There is a nest of cockroaches in the financial system. This is how Jamie Dimon, CEO of the investment bank JP Morgan, named them because “when one appears, there are generally more.” They are shadow banking dedicated to “private credit”, non-institutional credit from banks and other regulated entities, subject to stricter (in Europe) or decreasing (in the US) supervision.
This nest is generated in the granting of direct loans to companies, by large, less controlled funds or investment vehicles.
As regulatory demands increase after the Great Recession of 2008 —to avoid new junk mortgage-type crises—the most indebted, volatile, or accelerated growth companies, such as technology companies and later AI companies, resorted to financing from these funds.
And the fact is that, potentially defaulting, their bank credit tap had been limited or cut off, by failing to comply with the new, stricter scales. So by entailing more risk, they pay more for the credit they receive. And the fund can return better to its own bondholders, often in double digits, more than 10%.
Furthermore, these funds are allowed the sin of masturbation, prohibited to conventional banking: they lend to companies as financiers. commercial and invest in them by acquiring packages of their capital (or all) as partners industrial. And so, they tend to overweight the value of their clients/participants, a vicious circle typical of bubbles. And atavistic conflict of interest for being on both sides of the business.
More tricks. As a hook to place their own bonds to individual investors – often less smart than they think – they make them liquid through the mirage of “semi-liquidity”: they will be able to withdraw part of their investment (normally a maximum of 5%) during brief and limited windows on the calendar. When episodes of falling profitability occur, like the inflation unleashed by the Iran war —which triggers the great rival, public bonds—, the unwary run in a stampede to make cash. And the funds are set back.
This is what happened in the first quarter of this year, when the large North American vehicles Blue Owl, Apollo, Ares and Blackstone have seen refund requests double and even quadruple. Blinding him or delaying him as in a vulgar playpen, to the irritation of the respectable.
And to the concern of regulators. This same week the ECB has warned of the phenomenon. At the same time it limited its direct reach. In the US, private credit is close to two trillion dollars (perhaps double or triple that, because being opaque there is no exact record possible), that is, around 10% of bank credit (25 trillion).
But in Europe the exposure is less than 325 billion euros. The problem is not so much quantitative as qualitative: cockroaches have infiltrated banking, insurance companies and pension plans. And then there is the indirect impact for European assets that are pecking at the US market. Remember how junk mortgages inflated the toxic balance sheet of aircraft carriers like Deutsche Bank.
