Hello and welcome back to Slate Money. I'm Felix Salmon of Axios. I'm here with Emily
Peck of Axios. Hi. Oh my god is this a special edition? Oh what? Anishamansky, welcome back.
Hello. It's so good to have you back for those listeners who haven't been with us for
a couple of years. Introduce yourself who I am. So my name is Anishamansky. I was on Slate Money
for about four years. Wow. Hard to believe. So when I left Slate, I went back to working at Oak
Tree Capital where I had actually worked out before. So I am currently the senior financial
writer at Oak Tree Capital. I run our insights program. I also previously was working as a journalist
at Reuters Breaking Views before I came back to Oak Tree. Welcome Anna and you're going to
plug your new podcast later in the show but you have two podcasts now at Oak Tree, one with Howard
Marks, one with everyone else. And so go subscribe to them. We are going to talk to you about credit
and private equity and where the people might be rotating from stocks into bonds and mostly
about your favorite subject in the world. College sports. Super interesting. Can't wait to get into it.
It's all coming up on Slate Money. Hey, na, how are you doing? I've been working again.
Oh, no. How long? Two weeks. Come on, that's going faster than you think. Yeah, hopefully.
Fly Big of Lufthansa Group Hung Curious. Hey, everybody. It's Tim Heidecker. You know me,
Tim and Eric Bridesmaid's and Fantastic Four. I'd like to personally invite you to listen to
Office Hours Live with me and my co-hosts DJ Doug Pound. Hello. And Vic Berger. Howdy.
Every week we bring you laughs, fun games and lots of other surprises. It's live. We take your
Zoom calls. We love having fun. Excuse me. Vic said something. He's like, music.
Subscribe. No.
Anna, you work at a major credit shop and we're going to get nerdy about credit. But really,
you've come in here wearing college sports hoodie and I know what you really want to talk about
is college sports. That is very true. Okay. So you have two perfect interlocutors here because I feel
like Emily and I between us could probably fill a postage stamp with what we know about college sports.
Yeah. Okay. That's true. I mean, I don't like to associate with you and like say that I know
just as little about sports as Felix, but it's probably true.
But I have a overarching theory of college sports at least until two years ago and possibly
even until today, which is that they are especially when it comes to men's football,
are incredibly profitable organizations that TV companies pay billions of dollars for,
that pay millions of dollars to coaches, that subsidize universities, the tunes of millions of
dollars and that the people providing the incredibly valuable labor, which is ultimately responsible for
all of those millions of dollars don't get paid and that this is deeply unfair and at some point
somehow they're going to have to start getting paid. And we took a small move in that direction
two years ago. So yes. Roughly two years ago, there was the NCAA essentially said that athletes
could now make money off of their name image or likeness. So let me take a step back here.
Just to kind of set the stage because Felix, what you explained, there are certain things that
are true about what you said. The thing that I'll say is not actually true is that most sports programs
including football and basketball are not actually profitable. They're actually subsidized by
the university. They're not necessarily subsidizing the university. There are small number that are
profitable. So when you say most sports programs, you mean not only most sports, but even most
programs within safe football. Correct. Even within men's football. Correct. It's very, very
expensive to run. Why is it so expensive? Well, a lot of it actually is the scholarships for
the players. Oh, it's just like an opportunity cost. If you won't, if you won't,
it's money you you are as anyone who has debt college debt knows that is that is actual money. And
when you have one part of the university that is essentially giving scholarships, that has to be
accounted for. Okay. So in a way, if you're getting a free scholarship to a college that would
otherwise cost you $30,000 a year, then that then you're kind of being paid $30,000 a year.
Yeah. I mean, that's the interesting thing when it comes to college sports. So basically going
back like you know, 100 years, essentially when college sports first start for the most of the
history of college sports, the model made sense because basically there were almost like club sports.
You were going to school. You were paying us. You were playing a sport at a certain point
that playing that sport allowed you to go to college for free. So that is money, essentially,
that you were getting paid. And again, for vast history of college sports, there wasn't an insane
amount of money in those sports. And so that made sense. Then that started to change. And it really
changed for two sports. Again, college football, college basketball. For the vast majority of sports,
it is still true that the value of the scholarship and the room and board and everything else that you
get is way more than the value that the monetary value that you'd be bringing to the university.
However, for these other sports, that has started to change. One of the main reasons it started
to change were because of media contracts. And Felix, as you mentioned, especially in recent years,
you've seen these massive media contracts, including with the big 10, one of the conferences,
which had, I always think, was roughly between $89 billion TV contract.
And I'm assuming that it's called the big 10 because there were 10 schools?
You'd think, right? I mean, I'm just trying to work out if that's like a billion dollars per
school. So there used to be 10 schools up until the early 90s. And then Penn State joined and
there were 11 schools. And then years later, you had another three schools joined. And then now,
you're actually going to have UCLA and USC joining. So you will have 16 teams in the big 10s.
So a me a half a billion dollars per school? Yeah, exactly.
Some change. Exactly. So over the years, as schools were making more money off of these programs,
as these TV contracts were getting bigger, and also as you were having all these licensing
deals, so you were having jerseys with athletes names on them. You were having video games with
the athletes in them. And the athletes weren't getting money from that. And so I think fairly
reasonably, you had a number of athletes getting upset about that because even though, yes,
they weren't getting paid in the sense of there is a real value to that scholarship, as they say,
for anyone who has college debt knows that that's a real value, as well as a number of other things.
However, for a small percentage of athletes that are bringing a tremendous amount of value
to these schools, they certainly were getting underpaid. And just just so I understand one other
thing, which I've had in the back of my head for ages, is there a convention in basketball and
probably football as well that if you're a big professional team, like in the NBA or the NFL,
then you only hire people who play at the college level. And so that like, if you want to get one of
those big, high paying jobs in the professional leagues, you kind of need to go through this sort of
hazing ritual of spending four years not getting paid. So it's a good question. In basketball,
you actually know you have a lot of players now who go directly from high school or they play
in other leagues, European leagues or the NBA's kind of minor league, the G league, so that they can
get paid and then they can go straight to pros. In football, you actually do have a restriction.
It's basically the number of years outside of high school that you have to be before you can play.
And partly, it would be very, very challenging for a 18 year old or a 19 year old to play professional
football simply for the size of the men. There is a large difference between a 18, 19 year old and
like a 22 year old when you're talking about football players. So while I kind of am a believer that
they should just open it up and say, if you want to try go to it, if you're kicker, hey, I don't know,
maybe you can make it. There are some reasons why you've had those rules, although I agree with you,
I'm not a huge fan of some of those particular rules. But again, over the years, you had this kind
of brewing discontent. And then you started to have a number of states that were starting to change
some laws saying that like we don't agree with what the NCAA is saying, we think players should
be able to get money off of their name, image, and likeness. So just to back up, the NCAA is what exactly?
That is a good question. The NCAA is a useless institution is what the NCAA is.
Technically, the NCAA like manages all college sports. There are different divisions of college sports.
And money flows through the NCAA. So when there's like a TV deal for the PAC 10 or whatever you
called it, like that is going via the NCAA to the schools? The pens actually. Sometimes it just
goes through the conferences. I say this because the NCAA has become increasingly less important
as an institution. Basically, what's happened is that the conferences and then these other entities
like the college football playoffs, which is just a separate entity, have gained more and more power
and what the NCAA has really become is essentially a rule organization that tells people, you know,
this coach bought this player a hot dog, so we're going to find them like literally silly things
like that. I mean, that's a slightly exaggerated example, but not much so. And they do this because
what what are their incentives? So the NCAA obviously is making money off of all of these sports
that are going on and like licensing for you some stuff. Yeah. And the most money they make is
actually through the NCAA basketball tournament because that money does go through the NCAA.
And that is as everyone knows who you work, even people who don't know college sports,
often know the NCAA tournament because you do the brackets and everybody bets and you know,
right? March madness? The brackets? Oh, right. That's the thing with sweet 16, which I always
thought was really. Oh, yeah. Yes, exactly. I was like, there was this women's tournament when they
called it the sweet 16 and like, that's so sexist. And then everyone was like, no, they did that for
the men as well. Exactly. Exactly. And actually the women's tournament was way better than men's
tournament this year. Side down in basketball. So both the schools and the NCAA have very much
wanted to keep these athletes listed as student athletes and not as employees because if they were
employees, then you would conceivably have to pay them. And that gets so challenging when you start
to make the math work for that. And the reason goes back to what I said at the beginning.
There are only essentially two sports that make money. And even within those sports, there's
only a small number of programs that really make money. Schools have a tremendous number of athletes.
The vast majority of them obviously are not making, they're not bringing more money in that offsets
the value of their scholarship. So then it becomes how do you pay these players? And then on top of that,
if you're talking about an academic institution, you have title nine rules. So then it becomes well,
you're going to pay the men and not pay the women. Well, you can't do that. But then how does
that math start to work? And so that's part of the issue is that basically college sports has this
problem where most of college sports are basically kind of like club sports. And then you basically
have these enormous professional entities latched on. And you really can't make rules that work for
one that work well for the other. And that's part of the problem. So okay. So the NIL name,
image likeness thing happened two years ago. What's the impact then? So actually it's been just
incredibly interesting to me, both as someone who likes sports and as someone who likes economics.
It's been really interesting to see what happens when you basically start to open up a market
where you are capping prices. What NIL was supposed to do was enable a player to like do an advertisement
and get money from that. But what it's actually done is it's created these collectives. So these
are not parts of the school. They are basically boosters. So it's like wealthy alumni who want to give
money to certain players. So that they will come and play at the school. So what they do is they'll
say like, oh, well, they're going to go do this two signings and we're going to pay them $600,000
or something like that. So but basically you're giving players money is so so so there's like
quasi formal groups who are generally alumni of the school but are not officially the school.
And they basically quietly go up to various 17 18 year olds and say, here's a massive check if
you join this school rather than anyone else. There's really no disclosure about exactly who's doing
what and how much money and the rules are essentially nonexistent. The NCAA I think in a lot of
ways is just kind of thrown up a chance and then like whatever you figure it out. And but what I think
has been very interesting to see is that as I said at the beginning when you're talking about
whether players are being underpaid or not versus the value of their scholarship to me that was maybe
an academic question before. Now it's not because the fact that you're seeing more money going to
them shows that no actually for a certain number of players clearly there is a higher value and
that's why they're being paid that that market is showing that because before also what you had
is you had a black market before and everyone knew it which was that you also had players getting
money but it was it was illegal it was a violation now that's changing and so the other interesting
thing that has happened at the same time which impacts this is that you've had change in transfer
rules. So it used to be that players if they played at one school it was very difficult to transfer
to another school they'd have to sit out for at least a year or more and so what that meant is
that certain school is going to kind of like a hard talent but then that will change also so now
it's really easy to transfer and why that matters with this NIL thing is what then is happening is
not only are you having collectives go to you know 17 eight year old and saying here's you know
here's the bag of money I want you to play at Texas A&M you're basically also having teams be
able to go to other teams players and say well we want you to transfer here and then we'll give you
money now technically they're not allowed to talk to other teams players until the team the
person puts himself into the transfer portal but it's called it oh my god the terms are amazing
they're just they're unbelievable I feel like do you remember portals in like the late 90s when
everyone thought that the internet would be based on portals and and people called like excite
and altivista it sounds like Star Trek yeah who are called portals no I don't remember that I
I'm just thinking about Star Trek that's it that's all I have but yeah so that's the so then
you're now seeing this other thing where you're literally having players moving in between schools
it's essentially like total free agency and basically everyone in terms of coaches and administration
are like losing their minds because it is very challenging and to me the issue is that again it
goes back to that idea you have a professional organization that you have latched on to a non-professional
organization you're trying to make those two things work what they ultimately need is to acknowledge
that these players are in fact employees and then you can have contracts and things could be a bit
more stable but in order to do that you would then be having to pay all these other players who
aren't bringing in money from other sports and how do you make that work aren't there there cases
also there's like an end there's a BK litigation there's some athletes are trying to be classified
exactly exactly and you also have a lot of different law like different legislators that are
trying to push through different rules to establish that and I think the fact that you're going to
get like I think it's unlikely that you're going to get some type of national role I think this
is just going to be a little bit of a mess for a while to be perfectly honest
that was the sound of a yet another sale on Shopify the moment another business dream
becomes a reality Shopify is the commerce platform revolutionizing millions literally millions
of businesses worldwide you could be selling fine art prints you could be selling succulents whatever
it is you're selling Shopify simplifies the boring tech part of it so that you can concentrate
on successfully growing your business Shopify has industry leading tools and 24-7 help plus
an extensive business course library so they will support your success every step of the way
so now maybe it's your turn to get serious about selling in which case try Shopify today
sign up for a $1 per month trial period at shopify.com slash money all lower case
go to shopify.com slash money to take your business to the next level today
shopify.com slash money
this episode is brought to you by Wundery think back to 1983 when ice cream makers Ben Cohen and
Jerry Greenfield are trying to put together what ultimately became Ben and Jerry's which would
enter a massive war with Hargandars or 2010 when there's a huge war between fast fashion
giants Zara and Forever 21 these are history-making rivalries they sound like the stuff of Hollywood
movies and Wundery and business wars have turned it into a podcast series so follow business wars
wherever you get your podcasts you can listen to add free on the amazon music or Wundery app
for me it seems to me that universities have a lot of employees you know they have teaching
assistants and they have adjuncts and they have janitorial stuffs and they have like a whole bunch
of people who they don't pay particularly well but they do pay and that seems to work out okay for
them and if they ended up having to pay a relatively small amount of money to like the swim team
or whatever like how bad is that and then you know and then that would at least create that structure
that would allow the more professional parts of the college sports world to exist and yeah and
then universities could basically choose you know do we want to be one of those universities that
does the college sports thing and pays our athletes because their work is or do we not and then
you know if you want to be a college athlete you go to one of the colleges that does and if you
don't then you don't I do agree that I think you're going to start to have universities making very
distinct choices about how their programs are structured and but I would say it's not as simple
as saying well we'll just pay everybody a little bit partly because even if you do that if you're
still also doing scholarships it is very tough to maybe what that makes it even better right if you
start paying the athletes and maybe you don't need to do the scholarships and then that that stops
the weird admissions crap around scholarships which would also be a virtue it would not be a virtue
if you're a student athlete for the vast majority of student athletes this is the issue what I think
is going to end up happening is in my opinion is that you're probably going to see most sports
be like relegated to like essentially not varsity but almost like a club level because it just
simply will not make economic sense to have them and then you will have these very large revenue
generating sports and what's that's what that means is that for a lot of student athletes who
a lot of students who were able to go through school because they were athletes they're probably
not going to have that opportunity but not wait just just so I'm clear about this not all student
athletes who are on scholarship right just if I'm if I'm on the university swim team that doesn't
mean it's so factored that I'm getting a full scholarship not necessarily but a lot of them do
so no but the point being that like at that point the universities are already calibrating some
students they're giving scholarships to some students they're not some students they're giving
like partial scholarships to some they're giving full scholarships to we're already seeing that kind
of calibration all they need to do at that point if they start paying students you know minimum
wage on you know for starters to be part of the team if you're on the team then that you just
kind of take that off the other end in terms of the scholarships you're offering like I don't see how
that's such a bad outcome I would say that it it will be a better outcome for a small number of
players and a worse outcome for a large number but it would also be a better but it would be a
better outcome for all of the student athletes who are currently not getting any scholarships
well if they're not getting any scholarships it wouldn't really impact them well they would get
start getting paid and they'd have labor rates well the ones who aren't to don't have scholarships are
not going to be the ones who are going to be getting paid the ones who are getting paid are the ones
who are going to also have scholarships no but I'm saying like they wouldn't idea that if you're on
the team then you get paid that's the whole point you're an employee so like yeah you you are
getting even if you're just like on the swim team you get paid you don't get paid very much we get
paid something and that's better than nothing which you get if you don't have a scholarship the other
issue this brings up is if you go back to okay well we're gonna take a set of these athletes and
we're just gonna pay them the same thing and they'll get paid a little bit and that's fine
and you can say well are you also gonna give them a scholarship or you're just gonna pay them
okay well that's another question now the issue becomes if I'm a star quarterback
should I get paid the same as the third string kicker no I mean at that point yeah like on all sports
teams the stars get paid more than like can you do that in an academic institution that becomes
tricky I'm not saying you can't do it it becomes it becomes very tricky and then if you don't
perform well then does that mean you get paid less this also is very different than how the
current system works the it's I'm not saying that you can't figure out a system that works but
it's going to be have to be tremendously different than the current system when you say the current
system do you mean the system that includes all of these weird clubs or the system like free 2021
that didn't have the clubs that don't know the alumni clubs the club to collect this that's it
yes so the previous system I think for the vast majority of athletes frankly worked well
and then for a small percentage worked very very poorly I think what eventually is going to happen
is that for that small number of athletes things will work a lot better because they're probably
going to end up in a system where they can make a lot of money off of name image and likeness
and also beginning paid and then for a large number of athletes they're probably going to be in a
worst position to be perfectly honest however and just to be clear what we're doing here is
it's where we basically created a loophole which is that in most sports in professional sports
you have a contract with your team which pays you a certain amount of money and then over and
above that you you know appear on TV ads and you get other money for that and it's and if you
look at lists of high paid athletes that it's always very very clear how much money they get for
actually committing athletics and doing sport and then how much they get for other stuff
in in this case it seems the way you're saying Anna is that we're going to move to a world where
technically the amount of money that you're getting paid for doing sport is is is is
crossed as this you know publicity rights kind of payment because there's no sort of legal mechanism
to pay people for doing sports but that loophole is going to at least allow the elite of the
spectator sports to finally start getting paid right and that's what you're seeing with NAL
is basically that the elite athletes are some of them making quite a bit of money like young kids
making quite a bit of money as I frankly think they should be but that's not the vast majority
athletes just a small number but I actually think frankly that that makes sense that is value
that they are bringing and they in the fact that now that when you open up the market you see that
shows you that that value really is there it's going to be really interesting to see what happens
moving forward because anyone who watches college sports knows that most players don't work out
so I think that's going to become another interesting side of when workout as in like go professional
and be successful professionals or do well even on the college level so that because it's an
interesting because right now again this is all very murky in terms of the collective so it's like
you're giving money but then if the team doesn't actually do well are you still going to continue
to give money and it's this is when we're in this like gray area it just makes things really
interesting and complicated but Anna they're not just making money from the collectives right I
mean they are signing deals they are promoting products they're like doing influencer stuff and like
the really um did you hear the living risk did you hear the living risk the baby groan I don't
know what those words mean I'm just going to ignore it um they they're like the some of them are
like influencers and they're really like actively trying to make money oh yeah no and I as I said
like I actually think a lot of these changes ultimately are good I think the fact that you
couldn't make money off of your name image and likeness before was insane yeah right and because
now you also do have athletes the name image and likeness thing I think also potentially
could help some of the non-revenue generating sports where you could have someone who
is an athlete at a well-known school and thus can become an influencer and make money in a sport
that they wouldn't be able to make money but that's good let me exactly I mean please explain I'm
saying no these are just words and like literally you do not want to know what it means um but
put to one side what you know risen up is um the um interesting part of that sentence which is
impossible to see from the outside is this thing called livy livy is actually a student athlete
she's a gymnast she does gymnastics and she is huge on TikTok and Instagram and that kind of
stuff and she makes a lot of money doing that and I'm going to come out and say that
that would have been highly problematic two years ago and now and now she's going out and making
money from being awesome on the socials and like good for her no I completely agree
so the name image and likeness thing that's that's probably working out fine the collective thing
that's dodgy that's sketchy beyond that this is a question I kind of like it it's a nice little
way around like because you have all of these bizarre artificial constraints about being
employees and stuff it's a nice way of doing an end run around an end run around those constraints
and allowing the kids to get paid okay and then the third thing that's more hard and case by case
is deeming these athletes employees and figuring out how to do that that doesn't need to happen
necessarily you could just like oh my god Emily peck I was like you of all people would be like
these people are employees they need to get paid well I mean what Anna saying is true the most of
the student athletes aren't like these big stars that bring in lots of revenue to the school and
if most of them are getting scholarships then that seems like that's the thing I don't know it's
like if you go outside the big football and basketball like what percentage of those athletes
from scholarships because I feel like it's a bit you know it feels a little bit almost unfair to
everyone else if you just go to college and you want to play a sport and then you're like oh sorry
we've recruited all of these you know elite athletes with scholarships and therefore you
can't play the sport because reasons like that feels unfair to the team what's the club team
just something that's below varsity so I mean you can cheer murals play a sport yeah and as I've
said I honestly think some of these sports might end up getting relegated if you did shift to
some type of employee model there are two levels and you could make a distinction between those
levels yeah there are at universities there are lots of different when people talk about playing
sports at university they're talking about playing at kind of varsity level but yeah at universities
you either some already do have some type of club level or you could simply honestly like
relegate certain sports to that to try to get around the system but I think I kind of agree with
Emily that currently I think it probably I think it makes some sense to stay in the current model
because I think it ultimately does allow the players who really are bringing in tremendous
amount more value to get money for that while also allowing this other system to work for a lot of
people however it's I don't know how long it can possibly continue just because it is creating so
much like chaos in the sport and these are sports with lots of money in them and you have a lot of
people with a lot of power who care about this and so they want to create rules to frankly restrict
the power of labor because they don't like the fact that now these players can play these teams
off of each other and get a better a better deal so it it'll be interesting for me to see how long
this intermediate step stands before you do shift into something else.
Slate money is sponsored this week by Wondery which makes a podcast called Business Wars
Business Wars come in all manner of shapes and sizes for instance in this season there's
Hargan does this is Ben and Jerry's I think going back to 1983 when Ben Cohen and Jerry Greenfield
need to withdraw their remaining cash before the sheriff ceases it or think 2010 for another
business war the first fashion wars of grants like Zara and Forever 21 which got caught up in
all manner of scandal when there was a series of deadly tragedies at factories in Bangladesh
hosted by David Brown Business Wars is an award-winning podcast that tells the stories of some of
the greatest business feuds of our time so follow business wars wherever you get your podcasts
or listen ad free on the Amazon Music or Wondery app
this episode of Slate Money is brought to you by Factor it's summertime you are probably looking
for wholesome convenient meals for your sunny and active days you're out and about all day and
you probably don't want to be spending half an hour chopping things and warming up ovens and
frying pans Factor is America's number one ready to eat meal kit and it can help you fuel up
fast with flavorful and nutritious ready to eat meals delivered straight to your door no shopping
even at supermarkets you'll save time you'll eat well and you'll stay on track reaching your
goals just pick out the one you want throw it in the microwave you have never made a delicious meal
or quickly if I can do it you can do it if you want calorie conscious options this summer then
there are dietician improves calorie smart meals with around or less than 550 calories per serving
the fact of meals just sit in your fridge and you can see what they are on the side you don't
even need to take them out to look at them you can pick out the one you want just simply choose
your meals and enjoy fresh flavor packed meals delivered to your door it really is the easiest thing
in the world you take the meal you put it in the microwave it is delicious it is instant there is
no cooking involved this is not a meal kit this is a whole meal made for you head to factor meals.com
slash slate money 50 and use code slate money 50 to get 50% off your first box that's code slate
money 50 at factor meals.com slash slate money 50 to get 50% off your first box
at the end of your first year discover credit cards automatically double all the cashback you
earned that's right everything you earned doubled all the cashback from eating at your favorite
soup dumbling restaurant doubled all the cashback from that trip where you sort of learned snowboard
also doubled and the best part you don't have to do anything ridiculous to get it nope discover
does it automatically seriously though see terms and check it out for yourself at discover.com slash
match we're going to move on to credit because I know that we can talk about sports all week but
um we have anishamansky of oak tree here and we need to talk to you about credit which is
something we don't talk enough about on this show obviously um we talk a lot about interest rates
and the way that you know bond prices have fallen when interest rates went up and that
caused a banking crisis and you know all the fifth kind of stuff but there's something else which I
feel like has kind of been missing for almost 15 years now which is credit which is if you lend
money to someone they might not pay it back and default risk and that kind of thing and every time
everyone you know writes a research note saying oh no the sky is falling we're about to see this
huge wave of defaults like it never happens but it has to happen at some point right yes yes so
before we start a conversation kind of do my shameless plug please so as Felix said I
currently work at oak tree capital I'm a senior financial writer I run our insights program and
we have recently launched a new podcast so since 2021 we've had a podcast with Howard Marx
where we release his audio versions of his memos and then also I do interviews with him
Howard is great and that podcast has done very well mainly because Howard is great um and now we've
released a new podcast called the insight by oak tree capital which is going to have audio versions
of our insights pieces and then also interviews with people around oak tree and I'm the host and
the goal that I really have had is to try to make these actually interesting conversations
because as we all know a lot of finance podcasts just all kind of say the same thing and don't
say very much and I feel like okay we have a lot of very smart people at this firm we could actually
have some interesting conversations so that is my goal with the podcast and mostly this is going
to be about fixed income and credit and that kind mostly yeah I mean oak tree does have we do
have some equity components but we are primarily known for credit okay so first question what is
the state of credit right now we know that the rates went up a lot and that caused bonds to
it for just because interest rates went down but they did spreads gap out as well and also tell
the lovely listeners what a spread is yes so okay takes that back um when you're talking about credit
you're primarily talking about bonds and loans so bonds tend to be fixed rate instruments loans
tend to be floating rate instruments loans are senior in the capital structure so if there is
a default loans get paid out first and then later bonds so that is important in terms of
understanding what's been happening in credit in the last year so when Felix is talking about
spreads versus yields we've obviously seen yields rise because interest rates have risen
we have seen an increase in spreads they have widened but not massively and a spread is basically
the extra interest rate that you charge to make up for all of that default risk essentially yeah
you and part of the reason that you could argue you haven't seen a dramatic widening of spreads
in like fixed rate debt is because frankly the default risk has not increased massively
in fixed rate debt so during 2020 and 2021 there was so much money flowing into the financial system
and so all of these companies refinanced and what that meant is that they kicked out their
maturities so what that means is it we don't have a tremendous number of maturities in the next
few years and it's very challenging to default on maturities that don't exist so basically everyone
basically afford to make their interest payments the only problem happens when you actually need
to pay the principal back because the way that bonds are generally structured is you don't actually
have to pay any principal back until the very end and you have to pay it all back and then at that
point most corporate financiers most corporate treasurers don't actually expect to pay the money back
what they expect is to refinance and so you don't really get any defaults unless you are so
unlucky is to reach that refinancing point at the point when the markets are closed and then
no one will lend you the money exactly and it's important to know that you don't wait like if you
have a 2027 maturity you're not going to refine it to 2027 like you're going to finance well before
that I say that to bring up the point that while right now in fixed rate debt you may not have like
expect a massive wave of defaults you could start to get people more worried about that moving
forward if interest rates don't come down because as Felix as you noted then you start to think
about that refinancing risk so I'm fast that you keep on saying in fixed rate because behind that I
kind of feel like you're saying floating rate might be different yes so why is floating rate
different okay so in 2022 like early 2022 what you really were seeing a lot in credit in was that
because people assume that interest rates were going to be rising so actually floating rate debt
loans for investors became a very popular investment because people were like oh well if interest rates
are going to go up I want a floating rate instrument because then my coupon is going to increase my
interest rate that I'm getting paid is going to increase as rates go up I'm not going to get that
big hit to the value of my instrument like you would get in fixed rate debt so everyone's kind of
thinking that and then you got to a certain point last year where people started to be like wait a
second while yes as an investor I'm getting a higher coupon that also means that the borrower has
to pay a higher interest rate and then it becomes okay so my interest rate risk might be less but my
credit risk is now increasing so one of the reasons why we wanted to talk to you about all of this
was there was a super interesting Bloomberg article which we were linked to the talked about
private equity backed companies and we had a whole little thing about private equity last week
and one of the interesting things about private equity backed companies is they tend to and I'm
over generalizing here but they tend to be more reliant on loans while public companies tend to be
more reliant on bonds and as you say loans tend to be fixed rate for tend to be floating rate rather
fixed rate and partially as a result of this the debt service on pe backed companies is like six times
the debt service on public companies and this is a big difference between the private equity world
and the public company world is that suddenly the private equity world is finding its companies
which were already pretty highly levered and having to pay every cent of three cash low and interest
payments suddenly those interest payments have doubled or tripled because because interest rates
have gone up so much and now that's a real default risk for those companies. Yeah I mean you
it obviously depends on the private equity firm and the deals that they made but yeah I mean you
definitely when money was really really cheap when debt was really really cheap you definitely
had a lot of deals done that I think people who maybe were a little bit more circumspect were
questioning because you were putting a tremendous amount of leverage on companies and also you were
making very optimistic earnings expectations that they were borrowing based on in terms of the
cash flow you were expecting them to generate to be able to pay that back and so and also as you
said people were not anticipating that interest rates were going to go up and what this Bloomberg
article also mentions is people a lot of firms also weren't hedging the interest rate risk and
you look at that now and you're like why wouldn't you have hedged the risk it was very cheap then
and I think that is a very very reasonable thing to ask now I'm sure for a lot of these companies
it was like you know you had had 40 years of declining or very low interest rates and so I think
for a lot of firms again hedging is a cost it's like it's like taking on insurance you're there
is a cost associated with that and so I think people just didn't assume it was something they needed
to do but in my opinion it's the same of like talking about SVB and that idea of like just risk control
and expecting that interest rates weren't going to go up and creating a structure that
becomes very vulnerable when interest rates do go up so I was really surprised because private equity
you know they're supposed to be really smart that's what people think at least and the number of
these companies that didn't hedge the interest rate risk in like late 2021 when I mean I
knew interest rates were going to go up everybody knew interest rates were going to go up inflation was
high there's you know that if you look back in history the last time interest rates went up you
know during the vulgar era the same kinds of things happen then as are happening now so it's not like
this is unprecedented we couldn't have possibly foresee a lot of you know left-righted loans
and private equity during the vulgar year but I mean you could have looked like most banks
knew not to be like Silicon Valley bank because there was there was again precedent this isn't
a confusing thing so I was really surprised that these private equity firms kind of whifted and
that the cost to hedge was so cheap yeah no I mean I would say it depends on exactly when you're
talking about because once you started to get to the point where people really thought yeah
interest rates really are going to increase Costco it definitely started going up I actually have
a family member who is a CFO to company we're having a conversation about this where she's like
man we released an hedge about nine months ago um you know the cost increased relatively quickly
but I but at the end of the day Emily I think you're right that I think that a lot of firms should
have engaged in better risk management and I think you know this is tends to be what happens
in very easy money periods that people are incentivized to take on as much debt as they can and to
try to outdo the next one and the next firm and then when things inevitably pull back
they end up in a difficult position and it was fascinating there's like one of the biggest
bankruptcies of the year so far and there there've been a lot this year was that healthcare
company I think Envision is is a called Envision it's a healthcare company and you know they
filed for bankruptcy and the press release they listed like all these reasons challenging
business environment and customers but that was the one thing they didn't mention which would
have saved them no I mean like I felt cheated that I didn't know that
okay but I have a question about all of the this whole private equity model because when we're
talking about these companies we need to be very clear about which companies we're talking
we're talking about the private equity model is basically that the private equity company buys
the operating company the operating company is where the cash flows are and where all the debt
gets taken out but ultimately it's controlled by the private equity holding company and it's up
you know at the end of the day it's up to Apollo or whoever the private equity company is to
determine whether the hedges get put or not they own it they control it they run it and
there is this broad assumption that if interest rates go up very sharply and the operating
company is forced to file for bankruptcy that is sort of Ipso facto a bad thing and in hindsight
was a terrible mistake on the part of the operating company but for me what I do is I look at it
from the point of view of the private equity company that actually owns the whole thing and obviously
if you're a big one especially like Apollo you have debt funds you have equity funds
a lot of that debt is also your own money and if you file for bankruptcy that is really just
a sort of financial engineering thing you still like a different arm of Apollo ends up owning
the company ends up running the company the company itself in many cases isn't actually
particularly affected you know I wrote about this in the case of Instant Pot you know Instant Pot
is a perfectly good company making Instant Pot selling fewer Instant Pot and it was before
but that's fine sometimes it gets makes more money sometimes it makes less money and
there are headlines about it filing for bankruptcy which should true but in terms of the employees
of Instant Pot the vendors of Instant Pot they're largely unaffected by this they're still getting
paid in full and it's just a question of like oh well so some of the debt holders become equity
holders and some of the equity holders become wiped out that's just that's just investment that's
not the real world and what do you make of this so I'm not going to talk about any particular firms
any particular companies but I would just say that well yes I think that right now a lot of what
we're talking about with these defaults especially because default rates honestly are still quite
fairly low we're talking more about the markets implications and the implications for investors
I would argue that it isn't accurate to say that you can't have a real world impact it is true
that the US has bankruptcy laws and where companies can be restructured so if a company's
going through bankruptcy doesn't mean it's going through liquidation it's just restruct it's just
rearranging its capital structure however like they're going to be implications to that you know if
a company is doing that it's it's going to affect the company itself and if you have a number of
companies defaulting and also if they do that that means that their cost of capital is going to
increase they are now a risk they have or like they were a riskier company they just defaulted
their ability to grow their ability to hire all of these things are impacted and on top of that
there's a connection between credit and the real world when you're talking about like public equity
in the real world like stock prices go up stock prices go down but when you start to have problems
in the credit markets that's a bigger impact because that is then you're having the connection
of like well who is holding the debt and then who is holding their debt then you get into the
banking system it's I don't think that we're going to have some type of massive crisis because
we have some PE companies defaulting however I don't think it's accurate to say that you are not
going to have any real world impact I mean the whole point of this Federal Reserve hiking cycle
is to have a real world impact right they want the lenders to be more reluctant to lend they want
the borrowers to say they want to slow economic activity yeah I could afford to take out a floating
rate loan when the interest rate was 1% and I can't now that 6% therefore I'm going to do less
growing and less investing that is that is the actual mechanism by which the Fed tries to
bring down inflation and cool down the economy so so that's you know in many ways that's a feature
not a bug right that the the rising rates cause a reduction of economic activity and
one of the sort of tributaries of influence to the Fed has is via this like edge case of defaults
right that at the margin if interest rates go up you are going to have some quantum of extra
defaults and those extra defaults are going to have exactly the same effects that you you just
explained but really those effects of companies investing less growing less hiring less are broadly
the same you know and on the sort of macro level as just the effects of rising rates right they're
if it's a if it's a bankruptcy caused or a rising rate scores from an economic point of view the
effect is largely seven they're all related I mean but I would argue that what the Fed is ultimately
you know in a perfect economic model trying to do is to slow the economy without causing a
recession or a serious recession however the concern starts to become that when you do start to
see defaults increasing and then that spooks people then that makes money even harder then
human psychology can get involved and that's when you have that risk of something becoming a lot
more serious and so that's why the Fed in general wants to slow things but it doesn't want to slow
things so quickly that it could generate real problems so that's why I don't think it's as simple
as saying okay it's fine there can't potentially be more risk because any time you start to see
companies actually defaulting and you start to see those default rates increasing your likelihood
of having a really significant problem increases how much of the American economy is private equity
owned companies that are levied up to the girls I don't know the number off the top of my head
I mean I feel like that's an important question here right because most companies like we've
already discussed how public companies tend to be in the bond market they're issuing fixed rate
that they're much less exposed to this kind of thing family-run companies you know often
are very conservative when it comes to borrowing money like it seems to be this relatively small
you know segment of the economy that is the one that we're worried about here I don't think it's
as small as you think and I don't have the number off the top of my head but it's as they say
I don't think we're going to have some type of massive crisis some type of absolutely you know
devastating GFC level thing because of you know what we're seeing in loans I simply don't think
that that's accurate in any way especially partly also because of how the low market works but
I'm just saying that I do think it is a significant risk when you're looking at whether the
economy will be able to slow and either escape a recession or just have a very mild recession
or the potential likelihood that you could have something more serious happen I think you'll see
pain in places I mean private equity companies they own a lot they own health care providers
hospitals nursing homes vice media but if they you know have to file for bankruptcy or if they're
having trouble paying loans back like that's bad for their employees their consumers and that
could have you know individual real world impact sure yeah I mean there are millions of people in
America who work for private companies and those people are probably getting fewer raises right now
but I think probably that's true of public companies too yeah but it seems like the private equity
backed companies are the ones in bigger trouble because of the floating rate issue so you could see
real impact that way but I do wonder overall like what the systemic risk and we talked about this
a little last week with commercial real estate but it seems like the same kind of thing where it's kind
of like commercial real estate it's the same thing yeah a lot of leverage and assets that just continue
without you know whatever happens to the capital stack you know there's always the risk in private
equity that the company will just is it's and it's has liquidate but overwhelmingly it doesn't
overwhelmingly it's just a restructuring the capital state right so and also with commercial
real estate it's kind of slow moving it's like these loans take a long time and they refinance well
before they're due and like it doesn't it just doesn't seem like it rises to the level of of panic
no but I think there's a bad I think there's a place in between nothing to see here and GFC oh yeah
definitely this is in between yeah and that's what I would say look I mean I'm not a suitsayer I have no
idea exactly what is gonna happen but I do think that this is an area where it does seem that risk
has built in the system and it seems more likely that you could see default rates and one of the
things historically bonds would tend to have higher default rates than loans and it looks like
this time that loans are probably gonna have higher default rates than bonds you've also
received lower recovery values in loans than you have historically so it's gonna be really
interesting to see what happens in this part of the credit markets also I was interested one of
the pieces you shared with us from oak tree about how like savvy investors can get can get deals
right now like the yields on bonds are now like amazing so if you weren't tied to well yeah I mean
and again like you know we'll discuss everything but like yeah I mean like that's the thing I mean
this is where good time for credit investor if you're again full disclosure but like yeah I mean
if you're a credit investor who was kind of in like where risk control was important to you so when
time when markets are really frothy you didn't run into bad deals and now you have the potential to
invest like yeah you know it's it's not bad at all because you can get high yields you can get
strong investor protections so it becomes that like what did you do with in the good times that
composition yourself for the bad times and also we get rid of like some of the dumb the dumb
companies of the easy money era like you know the pizza startup the pizza tech startup yeah but
those that's gone like VC backs and didn't have but I'm sure there's equivalents in the PE world
like dumb companies that shouldn't have gotten so much money in terms of yeah I mean it might be like
slightly separate from but in general when you're talking about the shift from a very easy money
era to an era when money's a lot more expensive yeah you're not gonna see as much money flowing to
slightly stupid things right and then you'd also just a sorry you the stupid things won't get
funded but maybe more of the innovative things also well yeah I mean like that's why sorry the
last thing I'll say but like that's where there's always that question between how economies work
and whether it's always bad when money is flowing to speculative parts of the economy and it's good
let no no and I know and I know and I grew with that is like yeah at the end of the day you're
usually going to have some people who will lose their investment however society will probably
overall end up being better off because if speculative I mean down grows for it are good the
former sleep money box columnist down grow true a whole book called pop about exactly this
about how speculative investment all of that money that gets lost is still money that got spent on
you know R&D and people and humans and instructions but very quickly for a little
segment to put in at the end third segment here I want to just take Emily's line of thought to
its logical conclusion which is putting aside the what's good for companies putting aside whether
people are going to lose their jobs what's going to happen to the economy just on an investment
point of view because we don't talk about investing very much on this show we have already seen
a lot of money move from cash to fixed income bonds money market funds treasury bonds you know
that kind of thing because suddenly you have you had money for sending zero and now you can
earn five percent so why wouldn't you do that at the same time there's a lot of people who were
invested in the stock market just because there was no way of making money in the bond market
and bonds weren't yielding anything so if you wanted to grow your money you really had no
choice but to be in stocks so are we now entering a world where we can foresee a significant rotation
out of equities into bonds because equities feel very risky right now and bonds look like they're
actually quite attractive and high yielding yeah I mean like especially if you're looking at that
fixed rate part of the market where you know you can get a contractual yield of eight and a half
nine percent in a market where again if you're talking about fixed rate we're actually the quality
of the market has improved so if you look at the percentage of the high yield market that is double
b so the highest rating it's the highest it's ever been the percentage that's triple c the lowest
rating is the lowest it's ever been so you're getting higher yields for better quality so yeah I
I personally do think that especially if you see interest rates not coming down the way people
still some investors think they will so and I don't know what's going to happen with an
interest rates nobody does but you can lock in those high yields now I'm talking about more like
yeah right now I think certainly I think you could see a rotation I'm more talking about could
this be a longer term trend and then that really becomes a question of what we see happen with rates
because I think there are a number of people who do think that we may actually be entering like a
newer era where yeah you may have interest rates coming down a little bit at some point but
not coming down to zero not coming down to 1% staying where because right now frankly even though
it seems elevated it's really more normal historically so what does that mean moving forward that
means a very different financial world than most people who have worked in finance for the last 40
years have gotten very used to let's have a numbers round Emily yes it's five five
the number of men who perished this week on the submersible the Titan a story became obsessed
with like most Americans and didn't notice any other news it was everywhere and it was hard not
to pay attention and I think it's interesting and relevant for sleep money because so apparently
and this is because I listened to a great episode of the daily on the Titan the submersible because
like I said I became obsessed with this like most Americans who couldn't be obsessed with this I was
not obsessed I was really obsessed but I was basically going to see like the biggest shipwreck
of the 20th century I mean anyway the the reason I thought it was interesting for a slight money
perspective is because this is like a private industry right these people pay like a quarter
million dollars or something to go down in the submersible but apparently this is a huge industry it's
not just going to see the Titanic it's going to see all these other going on these other dives
to see stuff under the sea which is like a whole other world that's like under explored and the
money that these like disaster tourists over these undersea tourists pay funds like scientists
who go down in the submersibles too and do research so it's kind of like this interesting
subsidy yeah it's like a cross subsidy and now that there has been this awful horrible accident
maybe that is tamped down for a while it is true that even I wrote something about this if you read
my new book yes there you go there's this one one of the five men who died with this
Englishman named Hamish Harding and we'll see a billionaire Felix very good question he um he
wasn't but roughly one in three news articles about him over the since June 19 has described him
as a billionaire there's this billionaire now seems to have a new meaning which is anyone who
can afford $250,000 to go look at the Titanic Titanic is sort of therefore a billionaire and it's
fascinating to watch the meaning of that word above yes and also I didn't appreciate the
coverage that was like their billionaires therefore who cares they perish what like no I'm usually
not the first person running out to defend billionaires or millionaires but I was like in this case
yes I think there was one legit billionaire but the other four were not all humans I mean I
granted I said I'm sorry I did not follow the story very closely but yes it is sad when
human beings died yeah of course and of course you should devote some resources to finding them and
I stand by this yeah my number is five hundred and twenty seven dollars and sixty eight cents
uh Anna Emily are you guys familiar with lunch with the FT of course yes okay so lunch with the
F uh Anna you want to explain to me what lunch with the FT is so it's uh basically a series is in
the FT where one of the reporters goes to lunch with someone and does an interview and they always
list like the restaurant they went to and the prices of what they ordered and the
conceit is that the subject gets to choose where the lunch is being held and then the FT pays the bill
and there's lots of ways this has been undermined over the years but it's a beloved feature in the FT
and if you look at how the subjects choose the restaurant there's always this weird sort of
flex they do where they go somewhere like modest and they um they're like oh I really love this
place but you know they only serve sandwiches and you're not going to be able to spend more than 20
bucks you know that that kind of thing especially when it's like a billionaire or someone like that
but when in the world of actual humans if someone came up to you and said you can go to lunch
anywhere you like eat anything you like drink anything you like and someone else is going to pay
the impulse is to be like oh my god I'm gonna go somewhere I could never normally afford and I'm
just gonna get the FT to pay for it and this week we have lit quiddity the um anonymous
Instagrammer and Twitter getting taken out for lunch by the FT and he was like we're going to
burn a down and the first thing he does when he sits down is like we should have like the multi-course
tasting menu right and this is the first time ever that the FT has kind of launched a bit and
gone and done a bit of mental arithmetic and been like this is going to cost well into quadruple
digits for lunch and she kind of like launches a bit and he's like okay that's fine we'll just do
the regular recourse mean menu and say which even that one came to five hundred and twenty seven
dollars for two that's a lot for lunch which is a lot for lunch yeah more than sweet green but it's
less than half of what she would have paid if he'd done and honestly she should have just
said it of course we're doing the tasting menu because that's the point right lean into it if you
if you get the opportunity like when else are you gonna have a multi-course tasting menu for lunch
I don't have an impulse to pick the most expensive place when someone offers to take me out
and that's the opposite like yeah but it's not a somewhat it's not like this is her money this is
like Nick Hayes money yeah I just I as a human that's just not my impulse Felix like I'm like if
someone's taking me out to lunch or dinner I'm not gonna order the most expensive thing on the menu
that's just like that's what what I was taught I completely agree we will talk that I was taught
that Americans were I mean again it depends on who's paying and like whether it's gonna cause any
hardship to someone but if the whole point is to try and rack up the bill then trend rack up the
bill come on but I mean I guess FT is doing okay so it's fine FT is doing I mean the FT can afford it
all right and I bring us home what's your number okay so my number is 37 and this number
fits in with one of our topics in that I have not been at slight money for the past two years
so we miss you I miss you guys so the two years in which Michigan finally beat Ohio State I was
not here to be able to use the score as my number so 37 is the combined score of Michigan over those
two years is the combined score of how much we have beaten Ohio State in those two years 37 points
you've been saving that up for a while one time so many points well done well done Michigan
congratulations and commiserations to the poor people from Ohio we if you are listeners went to Ohio State
we we distance ourselves from Ana's opinion we love you okay we are going to talk about football
coaches in sleepless but otherwise thanks very much for listening thanks to merit and Patrick
for doing all of the amazing production work mostly thanks to Ana Shamanski for turning up
it's been absolutely wonderful having you here come back anytime and yeah we'll be back next week
with even more sleep money