"Private Credit" -- unregulated lending to high-rish borrowers

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.nytimes.com/2024/12/27/business/wall-st-private-credit-money.html

Wall St. Is Minting Easy Money From Risky Loans. What Could Go Wrong?

Everyone from Jamie Dimon to the International Monetary Fund is ringing alarms about the shadowy world of private credit. But the money keeps rolling in.

By Rob Copeland and Maureen Farrell, The New York Times, Dec. 27, 2024

…
The business of “private credit” is a simple-sounding term that belies its complexity — and its risk.

The new venture would not be a bank, but would operate almost like one — without the regulatory restrictions and government oversight that had made traditional banks skittish about this market. Unlike a bank, the firm would be amassing money not from individual depositors, whose savings are fiercely protected by the federal government and can be withdrawn at will, but from institutions like insurance companies and pension funds. Thus, the new firm would be legally permitted to finance tricky, highly speculative companies without reporting the details of such activities publicly…

And the firm, then called Owl Rock Capital, took the unusual step of setting itself up with so-called permanent investor capital that it would hold even longer than a typical private equity fund, where investors tie up money for a few years or even a decade. This would allow it to make increasingly long-term loans. In return, clients were offered the prospect of far higher returns than they could earn with more conventional investments…

Over the past few years, roughly $1.8 trillion has been raised by private credit investment firms. That money has been lent to highly indebted companies in sectors like software, insurance and health care…

Officials at the International Monetary Fund (“could become a systematic risk”), at the Federal Reserve (“financial stability implications”) and on the Senate banking committee (“may pose hidden dangers”) have all chimed in with warnings… [end quote]

This appears to be part of the “Shadow Banking System” where loans are not marked to market or public. Many of the investors are pension and insurance systems.

Nobody knows what will happen until the next recession.
Wendy

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iirc, in 08-09 there were companies who were not banks, so they were unregulated, until they got into trouble. Then presto they were banks, so the government threw money at them. Google’s AI thing says Bank of America took over Countrywide Credit (not a bank), then was bailed out due to Countrywide’s bad paper. Then there was AIG, also not a bank, that the government shoveled money to.

Steve

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AIG was the #1 US insurer, so TBTF. AIG eventually paid back all the loans and the govt made a decent profit on the arrangement.

Countrywide was nothing more than a shill for real lenders. However, their paperwork and actual documentation regarding borrowers was, shall we say, massively fraudulent.

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