Recruitment tables should just have a banner that reads 'we've already spent your bonus on legal fees, here's some chocolate'

Been a bit out of the finance game

If the bank has trouble, shareholders/executives lose - if the banking system has trouble... then QE will solve the bank trouble.

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).

  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!

What caused the SaaS apocalypse? Gen AI.

I'm long on AI hardware companies for this reason.

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.

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...

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.

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.

Not by the subprime mortgages given to anyone with a pulse?

So I guess the Fed expects these other kinds of lending to be safer than private credit?

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.

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.

So I think it’s not about how much of the debt is this, it would be about how intertwined it is with other things.

I’m not claiming it’s major btw, I’m just clarifying that in my understanding it could be a small percent but still end up causing default cascades, or it could be a large percent and not, depending on the debt graph.

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.

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.

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.

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.

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...

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.

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.

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.

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.

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...

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.

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.

Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI

I say this to say... who knows? I guess if you shuffle deck chairs fast enough everything works out fine (?)

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.

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.

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.

Any figures or lenders he's focussed on?

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?

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.

- 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

it's not programming and it's not tech

someone not knowing the definition != misleading title

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.

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...

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.

I don't remember oil getting expensive back then, but it's a long time ago.

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'.

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...

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.)

That work had already been done. To throw it all away for VC or PE to squeeze the life out of it and by extension the community, that's just sad, and a net negative for society. I don't really care about who to blame, the PE or the business owner who sold, the process is destructive.

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.

"lends" -> "borrows", right?

I don't expect this happens in reality though. In general the things that happen in a healthy free market are NOT happening in our society.

I think they are under 500 employees now. They basically laid off almost all of engineering and hired 100 new contractors in India to completely rebuild the entire platform in Node.js, as if the language it was written in was the problem. So glad to be far from that dumpster fire.

Really disappointing to see a great company gutted by some private equity people who almost certainly got their bonuses before the shit hit the fan.

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.

Like, when a bank originates a mortgage, that mortgage gets traded, much like private debts don’t.

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.

- 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

Whether a PE firm decides to buy it and do the same isn’t some nefarious act or special in any way, it’s just new owners.

Let’s say your neighbor has a lawn mowing business but wants to retire, says they’ll sell for $50,000. You think great! You could run the business better, plus the old man hasn’t raised prices since 1990! But you don’t have $50k, only $30k, so you borrow $20k from your brother. Congrats, you just did a leveraged buyout.

And no, it’s not risk free revenue (I think you mean profit?) because it clearly might go under and PE firms need to pony up some of their own cash too plus money raised through LPs.

Isn't this similar in spirit to the infamous (according to Western media) Chinese shadow banking market? There are articles [1] more than 10 years old talking about the collapse of China because of that practice, but it looks like the US is all too happy to do a very similar thing. I also wonder how big of a market we're talking here, as I was too lazy to check. A few hundred billions? $1 trillion? $2 trillion? More?

[1] https://www.cnbc.com/2014/12/03/china-shadow-bank-collapse-e...

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)

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.

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.

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.

The info on his podcasts isn't telling you who to short. It's more who has gone under & general knowledge.

Out of curiosity where do you primarily get your news?

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.

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.

How is that what you took away from this?

> When you see one cockroach, there are probably more… Everyone should be forewarned on this. -Jamie Dimon

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.

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.

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.

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.

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.)

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...

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.

or some manager at it? it must be easy enough to raise that starting money, if the PE firm could get the loan

“The wireless market has become increasingly competitive. The result has been steady declines in the average price for wireless services. Over the last decade, the average monthly revenue per wireless line has fallen from $47.00 per month to $34.56 per month. Unfortunately, this price reduction for consumers has been partially offset by higher taxes.” - Tax Foundation (2023)

Apparently they operate on very low level of tolerable risk (way lower than I thought)

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.

Makes sense. Thanks. Private here is as in private versus public companies.

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...

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.

Oil was more of the outside force that put a shock to that weak system.

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.

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.

As stated in the article, 9% is the number of borrowers that defaulted, which was concentrated in smaller borrowers (thus smaller loans).

And then, again, you can say probably half of the dollar amount of those defaults are recoverable.

Bond defaults spiked to around 6% in aggregate in 2008, to use a worst case example.

People accuse veterinarians of being in it for the money, the same day another owner decides to euthanize their dog because they don't want it anymore. While an angry owner on social media is rallying pitchforks over something that the vet can't even respond to due to privacy standards.

I have no sympathy for PE that's wandering around our lives, destroying the actual purpose of businesses to extract profit from everyone they can.

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.

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.

Capitalism is about who owns the assets, free markets are about how they are transferred. They don’t require each other. State owned enterprises can participate in the free market, an example are municipal utility companies. Private enterprises can operate without a free market, an example would be Lockheed Martin, whose defense business is mostly cost plus contracts.

The US hobbled the free market with deregulation since the 1980s. We encourage monopolies with strange reactionary legal precedent, use tax and other policy to establish price floors on residential units and health procedures.

The behavior that these firms are able to carry on with in veterinary, dental, dermatology, hvac and plumbing is anti-competitive and predatory.

Thanks for the reminder! I need to switch my plan away from a TDF to avoid this.

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.

Total bank balance sheets are about $25T.

My own read of the subtext was something a bit different. Dimon saw something he really didn’t like and my guess would be that more than just a handful of people at JP Morgan were having their next few days or longer personal plans cancelled—- or that it had already settled from something like that— to find whatever they had in the way of cockroaches. And so Dimon’s public statement was a soft nudge to try and get others to do the same, cautiously and slowly without panicking.

It’s tea leaves but the time since then seems to bear that out, with right now’s world economic volatility being a good opportunity for many places to go a little more aggressively in reigning in whatever they have in cockroach’s with some cover from that volatility and distraction to not have to explain too much more or get too much scrutiny that would accelerate things beyond manageable.

Overall, my take was that Dimon is still probably pissed off about SV bank and trying to make sure whatever shape or size this private credit rot may have doesn’t go down quite that haphazardly.

They also borrow money from banks to add leverage to this basic setup.

It’s like hoping for the apocalypse thinking you’re of course the hardcore survivalist. When in reality you’ll get eaten first.

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?

    > Obama promised to do it

The legislative produced Frank-Dodd...which Trump and Republicans later scaled back...

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...

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, nor does the hospital suddenly own itself.)

Could you please explain the how and why of the mechanics of this process (edit: from the perspective of the lender)?

It seems like the lender is taking a massive sucker bet.

Or is the reality that the lender gets repaid the vast majority of the time, and we only hear about the bad outcomes?

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.

This is the problem with so many market focused solutions. They discount the burden put on the consumer.

The harder the government makes it to operate a business, the less businesses there will be.

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.

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.

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...

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.

Broadly speaking, privately-held companies are called firms. Colloquially, it tends to connote closely-held companies.

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.

https://www.history.com/articles/titanic-sinking-conspiracy-...

But now those private loans are being syndicated to affluent investors who probably don't understand that while some of this debt is solid, alot of it is not. And without a rating agency involved nobody knows how much risk is in there.

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.

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.

It seems like almost every decision made is for short term gain, at the cost of long term viability.

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.

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.

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.

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...

(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.

Do you think replacing that 4T was a good call? I'm struggling to see how it was the right play.

As a result I prefer the naked greed of VCs where everybody - VC, owners, employees - knows the plan is IPO because at least it's transparent compared to the dirty lies a lot of PE pushes.

See Germany's rail network, where almost every time-slot is occupied by a train, and then one train is delayed, and the system collapses with nobody getting to their destination on time for the rest of the day, until the overnight buffer.

In queuing problems, queue length (which means latency) is inversely proportional to slack time. If a network link is running a 90% capacity, on average there are 10 packets queued up and a packet that arrives will have to wait for 10 packet transmission times. At 99%, 100. At 99.99%, 10000. And if you try to use exactly 100% of your network link, the expected queue length is infinity, and the expected latency is infinity, which will not occur in practice because sometimes it will exceed available memory and packets will be dropped, even though utilization never exceeded 99.9999...%.

Organic farming is one example.

They pay you 0-4% for the money in your checking account and lend it at 1-3% points higher. As long as they have a big enough uncorrelated portfolio, they make easy money.

And if the whole portfolio tanks all at once, the whole industry gets bailed out.

The public hates it because they see highly visible bankruptcies. They don't see the success stories, or the businesses successfully carved up for more value than the sum of their parts

People can scam you and jerk you around because you don't have options.

If you had options, they might be less inclined

[1] https://fred.stlouisfed.org/series/TOTBKCR

If you have unlimited capital and time horizon, because you're a nation with the power to tax and print money, then you can keep this game going for a long time.

The only thing that mandates it stops are if (a) too many of your loans are correlated with the same thing that crashes (e.g. energy, tulips, AI, etc) or (b) too many of your loans are tied together in a single entity (either because it combined multiple smaller entities or because it tied itself into all their financial arrangements).

People eventually want to spend their money.

Just make sure you can unpark it, else you're SVB.

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.

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.

This is not financial advice, it is gambling advice.

That may have been true once. It's rarely true now. Banks and shadow banks compete for the same borrowers.

But, yes, it is a travesty that more of the subprime loan salesmen weren't prosecuted. It has a lot of value for a society to actually convict people that have done actual wrong. We all want to live in a just world and seeing that people who have done wrong get what they deserve is part of that. Looking at the US from the outside I think a lot of the polarization we've seen in the US over the past 15 years could have been avoided if more prosecutions had happened in 2008-2012.

IMO this is also why big companies being allowed to do settlements without admissions of wrongdoing is so bad. They fail to fulfill the moral purpose of law enforcement. Ironically Goldman Sachs _did_ admit wrongdoing in their settlement with the SEC over their Abacus CDFs...

So the debt isn't "pushed" and it's not risk-free as the original comment said... also not Venture Capital. Lots wrong in that comment.

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?

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...

(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".)

> I don't want a "free market" solution where I need to switch providers every 6 months because some rich dude is being a dick.

Nature does not have a mandate that good quality services and products be available at low prices at all times. The rich dude being a “dick” was a tired vet owner who wanted to sell their equity, just like anyone else who sells their SP500 shares or their house.

The only thing that can be done is encourage government policies to ensure more sellers exist.

Coupling healthcare and employment makes it harder for agents to move and trade "freely" in the "free market".

So, I say again. The things that happen in a healthy free market are not happening in our society.

Oh boy, if this is the case, oh boy.

Lessons not learned indeed.

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.

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.

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.

If DB stock increases 50% before it crashes, would you be forced to sell at the top and lose all your money?

However, "Taxes, fees, and government surcharges make up a record-high 27.60 percent of the average wireless services bill... Since 2012, the average charge from wireless providers decreased by 29 percent, from $47.00 per line per month to $33.36 per line. However, during this same time, wireless taxes, fees, and government surcharges increased from 17.18 percent to 27.60 percent of the average bill, resulting in consumer benefits from lower wireless prices being offset by higher taxes and fees".

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.

Between the latter and the former I believe the former was a much smarter choice in the medium to long term.

Problem is they didn’t really understand the business and trusted the PE guys to keep running it well…

So, logically, selling to PEs/operators who are known to do this is basically the owners selling out and taking the cash. The consequences are clear to anyone who's been watching.

If you have investments, go and look what your holdings are. There's a real chance you have some sort managed portfolio that will trade equities to maintain growth. It might be algorithmically-driven. Your holdings may very well temporarily include some companies that you don't approve of, but trading happens so fast and so often that you're not going to be able to keep up on what you actually own.

I also don’t like it when a money-losing business stops giving me below-market pricing.

Any idea as to the etymology? What was the black pill? Is it a Matrix reference?

Meta: why are incel neologisms so catchy?

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.)

This can't be good for society. I wonder why it's just not criminalized somehow.

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.

This is the general leap, wealthy dynasties do. They scale up from a regular (family) business that provides services (eg. the clinic) to eventually transition into investors with lesser or indirect motivation of providing services/goods.

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

morningstar had a nice writeup of the changing winds https://dbrs.morningstar.com/research/469893/2026-private-cr...

The lesson isn’t being ignored- it’s being used as justification.

I resorted to the mortgage-lending analogy so others could quickly grok what multi-pledging means.

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

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.

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.

“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.

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

There's a great chart out there somewhere (I couldn't find it) which breaks down the impact of private equity on the availability of such opportunities in public markets. It showed a dozen or so companies (like Google, Apple, Uber, Stripe, etc) and broke down their market cap gains into two parts, "pre IPO" and "post IPO" gains. Of course, the pre-IPO gains were only available to private equity (or, at best, accredited investors), whereas the post-IPO gains were available to retail traders as well.

"Older" companies like GOOG & AAPL were much more likely to have experienced that vast majority of gains after their IPOs, meaning retail investors could have made big money by betting on them early. Meanwhile newer companies (like Facebook, Uber, Stripe, etc) were much more likely to have yielded the vast majority of their gains before their IPOs, meaning retail investors didn't have the opportunity to benefit from big returns.

Or never invoked. It's a safety feature for the fund and, arguably, systemic stability.

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.

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.

The easy way is to buy puts. Maybe your next question is, “who is selling puts?” And that’s a good question, but you don’t really care, because you can buy your puts on the open market and when you do that, you get protection from credit risk.

There are other reasons why this isn’t a good idea but “unlimited downside” is not one of them.

It’s likely the term is a pejorative referring to the Liverpool setup you describe.

> can be part of a combination strategy

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.

- Not every business has a growth story. Not every business needs a growth story.

PE can offer a business owner more than they expect it to make by:

- being ignorant about the business (Which we are seeing repeatedly)

- intend to run it hot to juice the numbers and resell it for their profit.

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

This is especially true from a global perspective. It would be a much more equal global economy but unimaginably poorer. The political consequences are unknowable but a deflationary collapse would not have had good political outcomes.

We largely shifted a nightmare into being a great time to be alive but take the good times completely for granted because we can't really know the nightmare we didn't see.

Not-an-expert here, but I think part of the problem is that it's hard to draw a nice legally-enforceable line that would distinguish when it's a "perfectly good" company versus one crying out for intervention.

For example, suppose a company is floundering because of executive mismanagement, outrageous compensation to the C-suite, etc. In that case, someone could LBO in, fix things up, and then sell the revitalized thing later and make a modest profit while improving the world.

It's... less likely, but they could.

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.

I'm asking this in as non-confrontational way as possible, what am I missing?

This was the missing bit for me. Thanks for taking the time to explain!

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.

Which goes up with inflation btw, so you can export inflation. Actors who maintain reserves of your currency will have to keep buying more from you, providing you with benefits.

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.

I suspect that the reason those "newer" companies were able to have the majority of their gains reaped pre-IPO was that during that time period, it was easy to acquire capital from investors without resorting to public market IPOs, where as the era of google and apple have not got the same level of private investment.

And i think it has to do with low interest rates. During the google early years, it is difficult to obtain low-cost loans (for private investors that is). Therefore, public markets look like an easier path for companies to raise money.

The "newer" companies in your list are mostly post-GFC, during a period of ultra-low interest rate. This makes money easy for private investors to obtain, and so companies have an easier time getting funding from those private sources. The IPO is realistically not a funding mechanism, but an exit mechanism for those early private investors.

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.

The advice is good in a kind of stopped clock sense.

If you are an equity index holder anyway, simply by not holding any exposure in an otherwise "market" portfolio is a "short" relative to benchmark.

ie if I "buy" the SP500 constituents according to weight but with TSLA zero'd out my portfolio is essentially the same as long SP500 and short weigtht*TSLA.

You may hold a short position as part of a net neutral or net long position with extreme caution.

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.

Which is a long-winded way of saying the bag holders are anyone invested in the long-term success of the company: 1. employees, 2. customers, 3. owners (i.e. the next PE fund) when the music stops, i.e. what we saw when interest rates went up impacting debt financing, and (real or not) AI-eats-SaaS impacted valuations. I'll add 4. "the public" if the company is big enough, with various levels of goverment and employment, taxes, etc. lost but I think it's more the smaller organizations in aggregate that hurt at this level than any specific company.

LBOs are also not a black and white classification, at least not the way they were in the Gordon Gecko 80's, with varying levels of target-borne debt financing specific to the deal. So while I agree "VCs don't do LBOs", PE does both LBOs and VC deals, with the PE firms doing their own style of fund and deals.

I found this book (though dated) to be a more academic analysis of PE: https://www.wiley.com/en-us/Private+Equity%3A+History%2C+Gov...

don't buy it; try your local library.

If you're familiar with Ray Kurzweil's work, I wonder whether this phenomenon might be related. Kurzweil notes that better technology begets better technology in a self-reinforcing and ever-accelerating cycle of technological advancement. His thesis implies rapidly evolving capital requirements. Massive amounts of nimble private capital, secure in the hands of highly competent people with relevant domain expertise, may well be an important precondition for continual acceleration.

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.

I do remember smart friends getting interested in options at different times in the last thirty years because they make higher returns. Then they have a period where make lower returns, or have a real problem. I don't think its worth the attention and the trading cost for most people, even people who understand what a short is. You can't argue with a person who has been doing really well with them for five years but it always seems like people stop.

There are reasons for not trading options, but the main reason is “you know less about price movement than you think you do”.

That's silly.

You can build pretty much any kind of shareprice-to-payoff function with enough options and other instruments. And that's one dimension (a line) more than just a single number. You can get arbitrarily more complicated, if you want to.

I was not saying this is how they make money - I was saying I honestly don't know. If you do know please share. I would love to understand why the banks are so keen to fund what looks to my eyes like super shady vulture capitalism. We start with a profitable company and end with a smoking husk. The Wall Street guys are doing it to steal as much value as they can before it all blows up. Someone is eating the eventual loss. Who? Or are you saying the majority of these deals don't end up with the company being eviscerated?

I've had quite a few conversations with someone who claims to be in the know about this situation (though, really, I don't think they're any more in the know than anyone!) and they swear up and down it's all a misunderstanding, which, cynic though I may be, immediately makes me think the accusations are at least somewhat true.

The public or private status of the manager has no relation to private equity being cloudy. Out of all of the delineations, PE is a pretty sharp one. VC is PE. Private credit is not. It’s private debt. Not equity.

How can you invest in SP500 minus TSLA without racking up exorbitant fees?

Unless such a fund already exists, you’d be managing it yourself and pretty much wiping out any gains any time you rebalanced.

Short positions are also bad, because there’s an ongoing cost to carrying a short position, and that cost is likely to cannibalize your expected gains.

Lots of good reasons around to avoid short positions and options like they’re the plague. I don’t like the “unlimited downside” reason because it’s solvable.

To people who are making lots of money in stocks or options… my question is always, “do you have high returns, or do you just have high volatility?” Because it’s easy to look at high short-term returns and believe that you’ve somehow beaten the market, when you’re really just holding a high volatility position that got lucky.

Volatility. Never trade options if you don’t understand volatility.

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.

Various options…

1. Direct indexing (requires minimum amount of assets),

2. Certain actively-managed ETFs like GGRW, which is not exactly SP500 minus TSLA but it’s not too far off

3. Buying passively-managed ETFs in sectors that don’t include TSLA,

4. TSLQ, maybe. You get fees and other problems. I wouldn’t.

Direct indexing costs more than ETFs in terms of fees, but there’s apparently some kind of tax loss harvesting that you can do with direct indexing to offset the fees, and some people say you can come out ahead. I don’t understand how tax loss harvesting works at a satisfactory level (I’ve read articles and watched videos, but I think I would need to take an accounting class and really sit down with a spreadsheet before I could say that I understand how direct indexing and tax loss harvesting work together.)

An executive's promise can only mean "I will sign the bill" because aside from executive orders, legal structures originate from the legislative.

There is no risk-free way to trade. You can place a market order and guarantee execution, bearing the risk that you get a bad price. You can place a limit order, and guarantee price, bearing the risk that your trade doesn’t execute.

It sounds like you’re starting with the assumption that you don’t know whether the options are undervalued or overvalued, and if you start with that assumption, yes, the correct answer is don’t buy or sell the option (barring some other reason to buy or sell). Duh. But the reason the market “knows something you don’t” is because it’s full of people doing research. Sometimes, the person doing the research is you, and you have an idea of where the price will go. That’s what an edge is. When you have an edge, you can make money, but maybe not very much and not very reliably.

Where it gets ridiculous is when people speculate with SPY options or dumb shit like that. The reason why speculating with SPY is so ridiculous is because it’s just so unlikely that you could get an edge with SPY. But in general? Yes, it’s possible to get an edge.

You earlier said that there’s no point in bidding anything but “current market price”, and that’s what I was responding to. Limit orders can execute at current market price but they can also execute at some future market price. It’s ok to place limit orders, they just have different risks from market orders.