Yeah. I guess the c the the final question before I let you go here is, you know, if this occurs, if the credit cycle does occur here, uh, how bad would it be? Uh what would that recessionary moment look like and how much better would it be compared to say 2008? Okay. That's actually a very, very important question to address. Um what made 2008 is calamitous as it was was that not only was there a recession, but there was an actual fear that the entire banking system was going to collapse. And then and then when the banking system collapses, that means if you go to the bank, you can't get your money. That that that's that's planet earth burn situation. And that's that's why the government had to step in. Um since the financial crisis, um the I think the federal Reser ve, which is the chief bank regulator of the United States now, that was what happened there from Dodd-Frank, has done a very, very, very good job recapping the banking system and reducing its risks. Not that it has no risks. This industry does have does make loans to these private credit funds. But I would categorically state that the U.S. banking system is better capitalized than it has ever been in history. Hard stop. It's never been even close to this well capitalized. It has never also has never had as much liquidity on its balance sheet as it has today. So I don't worry if there is a recession that there's a banking crisis, leaving Silicon Valley aside, which is which is a very, very unique kind of kind of situation. If we have a credit cycle, private credit could put the economy into recession. And it'll be a garden, I think a garden variety recession. People will lose I mean, it's it's not going to be pleasant. Nobody's going to be happy and say, oh, it's only just a recession. No one's gonna, you know, put candles on a birthday cake and say, How wonderful is this? Um but it'll be a garden variety recession, and the economy will slow. Um, people will lose jobs um and eventually will come out of it. But I I it you you're not gonna no one's gonna be worried about JP Morgan or Citigroup or Wells Fargo or any any of the banks. It just it it it it's just it's unimaginable to me at this point. Yeah equal pods encouraging and also quite worrying at the same time. We'll probably have to do another episode on this digging deeper. I'm sure we're gonna see a lot more head.s Oh you think there' gonna be more news like like maybe tomorrow. Exactly. You're gonna have to redo your your your monologue again. I have to redo my rap. Your rap. Steve Iisman, host of the real Iisman playbook. Steve, always appreciate it. Thank you. Thank you. Thanks for having me. Well, we've already discussed the insider trading scandal as it relates to Trump and Iran. The fact that $2 billion worth of oil and SP futures were traded 15 minutes before Trump announced he was in talks with Iran, and the fact that we likely won't see any retribution because Trump has essentially gutted the SEC, the agency whose job it is to go after these crimes. We've discussed all of this. But I think we should also just take a moment to put this specific insider trading scandal into context and acknowledge the fact that actually, this isn't the only one we've seen. No, we have seen plenty of other insider trading scandals during this administration, which Anthony correctly highlighted. But each time it happens, and after we've expressed a little bit of outrage, we seem to forget about it. And then we just move on to the next thing. So let me just remind you of a few of those scandals. Let's start with the tariffs, for example. Most of us were busy worrying about how bad the tariffs would be for the economy and for inflation and for trade relationships. And indeed, we were right. What we forgot about, though, was the fact that millions of dollars were likely being made by insiders who already knew what Trump's tariff policy was going to be. For example, more than a dozen government officials and congressional aides made big stock market trades before Trump came out with his first Liberation Day announcement. After that, he pulled those tariffs and he famously tarkoed. But just a few minutes before he did so, we saw once again a huge spike in SP options trading with some trade skyrocketing more than 2,000% in a single hour. It was one of the largest jumps in the SP's history, and a handful of people mysteriously seemed to know exactly what was about to happen. We also have to mention the insider trading in crypto. The fact that Trumpcoin netted more than a billion dollars for 58 anonymous crypto accounts, accounts whose operators happened to sell at the exact right time, right before millions of Americans lost literally billions of dollars of their own money. The same thing happened with Melania coin. The same thing happened with World Liberty Financial. In fact, Eric Trump is now bragging about how much money his family made off of these crypto grifts. But I'm not done yet. We could also talk about the billions of dollars Jared Kushner raised from foreign governments to invest in Middle Eastern assets before he personally steered us into war with Iran, as was literally admitted by Trump himself. We could also talk about the millions of dollars the Trump kids invested in defense companies and drone startups, again, before we decided to go to war in the Middle East. We could also talk about the Whitcoff children, who have been personally brokering real estate deals in the Middle East while their dad runs the United States foreign policy for the region. Or even we could talk about David Sachs, who continues to invest in AI companies through his VC firm while he simultaneously runs our AI policy for the entire nation. I could go on and on here. This is just scratching the surface. And as I explained yesterday and as Anthony explained too, this is only going to continue. Because the SEC and the DOJ and even the FBI have decided they don't want to do anything about it. Why? Because if they do, they'll probably get punished. Maybe they will get fired. This is a classic case of corrup tion. This is what happens in Russia. This is what happens in the fictional world of Batman and Gotham. The criminals are now in bed with the cop s. Which leaves us with one option. We have to vote them out. But it also leaves Democrats with an interesting opportunity, especially the Democrats who are running for election. And that is, you could make this your plat