The Compound and Friends - A Major Margin Call

Episode Date: October 10, 2022

On this special episode of Live from The Compound, Marc Rubinstein joins Josh Brown and Michael Batnick to discuss margin calls in the UK, Credit Suisse's "Lehman moment," the growth of shadow banking, and more! Read Marc's Substack: https://www.netinterest.co/ Check out The Compound shop: https://idontshop.com Follow The Compound on Instagram: https://instagram.com/thecompoundnews Follow The Compound on Twitter: https://twitter.com/thecompoundnews Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Mike check one two three live tape this is live to tape we don't really do this that often we call it LTT in the biz but I'm gonna I'm gonna tell you why we're doing it this way guys thank you thank you so much for joining us those of you who are

here for the live premiere thank you for lighting up the chat. This is an extra special edition of Live from the Compound. It's sort of live. Our guest today is joining us all the way from London, England. He's someone we consider to be one of the foremost experts on financial industry companies from fintech startups to the largest, oldest banks in the world. His name is Mark Rubenstein. Mark, welcome.

Thank you, Ben. We are so excited. I am a fan and subscriber of NetInterest. Let me give you a quick introduction for the audience. Mark Rubenstein spent a decade as a partner of the award-winning hedge fund that lands down partners. And before that, Mark was a top rated analyst at an investment bank. He is the author of a sub stack called Net Interest, which I subscribe to and read every one. Mark consults with corporations and investment firms, and he's also

an active angel investor in FinTech. Mark, welcome to the show and thank you again for doing this with us. Thanks. Absolute pleasure. Thank you. Big fan. All right. Here's what we're going to get into today for the audience. We're going to talk about the Bank of England intervention. We're going to get into your most recent letter, which was very timely, not an accident on market structure, the rising frequency of margin calls and the health of European banks, especially Credit Suisse. Then we're going to wrap it up with bank earnings that are coming out, at least US bank earnings coming out this week. Most of them report on Friday and what to look for there. So, all right, Mark, first question.

Let's get into the Bank of England. It's not very often that I wake up and the Bank of England is making headlines. So they stepped into the bond market last week. Why? Bring us up to speed. making headlines. So they stepped into the bond market last week. Why? Bring us up to speed. So what happened is in the UK, like in many other markets, there's a huge pension industry. And in the UK, we have pensions which promise pensioners a stream of money over a very long period of time, 25-year kind of liabilities. The problem confronting that industry is that there aren't sufficient assets which are able to back those liabilities. There's a kind of a duration mismatch. We can go into some of the weeds later, but there's a kind of duration mismatch in the available market for securities. And so they adopted, they created a kind of synthetic structure, which involved a derivatives overlay. The upshot being that these are- I'm sorry. These are the liability-driven

investment contracts or LDIs that everyone's talking about. Exactly right. Exactly right. So within the pension industry, a strategy evolved called LDI, as you said, covers about 1.5 trillion pounds of assets, which last week came very close to $1.5 trillion of assets. We almost reached parity on the exchange rate. And what this involves is the adoption of a derivatives overlay in order to match that liability funding stream. It involved derivatives. Derivatives involve collateral. And the collateral in this case was largely UK government bonds. And what happened was, there was a trigger event, which was a mini budget, new government in the UK, new prime minister,

mini budget, new government in the UK, new prime minister, new finance minister. We call him the chancellor of DXJECA. They launched a mini budget. It all happened very quickly because the death of the queen deferred that announcement. So it's an announcement that was deferred and it took the markets by surprise uh bond yields moved the gilt market the government bond market collapsed uh yields yields went up bond prices collapsed correct the new policy they announced was very reagan-esque kind of like cutting taxes on everyone and that sp spooked the bond market. Mark, do you think they were surprised by the surprise? Yeah, I think, so this is interesting. I think they were. I think, actually,

so this announcement was on Friday. Friday itself, we saw some weakness in markets, but it didn't really accelerate until the following Monday. Over that weekend, the Chancellor of the Exchequer, the Finance Minister, went on the news shows talking about potentially doing even more tax cuts. So in addition to the announcement on Friday, we had an acceleration on Monday, which suggests some degree of surprise. I think it did surprise them because we can go on and talk about this, the occurrence of these extreme events that happen in markets. Market practitioners are a little bit used to seeing extreme events, but on a spreadsheet from the outside, it's never happened before.

So why should it happen we've seen more severe causes like the pandemic before like the financial crisis before so on a stress test basis this kind of move shouldn't have happened just to give you some context the move in bonds over intraday on that Monday was more than we've seen in the whole year in any, but several of any year. So the one day move was bigger than almost any intra year, any yearly move that you've seen. Is that right? That's right. And so rising interest rates should be good for pensions. It makes the funded status appear better. However, that's assuming that interest rates don't have that sort of whatever 27 standard deviation move overnight. And so the collateral that they had posted, what happened to that and why did the

BOE have to step in? Exactly. So the first point you make is a really good one, a gradual move up, a slow non-volatile,, gradual move up in yields. Then you can reinvest at higher rates calmly. Really beneficial. Yeah. Really beneficial. It was that shock move meant that the value of their collateral was reduced. And this is the collateral to back the derivatives that they took on in order to create that

kind of synthetic yield, if you like, on the asset side. The collateral value is reduced. They were forced to put up more collateral. And in some cases, they were running through all of their excess collateral. In other cases, they were forced to rebalance because what also happened was their portfolios were becoming very rapidly imbalanced, value of bonds declining, value of other stuff. Mark, who is they? Can you give us some sense of how big the pension system is in the UK or how systemically important it is? When you say they, who are these funds that had these collateral shortfalls and margin calls?

Yeah, they own a large proportion of the total outstanding government bonds. Is that right? Yeah, they do. They do. They're the biggest single investor in, and part of the reason why they had to adopt these derivative overlays is because there aren't actually enough government bonds to satisfy their demand. Right. So they have to create them. They are their corporate pension funds.

They sit on the balance sheets of corporates. They're corporate pension funds. They sit on the balance sheets of corporates. And in the case of this particular strategy, we're looking at $1.5 trillion. And they're getting margin calls, like literally. And they're getting margin calls literally. So can you explain the transmission mechanism? Is this a bunch of people calling the people inside of the Bank of England? How do you think that gets going? Is it just

the phone is ringing off the hook? What literally do you think happened? So the Bank of England actually, a few days later, put out a statement, put out a letter. One of the Bank of England senior officers wrote a letter to a parliamentarian. Prior to that, there was a lot of finger pointing going on. You know, the parliamentarians, the politicians blaming the Bank of England, which is independent, like the Fed. Bank of England actually came out guns blazing with this letter that was filed last week, saying this wasn't our fault, this was your fault. We kind of saved the situation through our intervention. And to answer your question, what they said was they were monitoring the market very carefully. Clearly, again, like the Fed, they've got contacts, they've got a network of

market participants, traders, analysts, so on and so forth. They watched it. And come Tuesday or Wednesday, the feedback was that it was getting to such a dire situation that there was likely to be 50 billion pounds of sales of government bonds required partly for rebalancing purposes and partly in order to meet these collateral demands very, very quickly. And this market only trades 12 billion a day. So the market wouldn't have been able to absorb it. So I think that's a really key point is that, and we saw this with 1987, where you have a situation

where something gets triggered and sales become forced sales or forced liquidations, which then exacerbates the original problem. So the original problem here is bond prices dropped abruptly on news of tax cuts. And then if the solution to that is, well, all of these leveraged people that are posting bonds as collateral now have to sell, then that actually makes that original problem 10 times worse and it could feed on itself. And so somebody does have to step in. You can't not step in. The only question is how do you step in? So I wanted to ask you, do you think what the Bank of England has done puts out the fire or are other fires likely to break out that we're not thinking about right now? It's always a question of like, is this the last thing that we're going to say?

It's a firewall, right? So it slowed down the pace of bond sales, which allowed these pension funds some breathing room to rebalance, to inject more capital in, raise more capital in order to meet those collateral calls, slowed down the process. And in that sense, I guess they were acting as market maker of last resort. We typically think of central banks as being lenders of last resort. That works when the banks are at the front of the kind of at the epicenter of the financial system. But when that's no longer the case, pension funds, asset managers, their clients are at the epicenter of the financial system. You need a new model. And that new model is the market maker of last resort. We saw it in March 2020 globally. When the Fed came in, Bank of England came in, ECB

came in. They all came in backstop markets then successfully. And arguably, that was a playbook that is now being run with. So Mark, we woke up Monday morning to this and risk assets around the globe bounced. The S&P 500 had a 5% two-day rally that has since unwound. The 30-year gilt rates came in sharply, and that was a crazy standard deviation move. I think the 30-year went from five down to four, which is something you don't see very often. But now, a lot of the risk asset gains that we've seen have been wiped out, and you see this interest

rate ticking back to where the mayhem started in the first place. So is the market calling bullshit? What's the mood over there? What's going on? Yeah. So the mood is one of concern. There is a sense of fear. There's a lot of unknown elements. So the chart you showed that no one wants to have delevered at the peak there. There were inevitably funds delevering at the peak there. There were inevitably funds delevering at the peak there who got whipsawed when yields came back in again down to 4%. And so the price is the inverse of this. So being whipsawed at the top, it's really the bottom. Right. So any deleverage in that top place then, which was forced in many cases, is going to cause problems for those funds. Hey, Mark, if the fundamental issue that's causing this rapid rise in interest rates

around the world is as well understood as it is, which is inflation, why would any government come in and for their first idea out of the gates, let's cut taxes on the top and the bottom group of earners. Like that is in and of itself working in direct opposition to what the Bank of England was already in the process of doing, which is normalizing interest rates and cooling off the economy. So are these people brain damaged? Or was this like a political promise they made that they had to go through with? Do they not talk to each other?

Does the Bank of England not communicate with the incoming PM? What is the source of something that seems on the surface this incongruous with civics and reasonable governance? It's insane. It's insane. It's insane, right? It's insane. I don't have an answer. These people, they came. So this wasn't the prime minister that was elected by the population.

The election that occurred in December, 2019, it was Boris Johnson who famously became the prime minister. He was ousted. Yeah. New prime minister comes in, selected by her party members so literally in a country of 60 70 million people it was it was the votes of 20 000 people maybe that put her into 10 downing street right and she comes along with a vision with a with a with with with a set of politics that may be clearly on conducive to the current environment we're in they're not gonna say i don't even have an issue with like

like all right i'm i'm diet margaret thatcher or i'm gonna i'm gonna unleash you know the consumer whatever like i'm like just not maybe not right now like maybe not right this second given what we're really trying to do here so that's all right so that seems that seems insane to me um and i'm okay i'm glad that i'm not so one of the things what i was gonna say one of the things joe biden did when he got when he got in in january of 2021 is he immediately set about paying off all of these promises to the various people in the coalition that got him there. And one of those was a new stimulus package. And in hindsight, we know that that $1.4 trillion or whatever it was, was an inflation bomb. Like on top of what the Fed was doing, on top of all the programs,

that was like dropping another bomb. And I understood there was momentum behind it, and it was the thing he said he would do, but that's March of 2021. And we are already in trouble from an inflation perspective. But I feel like, I guess what I'm trying to say is, had Biden come into office in March of 2022, in the midst of this inflation fight, I would hope that somebody would whisper in his ear, hey, Joe, we're not going to do that stimulus package right now. So I don't know. I don't know if that would happen, but it just struck me as odd. And to your point about incompetence, they've U-turned anyway. That top rate of tax, they have decided not to reduce it anymore. So they've U-turned.

Good idea. Hey, maybe let's take this as an opportunity to pivot to market structure, because this obviously caught the attention of every financial community around the globe. And there's been a lot of talk over the last week. Mark, in your post, you wrote about the use of leverage and derivatives. And it's such a large number that it's incomprehensible. So I want you to break this down for us. You wrote that the total notional amount of over-the-counter derivatives outstanding is currently $598 trillion, up from $72 trillion in the late 1990s. But you included a chart from the Bank of International Settlements showing that this has really gone, it's a giant number,

but it's gone sideways since the GFC. So is that a good thing? How do we interpret this? So it's a giant number. It's a kind of meaningless number. We can talk about individual banks. I mean, Credit Suisse, we may come on and talk about Credit Suisse later, but Credit Suisse and Deutsche Bank are often seen as systemic because of the quantity of derivative exposure that they have on their balance sheet. People quote notional derivative amount as if that is... Can you explain that for us? What is that actually? What are people even quoting? It depends on what the underlying derivative, not even comparing apples with apples. If it's a stock derivative, if it's an interest rate derivative, if it's a commodity, it kind of means a different thing.

So we're not comparing apples with apples. It's a much bigger number. It crunches down through netting. It crunches down because, as you say, that's notional exposure anyway. It's a kind of meaningless number, but it's consistent over time. So it's gone up since the late 90s. What that chart showed is kind of the growth, the golden era for derivatives was maybe more the 1990s and early 2000s. And as you say, it hasn't really gone up since 2008.

What has changed? Shouldn't it go up, though, as the economy gets larger? Wouldn't it make sense? Yes, although we've seen what's changed since the financial crisis, 2007, 2008, is, well, two things related. One is banks have adopted less of a role intermediating derivatives. So you now have clearing houses that become a lot bigger, netting a lot of this stuff off. So you now have clearing houses that become a lot bigger, netting a lot of this stuff off. And kind of linked to that, non-banks have become much more involved. So these pension funds in the UK we were talking about, asset management companies as well, the BIS, which is the source

of the chart you just showed, they also show data on who stands behind these derivatives. Is it banks or is it other financial institutions, asset managers and so on? And asset managers have been increasing their use of derivatives. So the fabric underpinning that number has changed since 2007, 2008. It's been less about banks, more about pension funds, asset management companies. So Mark, you wrote about this. You said banks are now much smaller relative to the scale market, so are unable to act as loss absorbers. This is increasingly apparent in the US Treasury's market, which has outgrown the capacity of dealers to safely intermediate it on their own balance sheets. Since 2008, total assets of large banks have barely risen, while the stock of US

Treasury's outstanding has grown over two and a half X. So where is that excess capacity? Where is that going? Whose balance sheet is it sitting on? And is that something to worry about? That's the problem. So it's not sitting. So banks used to intermediate this stuff and they were the shock absorbers in the system. No, you said. That's your quotes. Right. Fine. Now, it's a big concern amongst financial stability commentators and policymakers that having changed the structure of the market in response to the financial crisis, they observed. So all of the Lehman derivative books got unwound. In 2008, that all got unwound pretty efficiently. Insolvency hasn't been completed yet, but the book of derivatives all got unwound. That was run out of the central clearinghouse.

And regulators thought this is fantastic. All the bilateral stuff is turning into a complete nightmare. Quagmire. But central clearinghouses worked as far as the Lehman exposures were concerned. And so we're going to roll that out across the overall industry. And so we've seen risk, if you like, shift from banks. That can take a kind of a...

Banks have got... seen risk if you like shift from banks that can take a kind of a buy they can take they banks have got you know a bank has always had someone on the end of a phone and there's always a negotiation that can take place you know if you read some of the stories about aig and goldman back in 2008 there was wasn't a negotiation goldman weren't AIG couldn't negotiate with Goldman, but a polite call was made. There's going to be a margin call tomorrow morning. And here's notice for it. Now, increasingly, this is all done by triggers. It's all done by machines.

There's no kind of overlay, human overlay. And there's no bank balance sheet either. As a market maker, banks historically, one of the best ways to make money is through contrarianism. And if you've got the balance sheet to do that, if you're a market maker and you're able to buy when everyone's selling and kind of absorb, kind of manage, that's the risk you're managing. That's the risk you're being paid for. So this is that decentralized financial paradise that we're all striving for.

Well, that's a really interesting point. Well, you wrote 20 years ago, non-banks held 51 trillion of financial assets compared with banks holding 58 trillion. On the latest data, non-banks, so this is private equity, asset management, et cetera, right? Non-banks are now $227 trillion in scale. Banks are at 180 trillion. And here's a chart indicating that. So these are asset management firms, pension funds, insurance companies. This is what we collectively refer to as the shadow banking system, I suppose. And they are not going to act like banks in a pinch. So could you talk a little bit about the market structure concern when, thought we had this victory because we got the lending institutions out of market making or significantly lessened their trading participation? But there's no one else.

You can't get an asset management firm to act as a market maker if they don't want to. So can you talk a little bit about why that could lead to gaps and things breaking, et cetera? So that's it. I mean, I think it's, as I've said, they in the past did provide that ability to absorb shock as market makers in the system and they get paid for that. Yeah. I think very clearly regulators, policymakers have taken on that role. The Bank of England came in recently. In March 2020, we saw all the central banks come in. March 2020 is an interesting point.

They would have argued at the time, well, this was a pandemic. No one could have predicted. This literally is a one-in-a-thousand-year event. No one could have predicted. This literally is a one in a thousand year event. No one could have predicted a pandemic. People may have predicted a pandemic. No one predicted a pandemic in 2020. And yet, you know, I don't know about you. I've been observing markets for a long time. I know you guys have as well. observing markets for a long time.

I know you guys have as well. The number of multiple standard deviation event occurrences we see, I don't know if I'm just lucky. No, you're right. It's like extreme climate events. Right. Yeah, exactly. By the way, they were intervening in the bond market in the fall of 2019.

The yield curve inverted in the spring of 2019. And by the fall, they were already pulling off covert operations in the US bond market for quote unquote liquidity purposes. That's five months before anybody ever used the word coronavirus. So this is now a permanent condition of the landscape. So talk about markets being more fragile. Mark, what are we looking at here? This was in your post, the Merrill Lynch option volatility estimate, which is now higher than the COVID high in March 2020. But what exactly is this measure? What are we looking at here? This is the bond market VIX. This is volatility in the bond market. VIX has been going up. It's not quite back to highs that we've seen historically yet,

but FX volatility has been going up. Commodity volatility has been going up. Bond market volatility has been going up. And the other thing I throw in there is even if you don't look at screens, it just feels, things feel a bit more uncertain. The number of- Treasury bond ETFs are acting like Cathie Wood stocks. I looked at the one to three year treasury bond ETF, which has like $27 billion in it, has an RSI under 20. It literally goes down every single day. And that is the portion of professionally managed portfolios and retail portfolios that people say is their risk off portion. So to your point, like just, you don't have to know the move index. You can just, you know, look at a lot of things that are doing something that they've never

done before. It's just, yeah, it's just, it's just extraordinary. And there's a combination, I think of a lot of things we've talked about. It's a combination of many, many years of low rates. Combination of- Because what? That invites leverage to get the same returns? Yes. And every time, like in March 2020, because the point I was going to make back then is we didn't know.

It's not, I think that the focus is on the cause and the cause might've been a one in a thousand year event, but the, the result, I dislocation in markets, that's not a one in a thousand year event. We see it all the time in different markets. Right. I want to talk about the European financials in general, which are always like anytime there's any kind of hint of global rate or dollar or stock or bond volatility, the first chart that the bears will pull out is look at the European banks, to which I would always say, well, when do they ever go up? It's almost like you're telling me water is wet, that these stocks are

acting like shit. But John, go ahead and pull up Credit Suisse, Deutsche, and EUFN, we threw in there just for the hell of it, which is the index down 20%. And that's in, Michael, that's in dollars, right? That's dollar terms. That's a blue. So the point that I made, and Mark, I'd love to hear your thoughts, is that Credit Suisse and Deutsche Bank, which is horribly run banks, have been for a long time now. And people are so desperate to fight the last crisis. And they throw up charts of the credit default swaps blowing out on Credit Suisse. Is this where the European banks could be the epicenter of the next crisis or what's going on here?

So I don't think so. I can never say never. And one of the things we've seen to your question earlier about, did anyone anticipate the impact on the UK bond market from that budget? And the answer was probably no, it's because dominoes fall and they fall in a complex system and anticipate the impact on the UK bond market from that budget? And the answer was probably no, is because dominoes fall and they fall in a complex system such as the market in a way it's very difficult to predict. So, but I don't think so.

And the reason why I don't think so is because it reflects, that was kind of last year's, that was the last war. That was the 07, 08 period. And actually in Europe, we then had another crisis in 2011, 2012, sovereign debt crisis in Europe. So we had two crises already, both of which have been de-risked. I mean, there's two perspectives here. Preston Pyshko 1.0 Wait, do you mean regulatory-wise or price-wise?

Just because there's no multiples and nobody wants to own them? Yeah. I mean, there's no multiple. I mean, from a regulatory perspective. Okay. Their balance sheets are liquid. Their funding is secured. It's not short-term wholesale funding the way Lehman was. Their assets are very, very highly liquid. They're barely making loans anyway. But they don't make any money. They don't make any money. They don't make any money.

They operate in very competitive markets. Jamie Dimon was saying, CEO of JP Morgan was saying today, he thinks the US is going to go into recession, but Europe's already in recession. he thinks the US is going to go into recession, but Europe's already in recession. And the people, what I think investors, they've never been paid to take risk owning European banks. It's always been since the last crisis.

And I think if that's going to change, it requires them to get through a recession. We didn't have a recession in 2020. We haven't had a recession in 2020. We haven't had a recession since 2008, right? So I think probably it's the same for US banks, which also trade at a discount compared to how they used to trade pre-financial crisis. They trade like utilities now. It's basically one times book value and they get very little credit for anything other than buybacks and dividends. Right. So Mark, speaking of that, we're going to hear from them this week. What are you looking for? The last time we heard from banks, they said, you know, they put aside loan loss reserves that

were quite aggressive, I think. And they said that at least they said that they, at least Diamond said that he expects a storm is on the horizon, but right now consumer credit looks good, I think was sort of the TLDR at the high level from bank CEOs. What are you looking for this week that will give you some sort of clues as to what might come in the future? So the trade-off for US banks and European banks is two things. One is higher rates should be positive for their interest income, particularly if they're not passing along any rate rises to depositors. But against that, you've got what you're alluding to. You've got losses stemming from a weaker economic outlook. And it is the outlook because these banks have to take provisions up front for anticipated losses rather rearview mirror, taking them as they come

due. Two things I've looked for. One is, there is some signs, this is US banks, that maybe with rates having moved up so much, that they're now, and competition from online banks, they're now having to pass more onto depositors than maybe they did when rates first started going up. They will net lose deposits if they don't move. You can't have overnight money be 4% and pay out 60 basis points. That's right. They've got so much, they still have excess deposits. They accumulated, I can't remember the figure, it was over a trillion dollars of excess deposits post March 2020. They don't have excess deposits, they don't need. Actually, loan growth started ticking up again recently, so they are going to soak some of that up. They don't need all of those deposits. So they can be a bit slow, but at some

point, you're right, they'll have to deliver some remuneration to depositors and that will squeeze their margin. So I'd be looking for signs of that. People in the industry call it the deposit beta, how much of the rate rise they're passing on. And up until now, it's been about 10%, you know, for every 100 basis points of- That's hilarious. That's hilarious. So we'll see how this, that's one. And the second thing is losses

and specifically on the consumer. Wait, for every 100 basis points in let's say the Fed funds rate, the banks only, the banks can get away with like just raising by 10 basis points? That's been the case. That's been the case so far in this interest rate cycle. That's right. Well, I don't think- That's the power of inertia on the part of the depositors.

I don't think investors are expecting a whole heck of a lot. JP Morgan is in a 37% drawdown. It's back to pre-pandemic levels, at least on the price of the stock. So I'm not saying that banks are going to bounce, but there's not a lot of optimism in these names right now. No. And the second thing is consumer credit and how that's behaving. All the banks, all the US banks were on the conference circuit. Management was on the conference circuit mid-September saying, we see what you see out there. We see what you see on the screens, but we're not seeing consumer deterioration yet. We're still seeing consumers flush. Actually, they're back to using credit cards to maintain the level of spending that they were

able to do with cash. They're not only not slowing down, they're willing to go into debt so as not to have to retreat. Is that bad, by the way? Is that bad? Mark, I'd love your views on that. People drag those charts out, that corporate credit card spending is at an all-time high. Does that mean that these people are going to default, that they can't pay for it? Or what's your take? No, I would look. We get monthly delinquency data from the securitization trusts that they run, We get monthly delinquency data from the securitization trusts that they run, which most analysts look at. We get the rate at which they pay down those cards. So I wouldn't worry about the actual growth of it.

I would look at the delinquencies and I would look at the paydowns. And we're not seeing delinquencies rise yet, are we? Not yet, but what we have seen is some, not the prime, but we've seen some wobbles kind of near prime, subprime, not the stuff banks necessarily do anymore. And the banks that are reporting, you know, JPM, Chase doesn't do this kind of stuff, but we are seeing Comax, we're seeing where credit kind of proxies, we are seeing some signs of deterioration. Yeah, the low income households are the first to have to change their behavior in an environment like this, just like every other time there's been any inflation or deflation for that matter. I mean, it doesn't, not every time that you see

low income households change their behavior and retrench, does that mean, oh, it doesn't, not every time that you see low income households change their behavior and retrench, does that mean, oh, it's the new subprime and therefore we're going to have a full blown financial crisis. Sometimes people who don't make a lot of money just have a tough time. And so far, like anything you want to say beyond that, you're, you're really just extrapolating because there isn't any evidence that there's some sort of a contagion coming from below. That's right. And there's always a cycle, you know, an upstart was a hot stock kind of November 2021. Yeah. And it, and it, and it's, it's, it reflects, they put on a veneer, a lot of these companies put on a veneer of being a tech company, but ultimately, they're

selling credit. When times are good, people want to buy credit. The credit cycle is as old as the world. Right. They were looking at non-traditional credit metrics from first-time borrowers. That was a hot commodity for banks to buy from them for a little while. I want to finish by asking you about Credit Suisse. So how pedantic is it of me to say Suisse rather than Swiss? We'll start with that. And then the second part of my question is, they are going to present some sort of a restructuring plan at the end of October. They are going to present some sort of a restructuring plan at the end of October. Like this is a three or $4 stock.

Is this thing, is this thing cooked or like what, what are the odds that they can restructure and fix this? And why do they wait till now versus do it a year ago when they could have basically done anything they wanted? New CEO. So firstly, I call it first Boston still sweet swiss swiss to me yeah good i'm about to start doing that too okay yeah yeah um no it's it's kind of the deutsche there's always a bank

which maybe there's some adverse selection there that always seems to soak up the shit it used to be georgia bank city exactly before that it was city you know right now it's credit swiss and the number and it's it's self-reinforcing actually so they they lose business they're forced to take on more risk they they lose employees because the whole place gets a bad rep they have have to pay up for more employees. So that squeezes profits more. They're like the thirstiest of the global investment banks. And they'll say yes to stuff that other banks wouldn't because they're forced to, because otherwise you're out of the running of being a global. And then you get into the wrong environment and that just

feeds on itself. It's very difficult to change. It's very difficult to, you've got, you've got tens of thousands of employees. It's very difficult to, to, to inculcate them with a new culture. So what do you think happens here? So you make, so I think this is another thing that's changed since the financial crisis. In the days of financial crisis, your stock price goes, as you say, $3. You're done. No one's doing business with you anymore. People take pride. People don't want to do business with you anymore.

That's right. Yes. But now, there is a firewall there. So actually, you can have a $3 stock. It's not great for your employees, especially as a lot of your bonus is in stock comp. It's not great for your employees. So long-term, you're going to bleed talent. But it doesn't necessarily mean... It would be funny if the restructuring plan is just a reverse stock split.

We saw Iron Man. Siti did that. Siti was a 99 cent stock. That was the turnaround plan. Oh, man. Hey, we have a $30 stock now. Mark, last question from me. Do you watch the show, the HBO show Industry?

Yes. Thoughts? It's fun. Are you a Yaz guy? How great is that show? I love the show. I watch it with my wife. I've worked on trading floors like that, like many people you know have.

Yeah, no comment whether they're really like that or not. Is it supposed to be like Barclays? Is that what they're doing? Are they doing like Barclays or is it somebody else that went out? I thought they were JP Morgan. You know the point, isn't it? It's like JP Morgan. It's supposed to be JP Morgan. Okay. All right. Great show. Season two was so good. They nailed it. Hey, are you coming

to New York at any point in 2023? I would love to come to New York. All right. If show. Season two was so good. They nailed it. Hey, are you coming to New York at any point in 2023? I would love to come to New York. All right. If you plan a trip, make sure you get in touch with us in advance because we would love to have you on the Compound and Friends podcast. And I would assume this whole situation by then will have gotten worse. So even better content. Mark, you're awesome.

We learn so much from reading you every weekend. Let's tell people how they can follow your stuff. And you don't just talk about banks. You talk about a lot of fintech and a lot of exciting new companies in addition to Credit Twist. Where do we find your sub stack? What is the name of it?

It's called Net Interest, N-E-T Interest, netinterest.co. Awesome. Well, listen, you do a great job with it and we're big fans. Thank you so much for being on with us today. Guys, subscribe to the channel if you like today's video and make sure we put lots of thumbs up for Mark Rubenstein, as many as you possibly can. And we will see you guys later this week.

Thanks again, Mark. Thanks, Mark. Thank you possibly can. And we will see you guys later this week. Thanks again, Mark. Thanks, Mark. Thank you, guys.