Original subtitles

There is a debate raging across Wall

Street about what's happening right now.

What's really happening right now in

private credit and what it might mean

moving forward. We've gotten past that

initial stage, the initial shock,

thericolor, the first brands, the hedge

fund redemptions, the cockroaches, and

the garbage lending. Okay, so now what?

Well, to begin with, we can look at what

banks are doing, but we're also still

getting a number of warnings coming in

from a lot of big names across the

entire sector. Right at the center of

the storm is ratings agencies. Again,

not unlike 2008. Bond giant PIMCO's

chief investment officer was the latest

to warn about garbage lending and the

high ratings that have been attached to

it by questionable practices. And this

comes from a firm which expects the

economy to pick up next year, too.

Though the CIO also added, quote, "If

you get into a period of economic

softness, losses will go up and there'll

likely be some disappointment." It's

that quote disappointment that's the

issue here. Flat beverage plus shadow

banking equals the key ingredients for a

lot more than just dissatisfied

investors and big-time institutions.

Even Bloomberg's editorial board wrote

on Friday that regulated banks have been

put on notice by these growing and more

visible cracks deep in the shadows. The

board adds it has all the similarities,

not just dubious ratings on opaque and

convoluted structures, but all the

similarities to 2008 because of this

framework that no one really knows and

they don't know what the values are to

the point that even government is

stepping in by starting to ask questions

and demand more information. That's

really the issue here. And as I keep

saying, the easy way to end this, to

answer everyone's question, is to simply

open the books. We don't need to see

every last trade and transaction, but a

thorough sampling and a legitimate

honest audit would be enough to put the

to put to rest all the doubts that

continue to swirl. And the reason they

continue to swirl is we know there are

legit reasons for all of these doubts.

And the unwillingness and probably the

inability of private credit providers to

answer all these questions is really an

answer unto itself. The one thing that

we're missing, the one thing that we

need everyone to provide is the one

thing that they don't have. That's

information. And information,

valuations,

and the opacity of the system is a bad

mix when it goes to the downside of the

credit cycle when flat beverage starts

to emerge and makes more than just the

real economy uncomfortable.

We do have some information we can pull

out. So, we'll go over that on top of

the continued debate and warnings about

these credit market shadows. But keep in

mind, back during the last credit

bubble, you had bad mortgages given to

struggling households that were buried

into offbalance sheet debt arrangements

that were funded by wholesale markets

like repo. This time around, they're

questionable loans to zombie companies

primarily, plus securized credit cards

and auto lending in the same complicated

arrangements, a lot of which is funded

in wholesale markets like repo.

Similarities are easy to spot here. So

already not starting out in the best

way. and figure out all this stuff is

really worth isn't so easy even in the

best of times. These are not liquid

markets for all these kinds of debts.

Nor do we have an answer for the true

state of private credit portfolios. That

last one, that's a big stumbling block

right now. All we really have are the

reassurances from shadow bankers

themselves that they're of course their

portfolios are stout, they're solid,

they are fundamentally sound. What else

are they going to say? So again, we're

stuck at square one. I mean, after all,

even the top central bankers at the Bank

of England smelled the rat on that one.

When bureaucrats like Andrew Bailey know

the the assurances from private credit

providers are worthless, you really know

what we're dealing with here. So, our

first problem is that shadow banks,

whatever term you want to use here,

non-depository financial institutions,

the technical term, they're not required

to disclose a whole lot. That's the key

part in the latter term. They are not

depositories. Since they aren't legally

banks, they don't fall under the banking

rules and regulations, including what

they're supposed to disclose. Thus, the

terms that private and shadow banks very

much apply. Without any depositors,

their investors are qualified

individuals, either hedge fund investors

or big institutions, including regulated

banks who supply the leverage in these

wholesale markets and other direct to uh

the shadow bank lending. So, absent

disclosure requirements and mandated

transparency, all we really have is

shadow bankers continued public

confidence as far as the status of their

credit portfolio. Sure, there are some

published numbers about default rates

and troubled loan estimates, but no one

buys them, and we know for a fact

they're understated by more questionable

tactics and policies like things like

selective defaults, which I mean, we've

talked about that before. But the first

problem here is we don't know who these

guys have really been lending to exactly

and by how much. And that leads us into

the second problem, which is how much is

all of that actually legitimately

honestly worth because you have to take

into account macroeconomics

considerations, financial variables, a

whole bunch of stuff to really come to a

a more solid conclusion about what are

these credit portfolios truly worth in

any real and meaningful sense. You know,

the stuff that we're talking about here

in this video, that's the reason why for

the first time, we're having a URL

university live event this coming

February 2026, President's Day weekend.

Not only we're going to talk about the,

you know, the signals in the URL system

and all across the marketplace and, you

know, try to navigate our way through

it, but also we're going to have

discussions about what can you do about

it? Things like distressed debt funds

and distress debt opportunities. So, if

you're a serious investor and this

sounds like something you want to be a

part of, there's a link in the

description of this video where you can

sign up to book a call and book your

spot for URAL University Live. Now, but

you got to be you got to hurry up here

because we put this out to Eurodal

University members and subscribers and

the response so far has been

overwhelming and we only have a limited

number of spots available. So, like I

said, if you're interested in coming

joining us, joining me and a bunch of

other people, experts and like-minded

individuals, serious investors, February

2026, President's Day weekend, book your

call at the link in the description. I

do hope to see you there. It's going to

be a lot of fun, a lot of stuff going

on. Plus, we've got a lot of talk, a lot

to talk about. Like I said, link in the

description to book your call. Now, it

might sound strange we're talking about

loans, but valuations are a huge

headache anyway, even when they're

actually transparent. If you remember

back during the 2008 crisis, new bank

regulations forced regulated banks to

put out more disclosures on exactly what

we're talking about right here. If you

remember, there were things called level

one assets, which had clearer market

inputs, which meant banks had to put

down what the market said for that

category of assets, including the values

of those securized structures and the

tranches of them, even that they still

had interests in. And that became a huge

problem in its own right when the

markets themselves grew illquid.

Therefore, it led to the whole

marktomarket problem. But beyond level

one, there's these level twos and level

three assets which the government rules

said banks could use their own models to

come up with values. But where level

three, it meant all sorts of just

blackbox calculations. It got to the

point where any bank that had a lot of

level three assets found itself in

trouble because no one had any faith in

those blackbox calculations and the

valuations that they spit out. That's

the risk that we're kind of facing here.

Not that private credit is that far down

the rabbit hole of a potential crisis,

just the same sort of difficulties with

the added downside of no regulatory

requirements whatsoever. It's almost as

if the private credit space is itself

level three. And we're supposed to just

trust all the internal blackbox model

values that private credit providers

come up with with all of these complex

models that we have no idea what goes

into them. And up until September, the

entire industry and all these investors

were perfectly fine with that. Everyone

said, "Who cares? Economy is great. JP

Paul solid labor market. Therefore, no

reason to suspect the numbers are

anything but what the shadow bankers say

they are." And this is where the flat

beverage really changes everything. And

that's where the Bloomberg editorial

board warning, that's where it really

picks up. Private credit exposures are

opaque and increasingly convoluted. I

don't know if they're increasingly

convoluted. have always been convoluted

with funds making loans backed by a wide

range of esoteric collateral even

repackaging fund stakes into assets

which we saw before in the last crisis.

A lack of public trading leads to loan

volumes that are subjective and

disputed. It can also lead to shocking

meltdowns as we talked about this before

too. Within weeks, Black Rockck revise

one loan's value to zero from a hundred

cents on the dollar. Those features

create an extra risk if things go wrong.

US banks with the most exposure to

non-bank financial institutions or

shadow banks or private credit

providers, whatever you want to call

them, are also those most dependent on

markets for their funding, according to

the International Monetary Fund. One

lesson of 2008, if investors aren't sure

how exposed a bank might be to losses,

best not to wait around to find out.

That's a recipe for a financial crisis.

Information asymmetry.

So if or when markets and investors

really begin to doubt both the models

and the private credit providers

reassurances, that's when you got the

problems. And we we've already seen

questionable practices and the

coaches that have come up so far, which

is only added to the mistrust that much

more. In other words, if there are more

troubled loans in these portfolios than

we're already led to believe, that would

have a huge impact on valuing them. How

much losses should investors expect?

Shadow bankers would tell us one thing

when in reality it might be something

very different. And in those frauds that

have come out, what what became clear in

all of them was no one did their

homework. Investors and funding

suppliers just took everything on faith.

Whether it was whether the collateral

was even there. Due diligence had

clearly fallen by the wayside. And

that's not a good sign that's going to

add more trust back to the system. And

that brings up the issue with ratings

agencies, which I've talked about

before, too. These firms and their seals

of approval exist for a couple of

reasons, including being able to sell

these debt structures to certain classes

of buyers, but they also exist to

essentially farm out that due diligence.

Those shadow banks who don't need to or

don't feel they need to do their own

homework will hire a ratings agency and

simply let them sample a portfolio of

questionable quality and put a rating on

the whole shebang. This is what this is

what PIMCO CIO was warning about that I

was talking about in the introduction at

the beginning of this video. quote, "It

is very, very dangerous to assume

something has an investment grade rating

just because the ratings agencies assign

a rating to it. There's been so much

growth in lending to lower quality

companies that's Gunlack's garbage." And

again, the last major cycle was lending

to lower quality households. And I said

at the beginning, this cycle has been

largely about zombie zombie companies

and corporate credit, but also to a lot

of households, just not not with

mortgage collateral. It's not mortgage

loans and housing collateral. Now it's

consumer loans and zombie corporate

loans and more those types of junk debt.

And Pimco's CIO then went on to add,

PIMCO expects the US economy to

strengthen in early 2026 thanks to AI

related capital investment and the

impact of the Trump administration's one

big beautiful bill. And we need to

realize here there has almost never been

a time when Pinko didn't think the

economy was strengthening going all the

way back to the days when Bill Gross's

public comments were haunting the firm.

But back to he warned that credit losses

could mount if growth weakens. Quote,

"If you get into a period of economic

softness, losses will go up and there'll

likely be some disappointment. And it

all really could be a possibly brutal

combination. You got questionable

ratings from tainted agencies worse than

economic soft. We're really talking

about flat beverage here. Plus, as the

Bloomberg board said, throw in worries

about valuations given the lack of

information, and you put all these

things together, and you really do have

the basic ingredients for a financial

crisis, and maybe more if it spills over

beyond into liquidity and shadow money.

Again, to that last point, valuations,

private credit providers are doing

themselves no favors. This has already

come up in a different context. Though

you can see how it easily easily applies

to this environment where mistrust is

still really starting to spark and to

grow and we're starting to see the smoke

come up from it. Go back to Bloomberg

here. Stark divergences and how

competing firms value private assets in

their portfolios are drawing increasing

attention from market participants,

academics, and now the Department of

Justice. According to Jay Clayton, who's

the head of its Manhattan outpost,

quote, "There are definitely some areas

of concern for me in private markets.

People should know that the financial

regulators in the department are looking

at those, but the rush to offer credit

has started to show cracks this year

amid mounting competition, not really,

alleged frauds by borrowers and a

growing body of evidence fueling

concerns that funds use varying methods

to assign values to the assets that they

hold and that these things are not

always dependable." One recent academic

paper referred to the apparent

subjectivity of the numbers as mark to

myth. Clayton says what he won't stand

for is money managers cherrypicking

prices that let them reap higher fees at

the expense of their clients. And

understand the parallels here. Yes, they

might, you know, cherrypick prices to

get higher fees, you know, make the

portfolios look bigger than they really

are, but that works in the other

direction, too. If they're cherrypicking

prices to hide losses and the public sus

suspects that's the case, it's only

going to fuel further mistrust. And one

of these tactics is just shuffling

assets back and forth between related

funds. Back to the article here, an

industry body representing fund clients

has called the transactions, this

shuffling back and forth, quote,

inherently conflicted and pushed for

clear guidelines in such deals. That

hasn't slowed down a boom in

continuation vehicles and they've

increasingly appeared in private credit

as well, but such asset shuffles may be

ripe for abuse. Clayton said an area to

watch for is marks on assets with no

trading when things are moved around

from vehicle to vehicle. If someone is

moving a position from fund A to fund B

and you can just name a price

internally, an opportunity to pick a

price that benefits the house over

investors is pretty high. And so again,

while that's a problem for valuations

and maybe puffing up the value of the

fund to raise higher fees or to create

higher fees, in this context of

questionable assets, talking about

losses, what these what these illlquid

structures might be worth, the

temptation might be there with this

tactic already in widespread use and

maybe even widespread abuse.

So again, we're seeing more ghosts of

2008. Now, I'm not saying there's a

repeat of that crisis. Just human nature

is human nature. There's a significant

case to be made for concern because

while private credit isn't as massive as

the leadup to the last crisis was, it is

still significant. It's significant

enough to create havoc and cause lasting

damage in money, finance, and most of

all most of all once again the real

economy. These kinds of obviously

questionable valuation practices aren't

doing the industry any favors,

especially right now. So you get the

sense that everything Wall Street comes

up with from blackbox models to trading

tactics to ratings assigned by agencies

that Wall Street itself pays for, the

real purpose of all of it isn't to

provide information. It's to not provide

information. It's to create the

impression of reassurance in lie of

anything useful. Don't worry, we've got

it all covered. And look at all this

this this stuff that we have to show

you. But when you scratch the surface,

you don't need to go too far to begin

doubting whether all that's really true.

So what we're looking for, what we're

doing here is when all of these things,

valuation problems, the investing

public's view on potential for losses,

the lack of forthright information, when

all of that might combine to create a

small backlash that could then lead to a

self-reinforcing cycle where it's no

longer really about values and credit

portfolios. it gets to be about a lot

bigger things like markets and

industries. So that's why we're watching

all of these various factors and

developments, cockroaches and garbage

lending and all these warnings from

across the credit market space itself,

not from private credit providers.

They're still saying, "Hey, everything's

fine, fundamentally sound." And then you

put all of that together in the

macroeconomic context as PIMCO CIO

himself admitted, you get to some

economic softening and suddenly the

entire profile for the whole thing

shifts. Well, that's what's been going

on over the last couple months. The

marketplace, the overall marketplace,

public com, all of it, hedge fund

investors, they can sense that shift and

people are getting quite a little antsy

about it. So, one indirect clue that we

can turn to is the regulated banking

sector because banks are maybe one step

removed from shadow banks. And while we

shouldn't trust that they've done their

due diligence either, as we've seen in

these frauds, banks do have leverage,

pun intended, to get more information

than certainly we can. And going by the

Federal Reserve's H8 statistics on

regulated bank holdings, what we see is

they have yet to pull back pull back

completely from lending to non

non-depository financial institutions.

Loans to shadow banking continue to

grow, though the rate has slowed down a

little bit more recently. This suggests

that bankers are at the very least

rethinking some of their shadow banking

exposures and future exposures, though

they aren't ready yet to simply pull up

stakes and exit the space entirely. So

maybe that's an early stage down cycle

signal. Though if you're an optimist on

the space or the economy overall, you

could argue, and many do right now,

there isn't really enough here to be

worried about. So maybe this is just a

whole bunch of one-offs and a few a few

bad cases, but no widespread proof that

private credit is heading for some kind

of major reckoning and then major damage

beyond it. But then you balance that

optimistic take out against really the

real economy, but also Jaime Diamonds

cockroaches, gunlacks garbage, PIMCO's

hit on ratings, and even the Bloomberg

editorial board's caution over

valuations of lack of information. And

there really does seem to be quite a bit

of smoke billowing up from the shadow

banking world, even if it's not yet at

an overwhelming amount. So that might

be, as I said, that this is all just

early. For most people, cockroaches and

collateral fraud just showed up a couple

of months ago. And we have to keep in

mind, credit cycles are processes just

like economic cycles. And that's another

thing. Flat beverage isn't all that flat

just yet, as we've been pointing out all

summer. make it flatter like the PIMCO

guy was saying and then suddenly we re

then we really see pressure we really

see demands on private credit then the

crisis ingredients really start to get

mixed up in the bowl so you see what I

mean here there is enough smoke here

it's not an overwhelming amount it

doesn't say hey this is thing is falling

apart this this is crashing right now

but there are enough problems and there

are enough ingredients for future

problems that we do need to be careful

we do need to scrutinize what's taking

place and we need to keep a very

cautious eye on all of these various

pieces as they might get closer and

closer together to combining. I mean,

we've got the cockroaches so far and

most of the common thread in each one is

about the lack of care and information.

It's not really about the collateral so

much as been about everything bad that

you would have expected at the end stage

of a credit cycle. And then all of those

habits compound the problem given the

shadow part of shadow credit. There are

genuine reasons to be asking hard

questions and up until recently no one

had any interest in raising again.

Diamonds cockroaches gunlets garbage

pimco on ratings Bloomberg editorial

board valuations and information. Even

the government is throwing up red flags

on valuations. If all this smoke really

is from a credit cycle downturn fire,

the reason it isn't massively billing up

is only because, as I said, it's still

early in the process. Flat beverage

isn't even all that flat. Just like at

ADP for example, job losses are there

and they've been there for months, but

they aren't huge numbers right now. What

happens to all this credit if they do

start to get big? That's really the

smoke. Employment problems don't just

mean higher potential losses in consumer

credit. As ADP also said in its negative

November numbers, those job cuts were

coming from small employers. In other

words, in a truly flat beverage economy,

both workers and employers struggle

badly to stay afloat. And if private

credit providers don't want to provide

information that the market really badly

needs under these circumstances, the

public, the investment public, the

markets will make up their own minds.

One key out of the way signal to that

end from the consumer side of things,

Americans can't afford car insurance.

They've gone without and they've traded

down. I went over the details in the

video link below. As always, thank you

very much for joining me. Join me for

URL University live. There's a link in

the description if you want to book your

call about that. Huge thanks to Eur

University members and subscribers. And

until next time, take care.