The history of Wall Street is rife with people who believed they were smarter by half and could engineer risk to near zero.
In my lifetime there was Long-Term Capital Management, the hedge fund that employed Nobel Prize–winning economists who believed their mathematical models had tamed market volatility. For a while the strategy seemed brilliant. Then Russia defaulted on its debt in 1998, correlations that “couldn’t happen” suddenly did, and LTCM collapsed so spectacularly the Federal Reserve had to orchestrate a $3.6 billion bailout to prevent broader financial contagion.
Then there was Enron, whose executives were widely celebrated by McKinsey and others as the financial geniuses of their era. The company pioneered complex energy trading markets and used exotic accounting structures and off-balance-sheet partnerships that were too complex for many analysts and journalists to understand. Enron’s leaders, who graced the covers of magazines, insisted their innovations had reinvented corporate finance. In reality, the complexity mostly concealed massive leverage and fabricated profits.
There was the subprime mortgage era, when Wall Street assured investors that sophisticated financial engineering had made risky home loans safe. Banks bundled mortgages into securities, carved them into tranches, and then repackaged them into even more complex instruments called collateralized debt obligations. Rating agencies blessed many of them as AAA. When housing prices fell, the structure collapsed and nearly took the global financial system down with it.
Each episode had the same storyline: brilliant people convinced themselves their models, structures, or innovations had eliminated risk when in reality they had merely hidden it until the moment it erupted.
In short order, the American public may learn about another Wall Street financial engineering “sure thing” that people with far greater financial expertise than me warn could trigger another financial crisis, one that could rival the 2008 collapse. It’s the private credit market, and if Americans come to understand what fueled it, the political consequences could be profound.
After the 2008 financial crisis, regulators moved to prevent another credit binge by forcing banks to hold more capital and discouraging the kinds of highly leveraged loans that had become commonplace during the housing bubble. True to form, Wall Street invented a new framework to circumvent the regulatory guardrails.
Private-equity firms and giant asset managers like Blackstone, Apollo, and KKR began making the sorts of highly leveraged loans that traditional banks were discouraged from making. Never mind that many had little experience originating and managing corporate loans. The multibillionaire Masters of the Universe who oversee these funds didn’t achieve their riches because of their humility.
Private credit is basically a variation of another Wall Street golden oldie. In the 1980s, Michael Milken’s junk-bond machine at Drexel Burnham Lambert allowed companies to bypass traditional bank lending and tap investors directly for high-risk financing. Private credit is essentially the latest twist on that idea, dressed up with more sophisticated marketing and a much larger investor base.
America’s biggest banks, hardly known for missing a lucrative opportunity, wanted in on the action. Although regulators discouraged banks from making highly leveraged loans themselves, nothing prevented them from providing lines of credit to private-equity firms and asset managers so those firms could fund their lending operations.
Voila. U.S. banks were once again in the leveraged-loan business, albeit relying on the underwriting “expertise” of private-equity firms and asset managers.
What could go wrong?
Unlike corporate bonds, private-credit loans aren’t publicly traded, which means there is no transparent and independent market to determine their real value. The value of private-credit loans is often determined by the firms that originated them and sold them to investors. Just as beauty is in the eye of the beholder, so is the creditworthiness of private credit loans.
What has raised concerns is that private-credit lenders have considerable exposure to software companies, a sector already facing disruption from artificial intelligence and shifting technology economics. Another concern is that wealthy investors have considerable exposure to private-credit loans because Wall Street thought it a swell idea to more widely distribute risk.
On Wall Street, “democratization” is a wonderfully flexible word. In theory it means giving ordinary investors access to opportunities once reserved for pension funds and endowments. In practice it often means distributing complex and illiquid investments to high-net-worth individuals who may not fully understand how they work.
Doctors, dentists, small-business owners and other affluent professionals have poured billions into private-credit funds on the advice of their brokers and wealth managers, many believing they are buying something akin to a high-yield bond with a little extra kick. What they often own instead are loans to highly leveraged companies that depend on continued refinancing and cooperative credit markets.
The peddlers of private credit loans insist all is well, just as investors exposed to subprime were assured any concerns were overblown. The Pollyanna assurances are despite a Bloomberg News report that BlackRock slashed the value of a private loan to zero at the end of 2025, just three months after valuing it at 100 cents on the dollar.
Bloomberg News also reported that BlackRock’s private credit fund signaled in January that it was preparing to mark down the value of its assets by 19 percent. If that doesn’t make investors sweat, this might: BlackRock’s HPS Corporate Lending Fund, a business-development company that makes private credit loans and doesn’t trade on an exchange, just announced it would stick to its plan to buy back up to 5% of the fund’s shares, the minimum amount it agreed to in a given quarter.
Bloomberg also reported that Blackstone’s flagship private credit fund faced redemption requests of roughly 8 percent. The firm was able to meet those redemptions in part because more than 25 senior leaders across Blackstone, many from its credit business, contributed about $150 million to the Blackstone Private Credit Fund. Combined with $250 million of Blackstone’s own capital, the money helped cover redemption requests totaling roughly $3.8 billion, or about 7.9 percent of net assets.
I’m hardly alone warning about the potential implosion of private credit, which Morgan Stanley estimates is approaching $3 trillion, larger than both the public high-yield bond market and the syndicated loan market. Moody’s projects assets under management will exceed $2 trillion this year and approach $4 trillion by 2030.
Mohamed El-Erian, the economist and former CEO of bond-market powerhouse PIMCO, recently warned that private credit may be facing a “canary in the coal mine” moment.
Dan Rasmussen of hedge fund Verdad Capital said on CNBC that “years of ultra-low rates and ultra-low spreads and very few bankruptcies led investors to go further and further out the risk spectrum in credit.” He added: “This is a classic case of ‘fool’s yield,’ high yield that doesn’t translate into high returns because the borrowers were too risky.”
JPMorgan Chase CEO Jamie Dimon has also expressed concern. “All of our main competitors are back,” Dimon said. “It’s good for the world, et cetera. I don’t know how long it’s going to be great for everybody. I see a couple of people doing some dumb things.”
Some of those “dumb things” may well be happening at JPMorgan itself. Last year the bank announced it would commit an additional $50 billion of its balance sheet to the private credit market, along with another $15 billion from co-lending partners.
How large is JPMorgan’s exposure to private credit? The precise answer is unclear, and regulators would like more detail as well. The FDIC and other regulators last year asked major banks to disclose their exposure to non-bank financial institutions so they could better understand risks tied to the booming private credit sector.
Most large banks complied. JPMorgan did not provide a detailed breakdown, instead reporting roughly $133 billion of exposure in a category labeled “other,” which includes lending to non-bank financial institutions such as private-equity firms and credit funds — precisely the kinds of entities regulators are trying to better understand.
JPMorgan has also taken its wealthy private-banking clients along for the private-credit ride. The bank both manages private credit funds and advises some affluent clients to allocate as much as 30% of their portfolios to alternatives, with private credit often replacing traditional fixed income.
JPMorgan recently named Stephanie Davis head of Private Wealth Alternatives, responsible for supporting financial advisors across the U.S. Davis previously worked at Hamilton Lane, which earlier this year agreed to settle allegations that it recommended unsuitable high-fee private equity and credit investments to the Pennsylvania Public School Employees’ Retirement System.
It hardly fosters confidence that roughly 30 investment firms holding more than $230 million of Tricolor asset-backed notes sold between April 2022 and June 2025 just filed a lawsuit alleging that JPMorgan, along with Barclays and Fifth Third, helped fuel and perpetuate what the complaint calls a “Ponzi-like fraud.” According to the lawsuit, the banks continued to finance and securitize Tricolor’s subprime auto loans despite glaring warning signs, choosing to “stick their heads in the sand” while collecting underwriting fees and protecting their financial exposure.
Tricolor, a subprime auto lender and used car retailer, filed for Chapter 7 liquidation in September 2025 after prosecutors say executives, including founder and former CEO Daniel Chu, double-pledged the same auto loans and vehicles to multiple financing sources. The alleged collateral shortfall was roughly $800 million. Chu has pleaded not guilty.
JPMorgan recorded a $170 million charge-off in the third quarter of 2025. Dimon called it “not our finest moment.”
Perhaps the most alarming warning about private credit risk inadvertently came from Ares CEO Mike Arougheti, who dismissed a UBS report saying that private credit defaults could reach 15%.
“If you’re talking about 15% default rates in private credit, which again I think is not possible, but if you’re there, everything else in your portfolio, I assure you, is going to be completely torched,” he said.
Even during the 2008 financial crisis, private credit portfolios had a one-year default rate of 8% to 10%, Arougheti said.
During the 2008 financial crisis, private credit was still in its infancy, a niche market of roughly $200 billion. Today it has swollen to about $2 trillion. An 8–10% default rate that once implied roughly $20 billion in losses could now translate into $160 billion to $200 billion.
One might expect that a leading private credit lender would understand the folly of presenting that comparison as reassurance.