Excess Returns Podcast Summary

Episode: "The Bear Stearns Moment | Ben Hunt on How Private Credit Unravels"

Date: October 19, 2025
Hosts: Matt Zeigler (B), Jack Forehand, Justin Carbonneau
Guest: Ben Hunt (A) – Founder, Epsilon Theory

Episode Overview

This episode dives into the unfolding risks in the private credit markets, drawing direct parallels to the lead-up to the 2008 global financial crisis. Ben Hunt, noted for his expertise on financial narratives and game theory, examines the structural vulnerabilities, the rise of "flow machines" in shadow banking, and the critical role of trust — with particular reference to recent defaults at Tricolor and First Brands. The episode explores systemic risk, market psychology, and how narrative shifts can trigger crises, culminating in a discussion of Ben’s methods for tracking financial narratives in real time.

Key Discussion Points & Insights

1. Parallels Between 2007-2008 and Today’s Private Credit Market

• Main point: Ben sees a strong similarity between the collapse of trust in banks leading into the 2008 GFC and what’s happening now in private credit.
  • “There was hidden leverage in the system of loans to Tricolor and the warehouse facilities and all like that. There was hidden leverage in the system of loans to First Brands. When that trust is broken...that is the moment where reality hits. That's the moment where narrative stops.” (00:00)
• Trust is eroded when defaults and bankruptcies surface, regardless of the ultimate size of those failures.

2. The Godfather Reference — Fraud as Betrayal

• Ben frames recent private credit failures through the lens of the Godfather’s Tessio — the betrayal from within.
  • “All frauds are betrayals. What always happens at the end, they go to someone who trusts them and says, ‘Hey, I’ve got a great deal for you.’ It’s always someone you trust...It deserves some heightened scrutiny.” (04:43)
• Not every deal is a betrayal, but current conditions require extra skepticism.

3. How "Flow Machines" Increase Systemic Risk

• Shadow/alternative asset managers (e.g., Apollo, Blue Owl, Blackstone) have become “flow machines” — businesses built to maximize the volume (not necessarily quality) of loans processed and sold.
  • “The goal...is to create this machine—a flow. And once you create a machine of flow, the goal then becomes just push as much fuel—that is, capital—through that machine...as is humanly possible.” (09:34)
• Complexity and opacity are engineered to maintain an information advantage, thereby attracting investor trust—until trust fails.

4. The "Chuck Prince" Moment — Dancing Until the Music Stops

• Reference to Citigroup CEO Chuck Prince's 2007 quote: "As long as the music is playing, you've got to get up and dance."
• Describes market incentives: risks are ignored while things hold together, but everyone scrambles when liquidity dries up.
  • “Everyone knew that the mortgage backed securities market was horribly overextended in 2007. Just like today, you're nervous as an investor in these for your clients. But...as long as that day is not today, you've got to get up and dance.” (14:18)

5. The Mechanism of Crisis: Information Asymmetry and Hidden Leverage

• Systemic opaqueness means investors underestimate their real exposure ("hidden leverage").
  • “It's what you don't know that creates the hidden leverage.” (28:09)
• Narrative breaks, and reality asserts itself when banks or funds are forced to acknowledge losses, causing investor pullback and potentially sparking a funding cascade.

6. Common Knowledge and the Dynamics of Trust Collapse

• Events like the Tricolor and First Brands defaults, or Zions Bank’s loan issues, function as "common knowledge" catalysts–moments where everyone simultaneously realizes there’s a problem.
• Analogies to political moments (e.g., Biden debate; Ceausescu’s fall) highlight how rapid shared perception changes drive market behavior.
  • “The crowd starts to hear the crowd respond...That's what drives this common knowledge formation.” (22:26)

7. Why Nominal Default Size is (Mostly) Irrelevant

• Even small defaults can trigger chain reactions because it's about lost trust and narrative—like Bear Stearns' funds in 2007.
  • “The size of these defaults doesn't really matter. It's the trust in this broader flow process that we have to be tracking.” (27:56)

8. The “Doom Loop”—How Real and Financial Economies Interlock

• When Wall Street seizes up (“runs on the bank”), credit dries up, feeding back into real-world defaults and further market stress—cyclical doom loop.
  • “Our economy, our real economy, depends so much on the credit that is extended to us by Wall Street that if that credit stops, then it creates more defaults, more problems in the real world, which creates still more problems on Wall Street. This is what I mean by the doom loop.” (39:18)

9. The Warning Signs: Monitoring Narrative Shifts

• Modern narrative tracking (via Ben's Perseant Pro) scans global news to measure how negative perceptions build, providing clues to whether we face a mere sector correction or a systemic freeze.
  • “We can track with pretty shocking precision when those stories start to grow, and they are growing today...That’s what we’re able to do.” (49:19)

10. Other Emergent Narratives and Macro Trends

• Beyond private credit, Ben tracks narrative momentum in areas like housing (still tilting toward a buyer’s market), gold (as a unique safe haven), inflation, employment, and AI CapEx.

Notable Quotes & Memorable Moments

• On the Irreplaceability of Trust:
  "In the financial world, you can be insolvent forever, but you can't be illiquid for a moment. You can't renege on your promise to make a cash flow, not for a second." – Ben Hunt (00:45 / 23:29)

• On Hidden Leverage:
  "It's what you don't know that creates the hidden leverage. What's the system of loans of which your deal is only one small part? I think there's a lot of hidden leverage here." – Ben Hunt (28:09)

• On Information Asymmetry:
  "Unless you're invited to sit on the Working Capital group... you're not going to have that information to say, 'Oh, I, I think actually First Brands is a real problem here.'" – Ben Hunt (25:52)

• On the Endurance of Narrative Over Reality:
  "I think it's much less reality than it is what our collective perception of the reality is. And that's what we can measure." – Ben Hunt (49:56)

• On the Current Risk:
  "It feels to me like we've got some catalysts and it's an open question as to whether these alternative asset managers, whether they are more robust than the commercial banks were in the mortgage business in 2007." – Ben Hunt (35:55)

• On Systemic Fragility:
  "You can have 18 interest free credit cards... and you're one layoff or bad job day or whatever missed bonus away from it all coming crashing down." – Matt Zeigler (33:28)

Timestamps for Important Segments

• Opening analogy: Hidden leverage, broken trust
  • 00:00–02:15
• Exploring the Godfather / Tessio analogy
  • 02:15–06:36
• Parallels: 2007 Shadow Banking vs Today’s Private Credit
  • 07:19–14:15
• "Chuck Prince" moment — Have to keep dancing
  • 14:15–17:51
• The trust mechanism and narrative shift (Biden debate, Ceausescu analogy)
  • 18:36–22:44
• Recent defaults, what matters isn’t size but trust
  • 22:51–28:09
• Systemic risk, hidden leverage, gearing to OPM, and Jamie Dimon's critique
  • 28:09–36:16
• Doom loop explanation, market seizures vs real-world defaults
  • 36:16–41:50
• Comparison: SVB collapse vs potential Wall Street credit freeze
  • 41:50–46:14
• Tracking financial narratives with Perseant Pro
  • 47:41–54:09
• Other stories: housing, gold, real data vs. government stats
  • 56:46–59:23

Conclusion & Takeaway

Ben Hunt argues that although the surface “smoke” in private credit markets (via defaults like First Brands and Tricolor) may appear manageable in scale, the real risk lies in a sudden, collective collapse of trust—a “Bear Stearns moment.” Such a shift, he claims, is not just possible but may be underway, enabled by hidden leverage, information asymmetry, and over-optimized “flow machine” business models. The lesson for allocators and investors: Don’t be distracted by the nominal size of defaults; instead, watch for shifts in trust and narrative, as these are the true drivers of systemic crises.

For ongoing monitoring, Ben recommends tracking narrative changes with data-driven technology (like his Persiant Pro), not just headlines or sentiment, to gauge whether we’re heading into a sector correction or a 2008-style financial crisis.