Thanks so much for this piece, Van. I was looking for something exactly like this for the past 6 months. It aslo pairs very well with the Capital Allocators podcast episode with the head of Ares Credit, Kipp deVeer.
You're welcome. I'm glad you found this helpful. The Capital Allocators podcast episode with Kipp deVeer is great. So are the interviews with Doug Ostrover and Tim Lyne (Blue Owl and Antares respectively)
Sorry, another comment. The most interesting thing about the Fed report is the incredible widening in yield spreads two years ago. If this is accurate it seems important. But I'm not sure what explains it.
You sort of skip over the early 90s rise of mutual funds in broadly syndicated loans. Preceded and somewhat anticipated private credit. Institutional investors despise mark to market love lack thereof which is the core reason popular. Management of career risk despite opportunities presented by properly marked portfolios.
Sorry for the length of this comment. I wanted to send it as an email but couldn’t find your address.
I was alerted to your website by a reference in one of Arnold Kling’s posts.
I want to thank you for your terrific in-depth overview of “Private Credit’s” origins and evolution. I agree with almost all of it, but I have a gazillion comments and questions. These are briefly listed below.
But first, I would like to emphasize two critical points that dovetail with your discussion.
1. In my opinion, the Basel I and II capital standards were not merely ineffective in preventing the 2008 crisis; THEY CAUSED THE CRISIS. See my post "Basel: Faulty". I would be very interested in your thoughts.
2. I don’t know if the rise of shadow banks is a good thing or not. I am convinced it creates redundancy in our financial system that significantly increases the cost of credit to borrowers.
I must disagree with your assertion that regulation has been just a minor factor in the rise of the “Private Credit” industry. In my opinion, this is BY FAR the main driver. Since at least the Texas banking crisis, regulators have been desperately trying to rein in the industry to protect themselves from blame for bank failures. Above all, this is reflected in their fetish for “more capital.” They have no understanding of how the industry works and would be overjoyed if no bank ever made another loan. Then their jobs and fiefdoms would be secure, and they would never again be publicly eviscerated in front of a Congressional Banking committee. Above all, regulators seek “plausible deniability” for bank failures.
I have many other posts on my Substack that might interest you. Most concern economic and banking issues.
Here are some additional observations regarding your essay.
I think I am a bit older than you. I worked at Goldman Sachs in the ‘80’s and watched Bob Freeman get frog marched out of his office for insider trading. My boss was Lee Cooperman and Jim Cramer was one of the annoying salesmen I was forced to interact with.
Kudos for mentioning the Latin American debt crisis. This is the great banking crisis that never occurred and ought to be an object lesson for regulators today. Back then, nearly every “money center” bank was technically insolvent, yet none failed. Unlike the 08 crisis, there were virtually no large non-bank competitors. And there was a very wise Fed Chairman.
The first non-bank credit was really the commercial paper market.
Prior to 1980, most borrowing from banks was to finance inventory and receivables. Commercial paper, technology, and de-industrialization has mostly obviated the need for such borrowing.
I’m not clear what you mean by “sub-majors.”
The whole issue of bank liquidity is totally misunderstood. BANKS ARE ILLIQUID BY DEFINITION. That is what makes the financial system work. A bank lends by debiting a long-term asset and crediting a demand deposit which can be withdrawn at any time. Every individual bank is necessarily illiquid, but the system itself is not. (See the appendix to “Basel: Faulty.”)
You did not mention real estate in your excellent analyses. In my opinion, the post- GFC regulatory kibosh on construction lending destroyed the independent builder industry and was the main cause of our current housing shortage.
It is undeniable that idiotic regulatory rules forced banks out of the mortgage business. This is explored in some depth in my post Law and Order: FDIC"
Well, I’d better stop there. Again, thanks for your article. I hope you find the time to take a look at my Substack posts.
Hi Charles - Thank you very much for reading my post. I'm glad you liked it and I appreciate you responding with such thoughtful comments, additions, disagreements, and questions. I will read through some of your other posts for the additional context! I look forward to checking out your substack, and continuing our dialogue.
What a great historical overview! Thanks
Glad you found it helpful!
Thanks so much for this piece, Van. I was looking for something exactly like this for the past 6 months. It aslo pairs very well with the Capital Allocators podcast episode with the head of Ares Credit, Kipp deVeer.
You're welcome. I'm glad you found this helpful. The Capital Allocators podcast episode with Kipp deVeer is great. So are the interviews with Doug Ostrover and Tim Lyne (Blue Owl and Antares respectively)
This is a phenomenal piece.
Thanks Eugene!
Sorry, another comment. The most interesting thing about the Fed report is the incredible widening in yield spreads two years ago. If this is accurate it seems important. But I'm not sure what explains it.
Hello! In case you didn't see it, I thought I'd share this paper from the Federal Reserve. Like most of the stuff that comes out of the Fed, it seems mostly accurate, but not very helpful. More of the same old CYA.https://www.federalreserve.gov/econres/notes/feds-notes/private-credit-characteristics-and-risks-20240223.html
You sort of skip over the early 90s rise of mutual funds in broadly syndicated loans. Preceded and somewhat anticipated private credit. Institutional investors despise mark to market love lack thereof which is the core reason popular. Management of career risk despite opportunities presented by properly marked portfolios.
Very valid points to add!
Sorry for the length of this comment. I wanted to send it as an email but couldn’t find your address.
I was alerted to your website by a reference in one of Arnold Kling’s posts.
I want to thank you for your terrific in-depth overview of “Private Credit’s” origins and evolution. I agree with almost all of it, but I have a gazillion comments and questions. These are briefly listed below.
But first, I would like to emphasize two critical points that dovetail with your discussion.
1. In my opinion, the Basel I and II capital standards were not merely ineffective in preventing the 2008 crisis; THEY CAUSED THE CRISIS. See my post "Basel: Faulty". I would be very interested in your thoughts.
https://charles72f.substack.com/p/basel-faulty-the-financial-crisis
2. I don’t know if the rise of shadow banks is a good thing or not. I am convinced it creates redundancy in our financial system that significantly increases the cost of credit to borrowers.
I must disagree with your assertion that regulation has been just a minor factor in the rise of the “Private Credit” industry. In my opinion, this is BY FAR the main driver. Since at least the Texas banking crisis, regulators have been desperately trying to rein in the industry to protect themselves from blame for bank failures. Above all, this is reflected in their fetish for “more capital.” They have no understanding of how the industry works and would be overjoyed if no bank ever made another loan. Then their jobs and fiefdoms would be secure, and they would never again be publicly eviscerated in front of a Congressional Banking committee. Above all, regulators seek “plausible deniability” for bank failures.
I have many other posts on my Substack that might interest you. Most concern economic and banking issues.
Here are some additional observations regarding your essay.
I think I am a bit older than you. I worked at Goldman Sachs in the ‘80’s and watched Bob Freeman get frog marched out of his office for insider trading. My boss was Lee Cooperman and Jim Cramer was one of the annoying salesmen I was forced to interact with.
Kudos for mentioning the Latin American debt crisis. This is the great banking crisis that never occurred and ought to be an object lesson for regulators today. Back then, nearly every “money center” bank was technically insolvent, yet none failed. Unlike the 08 crisis, there were virtually no large non-bank competitors. And there was a very wise Fed Chairman.
The first non-bank credit was really the commercial paper market.
Prior to 1980, most borrowing from banks was to finance inventory and receivables. Commercial paper, technology, and de-industrialization has mostly obviated the need for such borrowing.
I’m not clear what you mean by “sub-majors.”
The whole issue of bank liquidity is totally misunderstood. BANKS ARE ILLIQUID BY DEFINITION. That is what makes the financial system work. A bank lends by debiting a long-term asset and crediting a demand deposit which can be withdrawn at any time. Every individual bank is necessarily illiquid, but the system itself is not. (See the appendix to “Basel: Faulty.”)
You did not mention real estate in your excellent analyses. In my opinion, the post- GFC regulatory kibosh on construction lending destroyed the independent builder industry and was the main cause of our current housing shortage.
It is undeniable that idiotic regulatory rules forced banks out of the mortgage business. This is explored in some depth in my post Law and Order: FDIC"
Well, I’d better stop there. Again, thanks for your article. I hope you find the time to take a look at my Substack posts.
Best regards,
Charles Cranmer
Exton, PA
610-574-0165
Substack: The Open Society and its Banks.
Hi Charles - Thank you very much for reading my post. I'm glad you liked it and I appreciate you responding with such thoughtful comments, additions, disagreements, and questions. I will read through some of your other posts for the additional context! I look forward to checking out your substack, and continuing our dialogue.
Excellent write up
great apercu!
thank you!