Blue Owl Credit, one of the leading players in the private credit industry, has already started limiting investors’ ability to withdraw their money.
The shares of asset managers have already tanked on fears of contagion. And US Treasury officials have started calling meetings to assess the scale of potential losses.
It remains to be seen whether the wobbles within the “shadow banking” industry trigger a full-scale panic. Even so, one point is surely already clear: a crash would be a catastrophe for Donald Trump.
Not only because of the obvious economic impact but because his whole Maga movement was built on not bailing out Wall Street.
The private credit, or shadow banking, crisis is getting more worrying all the time.
The alternative asset managers have built up huge businesses by making high-interest loans to companies. As some of those turn sour, as risky loans eventually do, the whole industry will run into trouble.
Only this week, Blue Owl Capital said it would block some redemptions from two of its major funds after it was overwhelmed by demands from its financial backers to withdraw their cash.
Plenty of other funds, such as KKR, Ares Management and Apollo Global, have limited withdrawals to 5pc, while Andrew Bailey, the Governor of the Bank of England, warned on Wednesday that private credit was “fairly opaque”.
Crucially, he also said that if investors began to suspect problems were more widespread than previously thought, confidence in the whole sector could collapse very quickly.
The scale of the potential losses is substantial. The industry is estimated to be worth between £1tn and £3tn, depending on how you count the figures, and part of the problem is that it is so lightly regulated that no one knows how much money is at stake.
It has drawn in huge sums of money and lent it out again across the world, and not least here in Britain. Of course, it remains to be seen how that plays out.
The private credit firms may find that while they suffer some losses, enough of the loans will be solid to remain profitable, and financially viable, overall. If so, the whole “crisis” will blow over. Let’s hope so, at least.
Here’s the problem, however.
If the collapse escalates, how will the White House, the Treasury and, indeed, the Federal Reserve respond?
In normal times, we would expect the financial authorities to step in with some kind of rescue package. After all, that is what happened in the past.
After the financial crash of 2008 and 2009, a massive bailout was organised to rescue the banks from the losses they had suffered, and in the smaller bank run of 2023, when Silicon Valley Bank was in trouble, another rescue was quickly put together.
So if an asset manager faces collapse, it will get help, right?
Well, perhaps. The trouble is that Trump’s Maga movement has made it clear it does not believe in bailouts. Most of its leading figures, such as JD Vance, the US vice president, have been fiercely critical in the past, arguing that the government is there to help Main Street – and not Wall Street.
Indeed, back when Mr Vance was still a senator, he introduced “The Bank Failure Prevention Act” and teamed up with Elizabeth Warren, a US senator, to pass legislation to claw back bonuses from failed financial institutions.
JD Vance, the US vice president, has argued that the government is there to help Main Street and not Wall Street – Mandel Ngan/AFP via Getty Images
JD Vance, the US vice president, has argued that the government is there to help Main Street and not Wall Street – Mandel Ngan/AFP via Getty Images
Likewise, Marjorie Taylor Greene, a former US representative, another leading Maga figure who has recently fallen out with Trump, was among the harshest critics of the rescue of Silicon Valley Bank. “The fools running the bank were woke and almost became broke,” she said at the time.
And, of course, the Tea Party movement, the forerunners of Maga, had its origins in opposing the 2008 to 2009 bailouts.
In fairness, Trump himself, as so often, has been more vague about what he thinks, supporting the bailouts when he first ran for office in 2016, then switching to opposition as he figured out it played better with his base.
But no one can escape the overall picture. Insofar as Maga has a coherent world-view, admittedly a fairly questionable assumption, then surely it is on the side of small businesses, and the ordinary working man, and not the sleek financial engineers in the markets?
Against that backdrop, the White House is going to find it very hard to start writing out cheques for billions of dollars to rescue a private credit fund that is about to collapse.
The Maga movement was also opposed to getting involved in Middle Eastern wars, and it has been betrayed over that, to the understandable fury of many of its leaders.
It will be furious if it has to rescue the bankers as well.
And yet, if the shadow banking industry fails, it will take the economy down with it.
The loans at stake have been advanced to manufacturers, distributors, retailers and leisure chains, and if they all get called in, those companies will go bust and hundreds of thousands of jobs will be lost.
The rhetoric of letting the Wall Street fat cats go broke sounds fine on the campaign trail or on the floor of the Senate. It is a lot harder once you are actually in power.
If this crisis gets any worse over the coming months, Trump will have to make a fateful choice.
He will have to abandon his base. Or else he will have to let the shadow banking industry collapse, and risk a major recession.
Which way will he jump? The president is so unpredictable that it is impossible to say with any certainty. And yet one point is clear. Either way, he will be in deep political trouble.
A shadow banking crisis will destroy the financiers and their investors, but as it starts to unravel, it may well destroy the Trump presidency as well.
Xeynon on
The major recession seems likely to me either way at this point, given that Trump started a major war in the most crucial energy producing region on the planet that has knocked out substantial capacity for the foreseeable future.
If this recession takes down a bunch of dodgy financial institutions too? Good. We probably need to get back to running an economy based on solid business fundamentals and not speculative lending anyway.
Affectionate-Panic-1 on
The cure for this would be lower interest rates. Before the war we were trending in that direction as inflation has started to moderate despite some tariff shocks. Now, the fed will be reluctant to lower rates until the picture in the middle east is clearer.
Though I will note that this isn’t as bad as an overall banking crisis, the banking sector is still 10x larger than the private credit market. Private credit is not something we should be bailing out.
BunkyFlintsone on
Nothing spells disaster for MAGA unless the Congress and Senate step up and hold this Administration accountable.
It appears that they will not. So many laws are being broken by this Administration, the complete removal of checks and balances, The attack and removal of anyone who may have a dissenting opinion, and the mass of pressure put on the media to stay in line.
Nothing spells disaster for MAGA. But pretty much everything spells a disaster for Americans.
BoosterRead78 on
Oh it’s going to happen. Especially if something leads up Trump finally being removed. The damage is done. The numbers will catch up. The oligarchs can only inflate their numbers for so long before everyone else goes: “nope sorry.”
hillbilly-edgy on
He also said … no new wars. But here we are. MAGA got scammed, is getting grifted and they don’t care – because it’s an Us vs Them world in their view
6 Comments
Blue Owl Credit, one of the leading players in the private credit industry, has already started limiting investors’ ability to withdraw their money.
The shares of asset managers have already tanked on fears of contagion. And US Treasury officials have started calling meetings to assess the scale of potential losses.
It remains to be seen whether the wobbles within the “shadow banking” industry trigger a full-scale panic. Even so, one point is surely already clear: a crash would be a catastrophe for Donald Trump.
Not only because of the obvious economic impact but because his whole Maga movement was built on not bailing out Wall Street.
The private credit, or shadow banking, crisis is getting more worrying all the time.
The alternative asset managers have built up huge businesses by making high-interest loans to companies. As some of those turn sour, as risky loans eventually do, the whole industry will run into trouble.
Only this week, Blue Owl Capital said it would block some redemptions from two of its major funds after it was overwhelmed by demands from its financial backers to withdraw their cash.
Plenty of other funds, such as KKR, Ares Management and Apollo Global, have limited withdrawals to 5pc, while Andrew Bailey, the Governor of the Bank of England, warned on Wednesday that private credit was “fairly opaque”.
Crucially, he also said that if investors began to suspect problems were more widespread than previously thought, confidence in the whole sector could collapse very quickly.
The scale of the potential losses is substantial. The industry is estimated to be worth between £1tn and £3tn, depending on how you count the figures, and part of the problem is that it is so lightly regulated that no one knows how much money is at stake.
It has drawn in huge sums of money and lent it out again across the world, and not least here in Britain. Of course, it remains to be seen how that plays out.
The private credit firms may find that while they suffer some losses, enough of the loans will be solid to remain profitable, and financially viable, overall. If so, the whole “crisis” will blow over. Let’s hope so, at least.
Here’s the problem, however.
If the collapse escalates, how will the White House, the Treasury and, indeed, the Federal Reserve respond?
In normal times, we would expect the financial authorities to step in with some kind of rescue package. After all, that is what happened in the past.
After the financial crash of 2008 and 2009, a massive bailout was organised to rescue the banks from the losses they had suffered, and in the smaller bank run of 2023, when Silicon Valley Bank was in trouble, another rescue was quickly put together.
So if an asset manager faces collapse, it will get help, right?
Well, perhaps. The trouble is that Trump’s Maga movement has made it clear it does not believe in bailouts. Most of its leading figures, such as JD Vance, the US vice president, have been fiercely critical in the past, arguing that the government is there to help Main Street – and not Wall Street.
Indeed, back when Mr Vance was still a senator, he introduced “The Bank Failure Prevention Act” and teamed up with Elizabeth Warren, a US senator, to pass legislation to claw back bonuses from failed financial institutions.
JD Vance, the US vice president, has argued that the government is there to help Main Street and not Wall Street – Mandel Ngan/AFP via Getty Images
JD Vance, the US vice president, has argued that the government is there to help Main Street and not Wall Street – Mandel Ngan/AFP via Getty Images
Likewise, Marjorie Taylor Greene, a former US representative, another leading Maga figure who has recently fallen out with Trump, was among the harshest critics of the rescue of Silicon Valley Bank. “The fools running the bank were woke and almost became broke,” she said at the time.
And, of course, the Tea Party movement, the forerunners of Maga, had its origins in opposing the 2008 to 2009 bailouts.
In fairness, Trump himself, as so often, has been more vague about what he thinks, supporting the bailouts when he first ran for office in 2016, then switching to opposition as he figured out it played better with his base.
But no one can escape the overall picture. Insofar as Maga has a coherent world-view, admittedly a fairly questionable assumption, then surely it is on the side of small businesses, and the ordinary working man, and not the sleek financial engineers in the markets?
Against that backdrop, the White House is going to find it very hard to start writing out cheques for billions of dollars to rescue a private credit fund that is about to collapse.
The Maga movement was also opposed to getting involved in Middle Eastern wars, and it has been betrayed over that, to the understandable fury of many of its leaders.
It will be furious if it has to rescue the bankers as well.
And yet, if the shadow banking industry fails, it will take the economy down with it.
The loans at stake have been advanced to manufacturers, distributors, retailers and leisure chains, and if they all get called in, those companies will go bust and hundreds of thousands of jobs will be lost.
The rhetoric of letting the Wall Street fat cats go broke sounds fine on the campaign trail or on the floor of the Senate. It is a lot harder once you are actually in power.
If this crisis gets any worse over the coming months, Trump will have to make a fateful choice.
He will have to abandon his base. Or else he will have to let the shadow banking industry collapse, and risk a major recession.
Which way will he jump? The president is so unpredictable that it is impossible to say with any certainty. And yet one point is clear. Either way, he will be in deep political trouble.
A shadow banking crisis will destroy the financiers and their investors, but as it starts to unravel, it may well destroy the Trump presidency as well.
The major recession seems likely to me either way at this point, given that Trump started a major war in the most crucial energy producing region on the planet that has knocked out substantial capacity for the foreseeable future.
If this recession takes down a bunch of dodgy financial institutions too? Good. We probably need to get back to running an economy based on solid business fundamentals and not speculative lending anyway.
The cure for this would be lower interest rates. Before the war we were trending in that direction as inflation has started to moderate despite some tariff shocks. Now, the fed will be reluctant to lower rates until the picture in the middle east is clearer.
Though I will note that this isn’t as bad as an overall banking crisis, the banking sector is still 10x larger than the private credit market. Private credit is not something we should be bailing out.
Nothing spells disaster for MAGA unless the Congress and Senate step up and hold this Administration accountable.
It appears that they will not. So many laws are being broken by this Administration, the complete removal of checks and balances, The attack and removal of anyone who may have a dissenting opinion, and the mass of pressure put on the media to stay in line.
Nothing spells disaster for MAGA. But pretty much everything spells a disaster for Americans.
Oh it’s going to happen. Especially if something leads up Trump finally being removed. The damage is done. The numbers will catch up. The oligarchs can only inflate their numbers for so long before everyone else goes: “nope sorry.”
He also said … no new wars. But here we are. MAGA got scammed, is getting grifted and they don’t care – because it’s an Us vs Them world in their view