I think I had a Mark Baum moment today regarding everything that’s happening with the Iran war and private credit and I would like your insight. Tell me to go fuck my self and how wrong I am please…
After 2008 regulators told banks to stop making risky loans. So they did. Kind of. Instead of lending directly to people and companies that can’t pay them back, banks started lending to private credit funds who do the dirty work for them. 40% of total bank loan growth in 2025 went to non-bank financial institutions. Exposed to $4.5 trillion between US and European banks.
These private credit funds then lend to overleveraged companies, package the loans into CLOs, sell tranches to insurance companies and pension funds, and everyone collects their fees. 20% of the entire US insurance industry’s assets are now sitting in private credit products. The same insurance industry that’s supposed to be the safe boring money.
The risk didn’t leave the banking system. It just took a detour through a middleman so everyone could pretend it did.
Now look at what’s happening underneath. 40% of private credit borrowers have negative free cash flow. Actual default rates are closer to 9% but payment -in-kind accounting lets funds pretend borrowers are paying when they’re not. They just add the unpaid interest to the principal and call it performing.
Blackstone’s $82 billion flagship fund just got hit with $6.5 billion in redemption requests. A BlackRock CLO breached its collateral triggers. Funds are gating withdrawals left and right. Jamie Dimon said when you see one cockroach there’s probably more.
And that was BEFORE oil went to $170 physical and the Fed got trapped between inflation and recession. Now every overleveraged company in these portfolios is getting crushed by energy costs while the one thing that could save them, rate cuts, isn’t coming because CPI is ripping higher from the oil shock.
The 2008 chain was: bad mortgages, CDOs, banks, AIG, bailout.
The 2026 chain is: bad corporate loans, CLOs, private credit funds, insurance companies, banks who lent to all of them.
Same structure. Same incentives. Same opacity. Nobody knows who holds what. Nobody wants to ask because the fees are too good. Sound familiar?
DB has 30% of its loans to non-bank financial institutions versus 8% European average. They just disclosed a $30 billion private credit book. Citi has the highest systemic amplification factor of any bank at 14.8x meaning a shock at Citi ripples 15 times through the system. Both are sitting right at the center of this web.
The Iran war didn’t create this. 15 years of yield chasing and regulatory arbitrage created this. The war is just the match to the kerosene tank and whether the building can stand. CLO triggers are already breaching. Funds are already gating. Defaults are already at records. And the energy shock
hasn’t even fully hit earnings yet. That comes in April.
Tell me I’m wrong. I genuinely want someone to explain how $4.5 trillion in bank exposure to shadow lenders holding loans to companies with negative cash flow in the middle of an energy crisis ends well.
Positions: DB $20P 7/17, C $48P 7/17, TUR $27P 5/15. Because it’s not 2008 again. It’s the sequel.
Tell me I’m wrong. Private credit is 2008 with a different middleman.
byu/_Doomer_Wojack_ inwallstreetbets
Posted by _Doomer_Wojack_
29 Comments
bullish
your clf puts are gonna print but you’re missing the fed backstop – they’ll just expand the btfp or create some new facility to keep the whole thing propped up until after elections
Not nearly as leveraged. They can fail without taking down the whole banking sector.
put my fries in the bag
Too negative not to be taken down by a mod. Kinda says something.
[removed]
Iran was is a convenient cover for A LOT of things
On that I am sure
You’re wrong
Huh? How do you get from your thesis to buying puts on MSCI Turkey ETF?
Good write up. The joker card is the administration though which won’t let the economy collapse, but agree a bank’s equity might get wiped out unless bank management has connections.
I think you’re right…. we’re moving into a geopolitical stagflation regime – which for the credit markets will just hasten defaults – the long game on this is to buy EDV/ZROZ – they are very volatile and are impacted a lot by bond prices (as seen this past week) but in a credit crisis they shoot up a lot.
There might be some of them that can’t pay up, but most will be able to pay back. Once the wars get less, markets go… yes you knew it… up!!!
You’re wrong, it’s much smaller in scale than mortgage CDOs etc., banks less exposed. Still the oil crisis by itself is likely to produce massive recession
You’re wrong.
Guess we’ll need to wait until Hollywood rushes to do 10 biopics about it to know for sure
They’re senior loans backed by companies with revenue and assets. Not junk backed by poor people with cardboard mcmansions as collateral.
Not all of private credit is risky, the majority will be senior secured and you also have highly defensive sectors like infrastructure and real estate. It’s really only highly leveraged SAAS loans and consumer businesses that are risky, the rest are super safe to be honest as they will be lent against very predictable revenues with highly valuable underlying assets typical at less than 70-75% loan to value…
Don’t know if the fallout will be as bad as 2008 but I do think there’s something wildly similar to 2008 going on if you look at the usage of rated note feeders to reorganize debt from PE firms to lower capital requirements when holding them on the balance sheet
Remind me! in 6 months
You’re wrong. Loan quality at Blue Owl and others is high. These are nothing like CMO squared or loans to homeowners with no credit.? Couldn’t be more different.
private credit clos are a small portion of the clo market
https://preview.redd.it/l2qd88o3nlqg1.jpeg?width=803&format=pjpg&auto=webp&s=f326116e3883b9ec9496f70768fe9f2a3f3ecb9f
>Tell me I’m wrong.
You missed the AI bubble with their circular financing
[https://builtin.com/articles/ai-circular-financing](https://builtin.com/articles/ai-circular-financing)
The circular financing model also introduces some pretty glaring vulnerabilities:
>Distorted Demand Signals: Because revenue is often generated from investor-funded spending, demand can appear stronger than it truly is, muddying the distinction between true market traction and money simply being recycled back and forth.
>Overdependance: If a chipmaker slows production, for example, or construction on a data center is delayed, it can affect the entire industry, delaying projects and straining cashflow for everyone else involved — especially dependent startups, who often take on debt they might not be financially ready for just to participate.
>Overbuilding: Circular financing encourages everyone to go full steam ahead, pushing companies to expand capacity based on optimistic forecasts rather than confirmed demand — a recipe for wasted resources if growth doesn’t materialize as predicted.
>Potential Market Collapse: At a system-wide level, any mismatch between expectations and reality can trigger broader instability, with one failure cascading through interconnected contracts, valuations and credit markets — the kind of chain reaction that fuels concerns about a trillion-dollar AI bubble.
Buying puts in this market is the best way to blow your balls off. Ask me about my weiners!!!
Dividend gang will not be happy when you tell them that their precious bank loan and CLO tickers are trash
I am currently watching a large PE firm trying to figure out what to do with companies that they “maximized profits” over the past 5 years (probably all bs numbers from the start) and now the investors want their money back so they can reinvest it but the firm is screwed because no one wants their crap companies. Oh don’t forget about the regression in people development since all these PE firms gobbled up companies and didn’t invest a penny in employee development, leaving huge gaps in skills just as large numbers of the work force is set to begin retiring (or was pushed out in efforts to “maximize profits”which is going to crush our economy. I would be less worried about who is in office but rather what companies you allow into your communities – they are the one ruining everything.
The PC house of cards is funding the PE roll ups of everyday stuff we use.
Go try finding shampoo on amazon or your shelf at target / walmart that isn’t owned by PE.
The notional exposure of the private credit “crisis” is orders of magnitude smaller then what happened in 2007-2009. I would say it is about 1/3 the size, the systemic risk therefore is smaller. Also I would like to mention Deutsche Bank is really one of the worst big banks in Europe. Sort of the Citigroup equivalent for Europe.
All good points about the macro, amplification points, and systemic connections (seriously, not enough people appreciate how much private credit money pension funds hold!) One point your post didn’t dive into is that the major investment vehicle for a lot of these PC funds the last 5 years has been LLMs, data centers, and GenAI-adjacent companies. The economics of those looked unstable (at best) *before* the energy shock. Now? I honestly don’t know how a lot people are continuing to invest in neoclouds and data centers with margins of negative bajillion when the cost of electricity is about to go parabolic.