What 100 Years of American Finance Tells Us About Today
The modern financial system operates through three distinct eras, each shaped by regulatory guardrails and market incentives. System 1 (1933-1999) prioritized stability through Glass-Steagall's separation of commercial and investment banking. System 2 (1999-2008) saw deregulation, rising leverage, a
1h 6mKey Takeaway
The modern financial system operates through three distinct eras, each shaped by regulatory guardrails and market incentives. System 1 (1933-1999) prioritized stability through Glass-Steagall's separation of commercial and investment banking. System 2 (1999-2008) saw deregulation, rising leverage, and the Global Financial Crisis. System 3 (2010-present) introduced Basel 3 protections for commercial banks while private capital grew from $2T to $15T. However, since 2018, many firms adopted a 'factory model'—industrializing fundraising and deployment—creating asset-liability mismatches that echo past crises. The key lesson: financial crises stem from mismatched assets and liabilities combined with excessive leverage. Understanding these systemic patterns, not just symptoms, is essential for navigating today's capital markets.
Episode Overview
Alan Waxman, founder of Sixth Street, provides a masterclass in financial system evolution spanning 1933 to today. He explains how regulatory frameworks and market incentives have shaped three distinct financial eras. The conversation explores the Glass-Steagall Act's impact, the repeal that led to the 2008 crisis, and post-crisis Basel 3 regulations. Waxman introduces the concept of the 'factory model' in asset management—where firms prioritize rapid capital raising and deployment over selective, artisanal investing. This behavioral shift, accelerating post-COVID, has created concerning asset-liability mismatches in private markets. The discussion reveals how understanding systemic incentives and guardrails is crucial for investors navigating modern capital markets.
Key Insights
Financial Systems Are Defined by Three Elements
Every financial system can be understood through three lenses: incentive structures, regulatory guardrails, and market structure. These elements interact to drive participant behavior and outcomes. Understanding these systemic forces is more valuable than analyzing individual symptoms or events.
The Three Financial System Eras
System 1 (1933-1999): Glass-Steagall separated commercial and investment banks, creating stability but limiting growth. System 2 (1999-2008): Deregulation enabled mergers and rising leverage, culminating in the GFC. System 3 (2010-present): Basel 3 constrained commercial banks while private capital exploded from $2T to $15T, filling the financing gap.
All Financial Crises Share Common DNA
Leverage and asset-liability mismatches are present in virtually every financial crisis. Even the best investments fail when investors are forced to exit before the investment thesis plays out. The mismatch between liquid liabilities (deposits, redemptions) and illiquid assets creates systemic fragility.
The Factory Model Versus Artisanal Investing
The factory model industrializes both fundraising (raising maximum capital quickly) and deployment (lowering underwriting standards to invest faster). This contrasts with artisanal investing focused on selective, high-quality opportunities. The factory model prioritizes asset gathering over investment returns, often creating mismatched assets and liabilities.
Fee-Related Earnings Multiples Drive Behavior
Public market valuations of asset managers shifted from 10-15x FRE (fee-related earnings) in 2010 to 25-30x+ today. These elevated multiples incentivize rapid asset gathering since management fees (not carry) drive valuations. This creates pressure to adopt factory model behaviors even among firms that historically focused on investment excellence.
The Wealth Channel Characteristics
Retail/wealth capital is typically easiest and cheapest to raise in good times but most volatile in downturns. Unlike institutional capital with long lock-ups, wealth investors often demand quick redemptions during stress periods. This makes wealth-heavy liability structures inherently procyclical and potentially destabilizing.
SMAs Signal Industrialization
The proliferation of Separately Managed Accounts (SMAs) starting in 2018 marked the beginning of liability industrialization. Every institutional conversation shifted to 'we want an SMA,' enabling faster, simpler capital raising. This preceded the acceleration into wealth channels post-COVID.
Current Symptoms Versus Root Causes
Media coverage focuses on symptoms (stuck assets in private real estate, private credit concerns, redemption issues) rather than the root cause: the factory model's behavioral changes. Understanding the difference between symptoms and causes is essential for diagnosing what's actually happening in markets.
Notable Quotes
"As an investor, like when we start try to figure out what's happening in a current moment, which is we're definitely in a moment right now, we do two things. First of all, we think about it from the standpoint of like how did this get here? What's the history of it? How do we get here to really figure out the current moment and also determine where we're going."
"System 3 in my opinion has the potential to be the best system American finance has ever had because when you think about commercial banks or deposit taking institutions by the way that are basically backs stop by the government insured by the government through the FDI... having restrictions on capital or leverage and liquidity where they're doing sort of lower risk-taking activity to finance a system. That's a good pillar of any financial system."
"All crises generally are caused from not credit issues or other issues. There's they might start in other issues, but it's it's mismatched assets and liability."
"The factory model in our industry is there's two parts to it and then there's an output. The two parts to it are first part is the industrialization of the fundraising process or I would say liability gathering. So literally raising as much as much capital as you possibly can literally as fast as you can. And then what comes second is then as a result of that the industrialization of the asset side."
"Everything that is covered in the media is just talking about the symptoms and not actually getting to the root cause. And again, when you think about history, like people talk about the symptoms, but when you start to diagnose what happened and how we got there, it had to do with the root cause."
Action Items
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1
Analyze Systems, Not Just Symptoms
When evaluating market events or crises, examine the underlying incentive structures, regulatory guardrails, and market structure rather than just surface-level symptoms. Ask: What are the incentives? What are the guardrails? What's the market structure?
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2
Assess Asset-Liability Matching
For any investment or firm you're evaluating, examine whether assets and liabilities are properly matched. Can investors demand redemptions before illiquid investments mature? This mismatch is the root cause of most financial crises.
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3
Distinguish Factory from Artisanal Models
When choosing investment managers or strategies, identify whether they follow a factory model (rapid fundraising/deployment) or artisanal model (selective, quality-focused). Look for telltale signs: underwriting standards, deployment pace, liability structure, and whether growth is opportunistic or constant.
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4
Study Financial History for Pattern Recognition
Invest time in understanding the history of financial regulation and crises. The patterns repeat: leverage + asset-liability mismatches = crisis. Use this framework to identify risks before they materialize in current market environments.