Topic Guide
What Is Financial history?
Financial history is a subject covered in depth across 1 podcast episode in our database. Below you'll find key concepts, expert insights, and the top episodes to listen to — all distilled from hours of conversation by leading experts.
Key Concepts in Financial history
System 1, 2, and 3 of american finance
A framework developed by Alan Waxman to analyze the history of the American financial system since 1933, defined by evolving guardrails, incentives, and market structures. System 1 (1933-1999) involved strict separation of commercial and investment banking via Glass-Steagall; System 2 (2000-2008) saw deregulation and increased leverage leading to the GFC; and System 3 (post-GFC to today) features constrained commercial banks and a rapidly growing private capital sector. This framework helps distinguish root causes from symptoms in financial market behavior.
Factory model of investing
A business model in the investment industry characterized by the industrialization of both liability gathering (raising capital as quickly and simply as possible) and asset deployment (rapidly investing large sums). This model often contrasts with an "artisanal" approach focused purely on maximizing investment returns, and can lead to lower underwriting standards, narrow strategies, and asset-liability mismatches, especially when incentivized by high Fee Related Earnings (FRE) multiples.
Fee related earnings (fre) multiples
A financial metric representing the profit derived from management fees, calculated as management fee income minus operating expenses. The episode highlights how the increasing valuation multiples applied to FRE (e.g., from 10-15x in the early 2010s to 25-30x+ before the current moment) incentivized investment firms to prioritize asset growth and adopt the "factory model" to maximize these fee-related profits, sometimes at the expense of investment performance or risk management.
Face the tiger
A core ethos at Sixth Street, symbolizing the approach to problems and challenges. It means confronting difficult situations head-on, collaboratively, and actively running towards them rather than away. This principle is vital for adapting to rapid change and disruption, fostering a mindset of proactive problem-solving and excellence within the firm.
What Experts Say About Financial history
- 1.The American financial system's evolution can be understood through three historical "systems" (1933-1999, 2000-2008, post-GFC to today), each defined by distinct guardrails, incentives, and market structures.
- 2.Financial crises are often rooted in a combination of mismatched assets and liabilities, excessive leverage, and a lack of appropriate guardrails, rather than just market volatility.
- 3.System 3 (post-GFC) created a healthy financial structure with constrained commercial banks and private capital filling the risk-taking void, but this balance began to erode around 2018 due to behavioral changes.
- 4.The "factory model" of investing, driven by the industrialization of fundraising and asset deployment, can lead to compromised underwriting standards and asset-liability mismatches, especially in the pursuit of higher Fee Related Earnings (FRE) multiples.
- 5.Current issues in private markets, such as redemption gates in perpetual private BDCs and "stuck assets" in private real estate or equity, are symptoms of the factory model's influence, particularly in the wealth channel, not the root cause of systemic risk.
- 6.Responsible growth in private capital, especially within the wealth channel, requires careful governance of inflows, wide investment apertures across various strategies, and transparent communication about asset illiquidity.