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Donald Trump Is Setting Us Up for Another Financial Crisis
Private Credit and the Shadow Banking Crisis
By Max from UNFTR
Watch the video report on this topic here and read the full analysis from Max below:
Private Credit and the Shadow Banking Crisis
In this week’s State of the Union address, President Donald Trump played the hits. He demonized immigrants, he lied about the state of the economy, chastised the Supreme Court over tariffs and called Democrats “crazy.” As evidence of his magnificence he of course touted the stock market, not once but three times.
But there is one word that was completely absent from his economic picture. One concept that should be front and center in any honest accounting of where the risks to this economy actually live.
Deregulation.
Because while Trump was taking victory laps about the Dow, his administration has been dismantling the guardrails that were put in place after the last time Wall Street blew up the economy.
Guardrails
To understand what’s at stake today, we have to go back.
In the waning days of the Clinton administration, Congress passed a piece of legislation that would change everything. It was called the Gramm-Leach-Bliley Act, and what it effectively did was repeal the core protections of the Glass-Steagall Act — a law that had been on the books since the Great Depression. Glass-Steagall’s whole purpose was simple but profound: keep consumer banking completely separate from investment banking. Keep the place where regular people put their paychecks and savings away from Wall Street’s casino.
Those guardrails had protected us for more than six decades. Gramm-Leach-Bliley put the nail in the coffin of that protection. To be clear, the cap had been loosened under prior administrations—most notably Reagan but even Jimmy Carter—as the United States endeavored to shift gears from a manufacturing powerhouse to the financial capital of the world.
But after Gramm-Leach-Bliley the big banks almost immediately started using massive leverage on increasingly sophisticated (and deeply misunderstood) financial products called derivatives. The biggest, sexiest, most dangerous of them all? The mortgage-backed security. Thousands of home mortgages bundled into enormous loan packages, sliced into tranches and sold to investors around the world. When rates were low and confidence was high, everybody made money. The bonuses got bigger and the yachts got longer.
And then the music stopped. As rates increased and speculation ran wild — with leverage piled on top of more leverage — these products became highly unstable. When they unraveled, they didn’t just hurt the banks. They took the entire global economy down with them. Eight million Americans lost their jobs. Ten million families lost their homes. Trillions in household wealth evaporated. And the people who caused it? They got bailouts.
When we look back to 2008 there are two important things to remember as a building block for today. The first is about timing.
We romanticize the story of folks like Michael Burry — made famous by Michael Lewis’s book and the movie The Big Short — as this lone genius who saw the crash coming and made a fortune. What the movie touches on is how Burry almost went bankrupt waiting for it. He was early. His investors were furious with him. Some tried to pull their money. He had to restrict withdrawals to keep his fund alive. The point is: when you’re early in identifying a massive structural problem in leveraged financial markets, being right isn’t enough. You have to survive long enough to be proven right. Big financial products take a long time to unwind. The stress builds slowly then falls like an avalanche.
The second lesson is about what we did after.
In the wake of 2008, we put regulations in place to prevent a repeat performance — capitalization requirements, stress tests, transparency rules. Then we sent an ungodly sum of money into the financial system, bought back troubled assets from the big banks, and lowered rates dramatically to allow them to deleverage. Economically speaking, it was a masterclass in crisis management. The financial system survived.
But Main Street got left out in the cold. Foreclosures kept coming. Wages stagnated. The people who caused the crisis were made whole, and the people who suffered from it were told to be patient. That profound political and moral failure is arguably why Donald Trump won in 2016, and why he won again in 2024. We failed to learn the lesson.
So here we are. And the new thing that financial titans, Wall Street observers, and the more astute economic commentators have been whispering about is something called private credit.
It hit the mainstream last year with some very public bankruptcies that revealed shaky lending practices, massive over-leverage, and some genuinely shady dealings. You may remember Jamie Dimon — CEO of JPMorgan Chase, the largest bank in the United States — making his infamous ‘cockroaches’ comment. Where you see one, there’s probably more. That sentiment refuses to die and kind of haunts Wall Street to this day.
To understand what’s at risk, what’s real, and what might be overblown, we have to define private credit. We have to understand how big it is. And we have to ask the really uncomfortable question: does it actually pose what’s known as a ‘systemic risk’ to the financial system? In other words… Could it actually bring down the economy?
What is Private Credit?
Private credit — sometimes called private lending or direct lending — is exactly what it sounds like. It’s lending that happens outside the traditional banking system and outside the public bond markets. Instead of a company going to a bank for a loan, or issuing bonds that get traded on public markets, they go to a private credit fund. A firm that raises capital from institutional investors such as pension funds, endowments, sovereign wealth funds and wealthy individuals, and then deploys that capital by making loans directly to companies.
These are typically middle-market companies. Businesses that are too big for a local community bank but not quite big enough or safe enough to tap the public bond markets at favorable rates. Private equity-backed companies. Software firms. Healthcare businesses. Specialized services. Exactly the kinds of companies that get financed when the regulated banks won’t touch them.
By late 2025, global private credit assets under management were estimated at somewhere between 1.8 trillion and 3.5 trillion dollars, with nearly 600 billion dollars deployed in 2024 alone. For context — the entire U.S. commercial banking system holds about 24.5 trillion dollars in assets. So private credit is material. But it’s still a fraction of the traditional banking system. But that doesn’t mean there isn’t risk to the wider system.
These two worlds are deeply, structurally intertwined. Banks lend to private credit firms to give them leverage. Banks invest in private credit fund equity. Banks co-lend alongside private credit funds in what are called ‘club deals.’ And it’s growing faster than any other category of bank lending.
So when someone says private credit is a ‘shadow banking’ system — separate from the regulated banks — that’s only half right. It is separate in terms of oversight and transparency. But it is absolutely connected to the banking system in terms of money flows, leverage, and ultimately risk. And that means that the firewall regulators attempted to erect after the GFC isn’t completely intact. In fact, it’s pretty leaky.
The post-financial-crisis reforms essentially created a two-tier lending system. The top tier — the A-rated, safest direct loans — stay on commercial bank balance sheets, fully regulated, subject to stress tests and capital requirements. The riskier stuff sits on the balance sheets of private credit firms and outside the regulatory perimeter.
What’s amazing is that we have extremely limited visibility into how those portfolios are actually performing. There are really only two ways we get any meaningful window into this shadow market.
The first is when companies go bankrupt. When a borrower files for bankruptcy, the loan terms come out, the collateral gets scrutinized, and suddenly we can see what was really going on. It’s like lifting a rock and seeing what’s underneath. The second way we get visibility is through the publicly traded private credit firms, specifically a type of company called a Business Development Company, or BDCs, that have to file quarterly and annual reports with the SEC, disclose their portfolio holdings and hold earnings calls.
But there’s a catch: publicly traded BDCs represent only a small, and arguably less risky, slice of the overall market. About 80 percent of private credit assets sit in closed-end private funds — limited partnerships with no public reporting, no standardized disclosure, no requirement to update their marks more than their fund documents require.
Cockroaches
This brings us to current events that have insiders whispering about systemic risk.
Take New Mountain Finance. New Mountain is a publicly traded BDC, one of those visible companies we just alluded to. And what their most recent earnings release tells us is deeply instructive.
In February 2026, New Mountain reported that its net asset value per share had fallen from 12 dollars and six cents to 11 dollars and 52 cents in a single quarter. That’s a five percent decline in one quarter. They announced they were selling 477 million dollars in assets — at 94 percent of fair value. They explicitly stated the purpose was to reduce something called PIK income, increase diversification, and shore up financial flexibility.
Now in English. Selling assets at 94 cents on the dollar means accepting a loss. That’s distress pricing. When a company the size of New Mountain is moving assets at a discount and explicitly trying to reduce a certain type of income (PIK income), it’s telling you the portfolio has some problems it wants to get ahead of.
We’ve talked about PIK before. PIK stands for Payment In Kind. Here’s how it works. Normally when you take out a loan, you pay interest in cash. Every quarter, you write a check. With a PIK arrangement, instead of paying the interest in cash, the borrower simply adds it to the principal balance of the loan. The loan gets bigger. The lender books income on paper. But no cash changes hands. That’s not a healthy borrower. That’s a borrower who is struggling.
According to S&P Global data, nearly 12 percent of loans held by BDCs were making PIK payments as of mid-2024. Industry insiders suggest the real number is probably closer to 15 percent. And by Q3 of 2025, Lincoln International found that 57 percent of PIK arrangements in the deals they reviewed were this problematic kind. The shadow default rate, once you count these, may be closer to 6 percent, several times the official reported rate.
Then there’s Blue Owl. Blue Owl is one of the largest private credit platforms in the world — one of the flagship names in the industry. Earlier this month, news broke that Blue Owl had restricted or halted redemptions in one of its vehicles. The market’s response was to immediately punish Blue Owl’s stock and drag down peers like Apollo, Blackstone and KKR along with it. Because investors immediately started asking the same question: if this is happening at Blue Owl, what’s happening at everyone else?
And hovering over all of this is UBS. UBS sits at a key interface between the traditional banking world and private credit. In February 2026, UBS told clients it had to write down more assets in those credit funds, with one key investment representing about 5 percent of assets getting hit hard, resulting in losses in the millions. Meanwhile, UBS strategists are now openly warning that in a worst-case scenario, private credit default rates could reach 15 percent, several times the projected default rate in public high-yield bonds. Cockroaches under the cabinets. Smoke and fire.
Donald Trump is removing the smoke detectors during a fire
Given what we lived through with Enron after Clinton’s deregulation and after the Global Financial Crisis you might think that regulators would be tightening up and scrutinizing this shadow sector a little more closely. And yet, we’re doing the opposite.
Like, the exact opposite.
There’s something called FSOC — the Financial Stability Oversight Council. It was created after 2008 specifically to monitor system-wide financial risks. Under the Trump administration, Treasury Secretary Scott Bessent has essentially repurposed FSOC to advance a deregulatory agenda. The New York Times reported that the administration directed FSOC to ‘take actions that would alleviate regulations’ viewed as hindering growth. Bessent has argued that ‘true financial stability is most effectively realized through accelerated economic growth.’ FSOC’s 2025 annual report — while it does acknowledge what it calls ‘growing concerns’ around private credit and hedge fund leverage — pivots immediately to emphasize market resilience and, I am not making this up, explicitly endorses efforts to ‘reduce unnecessary regulatory burden.’
And that’s not the only regulatory rollback. The SEC under Biden had passed a significant private fund adviser rule package in 2023 — rules that would have required standardized quarterly reporting from private credit funds, annual audits, and restrictions on the kinds of sweetheart deals that let favored investors get better terms than everyone else. This was exactly the kind of sunlight that might let us see what’s actually in these portfolios before it blows up. The Fifth Circuit struck those rules down in 2024 after an industry challenge. And the Trump-appointed SEC leadership has shown zero interest in re-proposing them in any meaningful form.
On top of that, the Trump administration has been on a crusade to open private credit markets to retail investors, even issuing an executive order directing the Department of Labor to allow private credit and private equity into 401(k) plans. The framing is ‘democratizing access to alternative assets.’ The reality is inviting ordinary Americans into opaque, illiquid, high-risk products at exactly the moment the stress fractures are starting to show.
To be clear, this is not purely a Republican problem. It was a Democratic administration under Bill Clinton that signed Gramm-Leach-Bliley. The Republican administration under George W. Bush watched the mortgage bubble inflate and did nothing because the stock market was going up. We have a bipartisan tradition in this country of amnesia when it comes to financial crises. The banks and their lobbyists chip away at oversight during the good times, politicians from both parties let it happen, and then when it all falls apart the taxpayers get the bill.
What’s different now is the combination of factors. We have clear and accumulating evidence of stress in the private credit market — NAV declines, assets being sold below book value, PIK rates rising, redemption gates being put up. We are at a moment analogous to 2006 or 2007, when Michael Burry and a handful of others could see the structural cracks even as the official narrative was that everything was fine.
And layered on top of all that stress, we have an administration that genuinely doesn’t understand the problem (or doesn’t care) and is actively removing the monitoring systems that might let us detect how serious it’s getting before it’s too late. We have a president who thinks the stock market is the economy. We have regulators who have been explicitly redirected away from constraint and toward ‘capital formation.’
So here’s the “how does this impact us” part of the equation. When banks start absorbing losses on those exposures, the first thing they do is tighten their own lending. They reduce credit. They raise standards. They get cautious. And when traditional bank credit seizes up, it ripples through the entire economy. Businesses can’t borrow to make payroll or expand. Consumers can’t get mortgages or car loans. The whole credit-dependent economy starts to slow, and then contract.
Credit seizing up is the one thing that can truly bring it all down. Not the stock market. Not inflation. Not even a recession in isolation. It’s when the credit markets freeze that things get genuinely dangerous. We know this because we just lived through it less than 20 years ago.
The United States of Amnesia strikes again.
Max is a contributor to the MeidasTouch Network and Publisher of UNFTR Media.
For deeper dives into economic and socioeconomic stories, visit UNFTR.com or @UNFTR on YouTube.
Sources
https://www.finra.org/rules-guidance/notices/25-08
https://finance.yahoo.com/news/blue-owls-redemption-shift-shakes-165500164.html
