:max_bytes(150000):strip_icc()/GettyImages-2263713787-748af96df09d41debd4a73183f79342b.jpg "Something on Wall Street ‘Smells Like’ 2008, Says Former Goldman Sachs Chief. Here’s What It Is.")
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Key Takeaways
- Lloyd Blankfein, who led Goldman Sachs through the 2008 financial crisis, expressed concern in several recent interviews that hidden risks within private credit may put the U.S. on track for another financial crisis.
- Blankfein is one of several Wall Street veterans warning of impending losses in private credit right as the industry and White House push to make private assets part of the average American’s retirement portfolio.
The man who led Goldman Sachs through the 2008 financial crisis is sounding the alarm on private credit, joining a chorus of Wall Street veterans expressing concern at a pivotal time for the industry.
“It sort of smells like that kind of a moment again,” said Lloyd Blankfein, referring to the Global Financial Crisis, during an interview with Pablo Salame, co-chief investment officer at Citadel. “I don’t feel the storm, but the horses are starting to whinny in the corral,” added Blankfein, who led Goldman from 2006 to 2018.
Some on Wall Street are growing concerned about risky lending and hidden leverage within private credit. Late last year, the sudden bankruptcies of two companies tied to private credit forced several banks to disclose massive write-offs, amplifying fears the industry’s problems could ripple through financial markets.
Why This Is Important To Investors
Distress in the mortgage market sparked the financial crisis that tanked stock markets around the world and plunged the U.S. economy into its worst downturn since the Great Depression. Some experts are increasingly worried that the private credit market, which is about the same size as the subprime mortgage market in 2008, poses similar contagion risk.
Some industry insiders have been outspoken about their concerns. JPMorgan Chase CEO Jamie Dimon last year warned after those bankruptcies that spotting one “cockroach” is often a sign of more creeping around. Dimon late last month said some in the financial industry were “doing some dumb things” reminiscent of the years leading up to 2008.
Blankfein, in a separate interview, echoed Dimon in warning of recklessness within the industry. “The markets have been very good for a very long time,” he told Bloomberg’s The Big Take podcast in an episode released Sunday. “If everything is always good and there’s no cost, no adverse consequences, you start to lose discipline over time.”
The stakes, he warned, are rising amid a push by Wall Street firms and the Trump administration to open private markets to everyday Americans. Advocates argue allowing private equity in 401(k)s will boost retirement account returns, helping put savers on a path to a comfortable retirement. Detractors warn the illiquidity, opacity and complexity of private assets make them unsuitable for most investors, and that their inclusion in 401(k)s exposes retirement savers to more risk than opportunity.
“I would say the consequences of being wrong or having a problem in the account of retirees— i.e. real people, citizens, taxpayers, voters—is much more highly consequential” than credit losses dinging the portfolios of sophisticated institutional investors and wealthy accredited investors, said Blankfein.
Recently, the private credit concerns have centered on a separate hot button issue: artificial intelligence. Software stocks have been hammered this year by fears that AI is on the cusp of upending the industry. That has pressured the valuations of private software companies, to which asset managers like Blackstone (BX), KKR (KKR) and Blue Owl Capital (OWL) are heavily exposed.
Some investors are racing for the doors. Blue Owl last month restricted investors’ ability to withdraw from one of its private credit funds. Blackstone earlier this week allowed investors to withdraw nearly 8% of its flagship private credit fund. The firm and its employees reportedly put $400 million of their own money into the fund to fulfill the $3.8 billion in redemption requests.
Blackstone President Jon Gray, in an appearance on CNBC Tuesday, attributed the rush to cash out to “a constant spin cycle” in the media that’s put investors on edge. “There’s this disjointed environment now between what’s happening on the ground with underlying portfolios, and what’s happening in the news cycle,” said Gray, who added institutional investors continued to allocate significant resources to private credit and touted the strength of the companies whose loans make up the fund.
Gray acknowledged that not every loan in the portfolio will work out, and that there are inherent risks to non-investment grade credit. “But the underlying low-leverage loans here, and the performance of those loans, that’s what’s going to stand the test of time,” he concluded.
