Steve Eisman — Private Credit's Clock is Ticking

0:05 Cold open — Microsoft's win, Meta's "hilarious numbers," and a $20B fund liquidated

• Recorded Thursday July 30 (published Aug 10): "Last night, Microsoft reported great numbers and the stock was up 10% plus. Meta reported hilarious numbers. They had negative earnings growth, 28% revenue growth, 55% expense growth… Guidance was bad and the stock's down 10%."
• The day's other headline: "a very large hedge fund running 20 billion, run by a former employee of OpenAI, apparently was incredibly levered, lost a ton, and was liquidated today." (The Jul 31 wrap names it — Situational Awareness, forcibly liquidated to meet margin calls.)
• The guests: Glenn Schorr (Evercore — big banks, big brokers, traditional and alternative asset managers, trust banks; ~75-80% reported) and, new to the show, Ken Worthington (JP Morgan — brokers, asset managers, exchanges and crypto equities: Coinbase, Bullish, Circle; only ~15-20% reported). Eisman and Worthington covered these names together at Oppenheimer in the '90s.

3:08 The topics de jour — middle-market M&A, private credit, and selling alts to the wealth channel

• Worthington's three client questions in alternatives: "M&A and the outlook for middle market M&A. Private credit, what's happening in private credit. And then the outlook for selling alternative asset management product to wealth management clients. Those are really the three drivers."
• For the retail brokers there is only one question: "the outlook for cash. The retail brokers make a lot of money on the free float of customer cash."

3:49 Lazy cash — the mechanics Eisman insists get spelled out

• "Whatever is not invested is in cash. And the cash is swept often into a money market fund or a bank, and the broker will make a spread on that cash or fees on that cash, and it's really the lucrative part of the business." Eisman presses; Worthington concedes: "It's the most lucrative part."
• The distinction that runs through the whole segment: "the money is made, I'd say, on lazy cash. Cash that's not necessarily optimized."
• Eisman restates it as a worked example — $100,000 left idle earns the broker the T-bill rate; the same $100,000 moved into a money-market fund pays the customer and leaves the broker a much smaller fee. "Odds are if you're making more as the investor, the brokerage firm is making less on fees and spread and vice versa."
• The agentic question: can an agent "anticipate your credit card bills… your mortgage bills and your spending habits and optimize cash so the day that you need the cash it's available," and otherwise park it at the best yield? "That may be better for the end customers, but it may come at a cost of the profitability of the brokers themselves."

6:58 The same trade at the banks — $4 trillion earning zero

• Schorr: "Remember there are 4 trillion dollars sitting in checking accounts, bank accounts in the United States earning zero. And then there's a whole 'nother couple of trillion earning a little bit."
• The rebuttal to isolating that income as the whole franchise: "you don't just go to a great bank like JP Morgan just to park your cash. There's a lot of branches, you get convenience, you get safety, you get cybersecurity… you get investments, you get research."
• The framing to carry forward: "certain business models are set up to be able to defend and make money other ways if cash gets more efficient… and some models are less so."

8:22 Who survives cash optimization — big banks and Morgan Stanley

• Schorr's screen is switching cost plus product breadth: "I like big important banks that do a lot of different services that you have many products with… that's been your primary checking account for the last 30 years, that you direct deposit into, and you would rather pluck your eyebrows out than actually switch bank accounts."
• Even if agents optimize the cash, "they might be able to have other ways to charge you fees and have you move assets to them and consolidate."
• The wealth-management analogue: Morgan Stanley as "that same key financial advisor… including trust and estate planning and tax planning, such that the cash is not the only thing that has you there."

9:12 Schwab and LPL — a Buy, a gatekeeper, and a regulator

• The names: "Charles Schwab… LPL are two big ones that generate a lot of profits on customer cash." Worthington's call: "we like Charles Schwab a lot. We're recommending with a buy."
• Defense one — the customer already has the button: "there's always the opportunity for clients to click a button and optimize cash themselves." Defense two — the broker is the gatekeeper: "firms like Schwab don't have to necessarily open up to agents and allow them to maximize the optimization of that cash."
• Defense three — the system won't allow it. "If you really optimize cash and you have Ally Bank move interest rates by five basis points, do you see a big sucking sound out of 100 other financial institutions to get that five basis points and then you have runs on the banks. The regulators probably aren't going to allow this sort of cash flexibility because the financial system isn't designed around that level of optimization."
• And the optimistic version of the threat: "Will Schwab and LPL have their own agents that optimize cash and make it a service that they charge for?" — the spread becomes a fee.

11:08 Eisman's objection — "the business model is dependent upon the customer being lazy"

• "What doesn't hit me right is that this is a great company whose most of its revenue is from the idea that its customers aren't maximizing their own benefits… And it just bothers me. I just think that that's not an equilibrium long-term. But it's been an equilibrium for forever."
• Worthington's frame: Schwab "has to make money from their business somehow," charges no commissions, "give[s] away a lot of services for free," and the bar is relative — "if they get 90% of it right or 95% of it right, is that enough to be better than the competition?"
• The exchange that settles what kind of equilibrium it is. Worthington: "if you polled all the customers, would they tell you they're unhappy?" Eisman: "I don't think the customers know." Worthington: "Correct… That's the problem. They don't know."

12:46 The 2022 stress test — and the working capital that never leaves

• Schorr's natural experiment: through 2021 "it didn't matter where you had your money. You got paid nothing wherever you had your money. When rates went up 500 basis points in '22, there was a bunch of movement for the people… that were very aware and moved money."
• What that proved: the float is not defensible when the customer notices. "You could simply take your money from a checking or brokerage account, buy treasuries, buy money market, and poof, the net interest income disappears and there's nothing the company can do about it. It's the customer's cash."
• What it also proved: a floor exists. "There will always be working capital at the bottom of any account… but I'm not sure everybody's itching to maximize every penny. I'm not sure everybody's ready to sanction the bots and the agents to go play with their money."

13:56 The agent error rate — "wrong the majority of the time," and the 99.99% bar

• Worthington, citing internal work: "some of the studies that were done internally at my firm suggests that the agents are wrong the majority of the time" at managing money — specifically, "they will tell investors what they want to hear based on the prompts that are given, not necessarily what is the optimal way to manage a portfolio."
• The threshold for delegation, and it is not a majority: "the machines are going to have to be right not just the majority of the time, not even the vast majority of the time, but it's got to be like 99.99% for people who have money to turn over the management of their money to machines." Verdict: "They're definitely not there now… Not a threat immediately."

15:15 Private credit — inflows "infinitesimal," redemptions still above the gates

• Schorr: the March-April "tidal wave of news flow" has passed, "but make no mistake about it. The demand for direct lending products in the wealth channel, you can almost not see the line. The inflows, the gross sales inflows into the funds are infinitesimal." Eisman: "money coming in is dried up."
• Redemptions: "it's still definitely there and it's still in most places, not all, over the 5% per quarter limit. And so, you're starting to see an easing… It's the same people asking for their money. There's not as many new people asking."
• Why it hasn't broken yet: "the underlying investments that everybody has such anxiety about, including software, they're still cash flowing. They still have margins. They still have growth. And we're just predicting their demise someday." Eisman, on cue: "No, I've got a date certain. No, I don't, obviously."

16:49 Private equity — the first underperformance since '08-'09, and KKR the exception

• "In the last 4 years, the public markets have doubled. You would think that'd be pretty amazing for private equity" — instead "the performance for the first time in a very long time, probably since '08 or '09, has underperformed the public markets. It's hard to keep up with the Mag 7."
• Eisman's one-trade point lands here too: "it's all AI for these companies, too."
• The exit problem: "not everybody is able to sell what they have in their portfolio, even though their LPs want them to and have guns to their head saying, 'Give me some money back.'"
• The counterexample, 20:26: "Ken and I both cover KKR. They had record monetizations today… there will be others this quarter that put up results and have very limited monetizations. And despite better IPO market, better M&A market, and record highs in the equity markets, they can't sell some of the stuff they own."

21:24 Institutional vs wealth — a rotation that hasn't found its substitute

• Worthington splits the problem by distribution, not asset class: "the majority of these products have been distributed to institutions… [that part] continues to do reasonably well. It's a more steady business. The wealth part, the retail part, is the much smaller part" — but it carried the entire growth story. ("Unless you're Blue Owl.")
• The retail carousel: private real estate three years ago → private credit as rates rose ("growing like a weed. The returns were outstanding. You're getting private equity returns with much lower risk") → "that's dried up. That's essentially zero right now" in flows.
• What's replacing it, incompletely: "you're starting to see private equity products proliferate, private infrastructure proliferate, but we're not at the point where you're seeing perfect substitution… There's a little bit of contagion that has started."
• Schorr's vintage overlay 23:33: money raised in 2020-21 was "put to work at pretty high multiples with zero interest rates… And here we are 5 years, 6 years later and it would be the time when you would be selling" — so a slow sale asks "did you just pay too much and you have to wait several more years for earnings to grow into that valuation?"

24:12 Eisman's clock — the SaaSpocalypse math and the 2027-28 refinancings

• "My opinion on private credit is we are a year away from finding out what we're going to really need to find out."
• The mark: "You take ServiceNow. ServiceNow is down over 50% from its peak. So, any software company owned by private equity has to be down something like 50% from more or less where it was bought because that's what the public markets have done."
• The calendar: "the big issue is going to be starting in 2027, but it's bigger in 2028. These loans are going to get refinanced. What's going to happen? Is private equity going to say, 'we're not going to put any more money in?' Or are they going to hand over the keys?… until then, you could say whatever you want because the refinancings are not going to take place till sometime next year."
• Worthington's house view as the boundary condition: "as long as middle market companies are doing generally well, as long as we're not in a recession… we're not going to get the widespread significant default outside of say software and SaaS."

26:13 Naming names — Blue Owl and the technology-focused direct lenders

• Scope first: "the part of private credit that we're really talking about is direct lending… probably half, little over half of private credit."
• "You've got private credit managers that have a focus on technology. So, Blue Owl, I think is the one that is often mentioned because they've got technology-focused direct lending products… they've got big exposure and their stock has suffered because this is well known."
• The universal denial, and why Eisman rejects it: every other manager says "we've got software, but we like our exposure. Our exposure is fine"; "there's probably a problem somewhere, but it's not with our firm." Eisman: "I'm going to challenge that. I'll give them the statement that the companies that they own are doing okay. I don't think it matters" — because the refinancing question is about the collateral value, "not that the company is at fault. It's just that the valuation of the company is half."

28:05 The stalemate — $270B of maturities, few keys handed over, opportunistic credit waiting

• Schorr has run the question past managers and restructuring practitioners: "There is the full gamut. There's a few keys that have been handed over" — the sponsor answering a demand for fresh equity with "No, thanks. You can have it. We're not putting any more equity at this company" — "there's been very few of those yet. And there's also been very few 'sure, no problem. I'll take out the checkbook.' We're in a bit of a stalemate."
• The clock that ends the stalemate: "If there's 270 billion of software maturities held by financial sponsors that have maturities in 2028 and 29, it's somewhere in the next two quarters, three quarters where they'd normal course of business be refinancing."
• The dance: "the lender says, I'd like you [to] put in equity. Manager says, I don't want to put in equity. Lender's like, not sure that we're going to roll — and that's going to force your hand if you don't have financing."
• Why it may not become a default wave 29:44: opportunistic credit funds have raised a lot of money and "if Blue Owl or KKR or whoever else doesn't want to roll the financing… somebody will take it over… put in a lever layer of credit with more favorable position, scratch back better terms, don't let them do LMEs, don't let them do certain EBITDA adjustments, do it at a 300, 200 basis point higher yield." The consequence is repricing, not silence: "they'll happen at worse terms… it'll eventually bring markdowns that you haven't seen yet."
• Already visible in the return stream 30:23: "You were generating mid-teens plus returns in some of these direct lending products and now we're high single digits, mid single digits, and this year the returns are looking weaker… you're seeing this flow through the valuations already." Gradually.

31:06 The crypto brokers — Coinbase, Circle, Bullish, Robinhood

• A first for the show. Coinbase: "they act as an exchange, they act as a broker, they're prime broker, they're a market maker. It's really vertically integrated. In traditional finance, those would be done by different firms."
• Circle operates the USDC stablecoin; Bullish is "a more institutional-focused firm"; Robinhood joins the set but is "mostly options and equities" with a crypto arm.

32:44 Eisman's Bitcoin challenge — an asset that trades inverse to its own thesis

• The origin: a COVID-era podcast with a former big-bank macro strategist whose case was that crypto hedges "the debasement of fiat currency… That sounds pretty reasonable."
• The falsification: "my issue is that crypto trades inversely to its own thesis" — on a day like this one, with markets ripping and rates falling, a debasement hedge should be down; on war-and-rate-shock days it should be up. "The fact is that it trades opposite to that. And I've never heard a thesis other than this fiat currency hedge as to why you'd want to own crypto."

33:51 Worthington's answer — crypto as an asset class riding blockchain use cases

• "I view the cryptocurrency ecosystem as an asset class. And blockchain is a technology… the token and the technologies go hand-in-hand." The mechanism: usage on a chain requires transacting in its token, so "as the blockchain grows in terms of use cases and proliferates, we're going to see more blockchains, more tokens, and those tokens are going to be traded just like equities and fixed income."
• And therefore, the equity implication: "if the asset class proliferates, we need venues where we can actually trade the underlying tokens."
• Eisman's verdict on the framework, if not the asset: "I like his whole thought process because it's actually coherent… notice how much it's evolved, as opposed to a replacement currency."

37:32 Bitcoin, exempted — single use case, and half the market

• "Bitcoin is a single-use case technology. And the single-use case is a store of value. And if you're using it as a store of value, it's worth what someone else is willing to pay for it. That to me is less interesting because we aren't building on Bitcoin the same way we're building on Ethereum and Solana."
• The concentration risk: "There is an awful lot of value in a small number of tokens… half the market's Bitcoin. If I believe in the use case element of the crypto ecosystem, I don't have a lot of conviction in Bitcoin. I have more conviction in these other chains… over time the market pivots away from things like Bitcoin." Coinbase and Circle have each launched their own chain.
• Eisman's pet thesis for the weakness 40:04: "all the young people who used to trade Bitcoin are on Kalshi… it's just not hot. So my guest said something like Bitcoin is for boomers."
• Schorr's under-covered item of the quarter: "the big banks rolled out a partnership to have interoperability on their own tokens. So each of the big banks might have their own token or their own digitized tokenized deposits, tokenized money markets. And how the banks compete with stablecoin is an interesting thing."

40:55 "Circle should sell" — the Netflix lesson against Visa and Mastercard

• The prize and the precedent: Circle's real ambition is "to break into the payment system. That's the golden goose" — and "when Netflix got started, all the entertainment companies acted like idiots and let them grow like crazy and all of a sudden they all woke up one day and they said, 'Oh my god, we lost our business to Netflix.'"
• Why this time is different: "Visa and Mastercard are not dumb… they're among the smartest. I can't imagine that Visa and Mastercard are going to let some new company like Circle conquer the world with stablecoins" — and "a couple of weeks ago… Visa and Mastercard with another consortium created their own stablecoin. So I think Circle needs to sell to somebody who's got bigger pockets."
• The scale argument: "Visa connects billions of consumers with hundreds of millions of businesses. It's hard to recreate that. Very hard. So, God bless Circle if they can, but I just think it's going to be very difficult."
• Schorr's supporting count: "the big payments providers just had that announcement with 140 other financial institutions… That just sounds like a super competitive world."

42:07 Worthington's near-term Circle case — dollarization, cross-border, 24/7 settlement

• He agrees on the long-term requirement — "for Circle to really grow into what it wants to grow into, it really needs to have stablecoins be a part of the payment system" — but sees three buildable businesses before that: a digital dollar in wallets where "people in foreign countries don't trust their currencies" (today "largely dominated by Tether"), cheap cross-border remittance, and a settlement layer.
• The settlement point is the sharpest: "we're seeing more 24/7 trading. The problem is the back office of the financial world can't really keep up with that 24/7. So… if I've got a digital dollar that can move 24/7 as well, that can become the settlement layer of these 24/7 transactions."
• And the unbundling argument against the incumbents: "there's objections over the high level of interchange fees. There's a lot of services that are provided by the existing incumbents that maybe the world doesn't necessarily want to pay for. And by using stablecoins you're unbundling the payment." Coinbase joining with Shopify is the live experiment — "we're in this grand experimentation phase right now. It's very early."

46:43 The big banks — "actually stunning," with only seasonality against them

• Schorr's checklist: "Investment banking… up 38%. Trading even better, up 47%. Asset and wealth management, 7% organic growth and markets at all-time highs… expenses very much under check, great positive operating leverage, huge margin improvement, huge ROEs on high capital bases." Eisman: "Actually stunning."
• The one soft spot is the boring one: spread lending is "more mixed, just okay… But there seems to be some real competition on the deposit side" — cost of funds rising.
• "In the grand scheme of things, this is almost as good as it gets." The known headwinds: "the second half — this seasonality impacts things. Trading is historically down 17% second half from the first half," and banking depends on "is your one big AI trade happening or not happening."
• Schorr's rule 48:13: "When everybody agrees on something, trading's not going to be so good. And when we don't agree trading's going to be pretty good" — and today's backdrop (rate cuts priced out and hikes back on the table, geopolitics, the software/AI debate) "is a very active environment." Q2 equity revenues +68% on volumes up only 9-10%, with margin balances up 50%.

49:22 Lessons learned — "when everything is humming"

• Where he ends up relative to his guests: "I think Glenn and Ken are more positive on the sector than I am. I have my doubts."
• The private-credit synthesis: monetization times have "lengthened enormously… but not everywhere because KKR reported and they had very large monetizations," and "we all agreed that the software situation in private credit is only going to reach fruition sometime early next year as these companies are forced to refinance and since the valuations of these companies are much lower, it's going to be a very, very interesting negotiation process."
• On crypto: Worthington "seems to think that the use cases are going to expand as more and more tokens are created, but didn't think he had a great thesis as to why anybody would want to own Bitcoin."
• The contrarian tell to keep: "everything is just humming, which in some ways worries me because when everything is humming, it's always possibility that tomorrow that's not going to hum. But for now, everything is really great in the investment banks and the earnings estimates have all gone higher."