What 100 Years of American Finance Tells Us About Today

Summary

• Waxman’s core frame: everything in the private credit news cycle — perpetual BDC redemption limits, stuck assets, wobbling stock prices of asset managers — is “the symptoms, but not really the root cause.” The root cause is the factory model: the industrialization of fundraising first, then of investing, a behavioral shift he dates precisely to 2018 that went “game on” after COVID.
• The 125-year setup matters because incentives, guardrails, and market structure determine fate. System one (Glass-Steagall, 1933–1999) proved “with really good guardrails, you can get long stability” but not growth; system two (1999–2008) proved the opposite — repeal, banks at “20, 30 times leverage,” and nine years later the GFC. His crisis framework emphasizes retail money next to principal risk-taking, mismatched assets and liabilities, leverage, and incentives/guardrails/market structure.
• System three “has the potential to be the best system American finance has ever had”: Basel III-constrained, government-backstopped banks doing safer lending, with private capital — grown from ~$2T pre-GFC to $14–15T, private credit from $500B to ~$2T — providing risk capital on matched assets and liabilities. “Up until 2018, the system was working great.”
• Follow the incentive: FRE (fee-related earnings) multiples went from 10–15x in the early 2010s to 15–20x in 2018 to 25–30x+ before the current moment, paying firms to raise fast, narrow, and simple. On the asset side the tell is underwriting decay — lower your standards and your deal hit rate goes from half a percent to 2–3%, “literally all in your control” — and terms like getting levered from 50% to 120% LTV for a capped 10% return.
• The current noise: wealth-channel perpetual private BDCs where redemption requests have exceeded the 5% limit. His flat rule: “There’s no semi-liquid… there’s liquid and then there’s illiquid.” But he doesn’t think it’s systemic — only 5 years in, strong economic backdrop, and in a true distressed environment redemptions “would be two, three x what they are.” His verdict: “this is a gift to the industry to recalibrate.”
• The best answer is the market mechanism: LPs defunding bad behavior, wide-aperture multi-strategy vehicles with governed inflows, and honest suitability — assume you can’t get money back in a 2008/1929 scenario. Legislation risks the wrong guardrail and “creates like the next crisis.” Sixth Street’s receipt: a direct-lending franchise dating to 2001 and zero dollars of perpetual private BDCs. “It’s not that we couldn’t have, we just didn’t think it was the right thing.”
• On AI, the catalyst that started the redemptions: “This is not just software. This is every industry” — once one company in a sector cracks agentic capabilities and higher margins, slow adopters inherit the same problems the market now perceives in software. Which is also why a narrow strategy in a fast-changing world is “just crazy” unless you govern the capital raised.

Deep dive

1. With good guardrails you get long stability — but system one wasn’t built for growth

• Waxman’s method for a moment like this one: the news is “the symptoms, but not really the root cause,” so first ask how we got here, then look at everything through systems — “the incentive system, guardrails, and market structure.” The story starts pre-1929, when American finance was “the Wild Wild West”: commercial banks housed in the same institutions as principal risk-taking, a massive conflict of interest. After the crash, 9,000 banks failed.
• 1933 brought Glass-Steagall — “probably one of the most important regulations that took place” — plus the FDIC. Deposit-takers were separated from investment banks, and system one (1933–1999) delivered roughly 50 stable post-war years bar the 1980s S&L crisis. But it wasn’t optimized for growth: conservative banks, an undeveloped fixed-income market, and investment banks “more in the moving business than the storage business” — pricing securities to sell, not to hold.
• The lesson Patrick extracts, which Waxman endorses: good guardrails buy long stability — but in a globalizing world, a system not built for growth turns uncompetitive.

2. System two: repeal, a leverage race, and a nine-year fuse to the GFC

• European universal banks outside Glass-Steagall combined balance sheets and ran more leverage. In 1998 Deutsche Bank bought Bankers Trust — “definitely a moment” — and Citibank announced the Travelers merger while it wasn’t even allowed under existing regulation. 1999: repeal, then a merger wave (JPMorgan Chase and others).
• Commercial banks ran “in some cases 20, 30 times leverage”; standalone investment banks like his old firm Goldman Sachs, lacking cheap deposits, levered up to compete. The fixed-income market — corporate bonds, MBS, ABS, sovereign debt — grew from ~$7 trillion to $14 trillion from the ’80s to the ’90s, financing it all. “Nine years later, what happened? You had the GFC.”
• On Glass-Steagall’s blame, he hedges carefully: “definitely some attribution… clearly not the only reason.” His crisis framework emphasizes retail money next to principal risk-taking, mismatched assets and liabilities, leverage, and incentives/guardrails/market structure. “You could be the best investor in the world making the best illiquid investments, but if someone comes and asks for your money in a quarter… you’re going to get caught out of your option.”

3. System three has the potential to be the best American finance has ever had

• In 2010, Basel III (via the G20) put restrictions on bank capital — “think about that as leverage” — and on liquidity under shock scenarios; Dodd-Frank’s Volcker Rule “didn’t really last that long.” Several investment banks were forced to become commercial banks.
• The resulting architecture, “125 years to get here”: government-backstopped, FDIC-insured banks doing lower-risk finance, and private capital — pensions, sovereign wealth funds, endowments, insurers — filling the principal-risk gap with matched assets and liabilities (private equity, real estate, infrastructure, credit; hedge funds and REITs the exceptions). No depositor can demand money back against illiquid assets.
• The scale of the gap-fill: private capital roughly $2 trillion pre-GFC to $14–15 trillion; private credit $500 billion to ~$2 trillion. “Up until 2018, the system was working great… until we started to see behavioral changes in 2018.”

4. The factory model: industrialization starts on the liability side

• His definition has a strict sequence: first the industrialization of fundraising — “raising as much capital as you possibly can… as fast as you can” — and only then, forced by money sitting with a timestamp on it, the industrialization of investing. To raise fast you go simple and narrow, and you concede terms — including liquidity terms that break the asset-liability match. Patrick’s visual, which Waxman calls exact: an artisan hand-making horse saddles gets an order for 100,000 — you have to build a factory.
• Why liabilities first: without the raise there’s no behavior change — “you’ll run out of money in 5 days.” Yet “98% of the time spent” in investor conversations is on the asset side, which is fine only when liabilities are perfectly matched. His counterfactual: if every manager’s investors could call money back after 3 years, “that would probably be something you want to be talking about a lot.”
• The first signal was underwriting, and not just in private credit — real estate and infrastructure too. Deploying isn’t the skill: “the skill is investing. It’s that artisanal behavior.” Lower your standards and your hit rate goes from half a percent to 2–3% — “it’s literally all in your control.” Then “COVID happened and then post-COVID, it was like game on for the factory model.”

5. Follow the incentive: FRE multiples went from 10–15x to 25–30x+

• The incentive story corresponds with FRE — fee-related earnings, management-fee profit. The industry traded at 10–15x FRE in the early 2010s, stepped to 15–20x in 2018, and “before this current moment, we’re at 25 to 30 times plus.” After the original post-Basel III secular opportunity found steady state, “in order to keep growing… many participants adopted the factory model.”
• He resists the crass framing (GP equity beats carry) and insists the tell is clarity of purpose, not size or being public: some large public firms haven’t adopted the model; some mid-size private firms have, hoping to be acquired or to become one of the giants. If your purpose is to be an investment bank, fine — but then you need elite risk management. Jamie Dimon is “probably one of the best risk managers of all time”; the industry that imitates him “might not be as good a risk managers as him.”
• You know the factory model when you see it in terms a credit investor with capped upside should never give: collateral that “can literally be basically taken out of your collateral package overnight,” or being levered from 50% to 120% loan-to-value when an AI-disrupted software company repositions — “things that you shouldn’t do for a 10% return.” Patrick’s synthesis, accepted: return per unit of risk has been divorced from the deployment machine.

6. SMAs, then the wealth channel: “there’s no semi-liquid”

• The 2018 shift: from commingled funds to separately managed accounts — “all of a sudden… every conversation with every LP was basically we want an SMA” — starting institutional, with pensions and sovereign wealth funds. When SMA growth tapered, the industry moved to wealth: historically the easiest, simplest, and cheapest capital (“that doesn’t mean that they’re not smart, just the cheapest”) — and the most pro-cyclical. “When there’s problems or dislocation like there is today, they want their money back.”
• The irresponsible version: illiquid assets sold with quarterly liquidity, in narrow single-strategy vehicles sized by fundraising rather than by opportunity, plus “inflow investing” — money raised must be deployed immediately or it dilutes the vehicle’s return. His flat rule: “There’s no semi-liquid. Okay, there’s no such thing as semi-liquid… there’s liquid and then there’s illiquid.”

7. The current moment: perpetual private BDC redemptions exceeded the 5% limit

• What’s actually happening: perpetual private BDCs raised in the wealth channel, often in narrow strategies, hit by redemption requests catalyzed by software/AI portfolio questions and market volatility — and “the amount of money people have asked for has exceeded what is the 5% limit. And that’s creating all the noise that you’re reading about.” The “stuck assets” bought post-COVID in 2021–early 2022 at prices that “paid way too much” are symptoms of the same root cause.
• His verdict, hedged exactly as delivered: “I don’t think this is a systemic issue yet” — for two reasons: only 5 years in, and a pretty strong economic backdrop. “It could turn out that way, but that’s actually not what I think’s going to happen.” The quantum is “pretty small in the grand scheme of things,” and in a distressed environment redemptions “would be two, three x what they are.”
• Hence the reframe that anchors the episode: “this is a gift to the industry to recalibrate” — prudent underwriting readopted, behavior changed partly by force, because “you may not be able to raise more capital.” He prefers that market mechanism to legislation, which carries “a risk that it’s not the right guardrail and it’s not good for competitiveness and it creates like the next crisis.”

8. Responsible wealth access: wide apertures, governed inflows, honest terms

• He’s explicitly not against democratization: wealth allocations to privates have been 1–2% and are expected to reach 10%+ over the decade, and “that channel is smart. They see that value creation and returns are happening without them.” But narrow strategies must govern inflows — “sometimes you just say no” — and the durable answer is wide apertures across ecosystems whose capital supply/demand oscillates. The coming risk: “everyone’s going to show up and say, ‘Oh, I’m a multi-strategy private capital fund’” without the capabilities.
• His suitability test is blunt: “When you want your money back, you have to assume it’s like 2008 crisis, 1929. And if you’re comfortable keeping it invested, then you’re probably a suitable investor.”
• Sixth Street’s receipts: he started the direct lending business in 2001 “when there was only two of us,” with one of the best track records — and the firm holds exactly zero perpetual private BDCs. “It’s not that we couldn’t have, we just didn’t think it was the right thing.” The principle: block out FOMO; the great long-lived companies “never forgot what their purpose was, which is to serve their customers.”

9. AI is not just a software problem — every industry gets repriced

• Waxman lives on the LLMs — his wife makes fun of him for “constantly playing with my friend Claude or my friend Chad or my friend Jim and I” (likely Gemini) — asking each model the same question to feel the differences. Sixth Street tracks firm-wide AI usage: “off the charts.”
• The investable claim: software was the catalyst for the current moment, but “this is not just software. This is every industry.” Once one company in a sector “figures out how to actually use it as a tool and really figures out how to use their agentic capabilities and drive higher margins,” slow adopters get “some of the same problems that people perceive the overall software industry to have today.” Creative destruction, in his telling, is the American project’s feature: it forces “prudent allocation of capital to the right places.”
• This loops back to strategy design: in a world of accelerating change with oscillating supply and demand, “the idea that you’re going to have a narrow investment strategy… that’s just crazy — unless you put a governor on the amount of capital raised.”

10. The operating system: the one-sheet brain, career decades, face the tiger

• His personal system, “the brain”: one handwritten sheet holding his left brain — boxes for five strategic priorities (distilled from a personal business plan that takes three weeks each year-end), key people, and health (vitamin D; this year’s project is left-hip mobility from an old soccer injury) — with a second right-brain page of creative ideas, 25 years of which he rereads annually; ideas from 10–15 years ago resurface and become relevant. Generally rewritten by hand on a Sunday in about an hour: “there’s never a time I actually go through that process… where I don’t connect two or three dots.”
• His decade map: 20–30 is education — “you don’t really know anything from your 20s”; 30–40 is proving yourself — he started Sixth Street with his partners at 33 or 34 and “didn’t know what I didn’t know”; 40–50, everything comes together: “it’s go time”; 50+ is mentoring and teaching. On success, his father’s lesson from age 10: money, fame, and fortune are “a cup that will never get filled” — what drives a fulfilled life is relationships and shared experiences, his Hawaiian “Hui” climbing the mountain together.
• Face the tiger — there is a literal giant tiger off the elevator at Sixth Street: “we look at the problems head on… we don’t run from them, we run to them.” Most humans hate change; a small percentage, like Michael Jordan, thrive in chaos. His message to the firm as the pace of change accelerates: “It’s going to change whether we like it or not… you get one life. Do you want to be average or do you want to be excellent?” When problems hit: “Good. Let’s go.”