Why Everyone Is Freaking Out About Private Credit

Summary

---

What Next: TBD | "Why Everyone Is Freaking Out About Private Credit"

Hosted by Lizzie O’Leary | Guest: Tracy Alloway (Co-host of Bloomberg's Odd Lots Podcast)
Date: April 3, 2026

---

Episode Overview

In this episode, host Lizzie O’Leary digs into the rapidly-growing (and suddenly very nervy) world of private credit, especially as it relates to the tech industry and the wider U.S. economy. Joined by financial journalist Tracy Alloway, the conversation explores why private credit markets are getting so much attention, how they're changing, and what their risks might mean for all of us—even if the scenario isn't a replay of 2008. The show blends financial crash flashbacks, technical breakdowns, and urgent warnings about how opaque debt markets now touch many ordinary Americans.

---

Key Discussion Points & Insights

1. 2008 Crisis Flashbacks and Why the Vibes Are Eerie

• The Comparison: Both Lizzie and Tracy recall reporting during the 2008 financial crisis and note “the vibes are actually very similar” ([02:44]), with behavioral parallels on Wall Street—like funds restricting investor withdrawals and major banks coming clean about exposures.

  “History doesn’t necessarily repeat, but it’s definitely rhyming right now.”
  — Tracy Alloway (02:44)

• Is It Time to Freak Out? Tracy pushes back on the binary framing of another meltdown vs. nothing-to-see-here:

  “Even if you’re not going to get a 2008 Redux…it is definitely worth talking about private credit because it’s this huge, fast growing industry.”
  — Tracy Alloway (03:47)

2. What Is Private Credit? (Private Credit 101)

• Definition & Growth: Private credit refers to loans made outside the traditional regulated banking system—once called “shadow banking.”

  “In the aftermath of the 2008 financial crisis, policymakers…made it more difficult for banks to engage in certain activities, including riskier lending. So you had the slow migration of riskier lending outside of the banking system into other types of credit entities.”
  — Tracy Alloway (09:42)

• Market Size: Estimates range from $1.3 trillion to over $3 trillion, and the sector is now bigger than the US junk-rated bond market ([11:18]).
• Who Are the Players? Business Development Companies (BDCs) are a central vehicle—alternative lenders that aren't regulated banks, so defaults wouldn’t trigger the same systemic effects as failed banks in 2008 ([11:18]).

3. Why Private Credit Grew So Fast—and Why It Matters

• Regulatory Response: After 2008, regulation pushed risk out of banks and into "private" pools of capital ([09:42]).
• Profit Engine: It's been “a phenomenally profitable business” (12:57) and now has regulatory permission to creep into Americans’ 401ks, increasing its systemic relevance.

4. How Private Credit Works—and Its Hidden Risks

• Why Borrowers & Investors Use It:
  • For companies: more flexible, customized financing (but often costlier, with opaque terms).
  • For investors: the lure of higher returns than public markets.
• Transparency Problem:

  “You don’t have as much transparency on the price and often the deals are unrated…so you have to do your own due diligence.”
  — Tracy Alloway (13:53)

• Valuation Difficulty: Unlike stocks, private credit assets don’t trade openly. Funds hire third-party firms to estimate values quarterly, which might mask sharp changes or losses ([18:20]).

  “If everyone were to try to sell their private credit at once…it is very unlikely that they’re actually going to be able to crystallize the marks that are currently on their books.”
  — Tracy Alloway (19:09)

5. Tech Industry's Private Credit Addiction & AI Risks

• Concentration in Tech: A disproportionate amount of private credit is lent to software and tech businesses.

  “A big chunk of it is actually to software companies…now there’s a large question mark over their future.”
  — Tracy Alloway (16:51)

• AI Threat: With the rise of AI and code-gen tools (“Claude code”), some SaaS companies could be rapidly outcompeted.

  “If those really start to fail, private credit investors won’t necessarily have a lot of hard assets that they can tap to try to make up their losses.”
  — Tracy Alloway (16:51)

6. Redemptions, Liquidity, and “Gating”

• Lockups and Investor Nerves: Several funds have limited investor withdrawals—allowed by the terms, but spooking others.

  “Now the tide is turning. And so people again are getting pretty nervous because this is something that private credit hasn’t really had to deal with before.”
  — Tracy Alloway (22:02)

7. AI Boom’s Debt Spiral and Systemic Interconnectedness

• AI-Driven Borrowing: Many big AI companies are issuing debt to finance infrastructure without diluting their stock, tying the fate of tech and credit markets closer ([24:12]).

  “You have a chance here for a lot to unravel all at once. And that to me is kind of concerning.”
  — Tracy Alloway (24:12)

8. Policy, Regulation, and Hidden Connections

• Banks’ “Frenemy” Role: Despite Dodd-Frank, banks are still heavily exposed to private credit via partnership structures and indirect lending.

  “Moody’s…said that bank exposure to non-depository financial institutions…is now $1.4 trillion, which is up from basically nothing…There is exposure there.”
  — Tracy Alloway (27:31)

• Insurance Companies: Another major buyer of private credit—potential trouble if assets underperform.
• 401k Risk: Looming rule would allow private credit in individual retirement portfolios, broadening fallout risk ([29:49]).

  “Like the idea that someone with a 401k is going to be able to have very good insight into whatever private credit is getting stuffed into their retirement portfolio, I think is very difficult to argue.”
  — Tracy Alloway (30:28)

9. Systemic Risk: Are We All at Risk?

• Interconnectedness—the Big Unknown:

  “Is it Ben Bernanke’s hands shake or is it some companies fail and it sucks for them, but we’re okay?”
  — Lizzie O’Leary (31:45)

• Synthetic Risk Transfers: Banks are insuring some private credit exposure via “synthetic risk transfers”—an echo of pre-2008 synthetic CDOs.

  “If you hear the word synthetic risk transfer…”
  — Tracy Alloway (33:39) “I start thinking synthetic CDO and I’m like, that’s... No, that was bad. It was really bad.”
  — Lizzie O’Leary (33:39)

• Regulator Homework: There’s broad uncertainty over true interconnectedness, prompting Travis’s warning:

  “Regulators should be looking at this right now. They should be trying to figure out what those exposure figures and those interconnections actually look like…We're probably not at the sort of foothills of a 2008-style financial crisis. But again, that doesn't mean that you shouldn’t think about it. It’s an important part of the financial system.”
  — Tracy Alloway (34:50)

---

Notable Quotes & Memorable Moments

• “History doesn't necessarily repeat, but it's definitely rhyming right now.” — Tracy Alloway ([02:44])
• “Private credit…the new branding for shadow banking.” — Tracy Alloway ([09:42])
• “You’re talking about these customized deals…they’re not being rated, they’re not being put out into the overall market for other investors to judge.” — Tracy Alloway ([30:28])
• “If you hear the word synthetic risk transfer… I start thinking synthetic CDO and I’m like, that’s…No, that was bad.” — Exchange between Tracy Alloway and Lizzie O’Leary ([33:39])
• “We're probably not at the sort of foothills of a 2008-style financial crisis. But again, that doesn't mean that you shouldn't think about it.” — Tracy Alloway ([34:50])

---

Key Timestamps

• [02:44] — Tracy draws financial crisis parallels: “History…is definitely rhyming right now.”
• [09:42] — Private Credit 101: Where it came from, how it grew, post-2008 regulation.
• [12:57] — Why the growth and size should make everyone pay attention.
• [13:53] — How private credit works; transparency/trading vs. public credit.
• [16:04] — Why it’s so big in tech (especially software and AI) and the risks therein.
• [18:20] — How opaque/lack of liquidity in valuations adds risk.
• [22:02] — Investor gates and liquidity anxieties.
• [24:12] — AI boom/funding spiral: multi-market risks.
• [27:31] — Banks’ “frenemy” role with private credit; rising exposure.
• [29:49] — The Department of Labor’s proposed rule: allowing private credit in 401ks.
• [31:45] — Interconnectedness: “Ben Bernanke’s hands shake” moment?
• [33:39] — Synthetic risk transfer: a phrase echoing 2008’s synthetic CDOs.
• [34:50] — Final verdict on the importance of monitoring private credit.

---

Summary & Takeaway

Private credit has rapidly grown since the last financial crisis, shifting risk from big banks to a shadowy, fast-evolving ecosystem—now crucial to tech, AI, and increasingly, the wider U.S. economy. While the current dynamics aren’t exactly 2008, there are real risks in unchecked growth, opaque valuations, and hidden linkages between banks, private funds, and retail investors’ retirement funds. As Tracy Alloway puts it, regulators and the public need to scrutinize those interconnections—because even if we’re not at the edge of another global meltdown, the system’s vulnerabilities warrant all the attention they’re getting.

---

Transcript

[Progressive Insurance Announcer]

This episode is brought to you by Progressive Insurance. Do you ever think about switching insurance companies to see if you could save some cash? Progressive makes it easy to see if you could save when you bundle your home and auto policies. Try [e-mail] Progressive Casualty Insurance Company and affiliates. Potential savings will vary. Not available in all states.

[Ayo Akemwalere]

This is Ayo Akemwalere from the Athletic FC Podcast. Buying a car should be exciting, not exhausting. And if you're looking for a gleaming SUV to replace your old banger or you're taking the plunge and going electric, the good news is you can buy your car completely online on Autotrader. Really? Just go to autotrader.com and get picky. Search through dealer listings for the make, model, color and the features that matter to you. Then just drop in your info and you'll see all the cars that fit your budget. Really? Once you've found the car of your dreams, you can have it delivered to your driveway or you can pick it up at the dealership. Really? So buy your next car entirely online on autotrader. Head to autotrader.com or search the Autotrader app.

[Tracy Alloway]

My name is Tracy Alloway. I am the co host of Bloomberg's Odd Thoughts podcast.

[Lizzie O'Leary]

Tracy's been covering financial markets for a long time. I always learn something from listening to her. Do you remember what you were doing in the late summer, early fall of 2008?

[Tracy Alloway]

Of 2008? Oh my gosh, you know what? I had just switched jobs. I'd actually left Bloomberg at that time where I was covering airlines, of all things, in London, and I had joined the Financial Times, just joined their finance and markets blog, which was called FT Alphaville. It turned out to be a phenomenal time to start covering finance and markets in sort of September 2008, because not a single person at that time really seemed to understand what was going on. So even though my background was actually in airlines and transportation and logistics, I was able to be on an even playing field with people who had been covering banking and finance for decades.

[Lizzie O'Leary]

At the time, I worked for Bloomberg News covering economic policy in Washington, and I remember the whispers that something was starting to go wrong in the mortgage market. We all know what happened next. The financial crisis. And now some 18 years later, I'm hearing little conversations and worries about something called the private credit market, a kind of financing that is very big in tech.

[Tracy Alloway]

I think the vibes are actually very similar. And in fact, if we just look at this on a sort of behavioral Wall street basis, like let's pretend to be anthropologists of the financial industry at the moment. Some of the behaviors you're seeing right now look very similar to what we saw in sort of 2007, 2008. So you have some pretty big funds who are saying, we're not going to let investors pull out their money. They're allowed to do that. But the headlines are very similar to what we saw in, you know, 202008 with a few subprime funds back then. We're starting to see reports of private credit lenders having these sort of all hands on deck phone calls where they're trying to reassure their employees. We're starting to see major banks publish their exposure to private credit, which again, if you recall early 2008, you had a lot of big banks publishing their own exposure to subprime. So, you know, history doesn't necessarily repeat, but it's definitely rhymes and it's rhyming right now.

[Lizzie O'Leary]

Is it time to freak out?

[Tracy Alloway]

Okay, so everyone is asking that question. I get frustrated when people talk about private credit and it's like, either it's a 2008 style financial crisis or it's not worth talking about at all. That's the wrong way to think about it, in my opinion. Like, even if you're not going to get a 2008 Redux. Exactly. And again, remember, 2008 was, you know, the worst financial crisis that we've ever had basically. Certainly in modern times, even if you don't get that, it is definitely worth talking about private credit because it's this huge, fast growing industry. It's become more and more important to both banks and insurers. And I would argue everyone should care about what's going on with banks and insurers. And it's also become this really important engine of financing and credit to the wider economy. So if you think about the past few years, we had pretty high interest rates, like benchmark interest rates, than we've had in a very long time. We didn't really see a wave of bankruptcies from those additional financing costs. The US Economy kept growing. A lot of people would argue that's because you had this additional outlet from private credit, which was extending financing to corporate America. So there are reasons to care about this. Even if we're not talking about a 2008 repeat.

[Lizzie O'Leary]

Today on the show, a big financial engine of the tech industry is looking more and more uncertain. It's time to pay attention. I'm Lizzie o' Leary and you're listening to what next? Tbd, a show about technology, power and how the future will be determined. Stick around.

[Quo and Duck AI Advertiser]

Foreign.

[Lizzie O'Leary]

Today's episode is brought to you by Quo, spelled Quo Spring is here. That means it's time for some spring cleaning, including streamlining some of the messier parts of your business. Quo is the number one rated business phone system on G2, with over 3,000 reviews built for how modern teams work. That's why more than 90,000 businesses, from solo operators to growing teams, rely on Quo to stay connected, personally, professional and consistently reachable. Your entire team can handle calls and texts from one shared number. No more missed messages or disconnected conversations. Everyone sees the full thread, making replies faster and customers feel genuinely cared for. It's easy. Calls, texts, voicemails, transcripts and contact details all live in one clean view with full context at your fingertips. Your team communicates faster, stays aligned, and delivers a more personal experience. Make this the season where no opportunity and no customer slips away. Try quo for free plus get 20% off your first six months when you go to quo.com TBD that's quo.com TBD quo no missed calls, no missed customers. This episode is brought to you by Duck AI, a new product from DuckDuckGo. It's 2026 and the news is full of AI. It can be a little overwhelming, especially because it's easy to wonder if what you are asking a chatbot is really secure. That's why DuckDuckGo built Duck AI. Duck AI is designed to let you chat privately with the same AIs you might already be using. You go to Duck AI and they promise you can chat privately with the same AIs you might already be using and your data stays yours, not theirs. There's no signups, it's completely free, no subscriptions required. And it's from DuckDuckGo, the company known for protecting your privacy, not collecting your Data for nearly two decades. If you want to use AI but you're concerned about privacy, visit Duck AI TBD today. That's Duck AI TBD from DuckDuckGo, where AI is always optional and designed to be private.

[Quo and Duck AI Advertiser]

This episode is brought to you by Pebble Hiring is hard to do. I've been there. From the hundreds of applications and dozens of interviews to the actual back and forth of onboarding, it turns out hiring new help is actually a lot of work. But that's where pebble can help. Pebble is an AI powered global human resources platform built for founders, HR leaders and operators who are hiring and supporting teams around the world. Pebble is designed to help you hire, pay and manage talent in over 185 countries with fast onboarding that can be done in minutes. You can send offers to anyone in the world and get them onboarded fast. Instead of juggling separate tools for contracts, payroll, benefits and compliance, pebble brings everything together with built in guidance and local expertise to support you. This is especially helpful if you're managing teams internationally or planning to grow your business. Some of the fastest growing companies in the world use pebble to stay organized and reduce risk because you can use it to scale faster without feeling like you need to become HR or compliance experts. Bottom line, pebble simplifies global people operations so you can spend more time growing the business and supporting your team. Pebble's new standard, discounted pricing at $399 per month per employee helps you contain costs. Go to highpebble AI to get get a free estimate that is H I P E B L A I for a free estimate.

[Lizzie O'Leary]

So the words private credit like that makes sense, but I think a lot of people have no idea what the private credit market is. Let's do some private credit 101. What is it? How does it work?

[Tracy Alloway]

Yeah, so it is totally fair to not totally understand what private credit actually is. So definitions are going to vary. Definitions of the size of the market certainly vary quite a lot. I've seen estimates like 1.3 trillion in size all the way up to more than 3 trillion again just depending on how you account for it. But I think the other reason people are confused is because private credit kind of underwent a branding, a rebranding exercise very quietly. And I only just, just realized this myself like last year, but in the Aftermath of the 2008 financial crisis, we used to call private shadow banking. And I was a US Financial correspondent for the Financial Times at that time. And I remember writing all these headlines about, you know, shadow banking sector growing thanks to post 2008 banking regulation. That's what we called it. And the basic idea was that in the aftermath of 2008, policymakers did not want to see, you know, a repeat of that particular financial crisis. They did not want to be on the hook for bailing out banks yet again. It was a very politically unpopular, as you know. And so they designed these post crisis rules that basically made it more difficult for banks to engage in certain activities, including riskier lending. And so what happened, you know, 2009 onwards is you had the slow migration of riskier lending outside of the banking system into other types of credit entities. And the one that springs to mind right now is something called a business Development company. A bdc.

[Lizzie O'Leary]

What is that?

[Tracy Alloway]

So it's basically an alternative lender. It's you know, a fund or a company that makes other loans. And the big important thing to realize about BDCs is they're not regulated banks, they're not deposit taking institutions. So if a BDC gets in trouble because it makes a bunch of bad loans, theoretically that's not going to reverberate around the financial system in the same way that we saw in 2008 when banks made a bunch of bad mortgages and then, you know, built additional leverage on top of that. And that was the thinking. The thinking was, was well, we can't eliminate credit risk entirely from the financial system, but what we can do is hive it off to these non bank lenders, these shadow banks now called private credit. And that would help insulate us from any, you know, risk that might come about in future years. And so here we are in 2026 and shadow banking, slash private credit has grown enormously fast. So again, we're talking like 1.8 to maybe $3 trillion worth of credit. And that's something to emphasize here. Like this is an incredibly fast growing industry. It's actually, again, depending on the size of the market, bigger than the junk rated US bond market now. And the, the junk rated US bond market has been around since the 1970s. So here is something that has gotten bigger than another market that's been here for decades in just a few years.

[Lizzie O'Leary]

I think that context is really helpful because you can say, oh my gosh, 1 trillion, 3 trillion, that's a lot of money. But also like if you look at US equity markets, we're talk 60 +trillion. This is absolutely big, but not enormous.

[Tracy Alloway]

Yeah, it's a drop in the bucket of like US financial assets overall. But again, I think the speed and the rate of growth is, is really worth highlighting here. It's been a phenomenally profitable business for a lot of the entities who have been engaging in this activity. And it's getting bigger. Right. So one thing worth mentioning here again going back to why we should actually care about what private credit is doing, even if it's not necessarily going to lead to another 2008 style crisis, is we've just seen some of the rules around what can go into people's 401ks loosened up to include alternative assets, which would be private credit.

[Lizzie O'Leary]

So what is private credit useful for? Who wants this kind of different loan that's not a traditional bank loan, that maybe, you know, you're talking higher interest rates but Complicated terms, different terms than you or I would take for a very standard investment.

[Tracy Alloway]

So you have it exactly right here. There are reasons that people would actually want to engage in a private credit deal on the part of investors. If you invest in private credit, you're generally looking at juicier yields, returns than you would necessarily see from the public market. If you're a company looking to borrow, you might want a deal, a financing arrangement that's more customizable, more suited to your particular business needs. And it's probably helpful here if I just talk a little bit about the difference between public and private credit markets. So in public markets you have loans and bonds and we generally say they're syndicated out to the market. So there's a loan and you can sell it on to investors. The loan or the bond is usually rated by one of the big credit rating agencies people are familiar with. It's a, aaa, whatever, exactly like Moody's, S, P, all those familiar names. And then that bond or loan get in the open market. Now it doesn't get traded as much as an equity, a stock, but it gets traded. So there's some price discovery there. You generally have a decent idea of how much that bond or loan is worth in the private credit market. You know, the clue is in the name. It's a private transaction between investors, you know, maybe a club of investors and a company. So it doesn't trade as much. You don't have as much transparency on the price and often the deals are unrated. So you're not getting as much information from a sort of third party service about how the company is performing, what the balance sheet looks like. You have to do your own due diligence. And again, that's where you start to see some of the mistrust of this sector come in. A lot of people will have opinions on what the opinion of the credit rating agencies are worth anyway. But like in a lot of the private credit deals, you don't have any ratings at all.

[Lizzie O'Leary]

Our show focuses on sort of tech and power and how these things come together. And private credit has been a pretty big deal in the tech industry. And I wonder if you could explain why this kind of financing is so appealing in technology.

[Tracy Alloway]

Yeah, it's a really good question. So I would argue that, you know, tech is very attractive for investors in general. It's generally believed to be a growth area. And so a lot of investors naturally sort of migrate to that tech exposure thing. That is true is once you start diving deeper into private credit overall and looking at what Types of industries have actually seen the most private credit activity or private credit lending. There's a lot of software. A lot, A lot of software. And this raises some interesting questions because now we are in the age of AI. We are in the age of Claude code. Claude code. There are a lot of people out there right now who think that that poses an existential threat to a lot of SaaS businesses.

[Lizzie O'Leary]

Software as a service.

[Tracy Alloway]

Exactly. This idea that, you know, I, I might have a piece of software that I have dedicated customers to, but someone out there can use Claude code to basically replicate that entire service and absolutely demolish my business model in the space of weeks, potentially. So that's where a lot of the concern around private credit has come from. This idea that, well, a big chunk of it is actually two software companies because they were a big part of, of the US economy. They still are a big part of the US economy, but now they're a big part of the US economy with a large question mark over their future. And so that's where we started to see some of the anxieties over private credit actually erupt. One of the worries right now with private credit and software is that we're talking about software companies with a lot of intangible assets. It's basically just, you know, I guess some computers, some engineers, server space and, and a brand. And so if those really start to fail, private cred investors won't necessarily have a lot of hard assets that they can tap to try to make up their losses. So there's some nuance here.

[Lizzie O'Leary]

One of the kind of dorky things that I wanted to ask you about is how to value these things and how their valuation gets looked at on, you know, a balance sheet or someone's portfolio, because it's different than a lot of other assets. And that has added to some of this worry. Could you explain that part of it?

[Tracy Alloway]

Yeah. So this goes back to the difference between public versus private loans and bonds. And if you think I'm going to go one step higher and talk about the stock market right now, but, you know, if you want to know the value of a Tesla share, you can look it up pretty easily. It's trading, you know, hundreds, thousands, possibly millions of times per day. And there's a live price quote that tells you exactly how much that thing would sell for. If you were to go into the market right now and actually try to unload some of your exposure with private credit, that's not really the case. Okay. Again, these things do not trade on a regular basis. If at all. And so what tends to happen when it comes to valuations is if you are a private credit fund, you have all of these private assets on your book. You hire a third party pricing service provider, experts in pricing and they're going to look at that particular private loan or private bond on a probably quarterly basis and they're going to try to triangulate from other, you know, figures, other external signs how much they think that bond or loan is actually worth at that particular moment in time. Obviously people tend to get a little bit nervous about that, the idea being, well, you know, the market probably moves faster than on a quarterly basis. And so if you're doing this on a quarterly lag, it might mean that the marks are falling behind reality. What it also means is that if everyone were to try to sell their private credit at once and basically head for the exits at once, it is very unlikely that they're actually going to be able to crystallize the marks that are currently on their books.

[Lizzie O'Leary]

After the break. The AI industry has been doing some funky financing too. Could we be headed for a combination of private credit, AI debt Doomsday scenario?

[Progressive Insurance Announcer]

This episode is brought to you by Progressive Insurance. Do you ever think about switching insurance companies to see if you could save some cash? Progressive makes it easy to see if you could save when you bundle your home and auto policies. Try [e-mail] Progressive Casualty Insurance Company and affiliates. Potential savings will vary. Not available in all states.

[Skyrizi Advertiser]

My perfect day has sand, salt water and friends. But my moderate to severe plaque psoriasis can take me out of the moment. Now I'm all in with clearer skin thanks to Skyrizi Risankizumab RZA a prescription only 150mg injection for adults who are candidates for systemic or phototherapy with Skyrizi. Most people saw 90% clearer skin and many were even 100% plaque free. At four months Skyrizi is just four doses a year. After two starter doses.

[Lizzie O'Leary]

Don't use if allergic to Skyrizi. Serious allergic reactions, increased infections or lower ability to fight them may occur before treatment. Get checked for infections and tuberculosis. Tell your doctor about any flu like symptoms or vaccines.

[Skyrizi Advertiser]

Thanks to Skyrizi there's nothing on my skin and that means everything. Ask your doctor about Skyrizi, the number one dermatologist prescribed biologic in psoriasis. Visit skyrizi.com or call 1-866-Skyrizi to learn more.

[Lizzie O'Leary]

So what we have seen recently is that some people want to take their money out. What has that Done.

[Tracy Alloway]

So we've had a bunch of headlines about private credit funds basically saying that they're limiting the amount of money that investors in their fund can take out. And the reaction that you tend to get when you see those headlines, there are a lot of private credit bros out there who will say, well, obviously this is the way the funds are supposed to work. If you read the prospectus for the fund, if you read the documentation, it says right there that the manager is allowed to limit redemptions as they see fit. And again, there's some reasonable, you know, intent behind doing this. And the intent is basically trying to stop the scenario that I just described to you, which is everyone heading for the exits all at once and the fund having to liquidate at basically fire sale emergency prices. So the idea is, well, if you can kind of create an orderly exit from the fund, if you can manage the outflows, then the fund doesn't have to sell as much at depressed prices when everyone's panicking. And it can kind of manage its way through a down cycle in the credit market. That all seems very reasonable, but it doesn't really stop the fundamental thing that is happening here, which is you have a lot of investors who are worried about getting out at the moment, and maybe private credit funds will be able to manage their way through the cycle. But also it's a very different environment to how those funds have been operating for the past four or five years. You know, you think, again, private credit was a huge success story on Wall Street. It was all inflows, it was all invest, looking for additional yield. Now the tide is turning. And so people again are getting pretty nervous because this is something that private credit hasn't really had to deal with before.

[Lizzie O'Leary]

There's this other aspect of this that I wanted to ask you about, which is slightly different. Where many of the companies that are big in the AI boom are also selling their debt largely so that they can get more money without having to dilute their stock by selling it. How much is that tied to the overall credit worry? It just feels like there's a lot of debt going around.

[Tracy Alloway]

Yeah. So this is where I start to get a little bit concerned is the sort of interconnectedness of all of this happening at the same time. And Richard Bookstaber actually wrote a great piece in, I think it was the New York Times recently talking about this idea that, well, you know, AI is basically driving the US economy at the moment, or has been for the past year or so for a while. Yeah. If you start to break down Some of what we've seen in US gdp, a lot of that is just going into building the infrastructure data centers needed for AI. And a lot of that financing is coming from various parts of the credit market. Now it might be a bank loan, but it might also be a private financing deal. It might be a securitization of data center cash flows. And so the worry to me is if you start to see some doubts about the hyperscaler build, I guess at the same time that you're seeing doubts about the credit market. And this is kind of setting aside everything that's happening with the Iran situation and the overall stock market. But you, you have a chance here for a lot to unravel all at once. And that like that to me is kind of concerning.

[Lizzie O'Leary]

I mean, we just saw one of OpenAI's data centers canceled because it couldn't reach terms with Oracle. Like there is nervousness in that kind of funding. Ouroboros. I never pronounced that word correctly.

[Tracy Alloway]

Ouroboros. Yeah, it's a good word. It's a good word to describe it. Yeah.

[Lizzie O'Leary]

So if you add to that the other things that you just mentioned, gas prices are rising, the stock market is bouncing around every other day based on what the President says and we don't know what's going to happen in Iran. How does the Trump administration look at the private credit market? Does it say this is not our problem, Wall Street's got this or e, this might be something that bleeds over into the rest of the economy.

[Tracy Alloway]

Yeah. So I think there's a world where the Trump administration can kind of wash its hands of private credit and say, you know what, this is not a systemic issue. This is something that lies outside the banking system. But again, I would argue that there two things to worry about in that context. So number one is something I talked about earlier, which is this idea that private credit, because it's grown so fast, especially in recent years, has basically been this additional spigot for the U.S. economy. You know, if you're maybe a smaller medium sized business looking for financing in an era of higher rates, private credit could be your go to in some situations. So if the private credit spigot gets shut off suddenly you have a bunch of companies that might find it more diffic to get loans. The other potential concern, and this is where we start to see shades of 2008, is it is not entirely clear how much exposure some of the banks actually have to the private credit system. And the reason I say that is because even though we talked earlier about banks not wanting or not being able to extend as much risky credit in the aftermath of 2008 because of all those new rules, they have still managed to find a way to have a piece of the private credit pie.

[Lizzie O'Leary]

I thought they weren't supposed to do that because of Dodd Frank.

[Tracy Alloway]

Yeah. So it's kind of weird. And I've been describing the relationship between banks and private credit as frenemies because they're basically competing for the same business, but they're also partnering up in order to do it. So actually a Moody's report hit my inbox saying that bank exposure to non depository financial institutions, so private credit shadow banks, non banks, is now 1.4 trillion, which is up from like basically nothing. So that would be about 10% of total loan exposure in the deposit taking banking system versus like maybe 1 or 2% like 10 years ago. So there is exposure there. And the concern is that if you have a bunch of banks who are basically lending to non banks who are lending to riskier credits, that that's going to come back into deposit taking, you know, realm, which is exactly what post financial crisis rules were meant to eliminate. The other vector where this could become kind of systemic is one of the big buyers of private credit has been insurance companies and insurers. And banks are where, you know, if you're a regulator or a policymaker in the Trump administration, you probably should start getting a little bit nervous.

[Lizzie O'Leary]

Are they doing that at all? After all, they've had an extremely deregulatory push in this administration.

[Tracy Alloway]

Yeah, it's hard for me to judge. Right. Like this is not necessarily the most transparent administration of all time. The headlines I've seen so far, we have had one of the insurance regulators say that they are going to take a harder look at some of the unrated private credit sitting on insurer balance sheets and they could potentially require insurers to hold more capital against that private credit. Again, that was a change that was announced fairly recently. So we haven't actually seen much action on that front. The action that we have seen is in the deregulatory bent as you describe it, which is, well, let's allow in retail investors, mom and pop to have access to private credit and alternative assets in their 401ks if they want to.

[Lizzie O'Leary]

Okay, so this was where I was going with this because I think if you are not someone who follows the markets or who is particularly interested in this, this might sound confusing. But as you have mentioned, the Department of Labor recently released this proposed rule that would allow Alternative assets like private credit to be in Americans retirement accounts. And that to me is like a, hey, even if all of this stuff makes your head spin, you maybe should pay attention to this because suddenly if it's in your retirement account and we have a big problem, that's an everybody problem.

[Tracy Alloway]

Absolutely. And a lot of people are going to see that headline about the proposed change and think that, well, this sounds like retail is exit liquidity. Right. This sounds like a bunch of professional investors in private credit are now looking for someone to shift this stuff onto. And one of the things that you will hear from private credit experts all the time is, oh, it's not that the asset class is inherently risky, it's that you have to do your due diligence. You're talking about these customized deals between a single or club of lenders and a particular company. They're not being rated, they're not being put out into the overall market for other investors to judge. And so it's really up to the lender to figure out if they're doing a smart deal. It is very hard as a sort of ordinary investor. Mom and Pop is the classic example, to figure out whether or not, you know, something that is out as opaque as private credit is actually being, you know, well managed and with deal terms that are favorable to the lender. Like the idea that someone with a 401k is going to be able to have very good insight into whatever private credit is getting stuffed into their retirement portfolio, I think is, is very difficult to argue.

[Lizzie O'Leary]

I have this really strong memory from 2008 that like, I think about all the time it was when Congress passed the, the initial TARP proposal. I don't even think they passed it. When they came out with the proposal and I was sitting on the floor holding my little microphone right next to Ben Bernanke and I could see that his hands were shaking. And I didn't really know that much about this at the time because I had just started covering. But I had this moment of realizing, oh my God, the Fed chairman's hands are shaking. This seems bad, but what made it bad was that it was so systemic that it was so interconnected. And I guess my biggest question for you is how interconnected is the private credit market? Is it Ben Bernanke's hands shake or is it some companies fail and it sucks for them, but we're okay?

[Tracy Alloway]

So I think this is exactly the question to be asking right now, and I'm going to tell you right away, I do not have the exact answer. I'M not sure anyone does at the moment. But again, like, that is why the regulators should be looking into this and why, even if their hands aren't necessarily shaking just yet, their hands should be very busy, you know, typing and looking up interconnections and exposure and leverage built upon leverage within the financial system. There are some like little hints of areas that I would be worried about. So I mentioned that the banks have been lending to private credit entities in this sort of roundabout way and that there is exposure there in a way that we didn't have before. One of the ways the banks have managed that exposure is they've been striking something called a synthetic risk transfer where they basically, basically ensure some of their credit exposure in the market by striking a deal with other investors. And again, like you covered the financial crisis, if you hear the word synthetic risk transfer.

[Lizzie O'Leary]

Yes, yes. I start thinking synthetic CDO and I'm like, that's. No, that was bad. It was really bad.

[Tracy Alloway]

Exactly. And there are some estimates floating around for like how big those deals actually are in the market. And again, they're not like, they're not numbers that would immediately set alarm bells ringing. But again, in 2 2008, a lot of these interconnections weren't clear at that time either. Right. Like we had to kind of figure out that there were subprime mortgages and people had built derivatives on top of subprime mortgages, and then people had used subprime mortgages as collateral in the interbank lending system, the repo market. And it's hard to figure those things out. Like all of those markets tend to be very, very opaque. And once you add private credit in the mix and then try to figure out what's going on with private cred credit being used as collateral in the repo market, it just becomes very, very difficult to untangle. So I would be surprised. Maybe this is me projecting some hopefulness on the situation. But regulators should be looking at this right now. They should be trying to figure out what those exposure figures and those interconnections actually look like. We're probably not at these sort of foothills of a 2008 style financial crisis. But again, that doesn't mean that you should, shouldn't think about it. It doesn't mean that you shouldn't worry about it. This is an important part of the financial system. It's a fast growing part of Wall street and it's an important source of financing for corporate America. And we should really be trying to understand how it all works.

[Lizzie O'Leary]

And I would imagine if you are running an AI company right now. You should be thinking pretty hard about this stuff.

[Tracy Alloway]

Absolutely.

[Lizzie O'Leary]

Tracy Alloway, thank you so much for coming on.

[Tracy Alloway]

Thank you so much for having me. It was fun to reminisce about the 2008 financial crisis.

[Lizzie O'Leary]

Tracee Alloway is a co host of the Odd Lots Podcast. All right, that is it for our show today. What Next TBD is produced by Patrick Fort and edited by Evan Campbell. Paige Osborne is the senior Supervising producer for what Next and what Next tbd. Mia Lobel is the Executive Producer here at Slate. TBD is part of the larger what Next family and we'll be back on Sunday with an experiment in vibe coding. I'm Lizzie o'. Leary. Thanks so much for listening.

[Progressive Insurance Announcer]

This episode is brought to you by Progressive Insurance. Do you ever think about switching insurance companies to see if you could save some cash? Progressive makes it easy to see if you could save when you bundle your home and auto policies. Try [e-mail] Progressive Casualty Insurance Company and affiliates. Potential savings will vary. Not available in all states.

[Skyrizi Advertiser]

My perfect day has sand, salt water and friends, but my moderate to severe plaque psoriasis can take me out of the moment. Now I'm all in with clearer skin thanks to skyrizi risen Kizumab RZA, a prescription only 150mg injection for adults who are candidates for systemic or phototherapy with Skyrizi. Most people saw 90% clearer skin and many were even 100% plaque free at four months. Skyrizi is just four doses a year after two starter doses.

[Lizzie O'Leary]

Don't use if allergic to Skyrizi. Serious allergic reactions, increased infections or lower ability to fight them may occur before treatment. Get checked for infections and tuberculosis. Tell your doctor about any flu like symptoms or vaccines.

[Skyrizi Advertiser]

Thanks to Skyrizi. There's nothing on my skin and that means everything is everything. Ask your doctor about Skyrizi, the number one dermatologist prescribed biologic in psoriasis. Visit skyrizi.com or call 1-866-Skyrizi to learn.