Wall Street’s New ‘Shadow Banks’ Are on a Tear. They Want Your Money.
Booming ‘private credit’ industry aims to include 401(k) investors; tariff-driven economic stress poses risks
By Miriam Gottfried, The Wall Street Journal, May 16, 2025
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A multitrillion-dollar financial machine has become the hottest thing on Wall Street, transforming who lends money in the global economy and where the capital comes from.
At the center of this system, known as “private credit,” are titans of private equity such as Blackstone, Apollo Global Management and KKR , firms best known for buying and selling companies. They have emerged as major lenders to businesses and are competing head-on with traditional banks, while operating mostly outside the reach of regulators.…
Now, the industry is reaching even deeper into the pockets of everyday Americans to manage money more directly for individual investors. Blackstone said in April it was teaming up with Wellington Management and Vanguard to offer portfolios with a mix of public and private assets. KKR and Capital Group recently launched funds that blend public and private credit…
If an economic downturn prompts a wave of loan defaults, existing investors would feel that pain. …
Since private loans aren’t marked with a value in real time the way stocks are priced, investors might not realize right away if their private-credit portfolios are deteriorating…
Still, if serious problems develop, regulators might have difficulty spotting them before they have metastasized…
Private-equity firms amped up their lending after the 2008 financial crisis…
These firms joined the ranks of what were commonly labeled “shadow banks”— a parallel universe of nonbank financial institutions that perform banklike activities but aren’t regulated like banks. “Shadow banking is all grown up, and now it is called private credit,” said Marc Pinto, global head of private credit at Moody’s Ratings… [end quote]
One reason the 2008 financial crisis almost took down the system is that many loans that weren’t marked to market defaulted and pulled down associated companies. The government bailed out AIG because it was linked to so many other financial companies that its default would have metastasized.
The current shadow banking (aka “private credit”) system hasn’t been tested since the 2008 crisis. These companies aren’t regulated. The risk is much higher than investing with regulated banks. The investments may be illiquid. Individual investors may not be able to sell their investments in the markets (the way they would sell a bond, for example).
The Chicago Federal Reserve tracks financial stress with an index that includes the shadow banking system.
Individual investors who are interested should investigate the expenses and liquidity features of any investment, including funds offered by Vanguard or others. What would happen in a recession? Would the investment be liquid?
Each investor has individual requirements for risk and return. These shadow banking investments haven’t been time-tested and aren’t regulated. Do the higher returns compensate for the risks? Different investors will answer differently.
Wendy