A bank is a special kind of company because of its funding model. Compared to normal companies, banks:

1. Borrow much more money. JPMorgan Chase & Co., for instance, has $4.36 trillion of assets and $4 trillion of liabilities; 92% of its financing comes from debt. Compare Meta Platforms Inc. ($280 billion of assets, $95 billion of liabilities, so 34% debt financed) or Walmart Inc. ($262 billion, $103 billion, 39%). Those book values understate the difference: Meta and Walmart have equity market values of $1.76 trillion and $775 billion, respectively. Their liabilities represent about 5% and 13%, respectively, of their equity values; almost all of the value of those companies belongs to shareholders. JPMorgan’s market capitalization is about $740 billion; its liabilities represent about 540% of its equity value. Almost all of the value of JPMorgan belongs to its creditors.
2. Borrow with much shorter terms. Regular companies borrow by taking out multi-year bonds or loans. Banks borrow by issuing deposits, and many of their depositors can ask for their money back at any time. JPMorgan’s liabilities include $2.5 trillion of deposits, $533 billion of “Federal funds purchased and securities loaned or sold under repurchase agreements” (also in large part demand money) and $65 billion of “short-term borrowings.” Roughly three-quarters of JPMorgan’s assets are financed with short-term money that could disappear fairly quickly.
3. Borrow risk-free: Generally speaking, most depositors do not conduct careful credit evaluations of their banks before depositing money. Nobody says “I have deposited $100 in my bank, but there is some risk of them not paying me back, so I have marked my bank account at $90.” A dollar in a bank just is a dollar. The deposits may or not pay interest, but they won’t pay much interest, because the depositors are not expecting to be compensated much for credit risk.

Those facts — the funding model, lots of short-term borrowing that the counterparties treat as approximately risk-free — are what make a bank a bank.

And then there is the other side of the balance sheet. If you have the ability to borrow lots of short-term money from lenders who do not supervise your activities closely, what should you do with that money? One possible answer is, like, “use all of it to make risky venture-capital-style investments in hot startups.” That is a bad answer. It’s not a bad answer because no one should do it: Some people do make risky venture capital investments, and often it works out quite well. It’s a bad answer because banks, specifically should not do it. Banks should not do it because of their funding model. Because banks issue short-term risk-free deposits, it is very important that they not take too many risks. Making investments that could go up a lot, or that could go to zero, is not what a bank is for; banks are supposed to make investments that are safe, because it is very important that they always have the money.

But in fact the history of banking involves a lot of people who think “ooh I have all this cheap short-term funding, and my depositors never actually do ask for all of their money back at once, so I can treat it like long-term funding and invest in cool stuff that will make me a lot of money.” And then the history of bank regulation involves a lot of regulators saying “no, don’t do that.” You can see some of this history repeat itself in crypto, which reinvented (1) banks (in the form of exchanges and lending platforms that took customer money, promised to give it back whenever, and were treated by depositors as fairly safe) and (2) bank failures (in the form of the exchanges yeeting the customer money into venture capital investments or much dumber trades). 

But real banks are not supposed to do that. More broadly, they are supposed to do only “banking”: A bank, with its deposit funding, is not supposed to use the money to do any sort of business it wants; it is supposed to do the sorts of business that are traditionally banking. Those sorts of business are somewhat miscellaneous and historically contingent, but if there is a single core idea about how banks should invest their money, the idea is “diversified pools of senior claims.” The idea is:

1. There is a lot of economic activity in the world, and lots of people can profitably do lots of it.
2. Banks should not do that activity, though.
3. Instead, banks should lend money to the people who do that economic activity, and get paid back with interest.
4. The banks should have senior claims on the economic activity: The people doing the activity should promise to pay their bank back first. The bank has limited upside: If the activity works out really well, the bank only gets paid back with interest. But it also has limited downside: If the activity works out poorly, the bank still probably gets paid back with interest.
5. Banks should lend money to lots of different people, so that if some of them work out really poorly the bank still gets most of its loans paid back.

So in practice banks make a lot of mortgage loans: You borrow money from the bank, you buy a house, you own the equity but the bank gets paid back first. They make lots of business loans: You borrow money from the bank, you build a factory, you own the equity but the bank gets paid back first. Etc. The bank facilitates a lot of economic activity — it provides the money to buy houses and build factories — but not by doing it directly. It takes the senior claim, so that its deposits are not too much at risk.

But if you run a bank this will often feel boring, and you will look for ways to do stuff that takes more risk and gets more upside. You will want to do some equity investing, maybe make some venture-capital bets, own some infrastructure. You will get into the securities trading business and think about ways to make money by buying low and selling high. Much of this stuff will be allowed by regulators, in reasonable amounts, with reasonable capital against it. Sometimes it will end badly. Often it won’t; the banks will employ smart people and do a good job doing various economic activities that are adjacent to, but different from, taking senior claims.

This is so naturally the history of banking that it is the story everyone expects all the time. And what is interesting about our present moment is that it is the opposite: Most of the big stories about banks in the US in 2025 are about banks doing less other stuff, and doing more taking senior claims on economic activity. The big modern story is about banks becoming narrower, about them letting other people take the risks and taking only safer senior claims for themselves.

Here is an International Financing Review story about Goldman Sachs Group Inc.’s securities financing business. The article refers to this trend as “the re-tranching of banking”:

Financing represented over a third of Goldman’s markets revenue last year, up from 20% in 2020. ...

“The interesting thing about financing is that it truly benefits from a lack of volatility,” said [Ashok Varadhan, Goldman’s co-head of global banking and markets]. “Not doing enough financing is why we lost market share in 2014 to 2016 when markets weren’t volatile. We were too reliant on market-making.”

Goldman’s financing push reflects a broader transformation that some have dubbed the "re-tranching" of the banking system in the wake of the 2008 financial crisis. Regulators forced banks to hold more capital against risky activities, prompting much of this business to migrate to the so-called shadow banking system of private equity and hedge funds.

The rise of private debt funds is a case in point. These investors have seen their assets nearly quadruple over the past decade to about US$2trn, according to PitchBook, as they have taken over parts of the traditional bank business of lending money directly to companies. They also frequently require leverage to boost their returns – and banks are happy to oblige. 

Crucially for banks, regulators treat this senior form of financing secured against a client's assets far more favourably than if banks were engaging in those activities themselves, whether that’s making risky mid-market loans, owning chunky private equity stakes or harbouring large trading exposures on their balance sheets.

“What’s happened is we’ve moved from the riskier part of the capital structure to the safer part of the capital structure,” said Varadhan. "In simple terms, we became less of an investor and more of a financier of people doing these activities because of the capital rules.”

We have talked about this trend before: Big banks’ trading desks used to be essentially in the business of buying and selling securities; they made money by buying low and selling high, except when they lost money by buying high and selling low. Increasingly, though, the banks’ trading businesses are in the business of lending money to people who buy and sell securities; those people take the market risk, and Goldman just has a senior claim on their winnings.

As the IFR points out, the trend is the same in private credit. Big banks used to be in the business of lending to companies, taking a senior claim on their risky economic activities. Now the big banks are increasingly at one further remove: They lend to private credit funds that lend to companies, taking a senior claim on the private credit funds’ senior claims on risky activities. At FT Alphaville last month, Robin Wigglesworth discussed this trend:

As a percentage of bank assets and relative to the size of the US economy, C&I [commercial and industrial] loans have now been shrinking for half a decade. 

That’s not because US companies have suddenly discovered the virtues of resilient balance sheets and begun to borrow less. No, it’s because banks have begun to lend indirectly to many of the same companies by instead making loans to “non-bank financial institutions”. ...

According to a new report published by Barclays’ macro, credit and bank research analysts, US bank lending to these NBFIs has quintupled over the past decade to well over $1tn, and now accounts for more than 10 per cent of all US banking loans (and nearly 5 per cent of all assets).

He quotes the Barclays report:

Banks are required to risk-weight their assets when calculating their capital requirements. In the US, risk weights are highly standardized, with most commercial exposures attracting 100% treatment. However, NBFI loans are eligible for much lower risk weights, as low as 20%. The lower RWA density of NBFI lending reflects a number of factors, including high collateral requirements (ie, low LTVs) and in some cases covenant protections. Many NBFI loans are structured, allowing banks to take senior exposure to a relatively diversified pool of assets. This lending format is similar to the standard in the investment grade securitized credit market. Collateralizing obligations in this fashion ensures that loans to NBFIs have a defined amount of equity beneath them to absorb loss. This generally results in NBFI loans having relatively low loan-to-values (LTVs). These creditor protections support lower risk-weighting of NBFI loans, which makes them less capital-intensive assets in the calculation of regulatory capital ratios (ie, CET1/RWA).

This is not a weird regulatory arbitrage; this is just true. Having a low-LTV senior claim on a diversified pool of loans is safer than lending money directly to risky companies, so banks are encouraged to do it. We have discussed this trend as well: Private credit is a form of narrower banking, where private credit funds make loans with a lot of equity funding, and where banks have “moved from the riskier part of the capital structure to the safer part of the capital structure.” The banks are taking the safer, more senior tranche of a lot of activities, even traditional banking activities like making loans to companies and consumers. The financial world is becoming more tranched, sliced, with other big firms — asset managers, hedge funds, proprietary trading firms — taking the junior, riskier, higher-reward tranches and the banks taking the senior, safer, more boring tranches.

You could imagine some conservation laws here. If in the olden days banks made $100 of loans to companies, and in the modern days banks make $100 of loans to non-banks that add some of their own money to make $200 of loans to companies, then plausibly those companies are riskier: There is more money for loans, so riskier companies can get loans, and safer companies can borrow more money and thus become riskier. The risk falls, in the first instance, on the investors in private credit funds, who know what they’re getting into (they are not depositors who expect their dollars to be risk-free). But it falls, in the second instance, on the banks: A senior claim on a senior claim on very risky activity  (bank loans to private credit funds lending to highly leveraged buyout targets) might not be any safer than a senior claim on less risky activity (direct bank loans to stable boring companies). Here is a recent Moody’s report on “Private Credit & Systemic Risk,” worrying about this:

Reforms implemented in the wake of the [global financial crisis] have shifted nonfinancial corporate debt off bank balance sheets, reducing banks’ leverage but creating new transmission channels via nonbanks. Today’s network of interconnections in the financial system is more distributed, with a denser web of connections than it had pre-crisis, when the system operated more like a “hub and spoke” model with banks at the center of the network and nonbanks at the periphery.

While a more distributed network of financial institutions may enhance efficiency and capital allocation in normal times, the increased number of connections can act as a shock amplifier during periods of market stress. The same linkages that facilitate risk-sharing in calm conditions can become conduits for contagion under strain, especially when involving more opaque segments of the network—such as private credit—where risks are harder to monitor. This dynamic is evident in periods of elevated correlation and tighter network connectivity when markets come under pressure.

While the scale of private credit is still small and fund leverage appears modest, the direction of travel points toward growing systemic importance as it expands beyond middle-market corporate lending and begins to tap retail funding and explore liquidity features that could create fragility. 

And that could all be true. Arguably the 2008 financial crisis could be read as a similar sort of story. Back then, banks also re-tranched themselves by securitizing mortgages: Instead of lending money to people to buy houses and hoping to get paid back, banks would lend people the money, slice the mortgages into tranches, sell some of them to investors and keep the most senior claims for themselves. The result was that the banks could make more and riskier mortgages using less of their own money and capital. And that ended poorly.

Still there is something culturally interesting about this moment in banking, something that is hard to appreciate because everyone is so used to the traditional story of “over time, banks try to do more risky stuff unless you stop them.” The story now is that the banks are moving up the capital structure, doing less risky stuff and more lending of money to the people doing the risky stuff. The post-crisis push to make banks more boring is essentially working. That doesn’t make the financial system boring. There is at least a conservation law for interestingness, and if banks don’t do fun stuff then someone else will. And the banks will lend them money.

Everyone knows that entry-level private equity hiring is bad. The way it works is that big private equity firms mostly hire their junior employees out of investment banking analyst programs: You graduate college, you spend two or three years in banking, you learn how to build financial models and evaluate deals and be professional, and then you graduate to private equity. At some point in the mythical past, I assume the private equity firms interviewed junior bankers at the end of their analyst programs, and then hired the ones they liked, the ones who had done the best work and learned the most and demonstrated the most enthusiasm for doing deals over their two years in banking. You know, like a normal interview, for a job.

But then some private equity firm realized that, if it interviewed bankers two months before the end of their analyst programs, it could get to candidates first, make offers early, and snap up the best candidates before its rivals even got started interviewing. So it started interviewing a bit early, and 20 minutes later all of its rivals also scrambled to schedule interviews so as not to be left behind. And they interviewed candidates and picked the best ones and made offers that would start in two months, when the analyst programs ended.

And then the next year some firm realized it could be first by interviewing three months in advance, and so forth, in a race to the bottom that now results in private equity interviews happening before the analyst programs even start. Actually now the private equity interviews start before the analysts graduate college: You can start interviewing in May 2025 for a private equity job that will start in the summer of 2027. There is no theoretical limit to this. Private equity firms could interview college juniors for jobs that will start in three years, contingent on them graduating college and successfully completing a banking analyst program. They could interview high school juniors for jobs that will start in seven years, contingent on graduating high school and going to a target college and doing banking successfully. Eventually you will put your child’s name on the KKR waiting list the moment she is conceived, though the list of contingencies will get longer.

As far as I can tell, nobody likes this. The private equity firms get less information by interviewing early than they would by waiting until the candidates have a year or two of banking under their belts. The candidates have stressful interviews before they even know if they like doing deals. The banks are mostly pretty happy to train junior people to go off to work in private equity — it is useful to have alumni as clients — but they would prefer to have more time with their analysts before they accept new jobs. The banks would like at least a fighting chance to keep their best analysts, and they would prefer that the analysts have undivided loyalties. If you spend two years working at JPMorgan Chase & Co. when you’ve already accepted a job at KKR, then (1) you probably shouldn’t work on any deals involving KKR, for conflicts reasons, and (2) your heart might not be in any of your other deals either, because your long-term loyalties are not with JPMorgan.

And so everyone involved wishes the system was different, but nobody can make it different. If private equity firms decided to wait two years to recruit new associates, one firm could get an advantage by defecting and hiring early. (And if every private equity firm signed an agreement to wait, they’d all get in antitrust trouble.) If candidates refused to interview before their analyst programs started, the candidates who defected and interviewed early would get all the plum jobs. If banks refused to let their analysts interview with private equity, they wouldn’t attract many analysts, because the analysts all want to end up in private equity.

On the other hand Jamie Dimon can do whatever he wants so I guess he can give it a go. The Financial Times reported last week:

JPMorgan Chase has told its incoming graduates that if they accept future-dated job offers elsewhere within 18 months of starting their analyst programme they will be fired.

The revised policy, included in a letter sent to recruits due to start the bank’s US analyst training programme later this summer, is the latest escalation of the Wall Street giant’s battle with private equity firms over junior talent.

“If you accept a position with another company before joining us or within your first 18 months, you will be provided notice and your employment with the firm will end,” the note from global banking co-heads Filippo Gori and John Simmons said.

While JPMorgan does not single out private equity firms, there is an implicit reference to “on-cycle” recruitment during which buyout groups hand out jobs to graduates two years ahead of their expected start dates, to allow them to complete an analyst training programme at an investment bank first. …

“To succeed in the investment banking analyst programme, your full attention and participation are essential,” the note stated.

Training sessions, meetings and obligations are described as mandatory, and the bank warned in the letter that analysts who miss any part of the programme may have their roles terminated.

This is all very reasonable on its own terms and I assume they will quietly forget about it in six months, which is probably when on-cycle recruiting for 2028 will start. But maybe not! Maybe JPMorgan will be an outlier, and will attract good analysts who don’t want to go into private equity. Maybe JPMorgan will be an outlier in a different way, and private equity firms will reserve some spots for JPMorgan analysts and just wait longer to fill them. Or maybe everyone else will see this move and say “yes obviously this is better,” and everyone will hold off on recruiting until the analyst programs end. But, no, probably they’ll forget about it.

Generally speaking, the more shares of a company you own, the more power you have over the company. If you own 0.01% of the stock, you can’t do much. If you own 2%, you can probably get a meeting with management to lay out your grievances. If you own 20%, you can probably get a representative or two on the board of directors. If you own 60% — or, for most practical purposes, 45% — you can probably pick the whole board of directors and tell the company what to do. Therefore, if the board of directors doesn’t like you, they will probably look for ways to keep you from increasing your stake.

There are exceptions, though. There are occasional break points where, by owning more shares, you get less power, or at least less flexibility. In the US, for instance, there are rather annoying “Section 16” rules that limit the flexibility of shareholders who own more than 10% of a public company’s stock: If you go over 10%, you might be stuck holding the stock for six months; if you sell it before then you can be forced to give up your profits. Activist shareholders in the US will often try to stay below 10% to avoid those restrictions. But if you’re at 9.9% and the board doesn’t like you, they might try buying back some stock from other shareholders, leaving you at 10.1% and restricted. You had more flexibility at 9.9% than at 10.1%, so the board might try to push your ownership up to give you less power.

Bloomberg’s Daniele Lepido has a fun story about an alleged spying scandal at Ferretti SpA, the Italian yacht maker, apparently triggered by a stock buyback plan:

The relationship between senior managers at Ferretti — one of the world’s leading designers of yachts for the super-rich — and its biggest shareholder, had soured over a share buyback program. ... The plan, which was withdrawn, briefly triggered the scrutiny of the Italian government under a special “golden” veto power over deals involving strategic companies. …

Weichai [Group, a Chinese conglomerate] currently owns a 37.5% stake in Ferretti. An alleged rift between Ferretti’s Chief Executive Officer Alberto Galassi and some of the board opened in February 2024, when they voted on a share buyback plan, which would have seen the company repurchasing as much as 10% of its own shares, according to people with knowledge of management discussions, who did not want to be identified because they were discussing confidential matters. ...

A 2012 piece of legislation gives the Italian government a so-called “golden power” over companies of strategic importance, which means the authorities have broad powers to intervene in mergers and acquisitions, share buybacks and other transactions. ...

“The current, wide application of the golden power law effectively could sometimes serve as a tool for economic protectionism under Italy’s right-wing government,” said Luca Picotti, a lawyer specializing in foreign investment rules. The rule has led to friction at Italian companies with non-European boards, Picotti added.

The facts are disputed, but one possible reading might be something like “the Italian managers thought that, by increasing their Chinese controlling shareholder’s stake, they could reduce its power, by attracting more attention from the Italian government.”

There are tens of thousands of people named Goldman in the US, and thousands more named Sachs, and surely somewhere there’s a Goldman who’s friends with a Sachs. They could have fun together. Start a company, call it “Goldman, Sachs & Co.,” set up some meetings. “If you give us your money we will manage it using proprietary Goldman Sachs algorithms,” that sort of thing. That name carries some cachet, [1]  and you could probably free-ride off that cachet with people who aren’t paying too much attention.

We have talked about this sort of thing before — a guy named Rob Goldman published a research note touting a penny stock under the name “Goldman Small Cap Research” — but I guess you don’t even need to be named Goldman. As long as your company is. The Wall Street Journal reports:

A Southern California businessman has emerged in a series of bankruptcy cases as a trustee and representative of creditors while operating a side business named Goldman Sachs Capital LLC that has no connection to the famed Wall Street bank.

Arian Eghbali, 40 years old, has been involved in dozens of recent chapter 11 cases, including Forever 21, Hooters and Virgin Orbit, representing trade creditors through his firm Olympus Guardians. Eghbali has also won an assignment as the liquidating trustee of Plenty Unlimited, a vertical farming startup that was backed by Jeff Bezos and SoftBank before it filed for bankruptcy this year, and serves as the trustee for unsecured creditors in Zips Car Wash, one of the nation’s largest privately owned carwash chains. …

In September 2022, Eghbali registered Goldman Sachs Capital LLC with the California Secretary of State’s office, listing himself as the organizer. A separate document with the same office that Eghbali signed in 2024 showed him as Goldman Sachs Capital LLC’s chief executive officer, using the same address on Ventura Boulevard in Tarzana, Calif., as his other firms, Olympus Guardians and Enrich Financial. …

In an interview, Eghbali said that years ago he explored doing a business venture that he expected would receive funding from Goldman Sachs, the investment bank. So he registered Goldman Sachs Capital LLC because he thought the source of funds would be from Goldman. However, he didn’t move forward with that venture, and instead used Goldman Sachs Capital LLC to conduct ERC-related business activities, Eghbali said.

Good for him. I have to say that if you are in talks with Goldman to have them fund your business venture, and you name that venture Goldman Sachs Capital LLC, they will probably stop talking to you. But there are other uses for that name.

You know this, but last week Elon Musk and Donald Trump got into an online spat on their respective social media sites. Musk and Trump are not just (1) powerful political figures, (2) billionaires, (3) owners of social media platforms and (4) mad online; they are also shareholders and figureheads of various meme assets, which mostly went down. Bloomberg’s Denitsa Tsekova and Alexandra Semenova reported:

In a matter of hours, a loosely connected web of Musk-linked trades — and a few tied to Trump — cratered as the public feud escalated. Dogecoin sank 10%; a publicly traded fund dangling SpaceX exploration for retail consumption slid 13%; leveraged bets amping up returns on Musk-related ventures lost a quarter of their value or more. Shares of Trump’s media company slid.

The spat — ignited by the deficit-expanding tax bill threatening Tesla’s electric-vehicle subsidies — cooled on Friday and asset valuations steadied. But by then, investors had gotten the message loud and clear. “You can go from being an incredible beneficiary one moment and then being bludgeoned the next,” said Peter Atwater, founder of Financial Insyghts. “Anytime you are investing in something that is as crowded as these Elon Musk-related vehicles, you are going to be either the beneficiary or the victim of his standing.”

I guess I would make three points:

1. “I feel bad for our country but this is tremendous content.”
2. I wrote last month that, for an assortment of tax and accounting reasons that it’s not worth getting into, it would be good for Tesla Inc. and for Elon Musk if Tesla’s stock price were to (1) collapse and then (2) recover. Does Musk read Money Stuff? Honestly I have no idea. I will say that, for my plan to work, Tesla would have to grant Musk a big slug of new options at the lows, and so far I have seen no sign that the board is racing to do that. But “start an online fight with Trump, drive down the stock, get new options, make up with Trump and drive the stock back up” would be, you know, something.
3. If you own Tesla stock … look Tesla’s SEC filings do not currently include a risk factor saying “Elon Musk is a loose cannon who will alienate approximately all of our customers by going all-in on Donald Trump, and then also alienate Donald Trump.” Is that securities fraud? If there is one essential theme of this column (that is not legal advice) it is that everything is securities fraud, and hoo boy. 

I often have occasion to see a stock drop and think “ahh that’ll be a fun lawsuit,” but I have never looked forward to a securities fraud lawsuit more than this one. These ones. Bloomberg’s Rick Clough reports:

Ross Gerber, the CEO of Tesla shareholder Gerber Kawasaki, sharply criticized Musk’s behavior in a Bloomberg TV interview Thursday, saying it could lead to lawsuits from the automaker’s investors and cut the value of SpaceX in half.

“Elon isn’t functioning to the benefit of his shareholders,” said Gerber, whose firm has substantially reduced its Tesla holdings over the last few years. The meltdown is leading to the “dismantling of the Musk empire in real time.”

There’s just a lot of material, you know?