Every historical financial crisis traces back to the same cocktail: asset-liability mismatches combined with leverage, not simply bad credit decisions.
Waxman argues you can be the best investor in the world making the best illiquid investments, but if your liability structure lets someone ask for their money back before those investments have played out, you get caught out of position and forced to sell at a discount. Leverage compounds the problem but the root mechanism is always the mismatch.
asset-liability-mismatch
Glass-Steagall's 1933 separation of commercial banks from principal risk-taking gave the U.S. financial system 50-plus years of stability, but it was never optimized for growth.
By walling deposit-taking (backstopped by the new FDIC) away from investment banking, the post-1929 reforms prevented conflicts of interest that had contributed to 9,000 bank failures. The tradeoff was a conservative, low-risk-appetite system that worked fine in a non-globalized world but became less competitive once European banks began combining commercial and investment banking.
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Glass-Steagall's 1999 repeal was a response to competitive pressure, not a plan for economic optimization, and it set up a nine-year leverage buildup that fed the 2008 crisis.
Deutsche Bank's 1998 purchase of Bankers Trust and Citibank's merger announcement with Travelers (technically illegal under the existing law) signaled that European banks combining balance sheets could out-compete separated U.S. institutions. After repeal, commercial and investment banks merged, and non-bank investment banks had to leverage up (in some cases 20-30x) to compete, feeding directly into the GFC.
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Post-GFC bank regulation (Basel III and Dodd-Frank) constrained bank capital and leverage, and that gap was filled by the explosive growth of private capital.
Basel III restricted how levered commercial banks could get and mandated liquidity buffers against shock scenarios; Dodd-Frank (via the Volcker Rule, which Waxman says did not persist long-term) targeted principal risk-taking. The resulting gap in risk capital was filled by pension funds, sovereign wealth funds, endowments, and insurers: private capital grew from roughly $2T pre-GFC to $14-15T today, and private credit specifically from $500B to about $2T.
financial-system-evolution
The 'factory model' of investing industrializes fundraising first, then deployment - and it always starts on the liability side.
Firms make fundraising as simple and narrow as possible to raise capital fast (Waxman's saddle-maker-versus-saddle-factory analogy), sometimes accepting looser liquidity terms to get money in the door faster. Behavior on the investing side only changes once a firm is sitting on committed capital it must deploy - liability-constrained firms never develop factory-model behavior because they'd run out of money first.
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Rising multiples on fee-related earnings (FRE) - the profit from management fees - are a structural incentive pulling firms toward the factory model.
Waxman traces FRE multiples for alternative-asset managers from roughly 10-15x in the early 2010s to 15-20x after 2018 to 25-30x-plus in the current cycle. Because GP equity value scales with assets raised rather than realized carry, the multiple itself rewards raising capital fast over disciplined underwriting.
factory-model-vs-artisanal-investing
Today's private-credit stress is a symptom of factory-model behavior that began in 2018, not a new problem caused by AI or software.
Underwriting standards loosened industry-wide starting in 2018 as firms chased deployment pace; this accelerated sharply after COVID as firms moved from institutional SMAs (separately managed accounts) to raising money from the wealth channel. Media coverage focuses on proximate triggers - software-sector credit worries, stuck private assets bought at 2021-22 peak valuations - but Waxman says the root cause is the underlying change in fundraising and underwriting behavior, not any single sector shock.
asset-liability-mismatch
'There's no such thing as semi-liquid' - wealth-channel vehicles offering quarterly redemptions against illiquid private assets are mismatched by construction and show it under stress.
Perpetual private BDCs raised from mass-affluent and wealthy individuals promise periodic liquidity on fundamentally illiquid direct-lending or private-equity assets. When market volatility or credit concerns hit, redemption requests have exceeded the standard 5% quarterly gate at a number of these vehicles, which is the concrete mechanism behind the headlines Waxman is describing.
asset-liability-mismatch
Waxman does not think today's private-credit dislocation is systemic, given the small base of wealth-channel allocation and a still-healthy economy, but expects a necessary recalibration of underwriting and fundraising behavior.
Wealth-channel allocations to private markets are historically only 1-2% of portfolios (expected to reach 10%-plus over the coming decade), so the dollar quantum of the current mismatch is small in the grand scheme. Because the dislocation is hitting during relative economic health rather than a recession, Waxman calls it 'a gift to the industry to recalibrate' rather than a crisis, and expects market discipline (LPs withholding future capital from firms that behaved irresponsibly) to do more of the correcting than new regulation.
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Waxman's 'clarity of purpose' test distinguishes durable firms from factory-model firms: know explicitly whether your purpose is raising liabilities or driving investor returns, and stay consistent.
Being large or publicly traded doesn't automatically mean a firm has adopted the factory model - the tell is whether underwriting discipline (return per unit of risk) or asset-gathering has become the real objective function. Sixth Street, despite a strong direct-lending track record dating to 2001, has raised zero dollars in perpetual private BDCs on principle, which Waxman frames as proof that purpose, not opportunity, should gate what a firm raises.
factory-model-vs-artisanal-investing
Waxman runs a handwritten, two-page personal organization system he calls 'the brain' to manage return on time.
The 'left brain' page holds his top five strategic priorities (one box each), a running list of people to call, and personal items like health goals (vitamin D, hip mobility from an old soccer injury); it gets rewritten by hand whenever it fills up, forcing recommitment to what matters. The 'right brain' page captures ideas and themes and has been kept continuously for 25 years - he rereads the full archive annually and finds that ideas from a decade earlier regularly resurface as relevant.
personal-organization-systems
Waxman's framework for career decades runs 20s (pure learning), 30s (ambition without enough mistakes yet to have judgment), 40s-50s ('prime time,' competence plus continued learning), and 50s-plus (mentorship) - and chasing money, power, or fame is 'a cup that never gets full.'
He credits a lesson from his father at age 10 that success isn't about that cup, and instead defines it around doing excellent work with people who share his values ('face the tiger') and around relationships and shared experiences - he uses the Hawaiian term 'hui' (posse) for the people he wants to be climbing the mountain with, framing that as the actual purpose he's optimizing for at 80 looking back.
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Companies
Sixth Street - Waxman's firm - a multi-strategy private capital firm; he started its direct-lending business in 2001 and it holds zero dollars in perpetual private BDCs despite being able to raise them.
Goldman Sachs - Waxman's prior firm, cited as an example of an investment bank that lacked cheap deposit funding after Glass-Steagall's repeal and had to compete against newly combined commercial-investment banks.
JPMorgan Chase - Cited as one of the powerhouse commercial-investment bank mergers that followed the 1999 repeal of Glass-Steagall.
Deutsche Bank - Its 1998 acquisition of Bankers Trust is cited as a moment showing European banks combining commercial and investment banking ahead of the U.S., pressuring American banks toward deregulation.
Citibank - Its 1998 merger announcement with Travelers was technically not allowed under Glass-Steagall at the time, helping catalyze the law's 1999 repeal.
Anthropic - Waxman says he regularly uses Claude alongside other LLMs, asking the same question across models to compare how each answers.
OpenAI - Referenced as one of the LLMs (ChatGPT) Waxman uses regularly to compare answers across models.
Google - Referenced via Gemini as one of the LLMs Waxman uses regularly.
xAI - Referenced via Grok as one of the LLMs Waxman uses, needled by Patrick as 'not your friend.'
Techniques and frameworks
System 1 / System 2 / System 3 framework - Waxman's periodization of the U.S. financial system: System 1 (1933-1999, Glass-Steagall separation), System 2 (1999-2008, deregulation and leverage buildup to the GFC), System 3 (2010-present, Basel III/Dodd-Frank plus the rise of private capital).
The factory model - Waxman's term for industrializing fundraising first (raise capital fast in narrow, simple strategies) and then industrializing deployment second, as opposed to the artisanal model focused purely on investment returns.
Clarity of purpose - Waxman's test for whether a firm's growth is healthy: know explicitly whether the firm's purpose is raising liabilities or driving investor returns, and stay consistent with it.
The brain (one-sheet personal organization system) - Waxman's handwritten system: a 'left brain' page of five strategic priorities, people to call, and health items, redone whenever it fills up, paired with a 'right brain' page of ideas he has kept and reread annually for 25 years.
Face the Tiger - Sixth Street's core ethos: run toward problems instead of away from them, framed as the firm's response to an accelerating pace of change.
Summary
Alan Waxman, founder and CEO of Sixth Street, returns for a second conversation with Patrick O'Shaughnessy to explain the financial system's guardrails and incentives as the real driver of what's making headlines in private credit today. Waxman frames modern American finance as three successive systems: System 1 (1933-1999) began with Glass-Steagall separating deposit-taking commercial banks from principal risk-taking investment banks after 9,000 bank failures in 1929, producing decades of stability but a system not optimized for growth. System 2 (1999-2008) began when European banks, unbound by Glass-Steagall, combined balance sheets and out-leveraged their American counterparts, pressuring the U.S. to repeal the law in 1999; the resulting merger wave and leverage buildup (in some cases 20-30x) fed directly into the 2008 financial crisis nine years later. System 3, the current era, followed Basel III and Dodd-Frank constraining bank capital and liquidity, which opened space for private capital - pension funds, sovereign wealth funds, endowments, insurers - to fill the risk-capital gap, growing from roughly $2 trillion to $14-15 trillion, with private credit alone going from $500 billion to about $2 trillion.
The heart of the conversation is Waxman's "factory model" framework: starting around 2018, firms across private equity, real estate, infrastructure, and especially private credit began industrializing fundraising first - raising capital as fast and simply as possible, often in narrow single-strategy vehicles - and only then industrializing deployment, because committed capital creates pressure to deploy it quickly regardless of opportunity quality. He ties this behavioral shift to rising fee-related-earnings (FRE) multiples for asset managers, from 10-15x in the early 2010s to 25-30x-plus today, which reward asset gathering over disciplined underwriting. COVID accelerated the pattern further, pushing fundraising from institutional separately-managed accounts (SMAs) into the wealth channel, where individuals want liquidity that illiquid private assets can't actually provide - what Waxman flatly calls "no such thing as semi-liquid."
Applied to today's headlines, Waxman argues the private-credit stress in perpetual private BDCs (where redemption requests have exceeded standard 5% gates) is a symptom of this multi-year behavioral shift, not a new problem invented by AI-driven software concerns. He doesn't see it as systemic - the wealth channel's allocation to private markets is still only 1-2% of portfolios, and the dislocation is hitting during a relatively healthy economy rather than a recession - but he expects a necessary recalibration of underwriting standards and fundraising discipline, enforced more by market mechanisms (LPs withholding capital from firms that behaved irresponsibly) than by new regulation. His central prescription for firms is "clarity of purpose": explicitly deciding whether the goal is raising liabilities or driving investor returns, and staying consistent with that choice even when it's costly, as Sixth Street has done by declining to raise any perpetual private BDC capital despite a two-decade direct-lending track record dating to 2001.
The conversation closes on a more personal register. Waxman discusses AI and software as the leading edge of a broader wave of creative destruction that he expects across every industry, describes tracking his firm's LLM usage and personally comparing answers across Claude, ChatGPT, Gemini, and Grok, and details his handwritten "brain" system - a left-brain page of five strategic priorities, a running call list, and health goals, paired with a right-brain page of ideas he has kept and reread annually for 25 years. He lays out a framework for career decades (20s for learning, 30s for ambition without full judgment, 40s-50s as "prime time," 50s-plus for mentorship) and rejects money, power, and fame as a "cup that never gets full," locating his own definition of success in relationships, shared values, and Sixth Street's "Face the Tiger" ethos of running toward problems rather than away from them.
Notable Quotes
"What you're reading in the news today are the symptoms, but not really the root cause." - Alan Waxman
"There's no such thing as semi-liquid. There's liquid and then there's illiquid." - Alan Waxman
"It's like, what is your clarity of purpose? ... That's your pathway to building a great company that's going to be here for a long time, not short-termism." - Alan Waxman
"Once you start to prioritize [money, fame, fortune], that's a cup that will never get filled. Keep trying to fill the cup, and the cup keeps getting bigger and bigger. That cup never gets full." - Alan Waxman
"We look at the problems head on, we look at them together, and we don't run from them, we run to them. We run right at them." - Alan Waxman