[HN Gopher] US private credit defaults hit record 9.2% in 2025, ...
___________________________________________________________________
US private credit defaults hit record 9.2% in 2025, Fitch says
See also: https://alternativecreditinvestor.com/2025/10/22/us-
banks-ex...
Author : JumpCrisscross
Score : 194 points
Date : 2026-03-12 12:44 UTC (10 hours ago)
(HTM) web link (www.marketscreener.com)
(TXT) w3m dump (www.marketscreener.com)
| FrustratedMonky wrote:
| The US Ponzi scheme coming to an end. It works great while
| everything is going up.
|
| 2008 Financial Crisis was triggered by Oil prices. There were
| lots of problematic structural elements that were fine if nobody
| looked close. Oil was just the sideway hit on the building to
| knock it over.
|
| Just takes a nudge to collapse. And here we go again.
| reliabilityguy wrote:
| > 2008 Financial Crisis was triggered by Oil prices.
|
| Not by the subprime mortgages given to anyone with a pulse?
| alphawhisky wrote:
| Now the subprime credit of entire cities is being sold bank
| to bank. I'd argue that's a direct escalation of the 2008
| credit crisis.
| floatrock wrote:
| I thought it was by the layers upon layers of interconnected
| unregulated derivatives valued at a few orders of magnitude
| above the underlying subprime mortgages given to anyone with
| a pulse.
| JumpCrisscross wrote:
| > _it was by the layers upon layers of interconnected
| unregulated derivatives valued at a few orders of magnitude
| above the underlying subprime mortgages given to anyone
| with a pulse_
|
| It was interconnected derivatives and structured products
| linked to banks that caused a liquidity crisis in the
| former to cause a crisis of confidence in the latter.
|
| Meanwhile: "In the letter, Morgan Stanley said the fund
| wasn't designed to offer full liquidity because of the
| nature of its investments, and that credit fundamentals
| across the underlying portfolio have been broadly stable.
| The bank's shares fell 2% in premarket trading Thursday"
| [1].
|
| [1] https://www.wsj.com/livecoverage/stock-market-today-
| dow-sp-5...
| kryogen1c wrote:
| > liquidity crisis in the former to cause a crisis of
| confidence in the latter
|
| Wait what? Your thesis is the GFC was caused by a
| liquidity crunch/bank run? Isn't that... not true?
|
| Isn't the proximal to distal chain of events government
| encouraged subprime loans -> inaacurately valued MBS ->
| exponential, unregulated derivative instruments ->
| leveraged contagion. What does market confidence have to
| do with any of that?
| JumpCrisscross wrote:
| > _your thesis is the GFC was caused by a liquidity
| crunch /bank run? Isn't that... not true?_
|
| It's absolutely proximally true and it's not just my
| thesis. From Wikipedia: "The first phase of the crisis
| was the subprime mortgage crisis, which began in early
| 2007, as mortgage-backed securities (MBS) tied to U.S.
| real estate, and a vast web of derivatives linked to
| those MBS, collapsed in value. A liquidity crisis spread
| to global institutions by mid-2007 and climaxed with the
| bankruptcy of Lehman Brothers in September 2008, which
| triggered a stock market crash and bank runs in several
| countries" [1].
|
| > _government encouraged subprime loans - > inaacurately
| valued MBS -> exponential, unregulated derivative
| instruments -> leveraged contagion_
|
| The subprime crisis shouldn't have been bigger than the
| S&L crisis [2]. What turned it into a financial crisis
| was the credit crunch that followed. That crunch was
| caused by folks running on banks that had sponsored these
| products.
|
| On "inaccurately valued MBS," note that the paper marked
| AAA mostly paid out like a AAA security. It would be like
| if you were perfectly good for your word and I lent you
| money, but then I wanted to sell on that debt to a third
| party who didn't trust you at a 50% discount. What does
| "properly valued" mean in that context? It's ambiguous in
| a dangerous way. (In this analogy, you wind up paying
| back the debt at face value. But years later, albeit on
| schedule.)
|
| [1] https://en.wikipedia.org/wiki/2008_financial_crisis
|
| [2] https://en.wikipedia.org/wiki/Savings_and_loan_crisis
| FrustratedMonky wrote:
| That was the structural problem. Definitely bad. A weak
| economy propped up by some 'fake' money.
|
| Oil was more of the outside force that put a shock to that
| weak system.
| FrustratedMonky wrote:
| That was the structural problem.
|
| But it was swept under the rug, it was hidden by market
| constantly going up.
|
| Ponzi schemes can hide in a market going up, because nobody
| is trying to pull money back out.
|
| Suddenly everyone wanting their money, and the shortfall
| suddenly become apparent.
|
| Oil prices suddenly made everyone try to pull money out, and
| 'woops there is nothing here'.
| floatrock wrote:
| I did make a snarky derivatives comment elsewhere in the
| thread, but I do see you're not wrong about oil prices
| peaking at $138 in June 2008 (Lehman collapsed in September
| 2008): https://fred.stlouisfed.org/series/DCOILBRENTEU
| m0llusk wrote:
| There were many involved factors, but the 2008 financial
| crisis was started when Ben Bernanke raised interest rates.
| marcosdumay wrote:
| I think the GP is trying to say that oil prices where the
| nudge that pushed the bad loans and derivatives out of
| stability.
|
| I don't remember oil getting expensive back then, but it's a
| long time ago.
| naijaboiler wrote:
| it did. GFC was a financial recession no doubt, but oil
| prices was one of the final things that tipped everything
| over. Oil prices climbed high, slowed economic activity a
| bit, and the whole financial that teetering just collapsed.
| jacquesm wrote:
| This time it took ~35 blows with a sledgehammer. You have to be
| impressed with the degree of resilience here, even a chaos
| monkey like Trump has a hard time completely destroying the US
| economy even when all checks & balances utterly fail.
| fabian2k wrote:
| It feels a bit like in a Road Runner cartoon. We already ran
| well past the cliff, just haven't noticed yet that we should
| be falling down.
| ToucanLoucan wrote:
| Trump is a symptom, not a cause. One of probably hundreds of
| mediocre failsons gifted unbelievable wealth in the birth
| lottery who's greatest achievement in life was managing to
| not lose all of it to his awful business acumen and utter
| refusal to listen to a single living person.
|
| Every industry's leadership is full of trumps, many more
| palatable personally, many far better spoken, many even with
| better politics but none fundamentally are any actually
| better for society. They don't understand their company, the
| products it makes, they have utterly no care for anything
| besides the quarterly stock price and their lack of care
| costs real people their jobs and ruins the products we use
| every day.
|
| And, they are why every company is ripping the copper out of
| its own walls instead of actually building a business that
| will last.
| blakesterz wrote:
| "Most of the private credit loans were floating rate and tied to
| the federal funds rate, which has persisted at a high level over
| the past three years. Fitch pointed to this as a catalyst for
| last year's defaults."
|
| I wanted to dismiss that and say ... but it's not really
| historically high. I suppose it really is not IF you look WAY
| back. It actually has persisted at a relatively high level if you
| look back to 2009, which is more than a short time now.
|
| I guess it is fair to say the federal funds rate has persisted at
| a high level over the past three years now isn't it?
|
| https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
|
| Also interesting to note, "Fitch recorded NO defaults in the
| software sector last year. The rating agency noted it categorizes
| software issuers into their main target market sectors when
| applicable."
| trgn wrote:
| > but it's not really historically high
|
| i dont think the inflationary seventies and eighties are great
| lodestar
|
| low interest rates are historically a sign of a stable polity
| and economy. so if anything, we want the conditions for
| prolonged low interest rates, rather than prolonged high
| interest rate.
| ferguess_k wrote:
| The problem of the current situation is that even 5% is
| considered as a high interest for many people, if not most of
| them. Inflation already pushes up the base price, and if the
| interest rate keeps on 5% and above many people simply won't
| consume, which will further pull down the economy.
|
| For example, we decided to keep our vehicle for another 4-5
| years instead of buying a new one. The same Hyundai vehicle of
| the same model, but different year (2026 v.s. 2020), has gone
| up 8,000 CAD (10K CAD considering tax), with a much higher rate
| (5.99% v.s. 0%). There is no way I'm buying another car in the
| foreseeable future. We can definitely afford it, but we won't.
|
| The whole world has pushed up prices of food, housing and
| pretty much everything higher. This is the real problem --
| although I wouldn't say it is the root problem.
| cmiles8 wrote:
| Private credit is cracking and lending standards are tightening
| behind the scenes. If you're not building cash reserves right now
| you're going to wish you had. The distressed opportunities ahead
| go to whoever kept dry powder while everyone else was chasing
| growth.
|
| If your business is light on free cash flow (ie everyone in AI at
| the moment) buckle up as there are storm clouds ahead. If you're
| running a business that relies on external cash (VCs,
| loans/bonds, etc) to keep things going things will get very ugly.
| mothballed wrote:
| Well it only took 5 years of destroying responsible savers with
| every policy imaginable to make sure they get crushed by those
| who availed themselves of the negative real rate loan inflation
| machine. How many people are left remaining that were dumb
| enough to take that strategy and are still standing? If you
| were operating on a cash basis for the last 5 years you were
| mostly wiped out by people leveraged to the 9s on debts and
| meanwhile your buying power was erased.
| cmiles8 wrote:
| Interest rates on things like CDs and low-risk bonds have
| been decent for a while now. It's not been painful to sit on
| cash reserves provided you were smart about where the cash
| was parked.
|
| It's not an either/or, it's just a question of who was
| participating in the boom while preparing for storms ahead vs
| those all in on the boom.
|
| What implodes in the period ahead are things that are
| massively over leveraged and can't absorb a hit without
| doubling down again with more funding/loans and such. These
| are the folks and companies that get wiped out.
| b112 wrote:
| _Interest rates on things like CDs and low-risk bonds have
| been decent for a while now. It's not been painful to sit
| on cash reserves provided you were smart about where the
| cash was parked._
|
| Just make sure you can unpark it, else you're SVB.
| uneoneuno wrote:
| You're not wrong it's always good to have cash but certain
| allocations could have done 50%-100% return on investment
| while a CD brought ~5.5% for a while. Look at S&P since
| 2021. Knowing when to transition from cash, liquidity,
| other instruments is what kills/allows people to survive.
| We can't all do the same thing, it's almost as if it's
| economic ecological evolution, random death.
| hnfong wrote:
| It's decent only if you believe inflation = CPI
|
| In actuality, the CPI is lower than inflation because
| technological advancement, automation, and economies of
| scale (due to globalization etc) are driving consumer
| prices low. In other words, if factories are still
| producing things like they were 20 years ago, the CPI would
| have been much higher, and that higher number is closer to
| what should have been the inflation number.
| JumpCrisscross wrote:
| > _if factories are still producing things like they were
| 20 years ago, the CPI would have been much higher, and
| that higher number is closer to what should have been the
| inflation number_
|
| This is an impossible counterfactual to test. In reality,
| tracking value across time requires adjusting for
| immeasurable preferences. This is why inflation is really
| only a useful measure for personal purposes across
| periods of years. It's only macro economically
| interesting across a generation and close to meaningless
| longer than a human lifespan.
| hnfong wrote:
| I think it's so obvious that no testing is needed, but
| generally I don't disagree with your take.
|
| The thing is one really needs to understand what "real
| yields" mean when investing in bonds, i.e. it means your
| purchasing power with respect to cheap commodities
| tracked by the CPI is preserved, but it doesn't
| necessarily mean "value" (whatever that means in the
| abstract) is retained.
| JumpCrisscross wrote:
| > _it means your purchasing power with respect to cheap
| commodities tracked by the CPI is preserved_
|
| CPI isn't a measure of commodities. And "CPI" is a bit of
| shorthand, given there are pretty much as many measures
| of consumer and producer prices as there are economists.
|
| > _it doesn 't necessarily mean "value" (whatever that
| means in the abstract) is retained_
|
| This is what any measure of inflation ultimately seeks to
| measure. Purchasing power is intrinsically tied to the
| basket of goods and services its measuring. That basket
| varies across people and time as preferences vary.
| ifwinterco wrote:
| A better measure is what % of the total money supply you
| have.
|
| I.e. you started out with 2e-20 % of the total money, and
| after 5 years you now have 1e-20 % of the total money,
| then whatever happened to CPI, you've been diluted and
| you would probably have been better off investing in
| something else other than cash.
|
| That makes sense in theory, but in reality what "total
| money supply" is is a complete can of worms and basically
| impossible to measure
| hypeatei wrote:
| Decent is fine if you're about to retire and want to avoid
| risk but I wouldn't recommend parking your wealth in
| CDs/bonds if your retirement is still 15+ years out,
| personally. The government _has to_ print money to bail
| itself out which means things are going to inflate quite a
| bit, just look at what gold has done in anticipation of
| this.
|
| Banks bailed out the hedge funds in '98, then the taxpayer
| bailed out the banks in '08, then the government bailed out
| the taxpayer in '20... now monetary policy from the fed has
| to prevent the government from defaulting.
| coldpie wrote:
| > If you're running a business that relies on external cash
| (VCs, loans/bonds, etc) to keep things going things will get
| very ugly.
|
| Honestly thrilled to hear it. The AI bubble needs to burst so
| we can find out what's actually useful, start requiring real
| business models again, and get rid of all the noise and waste.
| alecco wrote:
| The problem is all these over-leveraged sectors will drag
| everybody else. And guess who will be bailed out? Heads they
| win, tails everybody but them loses.
| coldpie wrote:
| > The problem is all these over-leveraged sectors will drag
| everybody else
|
| Well, the good news is that's what good public policy is
| for, to blunt the impact of the damage with strong anti-
| trust enforcement and careful cash injections to weak-but-
| critical areas of the economy to help stabilize in rough
| times.
|
| Now, hang on for just one moment while I crawl out from
| under this rock and take a look at who we have entrusted to
| set our public policy.
| franktankbank wrote:
| Assets don't disappear they get bidded.
| mschuster91 wrote:
| The problem is, what assets remain of a company that
| doesn't own anything material? OpenAI, Anthropic - they
| don't own datacenters that could be auctioned off. All
| they own is training data and trained weights, and both
| are relatively worthless.
|
| The game that all the AI companies are playing is to be
| the last dog standing _at all costs_ , because that kind
| of dominance is a money printer.
| alecco wrote:
| And who buys those troubled assets at deep discount?
| Where do they get the cash to pay for them?
| tsunamifury wrote:
| Most business is noise and waste. I love that no one gets
| that.
|
| It's like hoping for the apocalypse thinking you're of course
| the hardcore survivalist. When in reality you'll get eaten
| first.
| derwiki wrote:
| This is not my field of expertise, but I modeled keeping cash
| reserves to buy distressed assets. Unless I was able to
| perfectly predict the crash, the outcome was still better to
| not time the market.
| persecutor wrote:
| Go figure. Employers don't want to pay living wages or hire
| anyone these days.
| persecutor wrote:
| Go figure. Employers don't want to pay living wages or hire.
| WarmWash wrote:
| Employers will never be able to pay a living wage, because the
| real problem is a lack of housing. Rents and mortgages will
| always outrun wage increases in the current market.
| flammafex wrote:
| Stop paying rent. Stop going to work. Pirate everything. No
| constitution. No copyright. Starve the beast.
|
| Don't let anyone who bought into this way of life get away with
| robbing the rest of us.
|
| And don't let anyone who brought children into this cruelty hear
| the end of it: what they did was evil.
| hnthrow0287345 wrote:
| People have cried wolf or been wrong about incoming crashes and
| bubble pops so many times that this signal -- whether it's a good
| signal or not -- simply won't change anything I do.
|
| I'm sure someone somewhere could make a trade off of this article
| and this signal is definitely for them.
| bluGill wrote:
| Even if this was a reliable signal for most of us it shouldn't
| change anyway. Timing the market is hard, so if you have a job
| keep investing in your retirement accounts and let dollar cost
| averaging work it out - odds are you are buying at fire sale
| prices. If you are one of those who lose your job - it doesn't
| matter much if the economy is good or bad, you need to adjust a
| lot of things (even in the best of times sometimes by chance
| you can be out of work for a long time)
|
| If you are the manager of a mutual fund you can take useful
| action on signals like this if you can figure out what they
| mean. Most people don't have enough money to be worth trying to
| take action.
| bittercynic wrote:
| You may not be able to properly let dollar cost averaging do
| its thing if you rely on your job to invest, since there's a
| high correlation between periods where people are out of work
| and periods where asset prices are lower.
| bluGill wrote:
| Even in the worst part of the great depression 75% of the
| people had a job. Most years where much better.
|
| Don't get me wrong, if you don't have a job things are bad.
| If you have a job but it isn't giving good raises, or it is
| a worse job than you are qualified for things are bad.
| However things are not hopeless for the majority of people
| even when things are really bad, and you can get through
| it.
| vmbm wrote:
| It is incredibly hard to make money going short. Even if you
| are right about the direction, most short positions require
| interest payments to hold, or have some sort of decay built
| into the structure. So timing is everything and even then, if
| the underlying security slowly grinds down (instead of a quick
| abrupt move) you could still lose if the interest/decay on the
| short position outruns the downward movement on the underlying.
|
| I have been actively trading in the market for a little over a
| year now, and while winning on a short position is probably the
| most satisfying trade for me, the overwhelming majority of
| those trades are losses and at this point I mostly treat them
| as hedges. I suspect that is true for most market participants
| as well.
| ifwinterco wrote:
| There's actually (at least) three things going against you
| going short:
|
| - position has significant negative carry (what you're
| talking about there)
|
| - stock/bond prices are nominal and the government constantly
| prints the denominator so prices tend to go up even if
| there's no actual growth
|
| - for equities there is a genuine long term positive drift
| over time even if the denominator doesn't change
|
| So yes, it's hard to make money going short and timing is
| everything
| jfengel wrote:
| "Signals" are rubbish. The market is irrational and will change
| its mind at random.
|
| This is, however, one of many indicators of an overall wobbling
| system. It would be a good time, not make the line go up, but
| to look for ways to stabilize the economy as a whole.
|
| Which is unfortunately a hard question. One could theorize that
| we should do different things than the thing we've been doing
| for the past year or so, but of course there will be many who
| say that we just haven't done it hard enough yet.
| bargainbin wrote:
| Luckily debt will be solved by the power of AGI, right? Just one
| more data centre! One more GPU! It can nearly write a basic three
| tier application with only 10 critical security vulnerabilities
| all by itself!
|
| Definitely think we're in for a rough year financial prospects
| wise, and doesn't even feel like we recovered from the 2008 crash
| properly.
| lenerdenator wrote:
| We didn't recover from the 2008 crash properly because we
| didn't introduce consequences for those who created it.
| SoftTalker wrote:
| In fact we rewarded them. We bailed them out by printing a
| lot of money. We then printed more money during the pandemic
| to pay people to stay home and watch Netflix. Probably a lot
| more examples. All that money flowing around that has no
| basis in actual productivity or value created. It's got to
| correct at some point. One of the corrections is how much
| more everything costs now, but I don't think that has fully
| absorbed the excess.
| wussboy wrote:
| I would argue the second instance (pandemic) was much more
| nearly what a good government should do than the first one
| SoftTalker wrote:
| It may be what they should have done, but the effect was
| still inflationary. There is no free lunch.
| piva00 wrote:
| It was inflationary but would spread out the pain over
| the recovery period after the crisis, the other option
| was to allow 100% of the pain to be felt immediately:
| economy shutting down, people losing their jobs,
| diminished household spending, less money circulating in
| the economy, businesses still running having fewer
| orders/customers, more people being laid off, all the way
| until the crisis passed.
|
| Between the latter and the former I believe the former
| was a much smarter choice in the medium to long term.
| pragmatic wrote:
| Exact opposite. We are in the midst of the COVID
| hangover.
|
| So that govt money went to the wealthy to buy up houses
| (Californians bought real estate in the Midwest as
| investments and it drove up housing prices along with
| small immigration to these states)
|
| Farmers etc benefited from bailouts when they were doing
| very well. It was a large blunder.
| superxpro12 wrote:
| All that money directly led to housing inflation that
| still hasn't settled. The PPP loans were all forgiven
| (which massively favored business owners and upper
| class).
|
| Meanwhile student loan forgiveness was overruled by the
| supreme court.
|
| It's really hard to ignore the implication that it ended
| up being more like a wealth transfer than anything else.
| AnimalMuppet wrote:
| > We bailed them out by printing a lot of money.
|
| We did. We created about $4 trillion. That just about
| neutralized the $4 trillion that evaporated in the crash,
| and the result was that we did _not_ go through a
| deflationary collapse. You know that they did not create
| too much, because inflation was basically nothing for the
| next _decade_. It was flat until Covid.
|
| Covid... yeah, that was inflationary.
| irishcoffee wrote:
| I appreciate your posts generally, you have a lot of good
| insights.
|
| Do you think replacing that 4T was a good call? I'm
| struggling to see how it was the right play.
| AnimalMuppet wrote:
| I think it was a good call, yes. A deflationary collapse
| is _incredibly_ damaging to the economy. The Great
| Depression was such a collapse, but there are others. The
| Panic of 1857, 1873, 1907... there 's a long history of
| these.
|
| The Fed avoided that. And they _also_ avoided causing
| inflation. It was an amazing job of threading the needle.
| (One could argue that they caused a decade of stagnation,
| but in my view that was minor compared to the other
| options.)
| irishcoffee wrote:
| Thank you for the thoughts. Do you think if we had ripped
| the band-aid off then it would have been completely
| disastrous? I don't mind saying that this economy is
| frustrating, and it feels like we keep kicking the can
| down the road. I'm confident I'm not the only person that
| feels this way, and I'm quite open to being wrong here.
| My guts says there's just too much money sloshing around,
| and it gets vacuumed up, leaving the majority feeling
| like nothing changed.
|
| I'm asking this in as non-confrontational way as
| possible, what am I missing?
| AnimalMuppet wrote:
| I think you may be missing that $4 trillion evaporated in
| 2008, and the scale of the catastrophe that would have
| caused if the Fed did nothing. What the Fed did then was,
| essentially, restore the amount of money to what it was
| in 2007. They were trying to turn 2008 into as much of a
| "nothing changed" as they could, and they did it quite
| well.
|
| I think the economy can adjust to any _amount_ of money;
| it 's the abrupt _change_ in the amount that causes
| problems (because it causes an abrupt change in the
| _value_ of money).
|
| I think you may be missing that I'm not saying the same
| thing about the pandemic response. I think that too much
| money got poured in during the pandemic years, and that
| _has_ caused inflation, and we 've been seeing that
| inflation since. I wonder if you are taking how you feel
| about the last five or six years, and mapping that onto
| the last 18 years.
|
| Now, from 2008 to 2020 was not all roses. Things were
| kind of stagnant. The rich were probably doing better
| than you were, because assets like stocks and land went
| up in value as interest rates went down, but your wages
| didn't go up. So, it was reasonable for you to feel
| "there's too much money sloshing around" in things like
| stocks during those years.
|
| But I think it got worse after Covid. The government air-
| dropped too much money in, and there has definitely been
| too much money sloshing around since then.
|
| In all of this, I'm not really saying that you're wrong
| in feeling that there's too much money sloshing around,
| or that the economy is frustrating.
| SoftTalker wrote:
| Thanks, that was a perspective I hadn't thought about.
| But still doesn't seem like that taught any lessons,
| other than the taxpayers will bail out our carelessness.
| badpun wrote:
| Consequences would be nice, but actually forbidding it for
| the future would be enough. Obama promised to do it, but
| didn't, and everybody kind of forgot and moved on.
| CharlieDigital wrote:
| > Obama promised to do it
|
| Do you know how the three branches of government work and
| who writes the laws?
|
| The legislative produced Frank-Dodd...which Trump and
| Republicans later scaled back...
| fragmede wrote:
| Do we still have three separate branches?
| CharlieDigital wrote:
| We sure did when Frank-Dodd was written by the
| legislative and then signed into law by the executive.
|
| GP's comment is about the aftermath of 2008, entirely
| missing the fact that the legislative did in fact create
| laws which were signed by the executive and then later,
| in 2018, dismantled under a different administration.
|
| It's a matter of simple facts here.
| badpun wrote:
| Frank-Dodd wasn't nearly as strict as the post-1929
| regulation (Glass-Steagall act) that actually prevented
| such crisies for half a century.
| CharlieDigital wrote:
| Sure, but is that Obama's fault? See GP
| badpun wrote:
| If it wasn't in his power to toughen regulation, why did
| he promise it in his campaign?
| sehansen wrote:
| Hundreds of financial institutions with greater or lesser
| responsibility for the crash in 2008 went under in those
| years[0]. The shareholders in almost all of these companies
| lost all of their money and the responsible employees lost
| their jobs. This includes some of the most guilty companies,
| like Washington Mutual, Countrywide Financial, IndyMac,
| Lehman Brothers, Merrill Lynch (through First Franklin
| Financial), Bear Stearns. But all these companies are
| completely forgotten now.
|
| Instead everyone hates on Goldman Sachs. Sure, Goldman Sachs
| deserves hate, but of the big banks they were the _least_
| guilty of the crash in 2008. Not saying they were saints, but
| in 2008 they were the least bad.
|
| 0: This list only covers banks, not non-banks like
| Countrywide Financial: https://en.wikipedia.org/wiki/List_of_
| bank_failures_in_the_U...
| keernan wrote:
| >The shareholders in almost all of these companies lost all
| of their money
|
| How is that penalizing those responsible?
|
| Isn't it a pretty big leap to go from penalizing those
| selling packaged fraudulent loans to the public (whom, to
| my knowledge were never prosecuted) to the shareholders
| losing money as protection against it happening again?
| lenerdenator wrote:
| When you have people at the top of those institutions who
| made those decisions, and made enough money during their
| tenures to weather any length of unemployment and were
| sometimes even given a severance worth more money than the
| average American makes in a lifetime, going out of business
| or losing a job simply isn't enough.
|
| It's one of the only investments of labor and time where
| the risk is not proportional to the return.
|
| In order to create risk, you have to either claw back their
| money through civil action - which you can't because the
| entire point of incorporation is to separate the business
| entity from one's personal finances - or look at criminal
| charges. Otherwise, you have created a class of hyper-
| wealthy people who have no real incentive to perform in a
| way that is for the best interests of shareholders or
| society at large.
|
| It's the reason we tie so much for regular people to
| employment in the US, like healthcare. Many argue that if
| you give the rank-and-file worker the kind of long-term
| financial security that just one or two years of being a
| C-suite executive at a major company, they won't work as
| hard. They won't make the best decisions. They won't be the
| dynamic workers our economy supposedly wants. That logic
| goes right out the window when a board goes hunting for a
| new CEO.
|
| There's zero real risk involved.
| spwa4 wrote:
| That's because debt IS money. Literally. If you create debt,
| you have created wealth. These people weren't punished so
| they could get back to creating new debt as quickly as
| possible. The problem with credit defaults, especially
| private credit defaults, isn't that some private creditors
| lose some money, it's that twice that amount of money is
| destroyed, and disappears from the economy entirely.
| AnimalMuppet wrote:
| > That's because debt IS money. Literally.
|
| OK.
|
| > If you create debt, you have created wealth.
|
| No, you have created _money_. Money is not the same as
| wealth. If you create money _without_ creating wealth, then
| it 's inflationary.
|
| Just a minor nit. The rest of your post I agree with.
| spacecadet wrote:
| I mean people have been saying a crash is coming for years...
| Consumers recklessly purchased homes and cars at double their
| value, while relocating for remote work that was never long
| term in the eyes of their employer. Sounds like a receipt for
| disaster or a repeat of 2008- however, so much has changed
| since 2008... whatever happens, Black Swan! Hope "you" have
| your ducks in a row... As for AGI, lol. A box of matmuls isnt
| going to solve any real problems, so far, as you point out- is
| can barely write software. LLMs are basically gifted children.
| Smart sounding, lacking wisdom, chaotic, and likely just going
| to end up not that impressive. Either way- before we ever see
| AGI, we better get our heads out of the holes of the wealthy
| and enact UBI...
| mikkupikku wrote:
| > _I mean people have been saying a crash is coming for
| years_
|
| The internet working didn't make the Dotcom bubble not
| happen. Investors don't know anything about the new
| investment space and most of them are going to get hosed
| eventually. It's going to happen, and it'll be bad for people
| who are betting on it not happening.
|
| > _A box of matmuls isnt going to solve any real problems, so
| far, as you point out- is can barely write software_
|
| Code monkey cope.
| spacecadet wrote:
| What cope? I work in AI, write code with AI, promote the
| use of AI... Im just a pragmatic realist man. Not a
| delusional cool aid drinker...
| mikkupikku wrote:
| You're coping. Two years ago they could barely write
| software. These days they do it just fine.
| aurareturn wrote:
| Luckily debt will be solved by the power of AGI, right? Just
| one more data centre! One more GPU! It can nearly write a basic
| three tier application with only 10 critical security
| vulnerabilities all by itself!
|
| If you read the article, it says the default is directly
| related to the sell off of software stocks, which are heavy
| private credit borrowers.
|
| What caused the SaaS apocalypse? Gen AI.
|
| I'm long on AI hardware companies for this reason.
| bArray wrote:
| https://web.archive.org/web/20260312130613/https://www.marke...
|
| ^ Encase the link also responds with this for you:
| Access Denied You don't have permission to access
| "http://www.marketscreener.com/news/us-private-credit-defaults-
| hit-record-9-2-in-2025-fitch-says-ce7e5fd8df8fff2d" on this
| server.
| rvnx wrote:
| Pretty sure the solution that US politicians will find will be to
| create new dollars out of thin air, so instead of increasing
| taxes they increase the money supply.
|
| Of course this is going to increase prices, but then they can
| blame China / Russia / Iran whoever is the scapegoat at that
| time.
| tartoran wrote:
| That's a tax on the poor
| bee_rider wrote:
| It would cause inflation, isn't that sort of a tax on people
| who have more wealth than income? (Which includes people like
| retirees, so, I'm not saying this is a universally good
| thing).
| bad_haircut72 wrote:
| No because assets hold their worth. Poor people have no
| assets
| mothballed wrote:
| Poor people are hit a lot harder, but rich still have to
| pay capital gains on inflation even despite having no
| real change in value. So the rich pay inflation at the
| rate * 0.2. Poor pay it at the rate * 1.0 (5x the rate of
| the rich).
| JumpCrisscross wrote:
| > _rich still have to pay capital gains on inflation_
|
| "Pay" is doing a lot of work there. My house is half
| equity half debt. The debt gets to be paid off with
| inflated dollars. And I pay no capital gains on the
| appreciation. I _can_ , however, tap it for liquidity if
| I need it.
| mothballed wrote:
| Rich people don't tend to have a sizeable portion of
| their worth tied up in their primary residence (and even
| then, IIRC there is a cap on capital gains exception),
| otherwise property tax would turn into a wealth tax for
| them which obviously they want to avoid. Non-primary
| residences still require paying capital gains. The
| inflated value you paid off with debt for a non-primary
| residence still gets captured as capital gain in the end
| when you actually want to sell the house for money.
| JumpCrisscross wrote:
| You're right, thanks.
| JumpCrisscross wrote:
| > _isn't that sort of a tax on people who have more wealth_
|
| Classically, yes, particularly when that wealth is closer
| to productive capital. In modern economies, the rich also
| hold a lot of debt, which lets them benefit from inflation.
| ziml77 wrote:
| Theoretically yes, but in practice the wages of people
| already not making much have not tracked inflation and
| there's no reason to believe that they will now. That means
| any inflation is also a tax on them.
| hammock wrote:
| Isn't it the opposite? Salaries are sticky while asset
| prices rise freely with the liquidity of the market for
| them
| rglover wrote:
| Misleading title*
|
| > The default rate among U.S. _corporate borrowers of private
| credit_ rose to a record 9.2% in 2025
|
| Emphasis added. Headline makes it sound like retail credit, not
| corporate specifically.
|
| *Edit: Not misleading, just an unfamiliar term/usage from my
| perspective. I'm not a finance guy so didn't know the difference
| and assumed others wouldn't either. _Mea culpa_.
| airstrike wrote:
| FWIW when I read "private credit" I think of private issuers,
| not retail.
| Mattwmaster58 wrote:
| That's exactly where my mind went as soon as I read the title.
| HN rules say to "use the original title, unless it is
| misleading". I think the original title meets the misleading
| bar but I can't speak for other readers.
| omcnoe wrote:
| "Private credit" is a finance term of art. It could be
| misleading if you don't have context for the correct
| definition, but that's true of many posts on this site.
| BikiniPrince wrote:
| We just need to socialism harder.
| john_strinlai wrote:
| it is correct, though.
|
| someone not knowing the definition != misleading title
| JumpCrisscross wrote:
| > _Headline makes it sound like retail credit_
|
| I'm coming at this loaded with jargon, so excuse my blind spot,
| but why would the term private credit bring to mind anything to
| do with retail specifically?
|
| (The term private credit in American--and, I believe, European
| --finance refers to "debt financing provided by non-bank
| lenders directly to companies or projects through privately
| negotiated agreements" [1].)
|
| [1]
| https://corporatefinanceinstitute.com/resources/capital_mark...
| airstrike wrote:
| Outside of finance, people associate "private" with
| "individual"
| rglover wrote:
| That's not the likely definition most will reach for here
| automatically (especially amidst the constant financial
| blackpilling).
| JumpCrisscross wrote:
| > _not the likely definition most will reach for here_
|
| A lot of the datacenter buildout has been financed with
| private credit [1].
|
| > _financial blackpilling_
|
| ?
|
| [1] https://www.bloomberg.com/news/articles/2026-02-02/the-
| 3-tri...
| AnimalMuppet wrote:
| "Blackpilling" is apparently an incel term for
| fatalism/nihilism. Sounds like they're trying to read
| financial news through that lens.
| JumpCrisscross wrote:
| > _" Blackpilling" is apparently an incel term for
| fatalism/nihilism_
|
| Any idea as to the etymology? What was the black pill? Is
| it a Matrix reference?
|
| Meta: why are incel neologisms so catchy?
| AnimalMuppet wrote:
| I _think_ (but I don 't move in such circles) that
| originally there was "redpilled" to refer to people
| playing "The Game" (pickup artists). Original reference
| is to The Matrix, of course.
| john_strinlai wrote:
| what on earth is "financial blackpilling"?
| hammock wrote:
| I think you're mistaken. We've been in a private credit
| bubble for a couple years at least, it's in the
| finance/economic news every week and I've even started to
| hear regular NPR doing primers on it for normies. The term
| for "retail credit" is consumer debt or consumer debt. We
| don't call it retail debt because the retailer is not
| actually a counterparty.
|
| Out of curiosity where do you primarily get your news?
| NoboruWataya wrote:
| > and, I believe, European
|
| Yes.
|
| It surprises me that most people would read "private credit"
| to mean "retail credit" by default, but I also come to this
| loaded with jargon so I guess would defer to others on this.
| But to be clear, the title is not misleading to anyone who
| has any familiarity with the financial markets.
| jasode wrote:
| _> , by why would the term private credit bring to mind
| anything to do with retail specifically?_
|
| If a layman is unfamiliar that "private credit" is about
| business debts, and therefore only has intuition via previous
| exposure to "private X" to guess what it might mean, it's not
| unreasonable to assume it's about consumer loans.
|
| "private insurance" can be about retail consumer purchased
| health insurance outside of employer-sponsored group health
| plans
|
| "private banking" is retail banking (for UHNW individuals)
|
| But "private credit" ... doesn't fit the pattern above
| because "private" is an overloaded word.
| JumpCrisscross wrote:
| > _But "private credit" ... doesn't fit the pattern above
| because "private" is an overloaded word_
|
| Makes sense. Thanks. Private here is as in private versus
| public companies.
| Centigonal wrote:
| In other words, "private credit" is private the way
| "private equity" is private, not how "private insurance" is
| private.
| bandrami wrote:
| With the caveats that banks _can_ originate private credit as
| long as it is separate from their reserve system credit (and
| consequently does not increase the money supply when
| originated)
| quentindanjou wrote:
| Thanks, I completely miss-read it thinking that it was about
| retail credit. _facepalm_. Time for coffee.
| lxgr wrote:
| Private as in private (i.e. non-public) corporation, not as in
| individual/retail/natural person borrowers.
| kentonv wrote:
| TBH "private credit" (meaning exactly what this article is
| talking about) is such a big thing in the finance industry that
| probably most finance industry people can't even fathom that
| the title is misleading to non-finance-industry people.
|
| I'm not saying they are right. But it's like if you posted an
| article called "Python Is Eating the World" on a non-tech side
| and people got mad because they thought the article was about a
| wildlife emergency. Fair for them to be confused, but maybe not
| fair to accuse the title of being misleading (at least not
| intentionally).
| piker wrote:
| Ha, yes I didn't even consider it meant anything other than
| corporate private credit. Otherwise we'd be talking about
| presumably mortgages or "consumer debt". Right?
| npilk wrote:
| It's some sort of Gell-Mann-Amnesia-like effect. I am
| accustomed to seeing thoughtful, informed discussion about
| technical topics on HN, so then it's jarring when something
| like this hits the front page and nobody seems to have any
| idea what they're talking about.
| mandevil wrote:
| It's opposite Gell-Mann-Amnesia: I am a SWE and I come here
| because I find it one of the best places to keep abreast of
| the broader software world, not just the little corner of
| it that I'm currently working in. So in the things that I
| know well, I trust it. My wife is a medical professional,
| and so I know just enough to see that most medical
| conversations here are complete and utter nonsense.
|
| So the mental model I have of the average HN contributor is
| basically that they are all SWE's- they know software
| engineering extremely well, and the farther you get from
| that the less valuable the conversation will be, and the
| more likely it will be someone trying to reason from first
| principles for 30 seconds about something that intelligent
| hard working people devote their careers to.
| layla5alive wrote:
| Probably mostly accurate. Though a few of us do know lots
| of topics. Can outscore med students on USMLE prep, know
| what private credit is, etc., etc.
| OJFord wrote:
| Has the title been changed already? It currently says 'private
| credit', I don't see how that misleadingly sounds like 'retail
| credit'?
| computronus wrote:
| Important to note that this is about "U.S. corporate borrowers of
| private credit", so companies and not individuals.
| airstrike wrote:
| Skip the blogspam and read the original article:
| https://www.reuters.com/business/us-private-credit-defaults-...
| tetromino_ wrote:
| Paywalled
| _ache_ wrote:
| What the hell ?! Nearly 10% ?! How can it be?! World wide, it
| seems to be around 4% since 2004.
|
| Page 22 (French but it's just numbers, you can read it).
| <https://www.eib.org/files/publications/thematic/gems_default...>
| Ekaros wrote:
| It is easy to keep your head above water level for surprisingly
| long times. Just look how some people in retail manage to rack
| up credit card and other type of debt.
|
| And it is especially so when money given is not their own, but
| instead they get to take cut. Which these funds can do. They
| might even just take promises that you will pay in future and
| even allow adding the interest on top of loan amount. Numbers
| look good, bonuses look good.
|
| Fundamentally this can only last so long and now is the time it
| starts to blow up.
| tsunamifury wrote:
| Yea the market will correct any time now from 2009.
|
| Things will stay the way they are for as long as people want
| them to. The economy and money is fundamentally made up. It's
| so funny when these types come out and start talking about
| made up fundamentals as if they are physics.
| SpaceL10n wrote:
| I'm not surprised. Weren't we getting signals like 3 or 4 months
| ago that used car repossessions were ticking up? That's a
| breaking point for folks. The economic boulder keeps rolling and
| I'm not wearing any shoes. Spiking the price of oil is definitely
| going to help. This too shall pass?
| tsunamifury wrote:
| Wrong market
| javcasas wrote:
| I have been following this development for a couple weeks, and
| now it's on HN. How long until the elevator guy tells me about
| it?
| ycombinatornews wrote:
| You have an elevator guy?! /s
| JumpCrisscross wrote:
| Yeah, I'm going down a bit of a rabbit hole this morning. Turns
| out Wells Fargo's $59.7bn of private-credit lending is equal to
| 44% of its CE Tier 1 capital [1]. Meanwhile, Deutsche Bank got
| back to being Deutsche Bank while I was not looking [2].
|
| [1]
| https://www.sec.gov/Archives/edgar/data/72971/00000729712500...
|
| [2] https://www.reuters.com/business/finance/deutsche-bank-
| highl...
| RobRivera wrote:
| Deutsche gonna Deutsche.
|
| Recruitment tables should just have a banner that reads 'we've
| already spent your bonus on legal fees, here's some chocolate'
| JumpCrisscross wrote:
| I'm re-running some of the Fed's stress tests and, somehow,
| still find myself flabbergasted that DB is at the top of my
| risk list. Despite only having $12bn of exposure, if they see
| a 60% loss on that risk alone (assuming 60% recovery and 1.5x
| leverage), they breach their 4.5% capital requirement. That's
| the lowest threshold I'm finding across all of the banks the
| Fed stress tests.
|
| Now 50% loss means wipe out. But given the size of the
| portfolio, there is also the concentration risk. A single
| private-credit firm going bust shouldn't take out a bank. But
| that seems-seems!-to be what I'm seeing.
| wizardforhire wrote:
| As long as nobody knows then it isn't risk... /s
| r_lee wrote:
| don't worry, they're adopting AI
| Aboutplants wrote:
| Time to short them?
| lumost wrote:
| With the current concentration of wealth and banking, it almost
| seems like there is an incentive for banks to ruin themselves
| when they end up in a little trouble.
|
| If the bank has trouble, shareholders/executives lose - if the
| banking system has trouble... then QE will solve the bank
| trouble.
| sciencesama wrote:
| When can qe start ?
| JumpCrisscross wrote:
| > _If the bank has trouble, shareholders /executives lose -
| if the banking system has trouble... then QE will solve the
| bank trouble_
|
| It's a game of chicken, though. The folks at Lehman and SVB
| didn't cash out. JPMorgan did. (Both times. Actually, all of
| the times since 1907.)
| r_lee wrote:
| Are you saying that they're using their private-credit
| portfolio as a Tier 1 capitalization to meet their regulatory
| demands (not sure if the ~10-15 something% rule has come back
| yet?)
|
| Been a bit out of the finance game
| JumpCrisscross wrote:
| > _they 're using their private-credit portfolio as a Tier 1
| capitalization_
|
| Banks' private-credit lending constitutes part of their risk-
| weighted assets. So yes, it's part of their CET1 [1], which
| is part of Tier 1 capital, and since it's equity measured it
| incorporates fucking everything.
|
| 4.5% is the U.S. minimum. Regulators start throwing their
| toys out of the pram when a bank breaches 7%. To be clear,
| I'm not seeing anyone in the near future breaching those
| limits. Deutsche Bank, the stupidest of the lot, seems to
| have let DB USA stuff most of the risk in its German AG.
|
| [1] https://www.investopedia.com/terms/c/common-equity-
| tier-1-ce...
| JumpCrisscross wrote:
| Reason this number caught my eye: last year the Fed's stress
| tests found "loss rates from [non-bank financial institution]
| exposures (i.e., the percentage of loans that are uncollectible)
| were estimated at 7%, under a severe recession in scenario one"
| [1].
|
| That's the scenario in which unemployment goes to 10%, home
| prices crash by 33%, the stock market halves and Treasuries trade
| at zero percent yield [2].
|
| [1] https://www.mfaalts.org/industry-research/2025-fed-stress-
| te...
|
| [2] https://www.federalreserve.gov/publications/2025-june-
| dodd-f...
| npilk wrote:
| What's odd is according to the article, this index estimated an
| ~8% default rate in 2024. So maybe the stress test was
| measuring something different? It's weird to think the stress
| test would find a _lower_ loss rate during a severe recession
| than in the most recent year with data available.
| JumpCrisscross wrote:
| > _maybe the stress test was measuring something different?_
|
| The Fed is measuring the loss on bank loans _to_ the private-
| credit lenders. A 10% portfolio loss shouldn 't result in
| those lenders defaulting to their banks.
|
| By my rough estimate, one can halve the portfolio loss rate
| to get the NBFI-to-bank loss rate. So a 10% portfolio loss
| means we're around a 5% expected long-run loss to the banks.
| Which is still weirdly high, so I feel like I must be missing
| something...
| smallmancontrov wrote:
| The regulators were modeling a scenario where private credit
| was dragged down by a problem elsewhere in the economy, not
| one where the rest of the economy was dragged down by private
| credit. Everyone understands that center of a financial
| implosion is always worse than its effects on the broader
| economy, but regulators aren't tasked with stopping the
| explosion at ground zero, they are tasked with stopping
| contagion dominoes from falling, so that's what they model.
| sehansen wrote:
| The categorization the Fed uses for NBFI is broader than
| private credit. E.g. if a hedge fund gives a loan to a private
| company, that's not private credit because hedge funds seem to
| have their own category. And lending backed by securities is
| also in a different category, it seems.
|
| So I guess the Fed expects these other kinds of lending to be
| safer than private credit?
| lizknope wrote:
| I've never heard the term private credit so I googled it.
|
| > Private credit refers to loans provided to businesses by non-
| bank institutions--such as private equity firms, hedge funds, and
| alternative asset managers--rather than traditional banks .
|
| Is that correct?
|
| So if these companies go under does anyone care? If they go under
| are they a systemic risk to the economy like the banks in 2008
| that got a taxpayer bailout?
| Ekaros wrote:
| Two funny things:
|
| Banks have lend to these institutions as they couldn't lend
| themselves. Might be systematic risk.
|
| Lot of pension capital is tied to these vehicles. So they go
| under. Many people won't be getting their pensions in short or
| long term...
| we_have_options wrote:
| Well, yes, as the article mentions. If this increases a bank's
| losses, then the bank could become insolovent.
| SlinkyOnStairs wrote:
| > So if these companies go under does anyone care?
|
| This is nowhere near as bad as the 2008 crisis, no. The banks
| don't really use the checking/savings account money for this.
| If you've invested in something that either invests in Private
| Credit or is reliant on Private Credit, then it'll suck for you
| personally.
|
| ...
|
| One teeny tiny extremely important detail: Private Credit is
| bankrolling the AI industry's datacenter construction. If
| anything happens to significantly increase interest rates,
| several datacenter companies and Oracle go bankrupt. The other
| big tech firms have taken on lots of debt as well so expect
| spending cuts there too, even if they survive.
|
| The systemic risk isn't in "bankers fucked it up again", it's
| in the AI bubble.
| azath92 wrote:
| I find the money stuff newsletter by Matt Levine (bloomberg)
| great for this, the link is behind a paywal, but the newsletter
| is free. strong rec. todays newseltter
| https://www.bloomberg.com/opinion/newsletters/2026-03-11/pri...
|
| From that newseltter:
|
| > At the Financial Times, Jill Shah and Eric Platt report:
|
| >JPMorgan Chase ... informed private credit lenders that it had
| marked down the value of certain loans in their portfolios,
| which serve as the collateral the funds use to borrow from the
| bank, according to people familiar with the matter. >...
|
| >The loans that have been devalued are to software companies,
| which are seen as particularly vulnerable to the onset of AI.
| ...
|
| From what i can tell the problem isn't that an individual who
| had cash to invest in a private (tech in this case) company
| goes down
|
| the problem is that a company "private credit firms run retail-
| focused funds ("business development companies" or BDCs)" which
| took out a bunch of loans to invest in private tech companies
| is now having the underlying assets that they got those loans
| against (long term investments in private tech companies)
| valued lower.
|
| the link im missing is what happens when people who also
| invested in BDCs want their money back, where their actual
| money is locked up in long term investments made to private
| tech companies, and their ability to get loans is now valued
| lower. I think this is called a "run" where if someone starts
| pulling money out, and ultimately you cant, then its a race to
| get your money out before others do, which applies to both the
| individuals and the institutional loans.
|
| Note: my quotes are from the bloomberg newsletter i mention,
| which helped me, not the OP article. And i am writing as much
| to clarify my own thinking as from a place of understanding. I
| welcome clarification.
| rchaud wrote:
| It is a systemic risk because its size and credit risk is
| opaque, like mortgage-backed securities were in 2008.
|
| Banks needs to disclose the % of non-performing home, auto,
| business loans to rating agencies and regulatory bodies so
| their credit risk is known, and so regulators they can set
| rules on how loose or tight lending criteria should be in the
| industry. With 'financial innovation' like tranched mortgage
| bonds rolling up thousands of mortgages at various levels of
| credit risk into one, they can be traded without anyone
| actually knowing what the default risk is.
|
| With private credit, there is no disclosure requirement because
| the lenders are not banks. PC is financing the entire AI
| datacenter boom, without which GDP growth in the US is
| effectively zero. If PC defaults rise, the bottom could rapidly
| fall out of the S&P 500, which is already being hit by the oil
| price crisis, and affect people's 401Ks and retirement savings.
| NoboruWataya wrote:
| > So if these companies go under does anyone care? If they go
| under are they a systemic risk to the economy like the banks in
| 2008 that got a taxpayer bailout?
|
| Mostly, no, which is exactly why private credit has become so
| big in recent years: they are making the loans the banks can't
| or don't want to make, because the banks are subject to a bunch
| of additional regulations, which are designed to reduce the
| probability of banks going bust and having to be bailed out.
|
| But it can be difficult to judge second order effects in
| finance. It's possible that a lot of private credit houses
| going bust would indirectly and perhaps unexpectedly hurt the
| broader economy. An obvious one being companies that are
| reliant on private credit going bust because their financing
| needs can no longer be met.
|
| Also, with this administration in the US I wouldn't entirely
| rule out bailouts for some of the more politically connected
| private lenders.
| derf_ wrote:
| _> But it can be difficult to judge second order effects in
| finance._
|
| Another obvious question to ask is who is providing the money
| that is being lent? Those are the people who now won't be
| paid back. The assumption is that these are people with
| predictable, long-term obligations who can lock up their cash
| for a long time: pensions, insurance companies, endowments,
| etc. Hopefully they are allocating a responsible amount of
| their portfolio to something as risky as private credit, but
| as the details are private, it can be really hard to know.
|
| There has also been a big push over the past year to put
| private credit assets into retail 401k's (which, in theory,
| also should be okay with locking up funds for a long time,
| but in practice, maybe less so), most insidiously by having
| private credit assets held in target date funds (which are
| the default funds for many plans).
|
| Many private credit funds also increase their leverage by
| borrowing from actual banks.
|
| All of that _should_ pose less systemic risk than if banks
| subject to bank runs were lending all of the money. But that
| has to be balanced by the fact that these are unregulated
| entities taking more risks than banks would. Long-term
| average default rates on high-yield bonds are around 4%, so
| 9.2% is high, but not in panic-inducing territory yet. Who
| knows what they will look like in the event of an actual
| recession.
| cs702 wrote:
| Trouble has been brewing in private credit for quite a while, but
| lenders and investors have been reluctant to write anything down,
| resorting to all kinds of "extend and pretend" games to avoid
| write-downs.[a]
|
| _tick-tock, tick-tock, tick-tock..._
|
| ---
|
| [a] https://news.ycombinator.com/item?id=47351462
| RobRivera wrote:
| What kind of trouble is brewing from the migration of partner
| capital committment to credit based on NAV?
|
| What is the risk, probability of actualizing the risk, and the
| outcome of actualized risk?
|
| The ticktock ticktock routine reads like baseless fearmongering
| to me.
| cs702 wrote:
| My understanding is that many private credit funds have been
| very lax about conducting basic due diligence on the
| creditworthiness of borrowers.
|
| For example, take First Brands, a multi-billion-dollar
| company which filed for bankruptcy last year. First Brands
| had pledged the same assets as collateral for loans from
| multiple private-credit funds. Those loans were being carried
| at a fantasy NAV of 100 cents per dollar, until suddenly they
| were not. Did none of these lenders submit UCC filings so
| other lenders could check which assets had already been
| pledged as collateral? Did none of these lenders ever check
| to see which assets had already been pledged? Did all these
| lenders make loans based on blind trust?
|
| Failing to check and verify that assets have not been pledged
| as collateral to other lenders is an _amateur mistake_. It 's
| reckless, really. The equivalent in home-mortgage lending
| would for a mortgage lender never even bothering to check
| that a homeowner isn't getting multiple first-lien mortgages
| simultaneously on the same home, then forgetting to put the
| first lien on the property title.
|
| My take is that for many private credit funds, NAVs are
| basically fantasy.
| bombcar wrote:
| Once you get outside of things that are highly standardized
| (like home loans to individuals) you quickly find out that
| no matter how regulated, finance is done on a handshake.
| cs702 wrote:
| That's true, but only to a point. Due diligence is not
| uncommon, especially with more traditional forms of
| credit.
|
| I resorted to the mortgage-lending analogy so others
| could quickly grok what multi-pledging means.
| RobRivera wrote:
| If lenders are in fact not performing due diligence and
| passing off good credit as bad...sounds suspiciously like a
| 2008-like era where noone cared about the credit worthiness
| but just wanted to generate lines of credit.
|
| Oh boy, if this is the case, oh boy.
|
| Lessons not learned indeed.
| vmbm wrote:
| Do you know if First Brand's actions are considered fraud?
| Or was this entirely on the lenders to make sure they were
| in the clear regarding the collateral? Doesn't excuse the
| lack of diligence, but curious if there was some assumption
| of good faith that may have played a role in what diligence
| was or was not done.
| cs702 wrote:
| Only a court can decide if the actions are fraud, but
| they sure look like it to me. Fraud doesn't excuse the
| lack of due diligence.
| sciencesama wrote:
| But what will break the clock ?
| JumpCrisscross wrote:
| > _what will break the clock ?_
|
| So unlike money-market funds, these private-credit funds can
| gate withdrawals and extend and pretend by turning cash
| coupons into PIKs. So I don't actually see credit concerns
| directly driving liquidity issues for the banks that didn't
| hold the risk on their balance sheet _glares Germanically_.
|
| Instead, I think the contagion risk is psychological. Which
| is an unsatisfying answer. But if there are massive losses on
| _e.g._ DBIP and DB USA halts withdrawals, then the 2% stock
| loss Morgan Stanley suffered when it capped withdrawals [1]
| could become a bigger issue.
|
| [1] https://www.wsj.com/livecoverage/stock-market-today-dow-
| sp-5...
| boringg wrote:
| I believe the gated feature can be waived though it causes
| a precarious situation. It ends up with same psychology of
| a bank run -- people (institutions) concerned because they
| can't access funds or they think that the queue to exit a
| failing fund is too long - filled each quarter (i.e. by the
| time they redeem NAV has collapsed).
| JumpCrisscross wrote:
| > _the gated feature can be waived_
|
| Or never invoked. It's a safety feature for the fund and,
| arguably, systemic stability.
| boringg wrote:
| Totally - its supposed to prevent a collapse of
| confidence but at the same time can signal a collapse of
| confidence. Double edged sword.
| epsteingpt wrote:
| You can't gate redemptions forever amigo.
|
| People eventually want to spend their money.
| themgt wrote:
| As Buffett said, "only when the tide goes out do you learn
| who has been swimming naked" - luckily, skimming the news,
| there's no obvious huge exogenous macroeconomic shocks on the
| horizon that could cause "the tide to go out" so to speak, so
| everything should be ok for now.
| Ekaros wrote:
| Umm... Couldn't whole Iran debacle be such shock? If the
| effects are not contained?
| lokar wrote:
| The only problem is allowing regulated US banks with an
| implicit gov guarantee to lend money to them.
| boringg wrote:
| There are limited ways to short these positions which would
| probably add some fuel to the fire.
| metrix wrote:
| I don't see it as adding fuel to the fire. I see it as
| helping the market price companies correctly
| boringg wrote:
| Its a balancing act.
| strangattractor wrote:
| You can always tell when there is a problem. When things are
| fine the companies keep the profits to themselves. When things
| start to get dicey - foist it off onto retail investers.
|
| Private equity (PE) is increasingly being introduced into
| 401(k) plans, driven by a 2025 executive order encouraging
| "democratization" of alternative assets. - Google AI
| chii wrote:
| It's why as a retail investor, never buy things that would
| otherwise have not been available to you (but was to those
| "elite"/institutional investors previously).
|
| Think pre-IPO buy-in. Investors in the know and other well
| connected institutional investors get first dibs on all of
| the good ones. The bad ones are pawned off to retail
| investors. It's no different with private credit and private
| equity. These sorts of deals have good ones and bad ones -
| the good ones will have been taken by the time it flows down
| to retail.
| rd wrote:
| This can't be a to-die-on rule though. Retail would've
| never bought GOOG, or TSLA, or AAPL if that were the case.
| Maybe I'm just being pedantic.
| wmf wrote:
| Even for good assets there's a price you shouldn't pay.
| People are joking(?) about triple-layer SPVs where you
| can get pre-IPO exposure but at higher-than-IPO price.
| Analemma_ wrote:
| Google and Apple didn't go through ten funding rounds
| like today's startups do. Apple had one angel and three
| rounds, Google had one angel and literally just an A
| round after that; then retail investors could capture all
| the upside. Now there's way more time for private
| investors to pick the bones clean before it gets dumped
| on the public.
| xenadu02 wrote:
| Funny enough Chinese State owned banks have been doing much the
| same for quite some time. No one ever defaults, loans are
| extended as long as it takes. Presumably the threat of being
| called into the next party meeting to explain yourself is
| sufficient motivation for the people running the business to
| pivot as many times as it takes until they find a way to make
| money. Worst case the state swaps someone else into leadership.
|
| I say this to say... who knows? I guess if you shuffle deck
| chairs fast enough everything works out fine (?)
| gzread wrote:
| To private credit _firms_. Most of what banks do is private
| credit, the news is them funding private credit firms.
| happytoexplain wrote:
| I don't know a lot about finance. What is the
| definition/significance of "firm" in this context (if that's
| not a complicated question)?
| lokar wrote:
| A private credit firm is a non-bank entity that raises money
| from wealthy investors, pension funds, etc to loan out to
| businesses. The funds are generally locked up for several
| years to match the duration of the loans.
|
| They also borrow money from banks to add leverage to this
| basic setup.
| aewens wrote:
| Not who you asked, but I think making the nuance between
| retail and corporate credit. With firms being corporate
| credit (i.e. we aren't talking about individuals / retail).
| lokar wrote:
| No.
|
| There are kind of 3 types of loans:
|
| - bonds. Loans interned to be bought by a range if
| investors and traded over time. Arranged and unwritten by
| investment banks.
|
| - bank loans. The classic loan. The bank takes depositor
| money (that the depositor can take back anytime!) and loans
| it to someone or some company. The bank holds the loan
|
| - private credit. Like a bank loan, but they get their
| money from long term investments by wealth people and
| institutions, add bank loans for leverage, and then hold
| the loan.
| JumpCrisscross wrote:
| > _The bank holds the loan_
|
| These are mostly syndicated. The traditional difference
| between loans and bonds was bank versus investment bank.
| The modern difference is in underwriting technique,
| degree of syndication/securitisation and loans mostly
| being floating and bonds mostly being fixed.
| lokar wrote:
| I mean the classic "it's a wonderful life" model
| JumpCrisscross wrote:
| Convergent evolution in finance is actually a pet
| interest of mine. It seems like it's mostly driven by
| regulation. But the more you stare, the more the
| regulation appears like a canyon wall and the hydrology
| customs and connections. I'm not sure what the underlying
| geology is, however. Something bigger than customs or
| laws, but not so grand that it becomes ethereal.
| lokar wrote:
| The pattern I see is:
|
| The Banks get in trouble, and Gov has to step in. So Gov,
| reasonably, add regulations and restrictions. But the law
| can't be really specific, it requires gov employees to
| actually examine the bank and make decisions (eg about
| risk levels, etc).
|
| The banks have a really large incentive to chip away at
| the effectiveness of the regulation. They hire lots of
| lawyers, consultants, notable economists, etc and just
| keep pushing on these rank and file gov regulators. They
| buy influence with politicians, and use that to pressure
| the regulators. They hire some of the regulators at very
| high pay, sending a signal to the others: play ball and a
| nice job awaits you.
|
| Over time, they just wear down the regulators. The rules
| are interpreted to be mostly ineffective and nonsensical.
| Often at that point the politicians come in and just de-
| regulate.
|
| The banks just have the incentive and focus to keep at it
| every day for years. No one else with power is paying
| attention.
| JumpCrisscross wrote:
| > _What is the definition /significance of "firm"_
|
| Broadly speaking, privately-held companies are called firms.
| Colloquially, it tends to connote closely-held companies.
| ajross wrote:
| That's not correctly stated. "Private Credit" is _defined_ as
| non-bank lending. Banks are doing "public" lending in the
| sense of being regulated. Private lending is any sort of
| financial instrument issued outside of those guard rails.
|
| It's generally felt to be risky and volatile, but useful.
| Basically, it's never illegal just to hand your friend $20 even
| if the government isn't watching over the process to make sure
| you don't get scammed. This is the same thing at scale.
| JumpCrisscross wrote:
| > _That 's not correctly stated_
|
| It is. (EDIT: It's a mixed bag. OP was correctly calling out
| a definitional error.)
|
| Banks have loaned $300bn mostly to private-credit _firms_.
| Those firms then compete with the banks to do non-bank
| lending. It 's a weird rabbit hole and I'm grumpy after a
| cancelled flight, but it feels like I'm in the middle of a
| Matt Levine writeup.
| ajross wrote:
| Good grief. I was responding to "Most of what banks do is
| private credit", which is wrong. Bank lending is not
| private credit.
| JumpCrisscross wrote:
| Oh, gotcha. Sorry, got hung up on the first bit.
| klodolph wrote:
| Isn't private credit defined in part as "lending by non-banks"?
|
| Like, when a bank originates a mortgage, that mortgage gets
| traded, much like private debts don't.
| KellyCriterion wrote:
| No, there is a huge difference:
|
| - when a bank creates a loan, this has an effect on money
| supply in total
|
| - when a private credit company "gives" a loan, it has no
| effect on total money supply and from balance sheet perspective
| its an accounting exchange on the asset side
| plagiarist wrote:
| Government removes regulations, economy collapses, government
| bails out the wealthy, quants get ski trips and bonuses while
| families starve.
| NickC25 wrote:
| And to make matters worse, those who remove regulations then
| get voted out, but show up on infotainment "opinion" shows
| disguised as news broadcasts....and whine that _those who were
| voted in to fix the mess aren 't fixing the problem fast
| enough_, so those who caused the problem should be voted back
| in. And lo and behold, they get voted back in, to cause more
| damage.
| voidfunc wrote:
| Its a big beautiful system!
| sciencesama wrote:
| Democracy
| frogperson wrote:
| Its un-fixable. The situation cant be explained simply enough
| for the majority of americans. Even if some of them do mange
| to understand, it will be quickly forgotten amid the flood of
| trump sewage we are sprayed with every day.
| RankingMember wrote:
| I think we'll get there (to explanation), but it'll be
| through the lizard-brain-level pain of poverty instead of
| rational understanding unless we get much better at
| communicating to the least willing to listen among us.
| butterlesstoast wrote:
| I picked a bad time to rewatch Mr. Robot
| derektank wrote:
| It's more accurate to say that the private credit market was
| created by the government adding new regulations, not removing
| them. Business development corporations have existed since the
| 80s but they didn't explode in popularity as business loan
| originators until Dodd Frank and other post-2008 regulations
| made it more difficult for banks to lend money. This led small
| and medium size businesses to seek out credit from firms like
| Ares et al instead.
| kelp6063 wrote:
| Unless I'm misunderstanding something, this isn't that big of a
| number in the larger scale of US banking; According to the
| numbers in the article that's only about 2.5% of all bank lending
| (300B/1.2T, with the 1.2T being ~10%)
| JumpCrisscross wrote:
| > _this isn 't that big of a number in the larger scale of US
| banking_
|
| It's not. It's just that we're seeing potentially 10% losses on
| the portfolio level [1], which could imply up to-up to!-5%
| losses to the banks' loans to those lenders.
|
| Again, tens of billions of dollars of losses are totally
| absorbable. But Morgan Stanley's stock price took a hit when it
| gated one of these funds [2]. And some banks (Deutsche Bank,
| somehow, fucking again, Deutsche Bank) have small ($12n) but
| concentrated portfolios where a single wipeout could materially
| impair their ~$80bn of risk-weighted assets.
|
| [1] https://www.reuters.com/business/us-private-credit-
| defaults-...
|
| [2] https://www.wsj.com/livecoverage/stock-market-today-dow-
| sp-5...
| kelp6063 wrote:
| good explanation, thanks
| JumpCrisscross wrote:
| You're welcome! Also, bank credit is like $20tn in the U.S.
| [1].
|
| [1] https://fred.stlouisfed.org/series/TOTBKCR
| dopamean wrote:
| you're the only person replying to comments on this post that
| seems to know what they're talking about. what do you do for
| a living?
| KaiserPro wrote:
| > Again, tens of billions of dollars of losses are totally
| absorbable.
|
| They are, in isolation. The _problem_ is that PE doesn't
| generally trade assets in public, which means that valuation
| only really come when you're either wanting to buy, wanting
| to sell, wanting to re-loan or in deep shit.
|
| This means that something like MFS can happen
| (https://www.reuters.com/business/finance/mfs-creditors-
| claim...) where assets appear to be used to raise two
| different loans without the other lender knowing.
|
| But! banking can absorb a few billion right? yes, so long as
| people are not asking questions about other assets.
|
| Because PE assets are not publicly traded (hence private in
| private equity) the value of assets are calculated at much
| lower rates than on a public market. This means that the
| assets that PE holds could be wildly over or under valued.
| The way we assess the value of PE holdings is thier looking
| at the Net Asset Value calculations (which might be done
| twice a year) or infer the value based on public information.
|
| Now we are told that markets are rational and great at
| working the value of things. This dear reader is bollocks.
| Because PE is a black box, if a class of asset that they hold
| (ie SaaS buisnesses, or high street stores, or coffee trading
| etc) looks like its not doing well, people will start to
| write down the value of people holding loans given to PE, or
| shares in PE.
|
| This creates contagion, because one PE company is in
| distress, the market goes "oh shit, the whole thing is on
| fire" and you get bank runs (because where is the money
| coming from to loan to PE? thats right banks, eventually)
| fastball wrote:
| Off by an order of magnitude.
| rchaud wrote:
| Washington Mutual had $307 billion in assets, and one credit
| downgrade and a bank run of $16 billion in September 2008 was
| enough to get them shut down.
|
| These private credit numbers are estimates provided by Moody's,
| who were famously clueless about the scale of mortgage bond
| risk even as they stamped them all with a AAA rating.
| boringg wrote:
| Update: original comment should be. 300B/1.2T*(10% of bank
| funds) = 2.5%. If I'm reading comment correct. Also I believe
| the whole private credit ecosystem is about 1T.
|
| In a catastrophic scenario: if the whole asset class went to 0
| (on the banks asset sheet they would lose 2.5% - absorbable
| pain assuming its not leveraged through creative financial
| mechanisms).
|
| I would wager that risk is more concentrated on certain
| institutions instead of across the board so acute pain likely.
| bagacrap wrote:
| That's only loans to non bank financial institutions.
|
| Total bank balance sheets are about $25T.
| overtone1000 wrote:
| And then that 25% is 10% of US banks' entire lending
| portfolio, so private credit is about 2.5% of their entire
| portfolio.
| karambahh wrote:
| I've been told by the head of compliance of the largest
| European banking group that 2.5% is exactly the threshold at
| which they begin to be very worried/ at systemic risk
|
| Apparently they operate on very low level of tolerable risk
| (way lower than I thought)
| AnishLaddha wrote:
| >2.5% is likely still survivable, but i think risk
| departments + regulators are all a lot less risk tolerant
| after seeing how quickly things went south in 2008 and
| worries about an out of control spiral
| epsteingpt wrote:
| Someone else owns all the other credit. This is the 1st domino.
|
| The liquidity challenges of a $1.2T shock to the economy is
| meaningful, because it has knock on effects on equity as well.
|
| When private credit (which is propping up private valuation)
| falls, private equity also falls and then everyone realizes
| that everyone else has been swimming naked.
| tmaly wrote:
| If there are credit default swaps involved anywhere, this could
| amplify the pain in the economy.
| cs702 wrote:
| Trouble has been brewing in private credit for quite a while, but
| lenders and investors have been reluctant to write anything down,
| resorting to all kinds of "extend and pretend" games to avoid
| write-downs.
|
| _tick-tock, tick-tock, tick-tock..._
| rvz wrote:
| Looks like we have another problem in the banking system once
| again, even before AGI has even been fully realized.
|
| We are _definitely_ in the year 2000 in this cycle [0] and
| between now and somewhere in 2030, a crash is incoming.
|
| Let's see how creative the banks will get to attempt to escape
| this conundrum. But until then...
|
| Probably nothing.
|
| [0] http://news.ycombinator.com/item?id=45960032
| NickC25 wrote:
| >Let's see how creative the banks will get to attempt to escape
| this conundrum.
|
| They don't need to get creative, they just need to buy congress
| or the administration. Same as they've done every time things
| get messy.
|
| And you know what? It works every time.
| hedora wrote:
| Well, the question isn't "is there any consequence for the
| bank managers"? The answer to that is "No, never, not even
| during the French Revolution".
|
| The question is "How long can they keep extracting money
| before the economy implodes?"
|
| The people producing macroeconomic indicators in the US were
| fired about 6 months ago for putting out an honest report.
| Since then there's been very little correlation between
| public sentiment on the economy and the official indicators.
|
| So, we're definitely in some sort of overhang situation,
| where the economy is imploding, but the stock market goes up.
| I think that's unprecedented in the US. In developing
| countries, when this happens, it usually leads to things like
| hyperinflation.
|
| So, I guess the real questions are: "How do you short the
| dollar?", and "How can you tell when the banks start doing
| it?" so you know when to jump off the merry-go-round.
| kentonv wrote:
| Since a lot of people here aren't familiar with the private
| credit situation, here's my understanding, which comes almost
| entirely from reading Money Stuff, a daily column by Matt Levine.
| If you are a tech person who wants to learn about finance, I
| recommend it! It's a lot more entertaining than most finance
| industry reporting.
|
| "Private credit" is an idea that has been hot in finance for the
| last several years, originating from the great financial crisis
| (GFC). After the GFC, regulations made it very hard for banks to
| make business loans with any kind of risk anymore. So instead,
| new non-bank institutions stepped in to make loans to businesses.
| These "private credit" institutions raise money from investors,
| and lend it to businesses.
|
| The investors are usually institutions who are OK with locking up
| their money long-term, like insurance companies and pension
| funds. This all seems a lot safer than having banks making loans:
| banks get their funding from depositors, who are allowed to
| withdraw their deposit any time they want. So a bank really needs
| to hold liquid assets so they are prepared for a run on the bank,
| and corporate borrowing is not very liquid. Insurance companies
| and pension funds have much more predictability as to when they
| actually will need their money back, so can safely put it in
| private credit with long horizons.
|
| It's not quite so clean, though.
|
| It's actually common for banks to lend money directly to private
| credit lenders, who then lend it out to companies. But when this
| happens, typically the bank is only lending a fraction of the
| total and arranges that they get paid back first, so it's
| significantly less risky than if they were loaning directly to
| the companies. Of course, the non-bank investors get higher
| returns on their riskier investment.
|
| And the returns have been pretty good. Or were. With the banks
| suddenly retreating from this space, there was a lot of money to
| be made filling the gap, and so private credit got a reputation
| for paying back really good returns while being more predictable
| than the stock market.
|
| But this meant it got hot. Really hot.
|
| It got so hot that there were more people wanting to lend money
| than there were qualified borrowers. When that happens, naturally
| standards start to degrade.
|
| And then interest rates went up, after having been near-zero for
| a very long time.
|
| And now a lot of borrowers are struggling to pay back their loans
| on time. And the lenders need to pay back investors, so sometimes
| they are compromising by getting new investors to pay back the
| old ones, and stuff. It's getting precarious.
|
| Meanwhile a lot of private credit institutions are hoping to
| start accepting retail investors. Not because retail investors
| have a lot of money and are gullible, no no no. 401(k) plans are
| by definition locked up for many years, so obviously should be
| perfect for making private credit investments! Also those 401(k)s
| today are all being dumped into index funds which have almost
| zero fees, whereas private credit funds have high fees. Wait,
| that's not the reason though!
|
| But just as they are getting to the point of finding ways to
| accept retail investors, it's looking like the returns might not
| be so great anymore. Could be a crisis brewing. Even if the banks
| are pretty safe, it's not great if pensions and insurance
| companies lose a lot of money...
| Tesl wrote:
| One guy has twice as much money as that. Can't be a big deal.
| erikig wrote:
| Equity/net worth is not quite the same as the liquid capital
| needed to cover losses or service debt.
| ploden wrote:
| > the top five lenders in the private credit market include Wells
| Fargo, which leads the way with $59.7bn (PS44.8bn) in lending
|
| anything Wells Fargo leads in must be bad
| dakolli wrote:
| Actually I believe they're just actually complying with new
| laws to disclose their balance sheets for these types of loans.
| Many other banks like JP Morgan have much higher amounts of
| these loans on their balance sheets, but refuse to report and
| are exploiting certain loopholes.
|
| The requirement to disclose has only existed for a year I
| believe, but many are kicking the can or claiming that it would
| cause them issues.
| lizknope wrote:
| Wells Fargo so big its suing itself
|
| July 10, 2009
|
| https://www.denverpost.com/2009/07/10/lewis-wells-fargo-so-b...
|
| My normal bank was acquired by Wells Fargo in 2008 and they
| also owned my mortgage.
|
| When I went to pay off my mortgage in 2012 they required a
| cashier's check for the final payment of around $80.
|
| I asked if we could do it electronically like all of the
| previous payments and they said no.
|
| So I walked into my local bank asking for a cashier's check of
| that amount and the bank teller told me that most people would
| accept a personal check for that little. I said yeah but YOU
| don't. She looked at me funny.
|
| So she asked who to make the cashier's check out to. I said
| "Wells Fargo" and she looked at me funny again and said "Wells
| Fargo is us, the check comes FROM Wells Fargo. Who do I put on
| the TO line" and I said "Wells Fargo"
|
| She again looked at me funny and I explained that I am paying
| off my mortgage. Wells Fargo is where I have my bank account
| and my mortgage. She said "Can't we just do it electronically?"
| to which I said "You would think but apparently your employer
| can't handle that and told me to get a cashier's check and
| FedEx overnight to them."
|
| She rolled her eyes and then started laughing.
| adabyron wrote:
| Highly recommend listening to past episodes on The Real Eisman
| Playbook podcast for more info on this topic & banking in
| general.
|
| https://podcasts.apple.com/bz/podcast/the-real-eisman-playbo...
|
| He's one of the "Big Short" guys but more importantly he has
| great guests on. Everyone is trying to teach & inform, not sell.
|
| He's been calling this risk out for over a year, especially once
| the White House started trying to allow retirement accounts
| access to private credit. For a lot of people that was the big
| alert, even before Jamie Dimon said he saw "cockroaches".
| JumpCrisscross wrote:
| > _He 's been calling this risk out for over a year_
|
| Any figures or lenders he's focussed on?
| adabyron wrote:
| I can't remember the names. Best bet if you don't want to
| listen is to just get summaries or transcriptions of the
| episodes you can an LMM questions on.
|
| The info on his podcasts isn't telling you who to short. It's
| more who has gone under & general knowledge.
| adam_arthur wrote:
| There is so much misinformed fear-mongering about private credit
| right now.
|
| Important Facts:
|
| 1) The majority of private credit funds are classed as "permanent
| capital". When you put money into these vehicles, you give the
| Asset Manager discretion over when to give the money back.
| Redemptions are often gated at ~5% per quarter.
|
| (So there cannot, by definition, be a run on the bank)
|
| 2) Credit is senior to equity, so if you expect mass defaults in
| private credit, it means the majority of private equity is
| effectively wiped out. Private equity has to be effectively a 0
| before private credit takes any losses.
|
| 3) The average "recovery rate" for senior secured loans is 80%.
| Even if private equity gets wiped to 0, the loss that private
| credit incurs is cushioned significantly by the collateral
| backing the loan. These are not unsecured loans the borrower can
| just walk away from.
|
| (The price of senior secured loans dropped by ~30% in 2008, as a
| worst case datapoint)
|
| 4) Default rates on many of the major private credit managers is
| ~<1% in recent years. There are other estimates stating higher
| default rates, but that often classifies PIK income as a default.
| A loan modified and extended with added PIK that ultimately gets
| repaid is not a "true" default.
|
| 5) Finally, it's true that NAVs are likely overstated, but
| generally it's by a modest amount. Every Asset Manager today
| could go out tomorrow, mark NAVs down by 20% and suddenly there
| is no crisis.
|
| (The stocks of Asset Managers have already traded down such that
| this seems expected and priced in anyway)
| JumpCrisscross wrote:
| > _Private equity has to be effectively a 0 before private
| credit takes any losses_
|
| Technically yes. But the overlap between private equity as it's
| commonly described and private credit is slim.
|
| > _average "recovery rate" for senior secured loans is 80%_
|
| Oooh, source? (I'm curious for when this was measured.)
|
| > _A loan modified and extended with added PIK that ultimately
| gets repaid is not a "true" default_
|
| True. It's a red flag, nonetheless.
|
| > _Every Asset Manager today could go out tomorrow, mark NAVs
| down by 20% and suddenly there is no crisis_
|
| Correct. The question is if 20% is enough, and if a 20%
| markdown creates a vicious cycle as funding for _e.g._ re- or
| follow-on financing dries up.
|
| You seem knowledgable about this. I'm coming in as an equities
| man. Would you have some good sources you'd recommend that make
| the dovish cash for private credit today?
| adam_arthur wrote:
| > Oooh, source? (I'm curious for when this was measured.)
|
| It depends when you measure, but you can Google around and
| find figures in the 60-80% range. 80% may have been a bit on
| the optimistic end of the range. But it's important to note
| that a "default" doesn't imply a 0.
|
| Of course this will depend on the covenants, underwriting
| standards, type of collateral.
|
| I would guess software equity collateral recovery rates are
| lower than hard assets like a building. (Which is why I
| personally don't like Software loans, nothing to do with AI)
|
| > Correct. The question is if 20% is enough, and if a 20%
| markdown creates a vicious cycle as funding for e.g. re- or
| follow-on financing dries up.
|
| I think it's almost certain that new fundraising for private
| credit will be materially hindered going forward. But this
| just limits the growth rate of these firms, does not
| introduce any "collapse" risk.
|
| They may move from net inflows to net outflows and bleed AUM
| over a period of some years.
|
| If NAVs were inflated previously, they may be forced to mark
| down the NAV to meet redemptions rather than using inflows to
| payoff older investors.
|
| In the world of credit, 20% is an enormous haircut. Again,
| senior secured loans fell by around 30% peak to trough in
| 2008.
|
| We have the public BDC market as a comparison point where the
| average price/book is around 0.80x. So the public market is
| willing to buy credit strategies at a 20% discount to stated
| NAV.
|
| The real systemic risk here, if we were to reach for one, is
| really that these fears become self fulfilling.
|
| If investors pull funds out of credit strategies en-masse,
| there is no first order systemic issue, but it means
| borrowers of many outstanding loans may not be able to secure
| refinancing as money is drying up.
|
| This could lead to a self-fulfilling default cycle. But this
| would be a fear driven default cycle, there is no fundamental
| issue with cash flows of borrowers or otherwise (in
| aggregate, currently).
|
| Finally, in regards to the asset managers themselves, many
| are quite diversified.
|
| Yes, they have private credit funds, but many have real
| estate funds, buyout funds etc. OWL is one of the biggest
| managers of data center funds, for example (which they also
| got hammered for on AI bubble fears)
|
| Given how depressed pricing is in public REITs, for example,
| I expect a lot of asset managers to pivot towards more real
| asset funds.
| hedora wrote:
| So, if I hold a bunch of Private Equity, and my holdings
| need a continuity of business loan, would I:
|
| (a) have the holding take out the debt, exposing 100% of my
| stake
|
| or,
|
| (b) have the holding divest a piece of itself, giving me
| control of the existing and new entities, then have that
| piece take out the debt, exposing 0% of my stake?
|
| I imagine any PE firm worth its salt would go with option
| (b).
|
| Presumably regulators would sometimes try to block such
| deals, but I cannot imagine that happening during the
| current administration. (Do the regulators even still work
| for the US government? I thought they were mostly fired.)
|
| Similarly, I can imagine the banks refusing to lend in
| scenario (b), but I cannot imagine bank leadership being
| allowed to make such a decision if the PE firm is
| politically connected to the current administration.
| adam_arthur wrote:
| It sounds like you're effectively describing some fraud
| scheme.
|
| A smart lender will not issue loans without real
| collateral. If you create a subsidiary, that subsidiary
| has to have sufficient collateral and cashflow to secure
| a loan.
| fairity wrote:
| So, if I'm following: Banks are lending to private equity firms
| to fund purchases of businesses.
|
| Many of these businesses are SaaS which means their valuations
| are tumbling.
|
| It seems possible that valuations tumble so much that the private
| equity owner no longer has any incentive to operate the business,
| bc all future cash flows will belong to the bank. What happens in
| practice then? Will banks actually step in and take operational
| control? Will the banks renegotiate terms such that the private
| equity owners are incentivized to continue as stewards? Or, will
| they prefer to force a business sale immediately?
| JumpCrisscross wrote:
| > _Banks are lending to private equity firms to fund purchases
| of businesses_
|
| Not quite. Private credit is to debt what private equity is to
| equity. (Technically, any non-bank originated debt that isn't
| publicly traded is private credit. Conventionally, it's
| restricted to corporate borrowers.)
|
| So bank exposure to private credit generally means banks
| lending to non-banks who then lend to corporate borrowers.
| jmalicki wrote:
| What does this typically look like? Who is the intermediary
| here between the bank and corporate borrowers - are these buy
| side created SPVs?
| JumpCrisscross wrote:
| > _Who is the intermediary_
|
| Business development companies [0]. Blue Owl. BlackRock
| [1].
|
| > _are these buy side created SPVs?_
|
| Great question! Not always [2].
|
| [0] https://www.reuters.com/business/finance/private-
| credit-fund...
|
| [1] https://www.blackrock.com/corporate/newsroom/press-
| releases/...
|
| [2] https://www.datacenterdynamics.com/en/news/meta-
| secures-30bn...
| vondur wrote:
| Am I wrong thinking this is similar to the housing loan
| crisis of 2008? This is just another form of that "shadow
| banking" system isn't it?
| JumpCrisscross wrote:
| > _This is just another form of that "shadow banking"
| system isn't it?_
|
| Private-credit lenders are literally shadow banks [1].
| But I'd be cautious about linking any shadow banking with
| crisis. Tons of useful finance occurs outside banks (and
| governments). One could argue a classic VC buying
| convertible debt met the definition.
|
| That said, the parallel to 2008 is this sector of shadow
| banking has a unique set of transmission channels to our
| banks. The unexpected one being purely psychological-when
| a bank-affiliated shadow bank gates redemptions,
| investors are punishing the bank _per se_.
|
| [1] https://en.wikipedia.org/wiki/Non-
| bank_financial_institution
| _heimdall wrote:
| You'll find plenty of talking heads on YouTube right noe
| claiming exactly this. Time will tell if private equity
| is actually wound up as tight as housing was in the GFC.
| harmmonica wrote:
| I don't think you're wrong if the following holds true:
| Before the housing bubble burst, banks lent funds to
| countless borrowers who couldn't, ultimately, afford
| their mortgage payments (because the banks didn't do
| their due diligence when underwriting the loans). This
| was widespread across pretty much every bank and mortgage
| banker. Not sure of the actual percentage of borrowers
| who, when all was said and done, had no business getting
| a mortgage for a house or condo, but suffice it to say it
| was well into the double digits percentage-wise (there's
| much more to this than simply banks and borrowers with
| Wall St. playing a major role in the collapse, but just
| keeping things simple).
|
| In this private credit situation the analog for the banks
| are these private credit funds that have raised the
| capital they've lent from institutions and high-net-worth
| individuals (as opposed to banks, which have funds from
| consumer deposits). The analog to the individual mortgage
| borrowers from 2008 are actual companies.
|
| To connect the dots, if the private credit funds were
| like the banks pre-2008, where due diligence was an
| afterthought, then this could turn out to be similar. So
| the real question is: are the borrowers (businesses in
| this case) swimming naked? Or do you believe the private
| credit funds when they say they actually conducted a good
| amount of due diligence when extending their loans? Once
| you know the percent of the companies that are naked you
| can evaluate whether this could/would end up similar to
| 2008. Nobody knows that yet, even, I suspect, the private
| credit funds themselves.
| bryanrasmussen wrote:
| Wouldn't they still owe interest to the banks on the money they
| borrowed, as well as the money they borrowed? I mean if all the
| money I make goes to the bank to pay off my mortgage my
| solution is not quitting my job, even though life is not very
| good under that situation.
| miketery wrote:
| The business owes the money or the fund. In any case the
| individuals do not unless they backed it with personal
| collateral.
| bryanrasmussen wrote:
| hmm, yeah ok so the collateral is the business they are
| buying, I forgot that one.
| klodolph wrote:
| The analogy has a lot of problems.
|
| Imagine you got a loan to buy a bunch of laundry machines to
| run a laundromat. But your laundromat earns $8,000 a month,
| and the loan payment is $10,000.
|
| You can decide to sink $2,000 of your personal money into the
| laundromat every month, or you can give up.
| spamizbad wrote:
| Banks have zero appetite for taking any operating
| responsibility for these firms and will work tirelessly to get
| them off their books ASAP.
| o-o- wrote:
| > Banks are lending to private equity firms to fund purchases
| of businesses.
|
| Yes some businesses are SaaS but here's the real problem: Many
| businesses' sole purpose is _leveraged buy-outs_ which really
| is the devil in disguise.
|
| It goes like this: A VC specialising in veterinary clinics
| finds a nice, privately owned town clinic with regular
| customers and "fair" prices, approach the owners saying "we
| love the clinic you've built! We'll buy your clinic for
| $2,500,000! You've really earned your exit!".
|
| So now the VC lends the money from the bank, buys the clinic,
| and here's the important part: _they push the debt onto the
| clinic's books_. So all of a sudden the nice town clinic has
| $2,500,000 in debt, raise prices accordingly, ~~burn out
| personnel~~ slim operations accordingly, and any surplus that
| doesn't go to interest and amortization goes straight to the
| VC.
|
| Debt and collateral on the veterinary clinics.
|
| Risk free revenue to the VC.
| pembrook wrote:
| So yes, PE funds are probably overvalued right now and there
| are a lot of PE funds getting rich off management fees while
| not providing promised returns...but this comment is so wrong
| I don't know where to begin.
|
| First, VC stands for _venture capital,_ which is a subset of
| private equity that does zero LBOs and doesn 't even acquire
| any businesses. VC funds buy equity in startups, and take on
| zero debt to do so. You have your boogiemen totally confused.
|
| Second, the entire point of a PE fund that uses a leveraged
| buyout strategy is that they need to _sell the acquired firm
| at a profit_ to make any returns to the fund. LBO funds don
| 't 'cashflow' businesses, and saddling a business with a
| bunch of debt is antithetical to that purpose anyways.
|
| Third, this is not "risk free revenue." It's a high risk
| strategy to _use the debt to increase the value of the
| business by improving operations enough that you can sell it
| for a profit to the fund._ If you saddle a company with debt
| and DON 'T increase the value of the business beyond the debt
| you took on, the PE fund will not be in business for fund 2.
|
| The risk-free revenue while the fund is alive comes from the
| _management fees_ that investors in the fund pay (usually 2%,
| which is way too high IMO, but has nothing to do with the
| debt or the acquired businesses).
|
| Please do not write confident sounding comments about things
| you don't understand, it spread misinformation and makes the
| internet a worse place.
| superxpro12 wrote:
| As someone who's life is currently being affected directly
| by PE middle-manning something I spend a LOT of time on, I
| am sensitive to this issue.
|
| IF you have problems with the vocab and terms, fine. But I
| have seen personally this issue in my life, that is
| affecting my bank account.
|
| And we have seen example after example of these LBO's
| ruining otherwise functioning businesses. It's happening.
| All over the place.
| pembrook wrote:
| It is absolutely possible (and even likely!) that a bad
| PE fund was the cause of the issue you're talking about.
| But there is also a media hysteria around PE, and a lack
| of understanding among the general public of what it is.
|
| It's just as likely the business that was acquired was
| already failing or unsustainable to begin with (hence why
| the owner wanted out at low multiples). LBO funds don't
| acquire promising businesses at 5-10X revenue like tech
| companies do, they usually buy businesses at low
| multiples that are past their prime or failing in an
| attempt to revitalize them (with debt, since you can't
| raise capital by selling equity in a failing business).
|
| Obviously this will not always work out great, given the
| trajectory of target companies was already not great to
| begin with. Momentum is the strongest factor in all
| markets.
|
| The problem is, Private Equity has become a
| conspiratorial catchall boogieman and scapegoat for every
| problem under the sun, so it's hard for me to assess
| without further details of the situation.
| maest wrote:
| > Momentum is the strongest factor in all markets
|
| Nit: beta is the strongest factor in all markets. Which
| is actually relevant for the success for PE funds in
| general, as a rising tide lifts all boats and people
| taking on debt to finance equity generally post outsized
| returns in bull markets.
|
| Anyway, the rest of the stuff you're saying I agree with.
| pembrook wrote:
| Yes, beta is the overwhelming source of returns. I was
| referring to factors in the sense of the University of
| Chicago research on market inefficiencies (where momentum
| is the strongest factor for inefficiency).
|
| If you buy a "factor-weighted" etf the idea is it's
| tilting you into those "factors" away from pure beta like
| buying whole market.
|
| PE you could argue is largely just leverage plus an
| illiquidity factor play, since if PE just returned beta
| (which these days it might!) you'd be smarter to buy the
| S&P500 with equivalent leverage and not pay crazy fees.
| mbesto wrote:
| > And we have seen example after example of these LBO's
| ruining otherwise functioning businesses. It's happening.
| All over the place.
|
| Your anecdotes and the anecdotes in media are no
| statistical evidence for "this is happening all over the
| place".
|
| Yes, PEs/LBOs deserves criticism, but "PE" and "LBO"
| isn't a one size fits all situation.
| financltravsty wrote:
| Background: I work for a PE-owned company and I have
| friends in PE (associates up to MDs).
|
| On your second point: LBOs aren't the only tool in the
| toolkit, and it's not as popular as it was decades ago, so
| I would lean towards the parent simply conflating "buying
| an ownership stake in a business in some capacity using
| other people's money" with the strict definition.
| Regardless, yes PE firms need to figure out how to get 20%+
| IRR throughout a short timeframe (usually a 5 year
| holding/funding cycle) -- however this is _through any
| means necessary._ Philosophically, it 's about increasing
| efficiency of operations and growing the business. In
| practice, it's financial engineering because PE firms do
| not have the operational skills to make any value-added
| changes to firms besides driving costs down.
|
| Saddling a business with debt is reductionist. I've seen
| absolutely nonsensical financial structures that make no
| sense for a layman, but in practice end up "using the
| business' finances to 'own' (beneficially) the business"
| (see: at the most vanilla, the strategy of seller financing
| in SMBs). No this is not technically "putting debt on the
| books" but it is in all practical respects a novation/loan
| transfer that can leave the purchased co financially
| responsible for servicing any debt that was used in its
| purchase.
|
| On your third point: what I wrote above can be used as
| context. It's not risk free revenue, frankly it's very
| risky unless you're in an inflationary environment where
| your assets will grow regardless of your business
| operations solely because the overarching economy is
| growing and you're riding a tailwind. However, it again
| boils down to _financial engineering._ It 's not as simple
| as assets - liabilities = equity. The calculations used to
| determine valuations are so ridiculously convoluted. The
| amount of work that goes into financially analyzing
| businesses and finding "loop holes" that can justify higher
| prices is the core business model. The debt factors into
| it, but there's ways to maneuver around it through various
| avenues.
|
| For example:
|
| * debt-to-equity conversions (reclassification of debt as
| equity)
|
| * refinancing
|
| * sale-leaseback (selling company's assets to a 3rd party
| and using that money to pay down the debt, then leasing the
| equipment back)
|
| * creative interpretations of what is actually debt (e.g.
| reclassifying real debt as a working capital adjustment or
| a "debt-like")
|
| * dividend recapitalization (a nasty trick of loading the
| company with debt, paying that out as a dividend to the
| holdco, then selling the company at lower enterprise value.
| They still extracted value for their LPs/investors, despite
| the exit being lower)
|
| * separating the debt from the operating company into a
| different holding company that services the debt
| newsclues wrote:
| The Mars family is doing that with the vets.
| at_compile_time wrote:
| They also own a large part of the pet food industry. Given
| how much health is affected by diet, that's a huge conflict
| of interest.
| koolba wrote:
| > Risk free revenue to the VC.
|
| How is that risk free? If the clinic goes bankrupt the VC
| will be on the hook for the rest of the loan. It's not free
| money.
| jaggederest wrote:
| They're not so silly as to have any personal or
| professional liability, they probably spin up a special
| purpose vehicle or llc to hold the bag if it all goes south
| edgyquant wrote:
| No bank would agree to such nonsense
| estimator7292 wrote:
| It's called "financial engineering" and banks and courts
| agree to it on the daily.
| JumpCrisscross wrote:
| It's analogous to a mortgage in a non-recourse state. If
| the borrower defaults the bank (or non-bank lender) gets
| the leveraged company, but can't usually go upstream.
| xenadu02 wrote:
| > No bank would agree to such nonsense
|
| Ohhhh a live one! Sir do I have a wonderful bridge in
| Brooklyn to sell you! :)
|
| Fun fact: banks fund this sort of nonsense constantly.
| I've asked about this before: why they do it. They must
| be making money I just don't know how. The LBO guys pay
| themselves massive management fees and dump the debt on
| the company so they walk away scott free.
|
| My wild guess was the banks offload the eventual IPO onto
| investors and so make their money on the IPO fees and
| funneling their own clients the dead-man-walking shares.
| But I honestly don't know.
| JumpCrisscross wrote:
| > _wild guess was the banks offload the eventual IPO onto
| investors and so make their money on the IPO fees and
| funneling their own clients the dead-man-walking shares_
|
| The banks get paid back their debt when the next PE fund
| buys the company or the company pays it off. Unless an
| IPO is being done to pay off debt, which it never is, the
| mechanism you describe doesn't occur.
| CapitalistCartr wrote:
| The usual arrangement for an LBO is to saddle the bought
| company, the vet in this example, with the debt,or spin off
| a secondary company from the vet with the poorest assets
| and most to all of the debt. It's all a scummy business.
| gowld wrote:
| Then why is everyone complaining "my vet sucks now" and
| not "my vet went out of business"?
| chrisweekly wrote:
| "So now the VC lends the money from the bank"
|
| "lends" -> "borrows", right?
| axus wrote:
| If hours of preparation for college testing taught me
| anything, it's the difference between lend and borrow.
| mbrumlow wrote:
| No dude. Read it again.
|
| The VC lends (the money from the bank) which the vc
| borrowed, to the clinic.
|
| They are a sort of middle man. It the clinic is on the hook
| to the bank and the Vc takes fist cut before playing the
| bank.
|
| Eg. The vc only risked the company they were buying, and
| gets paid first.
| NoboruWataya wrote:
| If the VC borrows money from the bank and lends it to the
| clinic, the clinic is not on the hook to the bank. The
| clinic is on the hook to the VC and the VC is on the hook
| to the bank. Which means that if the clinic goes under,
| the VC takes the loss because it still has to repay the
| bank.
|
| (Edit: To be clear, I agree with the other commenters
| that none of this is what VCs do. I'm just pointing out
| that the way this is being described doesn't even work on
| its own terms. Needless to say, LBOs are not "risk
| free".)
| mbrumlow wrote:
| Nope. The clinic is the collateral to the bank. VC stand
| to loose nothing.
|
| It does not happen overnight. But what happens is after
| they take control of the clinic or company they change
| the sales model to boost reoccurring revenue, this then
| allows the clinic or target company to take loans out.
| Because they look good on paper. The company then pays VC
| back when then pays bank back.
|
| This can be done in about 6mo to 1 year process with some
| companies. The initial out of pocket expense is small and
| paid back very quickly.
|
| I also forgot. Sometimes they will take the newly owned
| company and merge it. During that process they extract
| more money and load more debt onto the remaining
| entities, again making the VC money.
|
| In some cases they can even get huge tax benefits by
| loading the company with debt which offsets the tax bill
| of the final entity.
|
| When these transactions are done, within the span of a
| day multiple companies are created and merged and
| absolved.
|
| There is little to no risk for the VC
| hrimfaxi wrote:
| > It does not happen overnight. But what happens is after
| they take control of the clinic or company they change
| the sales model to boost reoccurring revenue, this then
| allows the clinic or target company to take loans out.
| Because they look good on paper. The company then pays VC
| back when then pays bank back.
|
| This was the missing bit for me. Thanks for taking the
| time to explain!
| JumpCrisscross wrote:
| > _The clinic is the collateral to the bank. VC stand to
| loose nothing_
|
| This is actually a case where using the correct
| terminology clarifies.
|
| VCs don't do LBOs. Private equity firms do. When their
| deals go bust they lose the equity they invested. That
| equity is the first layer to take a loss. When that
| happens, the lenders--whether they be banks or private
| credit firms--take over the company, often converting
| some of their previous debt into equity.
|
| There is a _lot_ of risk in LBOs. It's why they have such
| a mixed record.
| fireflash38 wrote:
| Who are the bagholders in these scenarios?
| klondike_klive wrote:
| What's the betting that it's (somehow, eventually) the
| taxpayers?
| JumpCrisscross wrote:
| > _now the VC lends the money from the bank, buys the clinic,
| and here 's the important part: _they push the debt onto the
| clinic's books_
|
| This mostly correctly describes a leveraged buyout (LBO).
| LBOs are done by LBO shops, a type of private equity (PE)
| firm. Not VCs. (VCS do venture capital, a different type of
| PE.) And LBO debt isn't "pushed" onto the company's books,
| it's never on the sponsor's (LBO shop's) books in the first
| place to any material extent.
|
| Private credit, on the other hand, involves _e.g._ Blue Owl
| borrowing from a bank to lend to software businesses, usually
| without any taking control or equity. It's fundamentally
| different from both LBOs and VC or any private equity
| inasmuch as it doesn't have anything to do with the equity,
| just the debt. (Though some private credit firms _will_ turn
| around and lend into a merger or LBO. And I'm sure some of
| them get equity kickers. But in that capacity they're
| competing with banks. Not PE. Certainly not VC, though growth
| capital muddles the line between what is VC and other kinds
| of PE or even project financing.)
| mbesto wrote:
| Guy who works in the PE market here (not a PE shop myself)
| - this comment is correct.
| gowld wrote:
| Why does Blue Owl borrow from a bank to lend? Why would it
| need investors if it borrows from a bank?
| JumpCrisscross wrote:
| > _Why does Blue Owl borrow from a bank to lend? Why
| would it need investors if it borrows from a bank?_
|
| Leverage. They raise money in their public funds. And
| then they borrow, typically around 50% of their capital,
| to amplify returns.
|
| Note: "Private credit lenders won't lose money before
| private equity firms do. That's how the capital stack of
| companies work: Equity is the first in line for losses.
| Before lenders like Apollo Global Management, Blue Owl
| Capital or Ares Management lose a dollar on their loans
| if a portfolio company fails, the private equity owners
| will already have been hit" [1]. Leveraging the senior
| debt is actually less risky than leveraging the
| underlying equity. (Though obviously they compound when
| done together.)
|
| [1] https://www.nytimes.com/2026/03/12/business/dealbook/
| private...
| codethief wrote:
| > And LBO debt isn't "pushed" onto the company's books,
| it's never on the sponsor's (LBO shop's) books in the first
| place to any material extent.
|
| Doesn't the LBO shop still need to pay off the debt,
| technically speaking? AFAIU the company's assets (hospital
| in OP's example) are used as collateral in a credit
| agreement between the LBO shop (as the hospital's new
| shareholder) and the bank. But unless I'm mistaken, this is
| not _exactly_ the same as the debt being on the hospital 's
| books and the hospital having a credit agreement with the
| bank. (For an increase in debt on the liabilities side of
| the balance sheet there would have to be an equal increase
| of assets on the other side. The hospital didn't receive
| the cash, though.)
| WorkerBee28474 wrote:
| > So all of a sudden the nice town clinic has $2,500,000 in
| debt, raise prices accordingly...
|
| From a financial engineering perspective this is wrong.
|
| Both equity and debt have costs of capital. Debtholders
| expect interest, capital holders expect RoE. The money going
| to debt interest is money that would previously have gone to
| equity, but now does not because the equity is replaced with
| debt.
|
| Crucially, the costs of debt is lower than the cost of equity
| because of the interest tax shield. Therefore, the vet clinic
| now requires _less_ revenue to maintain or even increase its
| return to equity.
| JumpCrisscross wrote:
| > _the vet clinic now requires less revenue to maintain or
| even increase its return to equity_
|
| The small-town vet would have probably accepted a lower
| RoE. More critically, they'd have been more willing to
| absorb shocks to said RoE than a lender will to their debt
| payments.
| t0mas88 wrote:
| Technically true, but RoE expectations from a PE firm are
| typically a lot higher than from the original owners of a
| small business.
|
| And the LBO model is much less resilient to economic
| headwind. Let's assume a 25% EBITDA margin business, with
| most costs fixed (like the clinic example). Unfortunately
| revenue drops 20% because of external factors. It would
| maybe have a tiny profit left, tax would also be tiny and
| there is no interest to pay. The shareholders receive near
| zero, absorbing most of the problem for a year waiting for
| times to get better.
|
| Now the same business, same reported EBITDA, but paying a
| large interest sum every year to the bank. If revenue drops
| 20% they can't pay their interest, and banks don't just
| wait for next year. Now the business has the restructure,
| agree with the banks what that looks like, or face a
| bankruptcy risk.
|
| While the new PE shareholder has a better RoE due to
| leverage in the upside scenario, the business (and the PE)
| could be completely cooked in a downside scenario. For the
| PE this is a calculated risk, they optimise the overall
| portfolio. But for the employees and customers this isn't a
| great scenario.
| 8note wrote:
| why wouldnt the previous owners just open a new vet clinic,
| and hore all the same people back?
|
| or some manager at it? it must be easy enough to raise that
| starting money, if the PE firm could get the loan
| t0mas88 wrote:
| An acquisition like that would have non-compete
| restrictions. And often the previous owners don't get 100%
| cash, they would receive part as shares in the new holding
| company.
| elevation wrote:
| Private equity is a huge inflation driver. I'm thrifty, and for
| years I enjoyed a $10/mo phone provider, ~$12.39 with taxes. I
| even evangelized this carrier with some young parents who were
| struggling to get financial traction while paying off student
| loans.
|
| Our affordable plan came to an end when the rates tripled!
| Turns out a private equity firm bought the company, jacked the
| rates on every customer, and sold it off again. This was not a
| fundamental cost being passed on in slightly increased fees --
| it was private equity extracting millions from the people who
| can afford it the least. Across my financially optimized life,
| I see this happening repeatedly.
|
| Personally, I can afford a more expensive cell phone bill. But
| I would imagine that many who have a $10/mo plan do not have
| many other options. I would like to punish the banks who are
| funding attacks on consumers. If by no other means, then by
| letting them fail.
| twoodfin wrote:
| Why did the phone provider sell to a private equity firm?
| sharts wrote:
| Why would banks take control? If they had that skillset or
| interest they wouldn't be lending to middle men to begin with.
| NoboruWataya wrote:
| The concern here seems to be that the credit risk on the
| underlying borrowers is being transferred to banks through the
| loans made by the banks to the private credit firms. But the
| banks' lending to the private credit firms is subject to the same
| regulations and constraints as their lending to other borrowers
| (the same regulations and constraints that led them not to lend
| to the underlying borrowers in the first place). When banks lend
| to private credit funds/firms, it tends to be through senior,
| secured loans which will be less risky than the underlying loans.
| JumpCrisscross wrote:
| > _the banks ' lending to the private credit firms is subject
| to the same regulations and constraints as their lending to
| other borrowers_
|
| Yes.
|
| > _the same regulations and constraints that led them not to
| lend to the underlying borrowers in the first place_
|
| No. Non-bank financial institutions (NBFIs a/k/a shadow banks)
| compete with banks. They also borrow from banks.
|
| > _When banks lend to private credit funds /firms, it tends to
| be through senior, secured loans which will be less risky than
| the underlying loans_
|
| Correct. Assuming 1.5x leverage and 60% recovery, you'd expect
| no more than half of portfolio losses to transmit to their
| lenders.
| NoboruWataya wrote:
| > No. Non-bank financial institutions (NBFIs a/k/a shadow
| banks) compete with banks. They also borrow from banks.
|
| How is this inconsistent with what I said? I was just making
| the point that the reason for the rise of private credit is
| that banks are less willing / able to lend, particularly to
| riskier borrowers, as a result of post-2008 banking
| regulations. So private lenders have stepped in to fill that
| gap.
| JumpCrisscross wrote:
| > _the reason for the rise of private credit is that banks
| are less willing / able to lend, particularly to riskier
| borrowers, as a result of post-2008 banking regulations. So
| private lenders have stepped in to fill that gap_
|
| That may have been true once. It's rarely true now. Banks
| and shadow banks compete for the same borrowers.
| hedora wrote:
| > secured loans which will be less risky than the underlying
| loans
|
| So, it's sort of like bundled mortgage securities, where you
| take some bad loans and mix them together to get a "less
| risky" loan, since the chance of them all defaulting at once
| is less than the chance of all but one defaulting.
|
| Presumably, since banks (by definition, an intermediary) are
| involved, those are then recursively repackaged until they
| have an A+ rating, or some such nonsense, right? Also, I'm
| guessing there's no rule that says you can't intermingle
| these things across separate "independent" securities, even
| if the two securities end up containing fractions of the same
| underlying bad loans?
|
| Clearly, like with housing, there's no chance of correlated
| defaults in a bucket of bad business loans that's structured
| this way!
|
| In case you didn't quite catch the sarcasm, replace "housing
| loans" with "unregulated securities" and note that my
| description switches from describing the 2008 financial
| crisis to describing the Great Depression, or replace it with
| "bucket shops" (which would sell you buckets of intermingled
| stocks) and it would describe every US financial crisis of
| the 1800s.
| JumpCrisscross wrote:
| > _where you take some bad loans and mix them together to
| get a "less risky" loan, since the chance of them all
| defaulting at once is less than the chance of all but one
| defaulting_
|
| Yes. This is mathematically sound.
|
| > _those are then recursively repackaged until they have an
| A+ rating, or some such nonsense, right?_
|
| AAA-rated CLOs performed with the credit one would expect
| from that rating.
|
| The problem, in 2008, wasn't that the AAA-rated stuff was
| crap. It was that it was ambiguous and illiquid.
|
| > _I 'm guessing there's no rule that says you can't
| intermingle these things across separate "independent"
| securities, even if the two securities end up containing
| fractions of the same underlying bad loans_
|
| Defining independence in financial assets like this is
| futile.
|
| > _there 's no chance of correlated defaults in a bucket of
| bad business loans that's structured this way_
|
| Software companies being ravaged by AI fears.
|
| > _replace "housing loans" with "unregulated securities"
| and note that my description switches from describing the
| 2008 financial crisis to describing the Great Depression_
|
| It also describes a lot of successful finance that doesn't
| reach the mainstream because it's phenomenally boring.
| hedora wrote:
| Generally speaking, the SEC exists to regulate
| communications about the underlying realities driving
| security values.
|
| Any mechanism involving "the bank invested (lent) my
| deposits to organizations that avoid SEC scrutiny, and
| used an instrument that spreads culpability for fraud
| across many unrelated and unwitting organizations" will
| eventually lead to investment bubbles and fraud.
|
| If I knew (and chose to have) 5% of my savings in private
| debt funds, where the holdings were public and had
| reporting duties, that'd be fine.
|
| Instead, that money is being lent behind closed doors. If
| the loans pay out, then the ultra wealthy make money. If
| they default, they'll be bailed out to prevent contagion.
| (And they still make money, since the lent money went
| somewhere before the loan default.)
|
| This has happened at least a dozen times in the US,
| including in living memory.
|
| Also, my example is not sound. Here is a counter example
| with a basket of investments with different risk
| profiles: I hold A directly. I hold A', which is a
| leveraged fund that only holds A. I also hold B which is
| a business whose only customer is A. I hold C, which has
| a contract with A and is securing the loan with future
| revenue from the contract. Finally, I hold D which is A's
| primary customer and a majority shareholder of C.
|
| Note that my example describes actual privately held
| companies that are probably the ones providing the
| private debt in the article.
| rlucas wrote:
| I don't think that's a true etymology of "bucket shop,"
| which per my recollection of Livermore was just an off-
| track-betting parlor for ticker symbols, but where nobody
| actually bought the shares (bundled or otherwise). Strictly
| a retail swindle, having nothing directly to do with the
| risk/maturity bundling work you are criticizing above.
| hedora wrote:
| We had them in the US before the SEC, which regulated
| them out of existence.
|
| It's likely the term is a pejorative referring to the
| Liverpool setup you describe.
| booleandilemma wrote:
| Related:
|
| Veteran fund manager George Noble warns that a private credit
| crisis may be unfolding in real time
|
| https://finance.yahoo.com/news/veteran-fund-manager-george-n...
| dkga wrote:
| For those that want a broader context on private credit, the Bank
| for International Settlements has been publishing some great
| material on the topic, including the connections between private
| credit and other corners of the financial system. Some examples
| follow.
|
| ---
|
| [0] https://www.bis.org/publ/qtrpdf/r_qt2503b.htm [1]
| https://www.bis.org/publ/bisbull106.pdf [2]
| https://www.bis.org/publ/work1267.pdf
| nstj wrote:
| For the OP: what's your view on the overall private credit
| situation? Who are the bag holders and how bad is the contents of
| the bag?
|
| You seem to be answering a number of other questions in the post
| so interested to hear your impetus for sharing in the first
| place.
|
| nb: thank you for being an ongoing contributor to the site! I see
| your handle cropping up a lot in substantive conversations
| michaelbarton wrote:
| I wonder if anyone can say if there's much risk of sub prime
| private credit? Not sure if that's the right term. My
| understanding is that synthetic CDOs are the rise again, this
| backed by private credit - which the article is discussing
| nicwolff wrote:
| Meanwhile: https://www.marketscreener.com/news/us-private-credit-
| defaul...
| resters wrote:
| Banks are following incentives that exist because of government
| policies, and in doing that they create significant moral hazard.
|
| The finance industry's main innovation is rent seeking.
|
| We all know what is going to happen, it's just a question of
| when.
___________________________________________________________________
(page generated 2026-03-12 23:00 UTC)