Vito Emanuel (3:05)

Natasha Sarin Is an economist and the president of the budget lab at Yale. When Lehman Brothers went under in 2008, she was sitting in a college economics class. She still remembers the moment they all learned the bank had collapsed.

Natasha Sarin (3:18)

Total shock on our professor's face. As we were watching the headlines come in, he turned on cnbc. That was the class that day. He said, you don't know it yet, but this day and this moment is gonna fundamentally change the way that the American economy works.

Waylon Wong (3:35)

And it did. Natasha recalls seeing people on TV lined up outside their banks to withdraw their money.

Vito Emanuel (3:41)

Remember, 2008 happened because banks had filled their portfolios with risky subprime mortgages, Loans to people with bad credit. When housing prices fell and homeowners stopped making payments, those loans unraveled. And then so did everything else. People lost their homes, their life savings.

Waylon Wong (3:58)

Congress wanted to make it more expensive and therefore less attractive for banks to engage in risky activity. That led us there. So. So it enacted tighter regulations like Dodd Frank.

Vito Emanuel (4:09)

That's the massive 2010 law aimed at clamping down on Wall street so another crisis couldn't happen again.

Natasha Sarin (4:16)

And at the time, people were already nervous that doing that would have the effect of pushing a lot of financial activity out of the traditional banks and into shadow banking.

Waylon Wong (4:28)

That's what ended up happening. Private credit is a type of shadow banking. Big financial firms, including Blackstone and Apollo, pool money from investors with individuals, insurance companies, and retail investors like Richard. Then they lend out this money to other companies. Natasha says these private credit firms are not technically banks, but they function much like banks.

Vito Emanuel (4:50)

And private credit is attractive to borrowers for precisely that reason. Much of Dodd Frank and many other banking regulations don't apply to these firms. Loans are easier to make, and their terms could be more flexible or better tailored to borrowers. So when it comes to riskier corporate

Natasha Sarin (5:06)

loans, over 50% of loans that were traditionally originated by banks is now being done by these private credit firms like Apollo, like Blackstone.

Waylon Wong (5:17)

Private credit is also attractive to investors who are looking for returns. They wanted an alternative to vanilla stocks and bonds. And the universe of investors in private credit has expanded so that it's not just billionaires and hedge funds.

Natasha Sarin (5:31)

In order to be able to grow that dramatically, private credit firms need dollars to invest. They're doing things like taking pension funds or taking dollars from invest insurance policyholders and then making loans and investing those dollars. Stuff that does touch regular people in a pretty concrete way.

Waylon Wong (5:50)

Regular people like retiree Richard Cox. He invested in Blue Owl, another private credit firm. It manages different pots of Money.

Vito Emanuel (5:58)

On the advice of his broker, Richard had invested some of his retirement savings into one of Blue Owl's pots. And last summer, Blue Owl sent Richard a mailing offering him a share redemption. These companies do this routinely and asking for a share redemption is investment speak for I want my money back.

Richard Cox (6:16)

And I recall having received one of those once before and not done anything with it. And this time I saw it and immediately decided I want to do this.

Vito Emanuel (6:24)

And remember, Richard had talked to another broker who thought private credit was too risky. He wanted to cash out.

Waylon Wong (6:31)

But these private credit funds are designed so that cashing out isn't always easy. These firms make mostly long term loans. So investors that put money into private credit typically do it with the understanding that they don't need the money back anytime soon.

Vito Emanuel (6:44)

Plus, these funds typically only let investors redeem around 5% of the total fund per quarter. Investors also agree to this fine print. That's the trade off for the high returns that private credit offers.

Waylon Wong (6:56)

Still, firms do offer exit ramps for investors like that mailing that Richard got. So he submitted the paperwork to line up for his money back. And while he was waiting in line,

Richard Cox (7:07)

I started hearing more and more stories in the news about private credit was, was looking more shaky and people were concerned about it being stable.

Waylon Wong (7:18)

Way more investors had started asking for their money back than usual. And private credit firms started having to turn people down.

Vito Emanuel (7:24)

For example, investors wanted 9% back from one of BlackRock's private credit funds. The firm said it would only give back what it was obligated to 5. And private credit investors at Aries and Apollo collectively ask for over a billion dollars more this quarter than they'll get back during this period. Investors are spooked for a few reasons. The first is good old fashioned bank run dynamics. People clamoring for their money back tends to lead to more people wanting their money back.

Waylon Wong (7:52)

Another reason is that many private credit firms like Blue Owl invested heavily into AI related companies. We covered on the show how Blue Owl is funding a meta data center in Louisiana. Natasha says some investors are nervous about how much of the AI boom is financed with private credit. Especially now that we're seeing some big tech companies scale back their plans.

Vito Emanuel (8:13)

A third reason for private credit jitters is that these firms are interconnected with other players in the financial system. Big investment banks are in private credit. So are insurers.

Natasha Sarin (8:23)

If they make bad investments. Those insurance policyholders are on the hook when they look to, you know, get their life insurance paid out or get their home insurance paid out.

Vito Emanuel (8:34)

And the last reason investors often have no idea what they've invested in. Private credit funds don't have to disclose as much information about their investments as banks do, and what is disclosed is usually a labyrinth of LLCs and holding companies. That was a big reason Richard wanted out.

Richard Cox (8:51)

I really didn't know how much risk Blue Owl was taking on, so therefore I was not aware of how much risk I was taking on by having my money tied up in that fund.

Vito Emanuel (9:02)

Richard got his money back. He said. He did lose a little bit compared to his original investment though. Natasha says these headlines we're seeing could just be the downswing of a normal credit cycle. After all, redemptions are a built in way for investors to get their money back if they've changed their minds about how much risk they want to take on.

Natasha Sarin (9:21)

After a period of loose credit and low underwriting standards, there is a correction in the market.

Vito Emanuel (9:28)

Still, riskier lending, less oversight, A big financial merry go round of packaged and repackaged loans, People racing for their money back. Isn't this all sounding a bit like 2008?

Waylon Wong (9:40)

Natasha says she's on the lookout for more big blowups, bad loans coming to light, evidence of systemic fraud. She hasn't seen much of that yet, but she says, remember it's private credit

Natasha Sarin (9:52)

and so there isn't much transparency about what types of loans are being made. All of that is something that only with time we're really going to appreciate.

Vito Emanuel (10:02)

Still, some top banking figures like Lloyd Blankfein from Goldman Sachs and Jamie Dimon from JP Morgan have been ringing alarm bells. Ultimately, though, we just don't know. And we might not unless something else breaks. By the way, we reached out to Blue Owl multiple times to comment on the uptick in redemptions and the stability concerns. They declined to comment. BlackRock also declined to comment. Apollo and Ares didn't respond and the Department of Labor didn't meet our deadline. This episode was produced by Julia Richie and engineered by Sina Lofredo. It was fact checked by Sierra Juarez. Kate Concannon edits the show. The Indicator is a production of npr.

Liz Ann Saunders (10:43)

This message comes from NPR sponsor Charles Schwab with its original podcast on Investing. It's hosted by Liz Ann Saunders, Schwab's chief investment strategist, and Colin Martin, head of fixed income research and strategy for the Schwab center for Financial Research. Each week, Liz Ann, Colin and their guests analyze economic developments and bring context to conversations around stocks, fixed income, the economy and more. Download the latest episode and subscribe at schwab. Com oninvesting or wherever you get your podcasts.