Is Leverage the Solution to America’s Retirement Crisis? | Abdul Al-Asaad of Basic Capital

If you plot human civilization over the past 5,000 years, you will see that on day one, all national income came from labor, 0% from capital. And over the last 5,000 years, capital has been taking a larger share of the national income and labor is a lower share. Why? Because productivity gains, technological gains accrue to shareholders. So we sit here and we talk about the risk of investing. We talk about the risk of taking leverage and investing, but what about the risk of not investing?

Welcome to another episode of Other People's Money. I am joined today by Abdul Al-Asaad, co-founder and CEO of Basic Capital, a new investing platform that is giving investors a way to access leverage in their 401(k)s. Abdul, thank you so much for being here today.

Thanks. Thanks for having me.

You guys made quite a splash with your launch video. Uh, we'll get into like more about Basic Capital, but I just wanna start there. It was a lot of noise and quite strong reactions. Why do you think the idea of giving investors access to leverage for assets like private credit and stocks generated such a strong reaction from the general public and, and really the investing community?

Like a knee-jerk reaction with any new ideas. That come to the market. And, you know, our idea is bold, our idea is new. And generally speaking, in financial services, it's, you look smarter, you appear smarter if you are bearish than if you're bullish, right? Everybody wants to be Michael Burry, everybody wants to be the short king, everybody wants to be— there is something really compelling about that narrative. So nobody is gonna like get credit or any clout if they say, oh, this is a good idea. Like no one cares. But unfortunately, the way social media is designed and the way financial markets generally work is that they keep people honest and they keep people honest by all these bears or by all these activists. And I actually really enjoy that. I think there is a healthy dose of skepticism. That people have. So I tried to engage with anybody that had a thoughtful comment. So when we launched and we went absolutely viral, whenever I saw somebody actually asking a thoughtful question, I was in the replies. I was there, I was engaging. I love what I do. I enjoy it. But there were trolls and there were memes. The memes I liked and I reshared because they were entertaining and I love a good meme. The trolls, it's like, hey man, like, you're just, if you're just here to, you know, to troll, you can troll. This is not a game I want to play.

So what do you think people got right in that initial reaction? And then what are the things that, that people got wrong?

I think people, what they got right is that the idea, uh, can have massive impact on society. I think you need to understand when you launch a business, and people come out, you know, there are, first of all, there's a bunch of positive comments, there's a bunch of endorsements, et cetera. But I'm assuming we're not gonna talk about that. We're not going to talk about Demet Levine, you know, describing our product as cool and giving a thorough explanation of it. Let's talk about the bears. Let's talk about the skepticism. When you launch a product and somebody says, oh, this is going to cause the next financial crisis, Oh, this is going to create like massive impact on society. Implicit in that statement, implicit in that statement is essentially an endorsement that this is going to be a really big deal, right? Yeah. They might perceive the consequences to be negative, or they might be stipulating that the consequences will ultimately be negative. But embedded in that assumption is that, hey, This is an idea that is going to change society. So when you ask me about what they got right, they got right that part, that this is an idea that's going to change society. What they got wrong is how it's going to change society. And we believe it's going to change society for the better. You look at something like Fannie Mae and Freddie Mac, right? This is a very controversial idea among the popu— the, the public, but among economists, it's not po— It's not controversial at all. Back in the days, mortgages were issued by banks and they were issued on relationship-based. So you go to the bank and the bank judge your creditworthiness based on how firm your handshake was, based on whether you belong to the country club down the street, based on, you know, whether you are a good dude or a good man and You know, they, they came up with all types of fugazi, like basically criteria to give people mortgages, which is, are you a male? Are you a white male? Are you rich? Right? Like that was basically the underwriting criteria. Then two phenomena appeared. One of them is essentially, well, three of them. One is credit scores. The inventions of credit scores made underwriting standards a bit more objective. Two, securitization. Made credit impersonal. Impersonal, meaning non-personal. And what I mean by that is like, no, now the bank is not gonna originate a mortgage and sit on the mortgage forever. A bank is going to originate a mortgage, put it into a bundle of mortgages, and sell it as a bundled pool of loans. And by that made the underwriting decision less personal. And I think that's a positive thing. Right? Because now there's less room for bias. And thirdly, the government showed up and said, listen, nobody wants to lend money to Black people. Nobody wants to lend money to poor people. Nobody wants to lend money to women. Nobody wants to lend money to the middle class. Obviously every bank wants to lend money to Rockefeller. So we're going to backstop these mortgages. And by backstopping these mortgages, by the invention of the Fannie Mae and Freddie Mac in the 1930s, '40s. You took home ownership basically from the low teens all the way to 63%. So now almost two-thirds, no, almost more than two-thirds of Americans own homes. And the optimal ownership rate is probably not 100%, right? Like not every American should own a home. Some Americans are too old to own a home. Some Americans are too young to own a home. Some Americans are not, uh, do not have the career security to own a home. So the optimal home ownership rate is probably right where we are right now, around 70%. And then Fannie Mae and Freddie Mac and the government guarantees led to the financial crisis, led to 2008. And people are like, oh well, the government messed up, you know, we blah, blah, blah. 2008 was a bad event. But going back to your original question, I think if you ask 9 out of 10 economists, Do you think Fannie Mae and Freddie Mac was a good thing or a bad thing? 9 out of 10 would say it was a good thing because it unlocked home ownership. So in that sense, I believe what people got right is that this is going to be a big consequential business to society. It's going to be a big consequential idea to society. What they got wrong is that even though there is, there might be one episode, crisis where people lose money or lose their home over the long term, the beneficiaries of the Fannie Mae and Freddie Mac backing way outweigh the people who actually, you know, went delinquent on their homes and lost their homes in foreclosures in 2008. It's a bit challenging emotionally to talk about this objectively because, you know, to foreclose on one's home is an absolutely horrendous thing to do. Horrible thing to go through. Um, but at the same time, the idea did not work in one episode, but over long periods of time, the vast majority of the American public and nation has been a benefactor of it.

Well, and a lot of those loans were made good in the end. Like, a bunch of guys on Wall Street raised a bunch of money to go out and buy all of the loans that, uh, traded down, and, and, you know, they did pretty well.

Yeah, the Federal Reserve's Ben Bernanke was a great trader. He bought mortgage bonds at 30 cents on the dollar, and I'm pretty sure they made money, and I'm pretty sure they got— the Treasury was sending something like $20 billion a year in, I think it's called remittances. Excuse my English, English is my second language. They were sending like $20 billion a year from the Treasury, from the Fed to the Treasury, because the Fed was making money with their mortgage holdings. So they had excess cash, so they were literally sending it to the Treasury and it funded things like roads and education and Obamacare. So it was made good, as you said. So just because something see one bad episode, it does not mean that that thing is inherently bad, right? Like financial markets go through a big crisis every 10, 20 years, whether it's the Great Depression, 1980s, whatever, 2008, 2000. But just because they go through an episode of a crisis every now and then, that does not make them inherently bad. I mean, take cars, for example. So many people die from cars every single year, thousands of deaths. We still allow people to drive them, right? Like we as a society agreed that, hey, the benefit of enabling somebody to drive outweighs the lives lost. If we're going to get really morally strict around that, then why not ban cars? I don't know.

Well, I think the argument here is that most, most of the time it affects everybody all at the same time. It's, it's like we're all in one giant bus and then the bus, bus, buses have crash rates and then we all go down together in the bus. I think that's, that is more the criticism there, but I'm realizing I wanted to start with the controversy. The idea though, maybe we haven't fleshed out as much. So why don't we get into what exactly it is that Basic Capital provides and why you think people should take on leverage. And when you say, I, I know you're not making, uh, investment advice for anybody, so let's just get that outta the way. Why you think leverage is a tool that more people should have access to?

First of all, thank you. Disclaimer, this is not an investment advice. This is not tax advice. Please get your own, make you do your due diligence, do your own analysis and make your own decision. This is not investment advice. Listen, the ethos of Basic Capital is that credit is a tool. Credit leverage, whatever you want to call it, is one of the same credit leverage financing. It's a tool. And particularly it's a general purpose technology. It's a general purpose tool. What is a general purpose technology? It's a technology that can be used in different ways. Take this shovel, for example. I can use this shovel to dig a hole and plant a tree. I can use it to kill somebody. Take the airplane. I can use the airplane to send commerce around the Earth. right, and promote commerce or travel, tourism, or I can use an airplane to drop a bomb, right? The airplane itself is morally neutral. Go one step further, take nuclear energy. Nuclear energy can be an incredibly important renewable source. It can be used for bombs. Leverage is the same. Leverage is a general-purpose technology. It can be used in a good way. It can be used in a bad way. And what we're trying to do at Basic Capital is enable people or give people an option to use credit in a positive way. To be clear, it's not like everyday people do not have access to credit. They have access to credit. They just have access to credit in a bad way for a bad purpose.

What are examples of credit that you think are bad?

Every day, every single weekend, I go up to pick up the mail from my apartment, from my mailbox, and I get a credit card from Capital One. I get a credit card from JPMorgan. I get credit cards from Wells Fargo. It's in the mail. Literally, they're sending it to my doorstep.

You're pre-approved, Abdul Al-Asaad.

I'm pre-approved. What do— did I ask for it? No. Do I have a reason to use this credit card? No. They're literally sending it to me in the mail. Did you know you have $25,000? You're pre-approved. And now I can take this credit card and I can go out and I can go to Vegas. I can spend it on buying anything and nobody will actually put any type of guardrails to protect me. That is an example of credit being used in a bad way. Credit used to finance consumption. Now I understand credit can be a powerful tool because a lot of people have cash flow timing problems where they get paid on the 15th and the 30th, and sometimes they're short on their cash. And this is basically like a working capital loan for everyday people and like they rely on it. And I understand why that's important. But at the same time, we as a society decided that, hey, it's okay to give people these loans and give them unlimited access to it. And that's okay. But everyday people do not have access to use credit for a productive purpose. And productive purpose would be consumption. Because if I spend a dollar of buy now, pay later to buy a Coachella ticket, or I spent a dollar of credit card debt to buy shoes, that's utterly unproductive purpose. It's just going boom, it's gone. But if I want to use credit for a productive purpose, like to buy an investment, that is not an option. Everyday people cannot get credit for productive purposes today. They can get a mortgage. You could argue that's a productive purpose, which is to buy a home. Homes generally go up in value over long periods of time. If population continues to expand, that assumption is being challenged now with people not getting married, people not having kids, immigration closed down. I don't know if you want to bet on labor market expansion, but our idea here is that credit is a tool. It can be used in a good way or in a bad way. We give it for people for a bad reason all the time. Why not give it to them for a good reason? And that's what Basic Capital is.

You mentioned mortgages. I mean, people can get margin in their investment accounts. We're seeing levered ETF products where you're not, you know, the consumer isn't taking on leverage, but it's embedded into the products. Crypto, I mean, you know, 40x, 50x, we've seen some crazy amounts of leverage there. So I guess what is the sweet spot of leverage and I think we all inherently understand what can happen when leverage goes wrong. How are you trying to find that middle ground? Because there is no way to take on leverage perfectly safely. I think that's also clear that it is a risk that, that when you take on leverage, you're taking on risk, but there is a way to mitigate the risk or concentrate it in a specific area. Like, correct. With how are you providing leverage and where do you think the risk lies?

Let's start first by defining what leverage is, right? Let's start by defining risk associated with leverage, and then let's talk about how we're different from a leveraged ETF or a margin loan. Leverage in physics is the ability to do more with less. That's leverage. It's the ability to do more with less. You want to buy a million-dollar home, but you only have $200,000 down payment. You can get $800,000 leverage. Now you can buy more with less, right? That's what leverage is. Put very simply, it's the ability to do more with less. When you ask the question of who should have the ability to do more with less, Right? Our idea is the people who should have the ability to do more with less is the people who need it the most. So paradoxically, leverage has risk associated with it, and we're going to talk about that in a second. But we as a society, we're comfortable giving leverage to the people that need it the least, which is like really rich people. So we're giving leverage to rich people and we're giving them the ability to do more with less. But the people who actually have less, we keep them out of leverage. And that's, in my opinion, an extremely problematic dynamic, which I would love to kind of touch on.

Yeah, but I would argue that it's not because we don't want to help those people. It's because of the counterparty risk. It's because of the risk. It's because of the risk. And then as well, the idea that the risk to the lender and the risk to the That, that they, consumers taking on the leverage don't quite understand the risk that they're taking.

Both. Absolutely. So, so let's talk about this idea of risk, right? Uh, whenever there is leverage, there is, wherever there is leverage and there is investing, there is risk. And risk can never be eliminated.

No.

Risk can be shifted. So you can shift the risk to somebody else. You can insure the risk of your house burning down. The risk of you getting in a car accident. So now you're shifting the risk. You can diversify the risk. So you can spread your eggs into multiple baskets and put your eggs into multiple baskets. You can test the river with one feet rather than both feet. So now you're diversifying your risk. You can pool the risk. So now you're not exposed to one, which is another— pooling is the opposite of diversification, right? So risk can never be eliminated. Risk will always exist. Risk will especially exist in investing. Why? Because what is investing? Investing is buying future cash flows. At its most basic level, investing is buying future dollars that don't exist yet. The entire financial ecosystem is built on some sort of like metaphysical story we tell ourselves, which is that there is some revenue in the future. That we're gonna buy today at a discounted rate. That's what a bond is. That's what a stock is. That's what an option is. All these are different forms of basically saying there is some value in the future that I'm going to discount it today. That future may not materialize because the universe is a complex adaptive system. And if it's a complex adaptive system, that value may not exist. And if it does not exist, then you're gonna lose money in investing. Now, if you took leverage, you're gonna lose even more, right? So that becomes even more problematic. So now when we, we accepted the fact that there is risk and the risk can be limited or shifted, how, what are some of the techniques that we can do to manage that risk? So when I came up with the idea of Basic Capital, I really built it for myself. I wanted to invest. I was one of those people who had less rather than more. And I wanted to have the ability to do more with less. But I also wanted to do it in a way that couldn't— without risking absolute financial ruin. So I went there and I learned from the best. I said, who are the kings of leverage? And I was told it's the private equity guys are the king of leverage. And I said, well, how do they do it? Well, let's take a page from their book. First, they lever up the portco, the portfolio company. They do not personally take debt. They basically borrow money against an asset, against a company. So the borrower is not themselves. So there is a limited liability protection. So you can limit the amount of risk by basically limiting it to the amount you put into the vehicle. So you're, instead of taking personal loans for recourse loans like credit cards where you could ruin your life, where people have ruined their life, you could in effect put some money into a limited liability company, risk losing all that money, but you risk losing no more. And in that scenario, you should size your bets. So you should go out there and say how much I'm willing to lose. And put money accordingly. By the way, when you put your money in crypto, you should ask yourself the exact same question. So you should size your bet. That exercise becomes on you. And the leverage we provide to people is unlimited liability basis, which means if you put a dollar with us, we give you $4 of financing, exactly like a mortgage, 20% down payment, 80% financing to buy diversified stocks and bonds. We can get into that in a second. But you cannot, you can never lose more than the money you put in. So that's number one. Number two is unlike a margin, the value of the term of your financing, let's say, which is basically how long you're allowed to have this money for, is not governed by a predetermined agreement like 5-year, 10-year. 15-year, it's governed by the value of the underlying asset. That's called margin lending. You have to maintain a certain margin, right? Like think of it as a notebook and there is a margin on the edge, right? And you have to maintain a certain margin. And if you cross that margin, now you lose the loan. I want my financing back. That's an extremely problematic way to finance asset investments. Because investments can go up and down in value. So that's actually, I would argue that's a horrendous financial mechanism, like for institutional investors or even for regular investors, for any investor. Like if you, unless you know with a great degree of certainty how an investment is going to perform, why would you ever use margin? Like unless you know something about the future that no one else does, why would you ever use margin?

Well, it gives you, gives you access to more capital. I mean, yeah, you, you do have to, I mean, that, but that is, that's the idea of risk premia versus, versus market inefficiency. Some people are willing to take the risk.

Exactly, exactly. And the way I decided to structure the financing is I wanted to sleep at night. So I'm, I'm like you, I'm a student of financial legends like Warren Buffett and Charlie Munger. And I think one of their ethos is like, Make it, you know, like just make sure you can sleep well at night.

You know, Warren Buffett, one of his greatest trades of all time was negotiating that he didn't have to do this daily margin requirement on these options.

And yeah, he used to sell puts to Goldman Sachs. Yeah, I know, because I worked at Goldman Sachs and he used his whole trade was, uh, and that's why he did, he put $5 billion on Goldman Sachs in 2008 is because he's like, listen, I'm going to sell you puts. 'Cause Goldman was required, like, by regulatory requirements to hedge some of their black swan events. So he was selling them all these, like, deep out-of-the-money puts on SPY. And he negotiated in such a way where he does not have to maintain a margin, and he crushed it. What's another form of that? You know, you think about insurance. You buy car insurance from GEICO. Also your boy, Warren Buffett. Who walks around saying leverage is a very bad thing, under the hood, it's like the most leveraged investor of all time, right? So you, you give him, you give him a, you give him premium for car insurance and he takes that premium and he basically puts it in an investment. And if the investment goes down 50%, nobody— you're not coming to him and saying, give me my premium back, right? The only time you can ask for a premium back is if an event occur. It's a contractual agreement. The margin call is not driven by an LTV maintenance, it's driven by the occurrence of an event, right? And essentially what I wanted to do is I want to take leverage without having somebody trigger that leverage on me based on something beyond my control, such as how does the investment perform. How an investment performs beyond my control as an investor, You're always a passive investor unless you are a Bill Ackman and you're an activist and you're trying, and even then you can barely effectuate the outcome. But 99% of the time as an investor, you are passive. How the investment performs is completely independent from your hand. Putin can attack Ukraine and now your investment is down, even if you've done the math right, even if you've done your calculations right. So I wanted to make sure that My leverage does not get triggered on me by an event outside of my control. So margin was not suitable for me. So we decided to use instead term financing. And what term financing means, it means I'm going to give you money and you're going to give it back to me on a certain date. All right. And you're gonna give it back to me on a certain date. And until then, I'm not going to be asking you, how is that money doing? So there is no mark-to-market. And I think where people got wrong online is that they thought we were margin loans, which we are not. We are more leveraged than margin loans. We're 5-to-1 leverage instead of 2-to-1, but we do not offer mark-to-market. We do not mark you to market. We give you term financing and you have that money and you go out and you invest in it. Now we're more expensive than margin. You have The reason why term financing is more expensive is because, well, there is something called term premium, which I'm sure you're familiar with. So you have term premium every time you go out one year in term, you're discounting more of the cash flow. So just the way the math adds up is it ends up being more expensive because the yield curve is positive sloping, right? So if the yield curve is positive sloping, that means the longer out you are in the term, the more expensive your financing gets. Margin loans have no term. They're basically like, like right now loans. So as a result, they tend to be priced at 5% now or somewhere around so far, depending on your relationship with your lender. We are at 6.25%, over 200 basis points over the benchmark.

So does that mean people have to stay for the whole term or do they have liquidity? Like, is it called—

they can't— that's a great question. They can have liquidity, so they can sell the assets. And prepay. So what you're describing is so-called prepayment risk in mortgage bonds. And mortgage bonds, so theoretically they can, they can sell and prepay. We don't have any prepayment penalties, so you're not going to get penalized for paying early. However, if you invest and you sell one year in, you have to pay your financing before you get your money back, which means if the value of the investments is down more than what you put in, you would lose money. By the way, it's true for the sale for a house. If you buy a house, you put 20% down and you buy a house and the house go down by 30% and you decide to sell the house, you're going to realize that loss. And now you are wiped out and your lender is wiped out $100K, right? So, I mean, you don't have to stay for the whole term, but if you decide to exit before the term, You're gonna have to realize the gains or the losses.

Part of this is home prices generally outside of certain periods have not been historically very volatile, and that has made it more palatable for people to take on this level of leverage that you're talking about.

I don't know if they have not been more volatile. Just like a side note, intellectual footnote here. I don't know if they have not been more volatile or they just have not been transparently volatile. Right? Like if, uh, like homes are basically a function, it's a cash flow stream, right? Mortgages are cash flow streams.

Oh yeah. Yeah. People just take it off the market if they don't like the price. They, they just take it off the market.

Exactly. It's kind of like the whole private, like, you know, like private assets thing. It's like, yes, the, they're not volatile, but theoretically, if, if, if you bought a house in 2020 and the Fed raised rates by 500 bps, Your house is down 20, 30%. You just don't know it because financing costs went up 20, you know. So anyway, but I see what you mean. They've been less volatile. And that actually kind of ties up nicely in what you might ask next, which is what are you invested in?

Yeah.

It turns out that low volatility assets are a good candidate for leverage because when you're levering up, you do not want to buy an erratically volatile asset like crypto.

Like MicroStrategy, perhaps?

Yeah, right. Levered— buy levered Bitcoin with leverage. That would be— I'm sure, by the way, this, this would— there would be a big market for that product. We do not have that product and it's not on the roadmap. Um, but I understand, I understand why it's compelling for many people. I You know, I personally would probably buy something like that because I believe in the long-term value proposition, but I wouldn't recommend that to anybody because I don't think anybody should be following my personal, I don't have the personal preferences that everybody else might have.

Yeah.

So yeah, we offer, I think, listen, as you said, there is risk with leverage and we believe you can mitigate that risk. We do not think you should run away from risk. We think you should manage risk. And the way you manage risk is by limit it, and we limit it with a limited liability company. You structure it in such a way where there is no mark-to-market, so you are able to withstand short-term volatility swings. And you use it for a productive purpose where the reasonable expected rate of return on your assets is going to outweigh your cost of capital. If you combine these three elements together, It does not mean it's risk-free investment, but it means it passed the sniff test. If you are investing in a higher rate than what you are borrowing and you are limiting your losses to what you put in and you are not getting mark to market, there is a reasonable chance that in 90% of the time you'll probably make money. Again, there will be episodes where you will not. And that's, and you should keep that in mind and you should size your bets appropriately. You should say, you know what, I'm going to put 20% of my money into this product. I'm going to put 50% of my money into this product, 50% of my long-term money into this product. And my short-term savings are all going to be in a high-yield savings account or something.

Obviously private credit is the majority of what people are investing in. With basic capital. Argument very similar to housing. Well, we've never seen everything, all the markets turn down together. That's never going to happen. So obviously plenty of smart people out there have said, well, that day is coming for private credit. The GFC day is coming for private credit.

By the way, it's been coming for like 10 years.

It has been, but look, it took Burry, it took Burry a while too. And private credit is different. I mean, private credit now, then no leverage embedded. Like there's leverage embedded into private credit too. So there's more leverage. And who's to say that as more people chase the asset class, it's, it's popular for all of the reasons that you've laid out here, right? As more people chase the asset class to get the returns that justify the illiquidity, they're, they're going to have to embed this leverage in it the same way. And that the leverage is going to increase within the asset class that you're investing in.

Mm-hmm. Yeah, I mean, just to give the listener some context, so you, you know, let's say you're a customer of Basic Capital. You would come in, you would contribute, you know, $2 to Basic Capital. We open a limited liability company called Basic Capital for Max. You are the owner of that. LLC, and you know, you have $2 in it, and then we give the LLC $8 financing as term financing, non-mark-to-market, non-marginable. So now you have $10 of investable assets, and that $10 right now, we put $9 in private credit and $1 in the S&P 500. You make on the private credit S+500. Yeah. And you borrow from us at S+200. So net-net, you're making 300 basis points spread. In other words, you are borrowing at 6.25%. S means the overnight borrow rate. So you're borrowing it, which is now 4%, 4.25%. So you're borrowing at 6.25% and you're investing at 9.25%. And net-net, you're making 300 basis points. You're making 3%. But what that really means from a return on equity perspective is that it's 15%. It's 15% on your $2, right? Because you're making 3% on $9, which really multiply by 5, you know, it's, it's more 15%. So rain or shine, you are making 15%. And then if the equity market appreciates and go up in value, you're going to make money on your $1 in the S&P 500. On your equity bucket.

Yeah.

So if the S&P 500 is flat, you're actually going to make 15% with basic capital. If the S&P 500 is down 5% or 10%, unless there is massive wave of bankruptcies in private credit, you're going to make 15% with basic capital. So think of it as like you bought a house. With a mortgage and you rented out the house and the rental income is much bigger than the mortgage payment. So you have this cash, you can go buy more houses. And people have been doing this, by the way.

Yeah. I mean, that's everybody who got rich off real estate did it through this.

Exactly.

Not, not that they bought a piece of dirt out in the middle of nowhere that became New York City. Yeah.

No, they bought a house, they leveraged it up, they rented it out. There is a cash flow. They refi'd it.

And they kept doing it. They kept doing it.

They kept doing it and it worked. It worked. It worked. And it worked for a very long time. And some, by the way, it worked for a lot of people and it did not work for a lot of people. Again, like some people made money, some people lost money. That's how things work. You drive a car, some people get home safe, some people get in a car accident. Like, you know what I mean? Like it's, again, like it's, it's not a guaranteed, it's not a guaranteed thing.

Well, and, and to use, to use the analogy of real estate, I mean, it matters what market you're in and what quality of properties you're in. And so that comes back to, I guess, like, what are the managers that you're investing in on the private credit side and how do you gain the confidence that you're not going to have a scenario where, you know, eh, maybe I shouldn't have been buying those rental properties in Phoenix, you know?

Yeah. Yeah.

Something like that.

Yeah, absolutely correct. Absolutely correct. Well, first of all, we have an underwriting criteria and our underwriting criteria is we invest in managers that have at least $1 billion of AUM. We invest in managers that have at least 20-year track record into being an asset manager. So we invest in the crème de la crème of asset managers, the largest institutional ones. We invest in managers that have track record of navigating different cycles and different asset classes. So they usually have a private equity business, a private credit business, a growth business, an emerging markets business, et cetera. So we invest in the top-tier platforms. We're not investing in like, like a small team that spun off 2 weeks ago, 3 weeks ago type of thing. We're investing in the largest publicly traded institutional asset managers, heavily regulated, et cetera, et cetera. Now the question that you're asking is like, what happens if private credit goes belly up? And what, first of all, let's take a sense of like, what is private credit? Let's take a step back and understand like, what is this thing that everybody talks about, private credit? For them. In the old days, you used to go to a bank and borrow money from a bank for a loan. Corporations did that. They went to Goldman Sachs, they said, give me a loan. And they took that loan and they used it for all types of purposes, to CapEx, to finance capital expenditures, to buy machines, to buy factories, to buy other companies, M&A, You know, leveraged buyouts to buy, you know, a new management wants to buy a company and fix it. And they used to go to the banks. Where do the banks get that money from? You, the depositors. You come and you put your money, which is a short-term, short-term funding, and they take it and they originate 10, 20-year loans. And that's called fractional banking. And that's an inherently fragile system because if everybody comes to the banks to get their money at the same time, you end up having an episode of It's a Wonderful Life and your money is not there. Silicon Valley Bank, 2008, et cetera. You have a liquidity crisis, so you have an asset liability mismatch. If you want to fund the loans and the credit is what keeps the economy going, Credit is the oil of the economic machine. If you want to fund economic activities, the question is, what is the best source of funding? Well, the rule of thumb here is that the assets must mask liability. We're funding the entire economy with short-term funding. In 2008, the Federal Reserve noticed that problem, and that's why Lehman Brothers went out of business. That's why Bear Stearns went out of business. And they said, we're done with this. We're going to really constrain what the banks can and cannot do. We're really going to get in there and regulate. And they did that mostly from good intention. And that basically limited the bank's ability to originate these loans. And that created a new space called private credit. What is private credit? It's a bunch of guys, smart guys who used to work on private equity. They go to an endowment and they tell the endowment, I'm going to open a fund. It's a 10-year fund. You're going to invest in this 10-year fund, and I'm going to go out and originate 10-year bonds out of that fund. So now you originate, now you have an asset liability match. And they went and they did that with insurance companies like life insurance companies and annuity underwriters. And these insurance companies are basically making private equity funds themselves. Exactly. So it started out the first lending activity they did, they The first lending activity, the easiest lending activity was to lend money to the private equity firms. This is called buyout sponsor-backed lending. So I'm going to go lend money to the sponsors because why? Because I know them and they need credit and I'm just going to give them the credit. It's like, it's not because it's just like really easy way to do business instead of going out and convincing the companies Coca-Cola to borrow money from me. It's going to be a really hard sell to convince Coca-Cola to leave their Goldman Sachs banker Who takes them out for wine and dine and concerts to come take money from me. I can just convince my private equity buddy to take money from me instead of Goldman. And that guy is like actually in the market for credit. So they started out that way and they did that for 10 years, but they very quickly ran out of LBOs to do. 'Cause there is like a limited universe of sponsors. Yeah. And there is a limited universe of buyouts to be done. And they basically— but they had too much insurance capital coming in and they had too much other types of insurance capital that had different risk appetite coming in and they started to expand. So now if you look at the private credit universe, it's what's so-called the replacement business. It's in the replacement business. What does replacement mean? It means they're replacing the banks. So they go out and they take money from insurance companies. And retirees, retirement savers like our customers, where we invest in the private credit fund. We say, listen, here is the money. I do not want it for 10 years, 20 years, whatever, because I'm not gonna retire for another 10, 20 years. And then they take that money and they make 10, 20-year loans. These loans are to companies like Anheuser-Busch, like Coca-Cola, McDonald's, Databricks. These are big, well-established companies. In the old days, it's correct to say that most of private credit started out as sponsor-backed lending, which means you're taking exposure to private equity. If you look at private credit today, it's more diverse. It's— there's still 10, 20% of any private credit fund is sponsor-backed, and a lot of private— and there are some private credit funds that are exclusively sponsor-backed funds, and they say that. But there are, the ones we invest in are 30% asset-backed lending. So this is like financing aircraft leases and infrastructure projects, 30% senior secured paper. So this is senior secured corporate paper. And most of the time it's being used for general purposes. It's not for M&A or LBO or anything like that.

Working capital.

Just working capital. Exactly. And, uh, 30% of it is like infrastructure projects, like other types of like longer-term, longer-duration projects. Is there a universe where the aircraft lease defaults at the same time as the company, at the same time as the infrastructure project in Germany? Is there a universe where all these actually go bankrupt at the same time? Of course there is. You can imagine a scenario like this, like a World War III will do that, probably. Yeah.

Yeah. That I'm sure some people were imagining that recently.

Yes. But you cannot live your life around World War III. I mean, that's the other thing is like, you cannot like, like, like there is 5% chance you get in a car accident every time you drive, but you cannot live your life around that chance. You know what I mean? Like you should, you should size your bets appropriately. You should think appropriately about risk. We should accept risk that it exists and deal with it accordingly. but you cannot live around the 5% chance of like, oh, I might get in a car accident. Otherwise you're never gonna get anywhere. Again, think of cars. You're like, it's the number one cause of death in America. So what we believe in is that we are investing in these tier one managers, institutional grade managers, multi-billion dollar funds invested in diversified asset classes between asset-backed corporate and infrastructure, et cetera. There is a universe where one or two companies go bankrupt, but the universe where all of them go bankrupt at the same time, it's a lower probability event. It could happen, but when that happens, you will not risk financial ruin. You will lose what you put in. You will not lose anymore. And I think that's a really important distinction between taking like a student loan where if you graduate and you do not get a job, now you are in utter destruction for the rest of your life.

In a scenario where everybody on the street is going bankrupt at the same time, the S&P 500 is probably not doing very well. The housing market is probably not doing very well. No, you've got other— yeah, yeah. Basic capital is not your only, your only problem at that point.

Odds are, odds are an event that triggers such a magnitude is probably going to trigger losses everywhere else. And odds are at that point, the Federal Reserve and the federal government is going to step in and stabilize things.

Well, so this, my head naturally went here. The, the private credit guys must love you. I mean, 'cause you're, your target market are the $12 trillion of employee retirement.

They actually don't love us. They actually hate us.

Okay. Tell, you, you gotta, I'm gonna riff.

I'm gonna riff on that for a second, if you don't mind. Can I riff on that for a second?

Yeah, please.

They hate us because I know in the media says they want to go talk to retail. Yeah. But you need to understand the managers we work with are institutional grade, top tier, crème de la crème. And these people don't like, don't want retail money. I worked on Wall Street and I can tell you this right now, like they actually much would rather take money from institutions.

They're better clients.

They're better clients. And also they just do not want to lose everyday people money because the government gets involved when that happens. So they, like, in a bizarre universe, like, even though it might seem like they love us, they actually do not want to deal with any potential headache that comes from us.

The backstop is not worth the regulatory problem.

Yeah. They're like, I don't care. Like, they're like, dude, I— but like, paradoxically, I actually think they have something good to sell. And I see, you know, and I know I'm in the minority camp here, perhaps because everybody loves to talk about how private credit is bad. And again, I think you come across smarter if you are bearish, you come across smarter if you are short. And if you are short for long enough, you are, you'll ultimately be right. You will ultimately be right. But the question is like, have you been paying premium or have you just been tweeting? Right? And if you've been paying premium, I would love to see the IRR on that trade. Or have you just been tweeting that you're short?

But, but the idea is that you, you do that with other people's money, the fund, you, you make the one big bet and then you go raise the next fund and that's how you get rich.

Yes and no. The way I get rich into the, into the big call short manager.

I mean, that's, that has been the playbook.

Yes, correct. Exactly. Exactly. And, and, uh, yeah. I think the way you build an enduring franchise in any business is by doing good to your customers. And I really think the vast majority of asset managers out there, they're not going out of their way to try to screw their customers. Like, I really don't. That's just bad business. Like, maybe there is like small funds that are trying to sell you on some sort of like multifamily, like real estate thing. Like, I understand there are bad actors. But the big ones, the way they make money is like by delivering good risk-adjusted returns to their customers over long periods of time. And nobody likes to play the short game, the short-term games, because the short-term games, because the way you actually build wealth is by building an enduring franchise.

Well, and I think that goes to what you're saying about not really wanting the retail clients. When I said that they're not the best clients, in fact, in many cases, they are, are better clients, in some cases worse. And I think maybe the worse side is what is a reasonable rate of return for risk? I think that perhaps where the retail, uh, customer base is furthest away from the institutional customer base is you see it all the time, like when they do these polls about, or surveys, like what, what do you, what return are you expecting from your equity portfolio? Over the next 10 years, and they're just like insane returns that people are expecting. Something that an institutional investor would never— you'd be fired if you said, I'm expecting stocks to return this over the next 10 years.

But people need yield. Yeah. I think what I really want to talk about here, we talked a lot about the risk of doing, of taking action. The risk of investing. We talked about the risk of taking leverage and investing combined. We talked about the risk of investing in private credit. What we did not talk about is the risk of inaction, not the risk of action. And if you look at our society. 50% of Americans own no stocks. The average American owns $27,000 of financial assets, stocks and bonds, in their portfolio. $27,000. That's nothing. And it's skewed entirely by the top half. And you have the vast majority of Americans essentially have no ownership in the American system. And that's why they've, you know, that's why we have this social climate we have today. I mean, we're recording this on June 25th. Last night, Mamdani, socialist, won in New York. And 6 months earlier, Trump became president for the second time. And I think of this phenomenon as two faces of the same coin. Which is you have a lot of Americans, rightfully so, feel like they do not own a piece of the system. And they are being gaslit by financial advisors online that the reason why you are broke is because you are buying Starbucks coffee. And the truth is saving has not worked for most of Americans. Saving is not an effective way to build wealth. We're literally being gaslit. Oh, you are poor because you're buying an iPhone. You're poor because you're buying sneakers. The truth is saving works for the rich. The median income in America is $72,000. The median cost of living is close to $100,000. That means there's $30,000 deficit. And that explains why there is $5 trillion of consumer credit card, revolving consumer credit card outstanding. That's basically that $30,000 multiplied by 300 million Americans. So we sit here and we talk about the risk of investing. We talk about The risk of taking leverage and investing. We talk about the risk of this sector and that sector and blah, blah, blah. All good points, all thoughtful feedback. But what about the risk of not investing? What about the person who's living paycheck to paycheck and the most they can save is $100? Doesn't that person deserve to do more with less? Doesn't that person need— they need to do more with less. There is no other way. I mean, sure, the government could somehow give them all money. We've tried that.

Yeah.

Tried that with Medicare, tried that with Medicaid, tried that with Obamacare, tried that with— you name the thing, we tried it. Did not work. So what really concerns me is I want to invest, I want to build wealth, and I'm literally building basic capital for myself. I want to have the ability to do more, and, but all I can do is save $1,000 or $2,000 a month. And there are so many people like me. And if I put my money in the S&P 500 and I wait a year, it goes up like 10%, I'm lucky. And now I made $100 in my $1,000. Like, okay, like what? What?

Abdul Al-Asaad: Dual compounding. You're not thinking long-term enough.

Ah, well, let her compound for, you know, like, that's the other thing. Okay, let her compound for 30 years. This would be $35K. What am I gonna do with $35K 30 years from now?

30 years, yeah, 30 years, that, it'll be a carton of eggs.

Hey, Zach, here you go, Zach. I'll buy a carton of eggs in 35, like, like, like, you know, we're being literally gaslit. They're like, hey, like, oh, like, you know, you should. No, no, no, no. Like, like economists have, like Thomas Piketty wrote a 700-page book. That basically, like, the entire thesis of the book: you cannot save your way to wealth. R is larger than G. Capital compounds faster than wages. That's literally the, the thesis of the book. Capital grows at a faster rate than wages do, which means mechanically, mathematically, it's impossible for you to actually capture a meaningful share of capital by relying on your wage growth. Like, that's what Like that is the nutshell here. It's like mathematically this, like, which is like a really fancy way of saying rich gets richer. It takes money to make money. And people have figured that out. And that's why people voted Mamdani in. And that's why people voted Trump in. So there is a real risk where if continuously capital starts to take a larger share of the national income. Right? Like, this is Macroeconomics 101. The national income is a function of two things: labor and capital. On day one of civilization, when we were hunters, the entire national income came from labor. We used to go out and capture a chicken and eat the chicken. That was 100% of the national income is labor. Then we invented the knife. Then we invented the fire. And as a result, now part of our productivity gain, part of the national income is actually from capital, from the knife, not from my own effort. The knife gave me leverage. Technology is just another form of leverage. And if you plot human civilization over the past 5,000 years, you will see that on day one, all national income came from labor, 0% from capital. And over the last 5,000 years, which is what Thomas Piketty did, Capital has been taking a larger share of the national income and labor is a lower share. Why? Because productivity gains, technological gains accrue to shareholders. If we create OpenAI and OpenAI helps companies become more profitable by automating a lot of the jobs and firing people, who does that productivity accrue to? Who does that gain? Cost saving accrue to? It accrues to the shareholders of the company. And if you do not own shares, you're fucked because they fired you and you do not own the shares. Now you're actually like, excuse my language, you're now you're royally screwed, right? And royally in trouble. And we talk a lot about the risk of action and the risk of initiative, but we do not talk enough about the risk of inaction. And, um, we ask people, listen, there is risk with action, but there's also risk with inaction. Size your bets appropriately.

I mean, capital tends to flow to areas that they think will get a return on that capital. That's what you're trying to do here. So let, uh, as, as, as true as it is that people should in theory benefit from this access, you and your shareholders and your investors are trying to benefit from providing this access. So let's talk fees. Let's talk fees.

Let's talk fees.

So let's talk fees and how, how you are trying to make money and, and how you position yourself in, in the marketplace of investment solutions for the, you know, the $12 trillion of employee retirement funds that are out there.

Yep. Yeah, we charge 3 layers of fees. The first fee is we charge a 50 basis point administration fee on assets under management. Think of this as an expense ratio. Yep. So that's just flat out management fee. We charge you money. There is another fee, which is the financing cost, and the financing cost is structured as follows. We give you financing at 6.25%, which is cheaper than the mortgage. Mortgage rates are at 7% today. So you can either take a 7% mortgage to buy a home and now you're 5 to 1 levered Columbus, Ohio, or you can come to Basic Capital and take a mortgage from us at 6.25% and now you're 5 to 1 levered America stocks and bonds. And I much would rather take 6.25%, that seems like a lower hurdle, and buy all of America stocks and bonds, the S&P 500, down to get long one zip code, right? And we get 5% of the gains at liquidity. So when you get out your, when you sell your assets, we take 5% of the gains. And the reason why we take that 5% of the gains is because we are technically an equity investor with you. So think of it as like 2 and 20 type of fee, like a performance fee type of thing. So part of it is like we have to do that. Um, and then we charge a subscription fee and that's where people really lost their online. We charge $25 per month, which comes out to be $300 a year. And when we structured the fee that way, we kind of, we were trying to be clever. We were like, oh, somebody is gonna do the math and realize that it's not worth putting $100 into Basic Capital. Because if I put $100 into Basic Capital and lever it up to $500, I have to pay $300 in fees. So somebody is gonna basically do the math and realize that the break-even point is like some, somewhere around $10K. And anywhere below $10K does not really, it's not worth it. Now unfortunately, we should have made that math cleaner for people because obviously if you're putting $100, you should not invest with Basic Capital. But we intentionally charge this $25 per month fee because in, we have two businesses. We have a retail business and a 401(k) business. And in the retail business, we have 10,000 people on the waitlist. We take a handful of people every day. The people we take are willing to contribute up to $1 million. So we're trying to get high-quality, long-term investors, and we provide a premium service, so we charge for it. If you don't like the fees, don't buy the product. But you are— but people are freaked out because they perceive it to be like, oh, $300 fee just to be there? It is an expensive product. I want to be clear, if you are an employee of a company that offers the basic Capital 401(k), there is no monthly fees for you. So you pay 6.25% of the financing, a 50 basis point administration fee, and that's it.

And then the, the company pays like what, $5? $5 a head?

The company pays, yeah, the company pays $5 a head, which is basically like what they already pay for their payroll. What they already pay for Fidelity. I mean, Fidelity charges like, well, a guideline charge is like $9 a head, right? Like, like, you know, competitors charge $9, $10 a head. We charge $5 a head. So the employer is paying that to offer you Basic Capital. The Basic Capital 401(k) is really interesting because if you think about who is the best customer for Basic Capital, it's somebody who does two things, who have long time horizon, And who does dollar cost averaging. So basically they buy the market on the way down, they buy the market on the way up. So this way they're not taking time sequencing risk. You're not taking like a sequencing risk or timing risk. And if you think of what is the best vehicle for that, it's the 401k. Because the 401k basically literally penalizes you if you try to take your money out early. And you dollar cost average your exposure on biweekly basis via the payroll. So the basic cap of 401(k), employers use our product, employees contribute on biweekly schedule. The employees can put 100% of their contributions into a target debt fund with Fidelity or Vanguard, no leverage. They can put 100% of their money in VOO. No leverage, and that's completely fine. And some employees do that, or they can split their money. They can size their bets. They can say, you know what, I'm gonna go 50/50. Of every paycheck contribution, every 2 weeks, I'm gonna put 50% with Basic Capital and 50% here. So let's imagine you have a 10% saving rate. So you put 10% of every paycheck into your 401(k). And let's say you put 5% with Basic Capital. And 5% in a target debt fund. The 5% of basic capital, we give you 20% financing on it. So now your saving rate went from 10% to 30%. Why 30%? Because you have 5% in a target debt fund and you have 25% invested capital with Basic Capital. We literally 3x your saving rate. If you put the full 10% with us, We give you 40% financing. So now your effective saving rate is 50% of your annual income. Think how powerful that is.

So how does the DCA work into a private credit fund? Aren't these like vehicles that have a vintage?

No, they're not. So this, the funds we invest in are evergreen. Okay. So all these like big funds are moving away from the vintage. Vehicle. And they basically, what they have right now is what's so-called 1940 Act interval funds. So these are not private funds, these are actually public funds. They are registered with the SEC. They are extremely transparent. They provide annual and monthly reports. They show you exactly their holdings. They show you exactly the marks. So they're like literally like publicly registered 1940 Act security. They're just like an ETF. But the underlying holdings are not public stocks and bonds, they're private. The fund itself is public, but the underlying investments are private. And these are evergreen vehicles, so you can dollar cost average yourself into them. Yeah. So because you can invest on biweekly papers and you have no vintage risk. Sequoia, for example, did this with their VC fund. So they put all their VC vehicles into one giant, like evergreen vehicle, and it has a public markets IPo stuff, it has a private market, it has early stage, and now they invest out of one massive vehicle, basically.

So where, final question is, where are you getting the financing? Where are you getting the $6.5 billion? So as the money comes in, who's financing you?

Yeah, wouldn't you love to know that? Listen, we work with partners, insurance companies, banks, balance sheet, out of our own balance sheet. And essentially we're trying to build a new credit system in order for the— I think people give us a lot of heat online, but people do not appreciate how difficult is the thing we're trying to build. The first difficult thing is we're trying to fundamentally shift the American mentality from using credit to consume to using credit to invest. And then we need to come up with big enough asset classes to deploy capital into. So that's private credit, infrastructure, public equities, private equity, et cetera. And then third, we need to come up with a big enough credit market to backstop that. The entire housing market is propped up by mortgage-backed securities, which is trillions. The entire private equity market is propped up by the high-yield bond market and the levered loan market. And in many ways, what we're doing is building a new credit market. It seems like an impossible task, but it's been done before. Before the 1980s, there was no credit card. Less than 10 years ago, there was no buy now, pay later. And now buy now, pay later is a multibillion-dollar securitization business. Every 2 weeks they do like a multibillion-dollar firm, Klarna. It's a big task, but we believe it's a worthy pursuit because we believe credit is a tool. And we believe if people want to have it, if people would like to use credit for a productive purpose, they should be able to.

So are you going to be securitizing?

We will be securitizing. And selling off. And you will see a basic capital securitization soon. And it will be a really, really big milestone and will be the first company to have securitized retirement mortgages.

Very interesting. All right, Abdul, well, we will leave it on that note. Thank you so much for joining us. Where can people find out more about you, more about Basic Capital?

We are at basiccapital.com, and I'm on Twitter @AbdulAl-Asaad or Abdul Al-Asaad. You'll find me there. Come work with us, come build Basic Capital, the new retirement generation with us. Come be a customer and thank you for having me, Max.

Thank you. It's my pleasure.

Pleasure.