On Private Credit, a Tale of Two Chairmen

A difference of opinion seems to be opening between two of the titans of American finance when it comes to the state of private credit. Concerns are growing over this slice of the financial sector, which entails some $1.6 trillion in non-bank lending. On Monday the Federal Reserve chairman, Jerome Powell, noted the jitters but said it “doesn’t seem to have the makings of a broader systemic event.” Yet the Oracle of Omaha, Warren Buffett, isn’t as blasé.These columns have been tracking the concern over private credit’s health. The rumblings stir echoes of the early innings of the subprime mortgage debacle that spiraled into the crisis of 2008. Ares Management and Apollo Global Management are limiting withdrawals from their private credit funds. A private credit fund run by KKR and Future Standard was downgraded to “junk” by Moody’s. Private credit lender Blue Owl had to call off a merger.Nothing to see here, folks, shuffle along, was the tenor of Mr. Powell’s reply after he was asked at a Harvard event about the potential risk from private credit, also known as shadow banking. “We’re looking for connections to the banking system, and things that might, you know, result in contagion,” he asserted. “We don’t see those right now.” The Fed chairman did allow as how there might be a “correction” brewing in private credit.“Certainly there’ll be people losing money and things like that,” Mr. Powell added, “but it doesn’t seem to have the makings of a broader systemic event.” Could the chairman’s nonchalance prove to be on a par with the Fed chairman’s assurances in the summer of 2021 that a brewing wave of price inflation was merely “transitory”? Within a year, the consumer price index reached 9.1 percent annually, a jump not seen in decades.That credibility gap could illuminate some of the concerns raised this morning by Berkshire Hathaway’s chairman, Mr. Buffett. He reckoned that while inflation is a worry these days, “what I really would care about is the stability of the banks.” He added that while “the banking system, in some sense is very strong,” in other senses, it “is very fragile.” He notes that JPMorgan Chase reports “doing $10 trillion of business per day,” but “that’s an unsecured policy.” By contrast, Mr. Buffett said, in 2008 “I didn’t want anything unsecured, you know, out there for a day. I mean, who knew?” He saw that as a reminder that “the world is very interconnected,” and, at times, “everybody panics.” Trying to quarantine private credit is doubtful, he said, because they are “all parts of the banking system” and “the troubles from one can spread over to another,” and, “well, you saw what happened, I mean, in 2008.”Mr. Buffett’s remarks suggest the challenge of evaluating the risks in private credit absent any objective monetary yardstick. In other words the lack of honest money tied to some kind of specie by which to measure the currency’s value. We have noted how private credit’s rise was enabled in part by a fiat currency regime, accompanied by overzealous regulation, that has helped fuel asset bubbles. “Fiat debt,” we called the private credit buildup.Mr. Buffett’s caution evokes J.P. Morgan himself, who averred that when it came to credit in finance, “the first thing is character,” and “money cannot buy it.” Morgan grasped, too, that “money is gold, and nothing else.” Private credit today is made of flimsier stuff. Of the market’s concerns Mr. Buffett concedes that “if people yell fire in a crowded theater, everybody runs,” and “I will stand back there and say, ‘Everybody stay calm,’ but that’s because I can’t run fast.”

On Private Credit, a Tale of Two Chairmen

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