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.
fairity
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?
show comments
cs702
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]
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%)
show comments
dkga
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.
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
ploden
> the top five lenders in the private credit market include Wells Fargo, which leads the way with $59.7bn (£44.8bn) in lending
To private credit firms. Most of what banks do is private credit, the news is them funding private credit firms.
show comments
NoboruWataya
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.
show comments
adabyron
Highly recommend listening to past episodes on The Real Eisman Playbook podcast for more info on this topic & banking in general.
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".
show comments
adam_arthur
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)
show comments
booleandilemma
Related:
Veteran fund manager George Noble warns that a private credit crisis may be unfolding in real time
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.
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?
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/edit?id=47351462
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%)
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
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
Related post (submitted alongside)
https://news.ycombinator.com/item?id=47349806 US private credit defaults hit record 9.2% in 2025, Fitch says (marketscreener.com)
115+ comments
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
> the top five lenders in the private credit market include Wells Fargo, which leads the way with $59.7bn (£44.8bn) in lending
anything Wells Fargo leads in must be bad
Meanwhile: https://www.marketscreener.com/news/us-private-credit-defaul...
To private credit firms. Most of what banks do is private credit, the news is them funding private credit firms.
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.
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".
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)
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...
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
Government removes regulations, economy collapses, government bails out the wealthy, quants get ski trips and bonuses while families starve.
One guy has twice as much money as that. Can't be a big deal.