Private Credit: It's 2008's All the Way Down  🔗 **Source:** [Private Credit: It's 2008's All the Way Down](https://share.snipd.com/episode/e33fef95-29df-4cb6-a993-a4696df103de) ## Highlights - **Private Credit Functions Like Unregulated Banks** - Private credit are loans negotiated by non-bank lenders like private equity arms and packaged into funds that pension funds and insurers buy. - These funds act like banks but lack FDIC rules, so short-term investor money becomes long-term risky loans with secret terms. Transcript: Mia Wong Let's run back to the specific thing we're talking about here is a thing called private credit. And so private credit, I'm just going to read this thing from the teller window, which is, I don't know, the teller window is actually a decently useful thing where the teller window Is the Fed is like, I'm going to explain something to normal people. Now, the problem is that this is still the Federal Reserve. So their explanation for normal people, by normal people, they mean like, I don't know, like dipshit day traders, right? Molly Conger Normal people don't have questions about the Federal Reserve. Mia Wong Yeah. So it's like this is like for people who are kind of know this stuff, but are running into this like arcane subfield for the first time. So I'm just going to quote from them because I think it's an interesting place to start. Although there is no universal definition, which you know, things are going great when we're in our second episode in a row talking about. We can't all agree what this even is. It's so good. It's so good. Although there is no universal definition, private credit generally refers to a loan that is negotiated between a borrower and a small group of non-bank lenders. These non-bank financial institution lenders are typically alternative asset managers, such as private equity firms, who package loans in different investment vehicles. Other non-bank financial institutions like pension funds, insurance companies, and sovereign wealth funds then invest in those vehicles. So this is the stuff that we talked about from last episode where, okay, so you have multiple layers of shadow banks, right? You have on the one hand the private credit firms are these these sort of groups that go in and sometimes they're just their own things there there's a bunch of different kinds of them Private equities firms tend to have like one arm of the private equity firm that's their like this is our shiny private credit wing um there were also these things called business development Corporations which do these. There are other like other types of them, too. But basically what those companies do is they go in and they negotiate a loan with a usually a pretty long term for repayments on the loan with a company. Now, the thing about these loans is that the terms of those loans are secret. From everybody? Molly Conger Yeah. Even the people involved? Mia Wong Well, when I say secret, I mean the company that's taking out the loan and the bank know how they work. No one else does. And then what happens is these are usually fairly risky loans because if you weren't doing a risky loan, you would get your money through like a normal bank. You would do a normal loan. You would do it normal style, right? This is not normal style. These are risky. And then they do the thing called securitization, which we talked about last episode, where you take a loan and do magic to it and turn it into something that someone else can buy. Molly Conger Whatever happened to products and services, Mia? Whatever happened to products and services? Mia Wong Well, because products and services make less money than betting on products and services. This is also where this is all going. Molly Conger So there's some real issues here with private credit. So we're buying and selling money that isn't real and the absence of money that isn't real. And then so what happened when there was the run on the fake bank? Well, that's that's kind of what. Because how can you how can you do a run on a bank if there's no money? Because you're not asking to get your money back out of it because there was never any money. Mia Wong Well, so here's the thing. So a lot of the way that these things work, sometimes like they are obviously selling the loans and packages, but a lot of the way that it works is that it does kind of work like a normal bank, Which is I mean, instead of being a lender you're like an investor but you give them a bunch of your money and they give it to these loan things so it is just literally a normal bank except It's not subject to banking regulations and it's riskier right so like like apollo capital management or whatever it's like you give a bunch of money to apollo capital management just Like global capital whatever is like apollo global capital is one of the big firms in this thing. And then they give that money out in loans. And then you're basically just supposed to wait. Because, you know, remember, last episode we talked about how in the way that normal bank works, right? There's like a fundamental kind of gap, right? Where you are putting your money in as like a short-term thing that you can take out immediately. And then the bank is turning the short-term money into a long-term loan. Molly Conger Right, it takes time for the money to grow up. Mia Wong Yes, and the reason we have financial regulations is to force the banks to have money on hand so that if you need your money back, you can take it out. Now, these banks don't have this because these are shadow banks. They are the credit arms of private equity. They're fucking, I don't know, they're like capital management firms. They're like, do-do Right. Molly Conger So like a normal run on the bank is like, obviously the bank doesn't have 100% of all. I put cash in the bank. We all put cash in the bank and everyone wants all their cash back. The bank doesn't have 100% of that cash. You get that, right? It's like they haven't invested and it hasn't, those loans haven't matured yet and things like that. But theoretically, if all those loans matured, that bank does have all of those dollars. But the shadow bank, they're selling these same loans to multiple people. So even if everything matured properly, they don't have all of those dollars anymore. Mia Wong Yeah. Those dollars don't all exist. I mean, to be fair, the bank's dollars also work like that because the banks are also selling their loans off. Molly Conger But you're saying that they were using like the same mortgage to secure a bunch of different. Yeah, right. Mia Wong So that's like, yeah, that's like a classic shadow banking thing. We're actually going to get back to that because they're doing an even dumber version of that now. Molly Conger I'm just saying it seems like a run on the bank would be kind of inevitable even in a minor crisis because they do not have most of the money they're pretending exists yeah well but okay Mia Wong So i i think what i would say about that is that this is also a problem for regular banks right like i i don't think this is actually a structurally different crisis. Like, because like the crisis here is just that the money is out in loans and they don't have it on hand. And this is the structural crisis that the private credit people are doing is that their money is also out on loans, so they don't have it. And a lot of these loans are like seven year loans in like very risky companies. So the money's like really isn't there. Molly Conger Right, because that venture capital, like, whatever, that's an inflated valuation. So you're talking about, like, oh, it's $10 billion, but it isn't and it never will be and it never was. Mia Wong Yeah, well, and the other thing that's going on, too, right, is, like, these are supposed to be risky loans. So they have a high rate of return. If they return. But, yes, and this is where this gets not good, because so the U.S. Private credit market is $1.3 trillion like under management. The global market is like $3.5 trillion of assets. I'm not really going to go into the Chinese ([Time 0:05:12](https://share.snipd.com/snip/0b5165b6-7822-4462-8db7-2d7c9cfe52e8)) - **Redemption Gates Reveal Panic In Private Credit** - Private credit funds limit redemptions (industry standard ~5% per quarter) and will shut withdrawals when hits exceed that cap. - Fund gating is how managers respond when many investors try to pull money at once, triggering headlines about runs. Transcript: Mia Wong And they have a limit to the total amount of like the percent of the value of the fund that can be taken out at one time. And that's what's been being hit. The industry standard is supposed to be about 5% of the fund can be withdrawn per quarter. And then after that, they just shut down redemptions. And that's what you saw in the news, because a bunch of companies, and some of these companies have higher limits. They're like almost like eight or nine, like 10%. They'll stop it at like nine, roughly. Molly Conger So more than anything, shutting down redemptions is an indicator that the market has panicked, right? That the investors are spooked and they want their money back because this risky investment is now looking like a very bad choice. Yes, but this is a real structural problem because... Right, but like as a measurement of something, it's just like what we're measuring is how many investors are shitting their pants. ([Time 0:12:24](https://share.snipd.com/snip/2c2bddb8-be24-4fee-97e2-2bff026715f2)) - **Subprime Auto Loans Echo 2008 Securitization Flaws** - Tricolor, a subprime auto lender, funded by banks and sold securitized auto loans, mirrored 2008 mortgage abuses by reusing collateral and layering leverage. - That structure made multiple banks and private credit managers suffer losses when the loans went bad. Transcript: Mia Wong The main thing that they've been eating shit on, and this is where this kind of hit the mainstream, because a whole bunch of normal banks also ate shit on this. J.P. Morgan ate shit on this loan. So a huge amount of money was poured into this firm called Tricolor, which we touched on briefly last episode, but then didn't really talk about much about what it did. So, OK, JP Morgan has lost one hundred and seventy million dollars. Oh, no big deal. Yeah. Which it's funny because like the JP Morgan CEO were like, yeah, we kind of ate shit on this. And also their CEO gave this quote where he was like, where there's one cockroach, there's probably more, which is like an extremely normal thing for the finance guy to be saying about The market. Does he mean we have an infestation of accidentally losing $170 million? Yeah, I mean, it's not great. But like, in the grand scheme of things, right? Like, JP Morgan does have $4 trillion or something dollars under management. Right. Molly Conger But if he's saying if there's one cockroach, there's more. Yeah. Usually if you have one cockroach, you have 100 cockroaches. So if you have 100, yes, 170 million dollar fuck ups. Mia Wong Yes. And that's not great. Right. And like Barclays, which is the very sort of like prestigious British bank, which also ate shit for doing this kind of stuff in 2008, also lost like 100 million pounds. What's interesting about this specific one is this firm, Tricolor, is a subprime auto loan company. Molly Conger Oh, that's a phenomenal business model. Molly, I think... So they're responsible for the Nissan Altima. Mia Wong Yes. This is what is known as an idea that could not possibly have gone right. It's very funny because when you read the stuff from Tricolor, they're all like, oh, we're trying to, like, help people who are, like, underserved in markets who need cars. Oh, so. Molly Conger But here's the thing about a shitty auto loan is, you know, you are serving an underserved community you are serving people with bad credit who might not otherwise be able to get a car Mia Wong But you're serving them by fucking them yes and this is the thing like you can tell yeah they they know that they're lying about this right it's just so evil yeah and like this is all downstream Of you know this is all downstream with the fact that we've built our cities around cars, right? And we built our cities around cars specifically. And this is a really fun thing. We built our cities around cars specifically because we had created so much manufacturing capacity after after World War Two that like Ford and General Motors had like pumped into That they were like, we need a fucking way to make money off of all of this. And this is also, by the way, why we did the Marshall Plan. Like we rebuilt Europe to sell cars to them. Molly Conger It's this terrible snowball of like induced demand and then dealing with that and then the fallout of that and trying to reorganize from that. Yeah. And we have destroyed the world with this. It rocks. Thank you, Henry Ford. It's so good. It's so good. Mia Wong We have literally like Earth is fucked because of this. This is like one of the largest engines of global climate change is the fact that we had all these fucking factories after World War Two and these companies didn't want to eat shit on them. Molly Conger So now everybody needs a car, but they can't afford one. So now we have a fake bank doing fake fucking auto loans. Mia Wong Yep, yep, yep. Who, by the way, and I can't emphasize this enough, right? The hole that we are in here is that there is, in theory, if you're going to be running a market economy, there is, like, room in it for, hey, this person has a long shot but good business Idea and we need to get them money. Molly Conger Sure, like, there's nothing wrong with the idea of loans. Yeah. Mia Wong But if your whole business model is exploiting people who need loans that's yeah well but and but this is you know this is this is going one layer up from like this subpar model loan company Right the problem that that we're going to hit with all of these private credit firms is that they're giving loans to just this shit right like the things they're giving high risk loans To aren't like interesting businesses they're subprime auto loan companies and they're like weird ai data center creation companies right it's like that shit and this is this is where Everything goes to shit because you know and it's something that actually wasn't really reported on very much in in a lot of the coverage on these companies eating shit but like what This company was doing was they were literally doing all of the 2008 stuff right they give out these subprime loans which they know like a bunch of them are going to fail they pull them All together into these like tranches of loans. And then they sell them off doing the securitization stuff we talked about last time. And again, this is literally exactly how the subprime mortgage crisis worked, except for doing it with auto loans. It seems a little bit more evil. Yeah. And they're doing this thing, right? They're doing the thing that we saw with the housing loans, where the same car is collateral for multiple of these loans. And the reason they're doing this right is that this company, Tricolor, their entire business model is trying to borrow more money from banks so that they can send out more of these shitty Auto loans so they can then sell that stuff back. And so they're also like heavily leveraged, right? Because they're taking out like every single loan they can possibly do. They're doing instruments so that they're the collateral on the loans that they are taking. So they take that money and give out more of these shitty auto loans. The collateral on that is multiple of the shitty auto loans. ([Time 0:16:56](https://share.snipd.com/snip/ef7d7ba6-40d5-4f0c-a05e-e769cbcbf0d5)) - **Same Collateral Sold Multiple Times Creates Fictional Assets** - Firms packaged subprime auto loans into tranches and sold them, sometimes using the same car as collateral for multiple securities. - That made the underlying asset effectively fictional and guaranteed systemic fragility when defaults rose. Transcript: Mia Wong And then they sell them off doing the securitization stuff we talked about last time. And again, this is literally exactly how the subprime mortgage crisis worked, except for doing it with auto loans. It seems a little bit more evil. Yeah. And they're doing this thing, right? They're doing the thing that we saw with the housing loans, where the same car is collateral for multiple of these loans. And the reason they're doing this right is that this company, Tricolor, their entire business model is trying to borrow more money from banks so that they can send out more of these shitty Auto loans so they can then sell that stuff back. And so they're also like heavily leveraged, right? Because they're taking out like every single loan they can possibly do. They're doing instruments so that they're the collateral on the loans that they are taking. So they take that money and give out more of these shitty auto loans. The collateral on that is multiple of the shitty auto loans. Molly Conger I mean, I would say it's a house of cards but like yeah it's not even it's not even that it's imaginary it's just it's yeah like the bottom row on this house of cards is just your imagination Mia Wong Yeah it's it's wily coyote running off the cliff and he's just like standing there and as long as his feet are moving no one realizes that that like wait hold on this is the this is literally The fakest thing i've ever seen and then it goes under, and this is a shit show. That's the only possible outcome. The only possible way it could have gone under. It's like, we've done this before. ([Time 0:22:01](https://share.snipd.com/snip/40812a94-de33-4299-b2d8-59db04c11eb0)) - **Cheap Money Drove Reckless Private Credit Expansion** - Low interest era (near-zero Fed rates) pumped excess capital into risky assets and private credit, incentivizing ever-riskier bets to chase returns. - That flood of cheap money fueled schemes from Juicero-level nonsense to leveraged private-credit structures. Transcript: Mia Wong But like we have this era, like the early 2020s and like late 2010s. That's like the zero Fed interest rate era, right? Where like it is basically just free to borrow money. And so there's just all of this money sloshing around that there's nothing to invest into. This fuels all sorts of just like heinous shit, right? Because there's suddenly just like all of this these pools of capital with like nothing to invest in and so they're investing it in like defense companies and like palantir and shit Like that is this why we got stuff like the juicero yeah but that's like the other thing right is like no but like like the juicero thing is like legitimately venture capital was just like Molly Conger Pouring money into stuff that was just like not fucking real. Yeah. Mia Wong You could juice fruit at home. And like this is, you know, I talked about this on a different episode about venture capital and like the way that it's done tech fascism, right, was eventually they started putting That money into like building the material basis for like a tech fascist state. ([Time 0:23:57](https://share.snipd.com/snip/41ac2af8-a092-4e50-9073-cf433c218bc1)) - **CDS Markets Open Ways To Bet Against Private Credit** - Banks began trading credit default swaps tied to private credit funds so investors can now bet on those funds failing. - This creates a market that both signals distress and amplifies downside risk for private credit managers. Transcript: Mia Wong And Molly, I'm just going to read you the thing from Reuters. Quote, JPMorgan Chase, Barclays and other Wall Street banks have started trading credit default swaps linked to flagship private credit funds run by Blackstone, Apollo Global Management And Aries Management. The Financial Times reported on Friday. And that's a good idea for them to do? Oh, this is this is really fun, because now what we're doing is they're now opening the markets to bet on these things to fail. ([Time 0:25:55](https://share.snipd.com/snip/70996be5-3e76-48b3-ab43-3f6cb286e555)) - **Finance Has Become A Casino Profiting From Failure** - The hosts argue modern finance increasingly resembles a casino where profits arise from betting on failures rather than productive services. - That shift normalizes exploitation—like subprime loans—and systemic risk requiring periodic bailouts. Transcript: Mia Wong It's like it's like this is your fault for not being willing to like not have a market economy right like like we could we could achieve the dream of not having your economy be run by a casino Molly Conger This is a thing that you could do it's just that you can't that was a euphemism before i don't think he realized that like we literally do have a casino for a time. He kind of did, right? It's not a euphemism anymore. I'm going to necromancy him and tell him about Polymarket. Mia Wong Oh, yeah. He would lose his mind about Polymarket. But he's watching people just betting on stocks, right? And he's watching a bunch of people... Molly Conger Grab the Ouija board and tell that bitch about Kalshi. Mia Wong This is like we're going back in time and showing him Kalshi and he's like oh fuck okay I'm like I am now again I am now against the market as an idea we cannot let this come to pass but like You know this this this has been like a known issue with the market as a system for a long time but it's a problem because in theory, you could try to go through and like regulate this stuff. But like investment is just gambling to some extent. Right. And when you talk to the people who believe in this stuff, they're like, well, no, you can't have stock markets without sort of equities markets. And you can't have these things without the ability to bet on it. And I would say, okay, well, don't have it then. Like, I think this is a really simple solution. But, you know, these people are like, no, no, no, no. ([Time 0:30:31](https://share.snipd.com/snip/b7c8157b-d463-4cd2-b343-b10d837ac215)) - **Check Redemption Terms Before Investing In Private Credit** - If you hold money in private credit funds, review redemption terms and be prepared for gates that legally restrict withdrawals. - Expect managers to prioritize stabilizing funds over honoring all investor requests during stress. Transcript: Mia Wong So basically what happened is they just like stopped the redemptions and everyone got really, really pissed off. But there's not that much they can do about it because. Molly Conger Because I'm sure that was in the terms and conditions whenever they signed up to do financial crimes together. Mia Wong Yeah. And what's been happening now, though, is that this is this has been spreading kind of panic about just, I don't know, they would call it like the asset class in general. Molly Conger Oh, like maybe it wasn't a good idea to invest all your money into this fake product? Mia Wong No, it was it was, in fact, a terrible idea. And this is this is this is, I think, why we're getting mismanaged your clients funds. ([Time 0:33:39](https://share.snipd.com/snip/34eb0be5-a1e5-4d3f-ad95-c0f63494efde)) - **Organize Locally To Resist Rebuilding The Casino** - To change this system, organize collectively: join a union, affinity group, or local mutual aid to push alternatives when crises hit. - Individual protest is weak; structural change requires mass political and social action, not just complaints. Transcript: Mia Wong Yeah, and if you want to stop there from being both Weird Little Guys and also having our economy be run on betting on funny money, go, like, organize a union or, like, join your local affinity Group or start doing Food Not Bombs or do whatever. Literally do anything. ([Time 0:37:28](https://share.snipd.com/snip/0f11403a-d195-464a-9528-3cf986d08ce2))