"Most of the private credit loans were floating rate and tied to the federal funds rate, which has persisted at a high level over the past three years. Fitch pointed to this as a catalyst for last year's defaults."

I guess it is fair to say the federal funds rate has persisted at a high level over the past three years now isn't it?

https://www.macrotrends.net/2015/fed-funds-rate-historical-c...

Also interesting to note, "Fitch recorded NO defaults in the software sector last year. The rating agency noted it categorizes software issuers into their main target market sectors when applicable."

If your business is light on free cash flow (ie everyone in AI at the moment) buckle up as there are storm clouds ahead. If you’re running a business that relies on external cash (VCs, loans/bonds, etc) to keep things going things will get very ugly.

^ Encase the link also responds with this for you:

    Access Denied

    You don't have permission to access "http://www.marketscreener.com/news/us-private-credit-defaults-hit-record-9-2-in-2025-fitch-says-ce7e5fd8df8fff2d" on this server.

> The default rate among U.S. corporate borrowers of private credit rose to a record 9.2% in 2025

Emphasis added. Headline makes it sound like retail credit, not corporate specifically.

*Edit: Not misleading, just an unfamiliar term/usage from my perspective. I'm not a finance guy so didn't know the difference and assumed others wouldn't either. Mea culpa.

[1] https://www.sec.gov/Archives/edgar/data/72971/00000729712500...

[2] https://www.reuters.com/business/finance/deutsche-bank-highl...

That's the scenario in which unemployment goes to 10%, home prices crash by 33%, the stock market halves and Treasuries trade at zero percent yield [2].

[1] https://www.mfaalts.org/industry-research/2025-fed-stress-te...

[2] https://www.federalreserve.gov/publications/2025-june-dodd-f...

tick-tock, tick-tock, tick-tock...

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[a] https://news.ycombinator.com/item?id=47351462

tick-tock, tick-tock, tick-tock...

"Private credit" is an idea that has been hot in finance for the last several years, originating from the great financial crisis (GFC). After the GFC, regulations made it very hard for banks to make business loans with any kind of risk anymore. So instead, new non-bank institutions stepped in to make loans to businesses. These "private credit" institutions raise money from investors, and lend it to businesses.

The investors are usually institutions who are OK with locking up their money long-term, like insurance companies and pension funds. This all seems a lot safer than having banks making loans: banks get their funding from depositors, who are allowed to withdraw their deposit any time they want. So a bank really needs to hold liquid assets so they are prepared for a run on the bank, and corporate borrowing is not very liquid. Insurance companies and pension funds have much more predictability as to when they actually will need their money back, so can safely put it in private credit with long horizons.

It's not quite so clean, though.

It's actually common for banks to lend money directly to private credit lenders, who then lend it out to companies. But when this happens, typically the bank is only lending a fraction of the total and arranges that they get paid back first, so it's significantly less risky than if they were loaning directly to the companies. Of course, the non-bank investors get higher returns on their riskier investment.

And the returns have been pretty good. Or were. With the banks suddenly retreating from this space, there was a lot of money to be made filling the gap, and so private credit got a reputation for paying back really good returns while being more predictable than the stock market.

But this meant it got hot. Really hot.

It got so hot that there were more people wanting to lend money than there were qualified borrowers. When that happens, naturally standards start to degrade.

And then interest rates went up, after having been near-zero for a very long time.

And now a lot of borrowers are struggling to pay back their loans on time. And the lenders need to pay back investors, so sometimes they are compromising by getting new investors to pay back the old ones, and stuff. It's getting precarious.

Meanwhile a lot of private credit institutions are hoping to start accepting retail investors. Not because retail investors have a lot of money and are gullible, no no no. 401(k) plans are by definition locked up for many years, so obviously should be perfect for making private credit investments! Also those 401(k)s today are all being dumped into index funds which have almost zero fees, whereas private credit funds have high fees. Wait, that's not the reason though!

But just as they are getting to the point of finding ways to accept retail investors, it's looking like the returns might not be so great anymore. Could be a crisis brewing. Even if the banks are pretty safe, it's not great if pensions and insurance companies lose a lot of money...

anything Wells Fargo leads in must be bad

Many of these businesses are SaaS which means their valuations are tumbling.

It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and take operational control? Will the banks renegotiate terms such that the private equity owners are incentivized to continue as stewards? Or, will they prefer to force a business sale immediately?

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[0] https://www.bis.org/publ/qtrpdf/r_qt2503b.htm [1] https://www.bis.org/publ/bisbull106.pdf [2] https://www.bis.org/publ/work1267.pdf

You seem to be answering a number of other questions in the post so interested to hear your impetus for sharing in the first place.

nb: thank you for being an ongoing contributor to the site! I see your handle cropping up a lot in substantive conversations

Since then I’ve seen small things indicating lots of people quietly checking their books for such.

In the last week or two this has accelerated. A lot. Every few days there are ratchets tightening things up. Dimon just put some hard limits on some private credit lines and what they could take out. A few other banks trying to take other precautions.

Honestly thrilled to hear it. The AI bubble needs to burst so we can find out what's actually useful, start requiring real business models again, and get rid of all the noise and waste.

i dont think the inflationary seventies and eighties are great lodestar

low interest rates are historically a sign of a stable polity and economy. so if anything, we want the conditions for prolonged low interest rates, rather than prolonged high interest rate.

For example, we decided to keep our vehicle for another 4-5 years instead of buying a new one. The same Hyundai vehicle of the same model, but different year (2026 v.s. 2020), has gone up 8,000 CAD (10K CAD considering tax), with a much higher rate (5.99% v.s. 0%). There is no way I'm buying another car in the foreseeable future. We can definitely afford it, but we won't.

The whole world has pushed up prices of food, housing and pretty much everything higher. This is the real problem -- although I wouldn't say it is the root problem.

I’m coming at this loaded with jargon, so excuse my blind spot, but why would the term private credit bring to mind anything to do with retail specifically?

(The term private credit in American—and, I believe, European—finance refers to “debt financing provided by non-bank lenders directly to companies or projects through privately negotiated agreements” [1].)

[1] https://corporatefinanceinstitute.com/resources/capital_mark...

I'm not saying they are right. But it's like if you posted an article called "Python Is Eating the World" on a non-tech side and people got mad because they thought the article was about a wildlife emergency. Fair for them to be confused, but maybe not fair to accuse the title of being misleading (at least not intentionally).

Recruitment tables should just have a banner that reads 'we've already spent your bonus on legal fees, here's some chocolate'

If the bank has trouble, shareholders/executives lose - if the banking system has trouble... then QE will solve the bank trouble.

It's generally felt to be risky and volatile, but useful. Basically, it's never illegal just to hand your friend $20 even if the government isn't watching over the process to make sure you don't get scammed. This is the same thing at scale.

It's not. It's just that we're seeing potentially 10% losses on the portfolio level [1], which could imply up to–up to!–5% losses to the banks' loans to those lenders.

Again, tens of billions of dollars of losses are totally absorbable. But Morgan Stanley's stock price took a hit when it gated one of these funds [2]. And some banks (Deutsche Bank, somehow, fucking again, Deutsche Bank) have small ($12n) but concentrated portfolios where a single wipeout could materially impair their ~$80bn of risk-weighted assets.

[1] https://www.reuters.com/business/us-private-credit-defaults-...

[2] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...

These private credit numbers are estimates provided by Moody's, who were famously clueless about the scale of mortgage bond risk even as they stamped them all with a AAA rating.

Like, when a bank originates a mortgage, that mortgage gets traded, much like private debts don’t.

In a catastrophic scenario: if the whole asset class went to 0 (on the banks asset sheet they would lose 2.5% - absorbable pain assuming its not leveraged through creative financial mechanisms).

I would wager that risk is more concentrated on certain institutions instead of across the board so acute pain likely.

The requirement to disclose has only existed for a year I believe, but many are kicking the can or claiming that it would cause them issues.

So I guess the Fed expects these other kinds of lending to be safer than private credit?

Been a bit out of the finance game

Not quite. Private credit is to debt what private equity is to equity. (Technically, any non-bank originated debt that isn't publicly traded is private credit. Conventionally, it's restricted to corporate borrowers.)

So bank exposure to private credit generally means banks lending to non-banks who then lend to corporate borrowers.

The liquidity challenges of a $1.2T shock to the economy is meaningful, because it has knock on effects on equity as well.

When private credit (which is propping up private valuation) falls, private equity also falls and then everyone realizes that everyone else has been swimming naked.

Yes.

> the same regulations and constraints that led them not to lend to the underlying borrowers in the first place

No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks.

> When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans

Correct. Assuming 1.5x leverage and 60% recovery, you'd expect no more than half of portfolio losses to transmit to their lenders.

Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI

July 10, 2009

https://www.denverpost.com/2009/07/10/lewis-wells-fargo-so-b...

My normal bank was acquired by Wells Fargo in 2008 and they also owned my mortgage.

When I went to pay off my mortgage in 2012 they required a cashier's check for the final payment of around $80.

I asked if we could do it electronically like all of the previous payments and they said no.

So I walked into my local bank asking for a cashier's check of that amount and the bank teller told me that most people would accept a personal check for that little. I said yeah but YOU don't. She looked at me funny.

So she asked who to make the cashier's check out to. I said "Wells Fargo" and she looked at me funny again and said "Wells Fargo is us, the check comes FROM Wells Fargo. Who do I put on the TO line" and I said "Wells Fargo"

She again looked at me funny and I explained that I am paying off my mortgage. Wells Fargo is where I have my bank account and my mortgage. She said "Can't we just do it electronically?" to which I said "You would think but apparently your employer can't handle that and told me to get a cashier's check and FedEx overnight to them."

She rolled her eyes and then started laughing.