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 . 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 M**a movement was built on not bailing out Wall Street.
The private credit, or shadow banking, crisis is getting more worrying all the time.
Isn’t this just rich people losing their money, more or less? It shouldn’t cause a big, widespread impact because it is only open to accredited investors. Money just moving around into a different pocket.
There are important reasons why failure of “shadow banks” isn’t just “rich people losing money.”
The shadow banks lend to small and medium sized businesses that can’t borrow in the bond market like a giant business can. Many of these smaller businesses have low-interest loans they got in the Covid years which are maturing and need to be rolled over. Without the shadow banks they may default and potentially fail.
Many of the investors are insurance companies and pension funds. Their beneficiaries are counting on the promised benefits. If the funds can’t withdraw their money to send to the beneficiaries there will be a lot of hurt.
Regulated banks are also heavily invested in shadow banks and need to be able to access their funds. Failure or even restriction of withdrawals could threaten regulated banks, too.
Wendy
Yes, in these complex financial days you can’t just isolate one sector of the financial world from the rest. The 2008 crisis started in the US housing sector and look where that led.
I have read this described as a “slow motion bank run”. People jumped in on the promise of higher returns, in exchange they gave up the right to jump out any time they wanted, being limited to withdrawals of 5% per year for the first X years.
Blue Owl (and others) were heavily invested in software (now prompting fears that AI will replace these companies or at least devalue them) which has taken a huge dump the past 6 months, and now investors are worried - and their money is trapped. So while the official NAV says “No problem”, the unofficial NAV (guesses by investors) shows the fund is probably worth 60% of what it says it is.
Blue Owl is the worst of them, but there are several others under stress as well, presumably for the same reason. If the economy goes sideways, expect a lot of moaning and crying about it. The real questions is “is this entire segment big enough to pose a systemic risk to everything?” That’s a question I don’t think anybody knows.
Depends. The private credit industry is better known to some as business development companies (BDCs). While they are “private credit” they are publicly traded stock companies. Usually they have a high dividend yield in the range of 10% which can attract a lot of people. Some rich, some trying to get rich. I used to own ARCC but sold about 6 months ago.