Jamie Dimon, chief executive of JPMorgan Chase, warned last month that some lenders are doing “dumb things” and he was starting to see parallels to the era before the 2008 financial crisis.
Lloyd Blankfein, the former chief executive of Goldman Sachs, who steered the investment bank through the global financial crisis, said this month that he saw signs the economy could be heading for a 2008-style crash and we were “due for a reckoning”.
“Now everyone says, ‘Oh, the world’s not leveraged’,” he told Bloomberg. “That’s exactly what everybody said in the mortgage crisis until you suddenly discover that there was a lot of mortgage risk in Iceland.”
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Much of that fear stems from concerns about the boom in lending by money managers known as private credit, which has grown significantly since the global financial crisis as tougher regulations and capital requirements made it more challenging for traditional banks to issue riskier loans to medium-sized businesses.
Private assets, including private credit, cannot be what bankers call “marked to market”, or valued based on how much they could be bought or sold for in today’s marketplace.
Now, suspicions are growing that some of these assets have been over-marked by money managers, in a comparable way to how mortgage securities were overvalued in the run-up to the financial crisis.
Alarm bells started ringing on Wall Street about the private credit industry around September last year, when First Brands, an American manufacturer of car parts which had borrowed billions of dollars in private markets, filed for bankruptcy and disclosed about $9.3 billion of debt obligations. Yet the company had received strong credit ratings. It was a similar story with Tricolor Holdings, a subprime auto lender that also filed for bankruptcy in the same month.
Jamie Dimon, chief executive of JPMorgan Chase Fabrice COFFRINI/AFP via Getty Images
Failures since then have included the London firm Market Financial Solutions, which is subject to a Financial Conduct Authority investigation and claims from insolvency practitioners of a fraud thought to have left £1.3 billion of its £2.6 billion loan book missing, with Wall Street and City institutions on the hook. It’s understood that its collapse was precipitated by increased scrutiny from institutional backers after private credit failures in the United States last year.
Part of the worry is that individuals and pension funds are invested in the private credit funds that lend to businesses, so the potential fallout from a broad rout in private credit firms could cause a broader economic crisis.
Johan Groothaert, chief executive of Fiduciam, a bridging and development lender, said the private credit industry plays a vital economic role, but that MFS’s failure showed that standards needed to be overhauled.
While it is hoped MFS is an unusual case in terms of the alleged fraud, other aspects of its approach were common across the market, Groothaert warned. “The MFS backers were not more negligent than other funding providers in the market, they just got unlucky,” he said. “It is standard across the industry that a lot of lenders are not doing consolidated accounts, or have auditors from tiny firms. MFS investors have applied the market standard, a low one, and accepted it because everyone else has.”
Groothaert noted that MFS accounts suggested it had equity against its loan book of a mere 2.5 per cent. “Is there any skin in the game? Putting aside the fraud claims, that is reckless.
Oil prices have risen more than 60 per cent this yearBrandon Bell/Getty Images
“It takes us back to the financial crisis — not much equity being invested and the hallmarks of black box securitisation. When you open the box, it’s full of sub-prime lending and worse, some of the security is allegedly missing.”
Groothaert said it was inevitable that more failures would emerge in the coming months. “Standards have to rise. I’m not advocating the FCA creating a new regulatory regime, but if you are lending money, you should at least have to file full accounts, if you are a group they should be consolidated and properly audited. The Bank of England can impose such requirements through the banks that provide funding lines.”
Further concerns have been raised by fears over the impact of artificial intelligence disruption to software companies, which have been big borrowers of private credit. The private credit sector has also become a big lender to AI data centre builders.
Along with the private credit distress seen today, there has been a surge in fuel prices caused by the US-Israeli war with Iran, which has pushed oil prices up more than 60 per cent this year.
In the summer of 2008, as private funds holding subprime mortgages reported rising losses, oil prices spiked from $70 a barrel in July 2007 to $140 in August 2008.
Michael Hartnett, Bank of America’s chief investment strategist, said in a note this month: “Asset performance in 2026 is more ominously close to price action seen from mid ’07 to mid ’08.”
He noted the market consensus that there would not be a prolonged war in Iran and that private credit issues were not systemic, encouraging investor optimism as they view that “policymakers always ride to Wall Street rescue”.
The broad sentiment across finance remains that the stress points are not systemic and are not going to sink the entire economy.
John Bringardner, the head of Debtwire, said: “There’s just so many things going on. Bottom line: we’re not seeing the wave of defaults yet. What we’re seeing is weakness creeping in.”
He added: “If you look just at private credit, the theme has been retail investors pulling out, and that’s certainly been the case, and we’ve seen some very high redemption requests for certain private credit funds, but institutional investors have not been pulling out. And in fact, there’s, in some cases, been more interest because they can get better pricing now that there’s not as much competition.”
Robin Vince, chief executive of BNY, said: “It’s always hard to see how the world’s going to unfold before it happens.”
He said: “The world’s certainly a complicated place. You can see the fear of AI in financial markets in some places. It’s a potential disruptor and some companies probably are subject to that disruption.
“You can see it in the significant amount of debt that’s having to be raised, not just by AI companies, but by the private sector, by the public sector too. Governments are borrowing more money than they have before because they have needs for that defence spending in Europe, [and] here in the US. So the combination of all of that is just creating more supply of debt. So then how are the buyers thinking about that?
“Ultimately, how does the marketplace absorb that supply? Actually, it’s been doing it pretty well. Yes, there have been some idiosyncratic situations in private credit. There have been some flaws. There have been some problems. Those have created dislocations and a bit of fear in the market. But we are not in the type of environment as we sit here today that looks like 2008. It’s hard to say it couldn’t become that, but I would not sit here today and say that we are looking at the beginning of that chapter.”