Global Finance Industry in an Incredibly Vulnerable Place, Again!
This month I was going to write about how the 'Zeitz-Unwind' is continuing at Harley, about how plain foolish the organizers of the INTERMOT expo in Germany have been since 2018, about how remarkable the Indian Challenger Daytona KOTB double header win was - choose any one, two or all three.
Somehow though they all feel a tad irrelevant in the face of the unwarranted risks for self-inflicted harm that 'The West' is again exposing itself to.
Unfortunately, what really and increasingly 'boils my piss' at this time, and in recent years, is the increasingly low-grade grasp of the fundamentals of capitalism, good business and good national governance that lie at the root of the seemingly endless cycles of self-inflicted harm that we regularly find ourselves facing.
The quality of business education, corporate governance and governmental financial management that shapes our world just keeps getting weaker. MBA's do not exist to help improve the quality of financial management, they exist because its slide needs to be halted somehow – so reach for the default, try and get it from a book rather than develop the instinctive and institutional knowledge that got us here drove us here ever since mankind started to trade surpluses.
So, this month's whinge? Private Credit. The rise of the $2 trillion private credit industry has been the banking, investment and financial industry's direct response to the guard rails and regulations that were developed with initiatives such as Dodd Frank and Basel 1, 2 and 3.
Those controls were designed to protect us, as humble consumers from 'them' and to protect 'them' from themselves. To protect financial institutions from becoming over extended and jeopardizing their ability to 'pay their way'. In business terms, failure to 'pay your way' results in failure to produce tradable surplus and therefore failure to produce the profits that fuel the flow of capital.
Producing surplus is the foundational beating heart of the capitalist system's requirements. Anything else is socialism, communism, fraud. As we have seen many times before, the results of bank and investment house failures are stark – unemployment, failure to pay the rent or mortgage, homelessness, poverty and hunger.
People are doing dumb things
I wrote once that debt had become a civil responsibility, more recently that as the amount of global debt exceeds the planetary equivalent of GDP, debt is becoming the primary product of humankind and servicing that debt the primary enterprise.
The regulations are designed to make sure that banks and other lenders can 'pay their way' and meet their obligations if there is another 2008-style crisis.
But the US Government, Treasury, banks, PE, VC and other investment houses have worked hard to roll back those protections and have stood aside as a 'Wild West' of a Private Credit lending market was built that sits outside those guard rails.
Ironically, those who the regulations benefit most, are the regulated. But they would rather allow the hit to be taken by the hapless suckers who lose the money they are theoretically trusted to invest than they themselves operate on a safe, sustainable and securitized basis instead.
As one famous Wall Street CEO once stood up and said at Davos – "there's nothing wrong with risk so longs as it isn't ours" – and that was just nine months before the financial industry exploded (imploded?) in 2008, taking the business that he was leading at the time down with it.
Ironically, it was JP Morgan who picked up those pieces, and it is present JP Morgan Chase CEO Jamie Dimon who, having advocated consistently in recent years for a loosening of the regulatory framework who is now, in fact, leading the siren calls for lending caution.
His is the world's largest bank by market capitalization – tellingly not the largest by asset base (those are mostly the major Chinese banks) and it is he (among others) who is saying that there are current parallels to the years leading up to the 2008 crisis.
He is on record as stating recently that he is seeing some people "doing some dumb things" when it comes to the Private Credit Market (also known as the 'Shadow Banking' sector), and recalling that Wall Street missed the signals the last time around because profits were flowing like 'milk and honey'.
Another commentator has used the classic old saying that it doesn't matter if you can swim better than all the others if you are standing on the deck of The Titanic. Increasing numbers of the world's premier financiers are making increasingly frequent statements about inappropriate levels of private credit lending – evoking the 2007 'pre-game' lead-up to the 2008 'Great Financial Crisis'.
This is just part of the background music to the risk that is now being taken with an ever-increasing proportion of all businesses, including motorcycle businesses, being in the hands of a private equity sector. A sector whose primary source of investment fund capital is the private credit market.
As I write this piece both JP Morgan and BlackRock (the largest bank and the largest investor) have announced that they are starting to restrict some lending to private credit funds, after finding that they have had to start marking down the value of certain loans in their portfolios.
The devalued loans are mostly, so far, to software companies and so-called BDCs (Business Development Companies) on the basis that software makers (in particular) are likely to be among those most heavily affected by AI-creep. Meanwhile BlackRock has even gone as far as starting to limit withdrawals as redemptions pressure fund liquidity.
We've all seen how this movie ends. I suggest everybody reading this starts to listen more carefully and to drill deeper in reading more about what is going on around them. A full-blown credit default cycle could be edging ever closer than any of us realize.
