00:00Bill, let me start with you. Always good to gauge your level of worriedness about something like
00:05this. Are you seeing these restrictions on withdrawals and the likes and feeling like
00:10something is on the horizon here, something worth us noting? Well, David, maybe I'm like the boy who
00:16cried wolf a few times, but we are overdue, shall we say, for some sort of financial correction,
00:23right? Usually, you know, as a Wall Street historian, usually these things happen once
00:29every 20 years or so. So it's been 18 years, right? So we're probably due for something. So that feels
00:36like maybe something is imminent, but I don't think this private credit is going to be the
00:41catalyst. I think this is a big overreaction, frankly. I can elaborate. Please. I was going to
00:53really, like, if you create a fund and you say people can only take out 5% of their money,
00:58you
00:59know, every quarter, and you're a retail investor and people start making noises about being worried
01:04about software credit or something like that, and your broker says, well, maybe you really should
01:09think about taking money out. Of course, you're going to take money out and ask questions later.
01:13So everybody floods to that, and then it becomes headlines that, you know, more than 5% people are
01:17seeking redemptions and everybody's starting freaking out, and it's contagious. But what are we
01:22talking about here? We're talking about basically 97% of the securities in these funds or private
01:30credit generally is senior secured debt, okay? Senior secured debt, top of the food chain.
01:37If we want to be worried, we should be worried about the equity down at the bottom of these
01:42companies or these leveraged buyouts or whatever these credits are. Nobody seems to be talking
01:46about their concern about the equity. No. Once you, if you're going to be worried, let's worry
01:51about the equity holders. And then maybe down the road, we can worry about the senior secured credit.
01:56As a millennial, I'm more worried about another financial crisis. Thanks for that. But Danny,
02:01you were nodding when you were saying equity. Talk to us about why that's a concern.
02:04I mean, this is, I have to say, I've heard this argument a lot, and I think it makes complete
02:07sense just given where the capital stack exists, where credit exists. That's going to get paid out
02:11first. You have to worry about the equity if a loan is going to zero. It's something that I have
02:16to say
02:16Blue Owl makes the argument of quite frequently, and it's completely fair. Also, if you're in a
02:21credit cycle, what's happening to the equity market? What's happening to public equities if
02:25you're in the middle of a credit cycle? So it's not just private credit. And I think it is important
02:28to contextualize how big this universe is. It's just under $2 trillion. The BDC, these retail funds,
02:34are even a smaller amount of it. And most of these funds gate them at 5%. So only 5%
02:40of those even
02:40smaller funds are coming out. It's something that John Zito from Apollo has said, if you can't meet
02:46these redemptions, I think he said something along the lines of like, you're a fool, not exactly that,
02:50but basically saying they amount to a rounding error for us, the amount of money that's being
02:55pulled out. Look, that doesn't mean that there aren't issues, especially for specific funds that
02:59have essentially built themselves around these being the profit drivers for them or the future
03:04drivers of growth, but it's not necessarily systemic. Bill giving us this hypothetical,
03:08the retail investor calling the broker and getting nervous. I think a lot of people seized on Jamie
03:13Diamond's kind of markets etymology a few, entomology, excuse me, a few months back when
03:17he talked about cockroaches. I mean, it's something very vivid that a lot of people seized on.
03:21Again, you've been tracking bank earnings over the course of the week. What have bank executives said
03:25about what is effectively one of their rivals? I mean, they are taking business away from some of
03:29these major banks. I don't know if you got this too, but it felt kind of like a pullback from
03:32Jamie
03:32Diamond. He wasn't as forceful when he talked, he didn't bring up cockroaches or anything like that.
03:37And in fact said that if we have some sort of crisis, I don't think that private credit is
03:42going to be the thing that causes it. And by the way, any ruptures in the business to your point
03:46is good for these banks. I mean, they do have exposure. JP Morgan has about $50 billion,
03:51which they laid out. But broadly syndicate markets get a little bit more popular when you start to
03:55see pullbacks on private credit. You have started to see there was really intense competition.
04:00It still exists, but it feels like it's ebbed a bit.
04:03I mean, what are we really talking about here? We're talking about loans that banks have been
04:09making for generations, for millennia. So Jamie Dimon is like one of the biggest lenders that
04:16there is. So he's in the private credit business. Yes, because after Dodd-Frank, after the 2008
04:23financial crisis, you know, Gary Gensler and his fellow regulators, you know, wanted to push
04:30that kind of business off the books of the central banks, the big banks on Wall Street.
04:36They became in the moving business, not in the storage business. So what happened around all of
04:42that, around all that new regulation, up comes, you know, the Apollos, the Blackstones, the KKRs,
04:48the Blue Owls, you know, all of them who are the sort of private credit leaders. And by the way,
04:53that business took off. They all used to be just private equity guys. Now all of a sudden,
04:57their private credit guys or their alternative asset management guys, they're all in the same
05:01business. They're all doing the same thing. And they're all sort of filling the hole that was left
05:05by when GE Capital went out of that business in 2015. So they're all making loans to, you know,
05:13inventory finance or mobile home finance or things that basically nobody really wants to do,
05:19but they're senior secured at the top of the credit structure. And so what are we really worried
05:23about here? Yes, it's great headlines. And it's fun to see people take, want more than 5% of their
05:29money out when, you know, they can only take 5%. They want 7.5%. What do we do? Do we
05:34put more
05:35money in or do we gate them? What do we do? So it's an event, but. All right, we've got
05:39about two
05:40minutes left. I'm going to start with you, Bill, and then I want to go to Danny. If we're not
05:43worried
05:43about private credit, what are we worried about? It's an impossible question. You know that question.
05:50What is keeping you up at night? Well, I mean, again, I think human nature is such that, you know,
05:56people forget the last. Short memories. Short memories. So I'm, you know, I'm worried about,
06:02I'm worried about the excess valuation, the toppiness to the valuations. I mean, you know,
06:07the AI, I mean, we all talk about AI. I mean, AI is probably going to be revolutionary, but, you
06:12know,
06:13valuing these things at infinite multiples of earnings, I mean, it's bound to come down,
06:18but shorting them is a very dangerous game too. Danny? I'm worried kind of on the existential
06:24AI thing and what it means for our labor markets. I know that's completely, like, feels non-sequitored,
06:29but what we're talking about, but to be fair, it is part of the ruptures we've seen in private credit.
06:34We've seen kind of trickling in companies talking about layoffs because of AI. It could be a little bit
06:40of AI theater, but are politicians prepared for this? We've seen backlash in communities about
06:46building data centers, which, by the way, private credit, that's been a huge business for them.
06:50I feel like we're moving towards something and we haven't fully thought out what that end game
06:55looks like from politicians, regulators, and even capital markets and valuations. I feel like we're
07:01kind of putting the plane together as we're flying, and that worries me a bit.
07:04And no one rings a bell at the top of the market, and no one, very rarely can you anticipate
07:11the crisis that's going to occur until it occurs. Bill Cohen, you're going to come back here in a
07:14bit. You've got a new movie out, a book on the way, plenty to talk about. We'll get to that
07:17in a few minutes.
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