The Hidden Fuse: How the Private Credit Boom Will Ignite the Pop of the Everything Bubble
The Hidden Subprime — How Yield-Starved Institutions Rebuilt 2007’s Risk in Corporate Form
Opening: The Calm Before the Detonation
“The fuse is longer, the powder is drier, the bubble is bigger — and so will the bust be.”
In late 2025, Equity markets still hum with an eerie calm. Stock indices hover near all-time highs, buoyed by optimism around AI and a seeming still robust economy. Unemployment remains low, and policymakers have already cautiously celebrated a “soft landing.” It all feels reminiscent of 2007’s complacency – the moment before the blast. In my September 2025 TEDx talk I cautioned against the seductive belief that “this time is different,” urging listeners to question rosy narratives[1].
Beneath the surface of today’s apparent stability lies a long, burning fuse: a decade-long credit boom outside traditional banks. And that hidden fuse is now smoldering, unseen by most, ready to detonate.
From 2008 to 2025 — The Migration of Risk
How did we get here? The story begins in the ashes of the 2008 financial crisis. In response to that crash, regulators clamped down hard on banks. New rules like Dodd-Frank and Basel III forced traditional banks to hold much more capital (a protective cushion) and to scrutinize borrowers far more rigorously[2]. Risky lending by banks became costlier and slower, leaving many would-be borrowers out in the cold[3]. Yet the need for credit didn’t disappear – it migrated. A new set of lenders stepped in to fill the gap created by stricter bank regulation[4].
This was the birth (or really the rapid maturation) of private credit – often dubbed “shadow banking.” Instead of deposit-funded banks making loans, we saw non-bank institutions raise money from investors to lend directly to businesses[5][6]. Ultra-low interest rates in the 2010s supercharged this shift: banks themselves were eager to lend cheaply to these new credit funds, which could then re-lend to firms at higher rates[7]. It was something of an arbitrage: heavily regulated banks effectively outsourcing risk to lightly regulated funds. As one UK regulator recently observed, private credit has “flourished” precisely in countries where banking rules tightened the most[8]. In other words, the risk didn’t evaporate after 2008 – it migrated from the visible banking sector into the shadows.
The result? A dramatic boom in the shadow credit market. At the start of 2025, private credit assets globally reached roughly $3 trillion, up from about $2 trillion just five years prior[9]. (By comparison, this sector was a niche back in 2008.) Some estimates even foresee private credit swelling to $4.5–5 trillion by the end of the decade[9][10]. This explosion of “banking in the shadows” means that today a huge share of corporate debt – loans to businesses of all sizes – no longer sits on bank balance sheets or under regulators’ noses. It sits in private funds, beyond the traditional oversight that flags trouble early. The Everything Bubble of the 2010s and 2020s – in stocks, real estate, and beyond – was built on an unprecedented wave of cheap money, but much of that wave flowed outside the traditional banking shoreline.
The Hidden Subprime — Corporate Credit Replaces Mortgages
Back in 2007, the spark that lit the crisis was subprime mortgages – millions of households who couldn’t afford the loans they’d been given. Today’s equivalent lives in corporate America (and beyond): highly indebted companies propped up by easy credit. Over the past decade, corporate leverage quietly reached historic highs as yield-starved investors poured money into leveraged loans, high-yield bonds, and direct private loans. Borrowers that once might have been screened out by cautious banks found willing lenders among private credit funds. Many loans were “covenant-lite,” offering lenders fewer protections, and reminiscent of the no-documentation “NINJA” loans of the housing bubble era. The new subprime is a BBB-rated company rolling over its debts at ever-higher interest rates, or a struggling retailer kept afloat by a direct loan from a private fund despite questionable cash flow.
The numbers are telling. Moody’s recently put the average one-year default probability for U.S. companies at 9.2%, a post-2008 high, reflecting how many firms are on the brink[11]. Fitch Ratings forecasts that defaults on riskier corporate loans could hit 5.5–6.0% in 2025 – several times higher than pre-pandemic norms[12]. These figures, while not crisis levels yet, signal that many businesses are essentially the new subprime borrowers: deeply in debt and vulnerable to any downturn. Instead of overextended homebuyers, we now have overextended corporate borrowers. And crucially, these loans have been sliced, diced, and dispersed through the financial system in ways uncannily similar to the mortgage CDOs of 2008. For instance, Wall Street engineered CLOs (Collateralized Loan Obligations) to bundle corporate loans and sell tranches to investors – a modern echo of the CDOs that bundled subprime mortgages[13]. The systemic risk is familiar, but hiding in a different corner.
Another parallel to the subprime era is the emergence of outright fraud and poor underwriting as the boom matures. In the frenzy to deploy billions in capital, some lenders clearly dropped their standards. “In the search for yield… there has been a lack of care around underwriting standards,” one U.S. consumer advocate noted recently[14]. We’re seeing deals that call to mind 2006’s infamous no-income loans – except now it’s lending to companies with dubious financials. Just as subprime mortgages were often predicated on rosy assumptions that housing prices would always rise, many private loans to businesses were made on the assumption that ultra-low rates and benign economic conditions would persist. That assumption is unraveling in real time.
Mapping the Shadow System — Who the New Lenders Are
Who are the players in this shadow credit boom? It turns out, they include some of the world’s largest and most sophisticated financial firms – as well as some fast-and-loose upstarts. Here’s a quick map of this parallel lending universe that has grown since 2008:
Alternative Asset Managers: In the U.S., private credit is dominated by giants better known for private equity. Firms like Blackstone, Apollo, Ares, KKR, and others have amassed massive credit arms[15]. They raise money from pension funds, insurance companies, endowments, and wealthy individuals, then lend it out to corporations. These managers operate private credit funds that can range from middle-market direct lending pools to distressed debt funds. Crucially, they do not take deposits and thus face far less regulatory scrutiny than banks. Blackstone’s CEO famously dubbed their flagship private credit fund a “shadow bank” – a term that has stuck.
Business Development Companies (BDCs): BDCs are a special type of U.S. investment vehicle that bundles private loans to mid-sized companies and trades on the stock market like a fund. They’ve become immensely popular as a way for retail investors to get a slice of the private credit action. However, recent events have shown BDCs’ vulnerability. Many BDC share prices have slumped in the wake of credit scares, reflecting fears about the true value and risk of the loans they hold[16]. These public funds effectively democratized shadow lending, but also potentially democratize the pain if those loans sour.
Insurance, Pension, and Asset Managers: It’s not just alternative PE firms. Many insurance companies and pension funds now have their own direct lending divisions[15]. They’ve become big players in private credit, attracted by the higher yields. For example, Canadian and European insurers have poured money into U.S. middle-market loans. These institutions typically fly under the radar, but their involvement means that risks in private credit could have wide tentacles (for instance, a pension fund’s losses ultimately affect retirees).
Fintech and Specialty Lenders: The shadow system also includes newer fintech-driven lenders and specialty finance firms. A cautionary tale here is Greensill Capital, a UK-based finance firm that wasn’t a bank but provided supply-chain financing to companies globally. Greensill collapsed spectacularly in 2021 due to opaque risks[17], foreshadowing the kind of opacity we now see in cases like First Brands (more on that shortly). Similarly, peer-to-peer lending platforms and online direct lenders have sprung up, some catering to subprime consumer credit, others to small businesses – all largely outside traditional bank oversight.
What all these shadow lenders share is freedom from bank-like regulation. They don’t have to hold statutory capital buffers or make public loan disclosures the way banks do[6]. They’re often leveraging “regulatory arbitrage” – benefitting from doing bank-like business without bank-like rules[6]. That gives them flexibility and speed: loans can be made in weeks on flexible terms, something banks struggle with. It’s part of why companies (and investors) flocked to them. But it also means the system lacks the shock absorbers and transparency of the traditional banking system. In effect, we’ve replicated a huge banking-like credit machine without the guardrails. Banks and shadow lenders have also become deeply intertwined – big banks provide credit lines and securitization deals for private credit firms, and in Europe especially, banks have significant exposures to these non-bank lenders[5][18]. The shadow system is vast, connected – and until recently, largely presumed by the public to be benign.
For years, this arrangement seemed to work nicely: borrowers got capital, investors got high yields, and banks offloaded risk. The Emperor’s New Clothes illusion – that everything was fine – persisted. In fact, I wrote in June 2025 (“The Emperor’s New Clothes and the Coming Economic Crash”) that we were ignoring clear warning signals and repeating pre-2008 mistakes, simply because the risk was hiding in a different costume[19][20]. We had a larger bubble, but it was harder to see. Now, however, cracks in the shadow edifice are beginning to show. The hidden fuse is getting shorter.
Measuring the Hidden Fuse
How can we measure this hidden fuse before it blows? One way is by looking at the sheer scale and growth of private credit – which we did above (a tripling in a decade to ~$3 trillion[9]). Another measure is the quality of loans and signs of strain within that pool. We’ve already noted that default forecasts for junk-rated corporate debt are elevated. Additionally, metrics like the CDX High Yield index – which reflects the cost to insure against junk bond defaults – have been flashing amber. In the weeks after the recent credit scares, the CDX High Yield spread widened noticeably, indicating rising investor nervousness about defaults (the index moved from roughly 280 to over 320 basis points, a significant jump)[21]. This kind of widening in credit spreads is often a harbinger of trouble, much like how widening mortgage spreads signaled distress in 2007.
Another way to gauge the hidden risk is via liquidity mismatches – essentially, whether the funds that made illiquid loans can meet investors’ redemption requests. In the regulated mutual fund world, this risk is tightly managed. But in private credit, many vehicles promise periodic liquidity to investors while holding hard-to-sell loans. We’ve started to see stress here too: several large private real estate and credit funds had to gate (limit) redemptions when too many investors asked for their money back. A prime example is Starwood’s SREIT, a $20+ billion non-traded real estate income trust. Facing a flood of withdrawal requests amid falling commercial real estate values, SREIT imposed strict limits on redemptions starting in early 2023, allowing only a trickle of cash out each month[22][23]. Even by mid-2025, SREIT still had about $850 million in backlogged withdrawal requests waiting to be honored[24] – essentially a queue of investors wanting out, but unable to get their money immediately. This is a clear sign of liquidity stress in the shadow system. The fund sold over $1.6 billion in properties to raise cash and loosen the caps slightly[25][26], but investor confidence was shaken. If redemptions accelerate broadly in private credit funds, many will face the same dilemma: sell assets fast (if they can) or freeze withdrawals. Either choice can transmit stress to markets.
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Regulators and analysts have begun crafting metrics to monitor these risks. The Bank of England, for instance, just announced a plan to run system-wide stress tests involving banks and non-bank lenders together[27][28] – effectively trying to measure what happens if the fuse ignites. One telling comment from the BoE Governor: he drew parallels to the “early stages of the global financial crisis” and openly wondered if recent blowups are “the canary in the coal mine”[29]. When a central banker starts talking in those terms, you know the hidden fuse is very much on their radar.
In sum, we measure the hidden fuse by looking at scale (trillions in exposure), credit quality (default odds rising), market pricing (spreads widening), and liquidity pressure (redemption gates, asset fire-sales). By all these measures, the fuse is lit. The only question is how fast it burns.
Where Cracks Are Emerging
If the Everything Bubble is heading toward a “pop,” what might light the fuse? Increasingly, it looks like the catalyst will come from the shadow credit system itself. In recent months, specific cracks have appeared – high-profile failures and distress signals – that illustrate where the system is weakest:
First Brands Group – Off-Balance Sheet Implosion: Perhaps the most alarming case has been First Brands, a massive auto parts conglomerate. In September 2025, First Brands filed for bankruptcy, listing over $10 billion in liabilities[30]. The shock wasn’t just the size of the debt but how much of it had been hidden off-balance sheet. First Brands had used opaque financing maneuvers – borrowing against invoices (factoring) and other forms of private credit – to keep debt off its books[31]. This effectively turned a mundane manufacturing firm into a highly leveraged finance company without investors realizing it[31]. The speed of the collapse was stunning; First Brands went from seemingly stable to insolvent in a blink, spooking Wall Street[32]. As more details emerged, they were troubling: a creditor (Raistone) alleged that $2.3 billion simply vanished in the company’s maze of deals[33]. The U.S. Department of Justice launched an inquiry, suspecting fraud[34]. Major financial institutions turned out to be exposed – UBS and Jefferies each stand to lose hundreds of millions, and a Japanese bank consortium faces a whopping $1.75 billion hit[35][36]. Charts mapping First Brands’ $9.3 billion debt web showed dozens of lenders, from CLOs to ad-hoc creditor groups[13][37]. First Brands is, in many ways, a microcosm of the hidden fuse: complex, off-balance-sheet borrowing, distributed across the shadow system, with poor transparency. “This will get attention because of the opaque nature of First Brands’ structural complexities,” one portfolio manager noted, “and that could tighten standards for all lenders.”[38] In other words, First Brands is forcing everyone to ask: How many more firms have ticking time-bombs in their financing? Even the Bank of England’s head, Andrew Bailey, cited First Brands as a potential harbinger of broader problems[39].
Tricolor Auto – Subprime by Another Name: Just as First Brands signaled hidden corporate leverage, Tricolor Holdings – a Texas-based auto lender – highlighted dangers in consumer credit within the shadow system. Tricolor specialized in car loans to borrowers with poor credit (essentially subprime auto loans) and was itself funded by private credit. In mid-September, Tricolor collapsed into bankruptcy amid fraud allegations[40]. The CEO of JPMorgan, Jamie Dimon, later quipped, “When you see one cockroach, there are probably more,” referring to Tricolor and First Brands[41][42]. Indeed, Tricolor’s failure revealed that multiple banks were on the hook for its loans: Fifth Third Bank disclosed a potential $200 million loss, and JPMorgan ate a $170 million write-off[43][44]. The “cockroaches” in Dimon’s analogy are the likely other weak credits lurking out there – perhaps other subprime auto portfolios, consumer loan fintechs, or highly leveraged companies ready to go bust when the music stops. Tricolor’s tale also underscores how shadow banking problems boomerang back to traditional banks (more on that in the next section). If subprime auto loans are failing, one has to wonder about other consumer credit – credit cards, personal loans – that thrived in the low-rate era via non-bank lenders. As one professor observed about First Brands and Tricolor, “the fear is that the private debt market has been too hot, giving out money at high interest rates to companies that just can’t pay it back…especially in the auto market.”[45] We’re starting to see precisely that.
Publicly Traded Canary – BDCs & Credit Stocks Slump: The pain isn’t confined to bankrupt companies. We also see it in market pricing for the lenders. The share prices of several publicly traded private credit vehicles and asset managers have lagged badly in recent months, underperforming the broader market. Investors are effectively pricing in greater risk and potential losses in these firms’ loan portfolios. This divergence – credit specialists dropping while the overall market climbs – is a classic early warning sign. It mirrors 2007, when bank stocks quietly began underperforming even as equity indices hit new highs. Here, it’s BDCs and alternative asset managers feeling the heat. In fact, some of the largest BDCs have traded at big discounts to their stated NAV (net asset value), implying that investors don’t fully trust the value of the loans on their books. This skepticism intensified post-First Brands. As Bloomberg noted, BDCs have become a “battleground” for traders looking for weakness in credit markets[46]. Fears about underwriting standards and valuation methods are mounting[16] – basically, concerns that the loans were made too cheaply and that the assets are marked too optimistically. This is a key crack: if confidence in the pricing of private credit assets erodes, the whole edifice can start to wobble (since these funds rely on investor trust in their reported values).
Freezing the Exits – Redemption Gates and Withdrawals: I touched on SREIT’s troubles earlier as a measure of stress. It’s worth underscoring: when investors rush for the exits and funds lock the doors, panic can spread quickly. We saw a mini-version of this in late 2022 and 2023 with private real estate trusts (Blackstone’s BREIT and Starwood’s SREIT) limiting withdrawals. Those incidents were contained, but they set precedents. In the credit space, there are private debt funds and interval funds that offer periodic liquidity. Any sign that one of these is suspending redemptions or heavily pro-rating withdrawals is a red flag. It means investors are nervous and the fund can’t easily meet demands – usually because selling loans in a hurry is hard without taking a big loss. So far, we haven’t seen major credit funds gate en masse, but industry analysts are on high alert. “A broader sell-off in private credit and mass redemptions would expose these vehicles to their first real test, bringing liquidity mismatches to the surface and putting portfolio valuations under pressure,” warned a Morningstar strategist recently[47][48]. In other words, the first big wave of exit requests could force a painful unwinding. This is precisely what could ignite the fuse, turning isolated issues like First Brands into a systemic fire.
To sum up the cracks: a large company blew up in an accounting/funding scandal (First Brands), a significant lender failed due to bad loans (Tricolor), market prices for shadow credit firms are flashing warnings, and some funds are straining to meet redemptions. These are early tremors along the fault lines of the Everything Bubble. Each on its own might be considered “idiosyncratic” (as some optimists insist[49]), but taken together they paint a clear picture of mounting stress in the credit system that underpins the bubble.
The Transmission — How It Reaches the Banks
A critical question arises: if the trouble is in shadow banks, why not let them burn without endangering the wider system? After all, these entities aren’t federally insured banks. The answer is twofold: interconnections with real banks, and knock-on effects on the economy at large.
First, traditional banks are far from aloof bystanders – they are deeply enmeshed in the private credit ecosystem. Banks lend to the lenders, finance the financers, and sometimes co-invest alongside them. Recent events have illustrated this vividly. Regional banks in the U.S., for example, have disclosed sizable losses linked to loans made alongside shadow lenders. Utah-based Zions Bank admitted it lost about $50 million on two supposedly “industrial” loans that in reality involved “apparent misrepresentations” – essentially fraud[50][51]. Another regional bank, Western Alliance, revealed a similar lawsuit over a commercial real estate loan gone bad, also citing possible fraud[52]. These cases suggest some banks have been indirectly funding shadowy deals that weren’t what they seemed. In both instances, the banks had unnamed ultra-wealthy individuals guaranteeing the loans – a structure common in private credit club deals[53]. When those guarantees proved hollow, the banks were left holding the bag.
The Tricolor collapse further showed bank entanglement: JPMorgan’s $170 million write-off and Fifth Third’s $200 million hit came because they had extended credit to Tricolor (or its financing vehicles)[43][44]. These are not small losses, even for large banks. Jamie Dimon’s “cockroach” remark was effectively an admission that even JPMorgan, the largest U.S. bank, can get caught with its hand in the private credit cookie jar[41]. And it’s not just U.S. banks. The First Brands case implicated UBS, a Swiss banking giant, and even entangled a Japanese bank (Norinchukin) via a complex lending vehicle[54][36]. Banks globally have been reaching for yield too, often by participating in or providing credit lines to these shadow deals. This means when a private credit blow-up happens, bank balance sheets feel it – either through direct losses or through hits to investments they’ve made in private credit funds.
Second, aside from direct losses, there’s the channel of contagion via asset markets and the real economy. If private credit funds start dumping loans to meet redemptions, who steps in to buy? Often, it may be banks or broker-dealers, but at fire-sale prices that then mark down the value of similar assets on banks’ books. For instance, if a bunch of leveraged loans get sold at 80 cents on the dollar, every bank holding comparable loans or CLO tranches might have to mark to market – suddenly their capital ratios look worse. This is akin to 2008 when banks didn’t own tons of subprime loans outright, but once CDOs collapsed, the values of many related assets tanked, imperiling bank solvency.
There’s also the credit crunch transmission: as shadow lenders pull back (or blow up), borrowers lose financing and can default on other obligations, including bank loans. A private equity-owned company that can’t refinance its private loan may also default on its bank revolver. Or consider real estate: if a non-bank mortgage lender collapses, borrowers might default and property values fall, hurting bank mortgage portfolios. In short, the fates of shadow banks and real banks are more entwined than it appears. “We simply don’t know the actual financial condition of most of these [shadow] assets,” one portfolio manager remarked, “somebody is going to have to take on these losses.”[55][56] Ultimately, that “somebody” often ends up being a bank or a public investor.
Regulators are acutely aware of this linkage now. That’s why the Bank of England’s planned stress test will include banks and non-banks together[29][57] – essentially acknowledging that in a crisis, the distinction blurs. In the U.S., officials have also fretted (mostly behind closed doors) that they lack good visibility into where the risks sit, but they know a real mess would hit the banking system one way or another. During recent earnings calls, U.S. bank CEOs tried to reassure investors. Citigroup’s CFO noted they saw “no particular distress” in corporate credit and claimed Citi had “no exposure” to the trouble names[58]. Goldman’s finance chief similarly insisted their underwriting is disciplined and they avoided the First Brands/Tricolor deals[59]. Those statements are meant to calm – and they may well be true for those specific banks. But the very fact they had to address the topic shows how on edge everyone is about who might be holding the bag.
Another transmission path is through confidence and funding markets. If one big shadow lender were to fail suddenly, it could spook the short-term funding markets where banks raise cash. We got a taste of this in March 2023 when the collapse of non-bank crypto lenders and some regional banks sent interbank lending rates jumping and forced the Fed to intervene. In a full-blown credit event, banks might start hoarding liquidity and pulling back lending even to healthy businesses, simply out of fear. That’s how something starting in the shadows can rapidly cause a credit crunch in the real economy.
In summary, the firewall between shadow credit and traditional banking is paper-thin. Exposures, asset fire-sales, borrower defaults, and plain old fear provide numerous channels for contagion. As I wrote in The Monetary House of Cards, our financial system today is so interconnected that a tremor in one corner can bring down the whole house[60][61]. The shadow system was supposed to absorb risk away from banks, but in a severe stress, it may instead transmit and amplify that risk right back into the heart of the financial sector.
The Pop of the Everything Bubble
Let’s step back and consider the bigger picture – the “Everything Bubble” that I and others have warned about (in June’s Emperor’s New Clothes piece, and in my book The Monetary House of Cards). This bubble encompasses stocks at extreme valuations, real estate prices that soared on cheap credit, record high global debt levels, and even speculative manias in crypto and tech. It has been inflated by years of near-zero interest rates and massive money printing by central banks. I’ve argued that this is likely the largest financial bubble in history[62][20]. Now, every bubble needs a “pin.” The emerging cracks in the private credit system are a prime candidate for that pin.
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Here’s how it could play out: The private credit fuse ignites, meaning a major wave of defaults or fund failures occurs – beyond just one or two “idiosyncratic” cases. Perhaps a well-known credit fund halts redemptions or a large borrower default triggers panic selling of similar loans. Suddenly, investors who yesterday were complacent realize that nobody really knows what these loans are worth or who is exposed. Confidence evaporates. Just as in 2008 when questions about mortgage bonds froze the commercial paper market, questions about private credit could freeze credit markets now.
If credit markets seize up, companies across the spectrum lose financing. Highly leveraged firms that relied on rolling over loans or tapping new credit will be cut off. This could lead to a cascade of corporate bankruptcies. We might see defaults not just in obscure companies but even well-known corporates that had binged on cheap debt. Ratings downgrades would accelerate; credit spreads would shoot through the roof as investors demand huge premiums to lend. Essentially, the easy credit era ends with a violent snap-back – the sudden realization that much of the debt out there can’t be refinanced under tighter conditions.
What happens when companies fail en masse? Unemployment surges, consumer spending contracts, and the economy slides into recession. That part is straightforward. But layered on top is the bursting of the asset bubbles. As defaults rise and earnings fall, the stock market – which has been priced for perfection – will likely crater. The S&P 500 and Nasdaq could rapidly shed 30, 40, even 50% as the air comes out of highly inflated valuations. Remember, by some measures stocks in 2025 traded at higher valuations than even 1929 or 2000. One metric I often cite is Market Cap-to-GDP (the Buffett Indicator), which in recent years hit unprecedented highs around 2x (double the size of the economy) – far above 1929 levels. When the credit underpinning the economy gives way, those lofty valuations have no choice but to fall back to earth. We could see a simultaneous crash in equities, corporate bonds, and parts of real estate. In effect, the Everything Bubble pops – because the confidence and cheap money that inflated everything disappear.
Why might this bust be harder to contain than 2008? There are a few key reasons:
The epicenter is dispersed and opaque: In 2008, the immediate problem was clear – banks stuffed with bad subprime loans and derivative exposures. Regulators at least knew which major banks to ring-fence (Bear Stearns, Lehman, etc.). Today’s potential ground zero is a web of non-bank entities. Who do you bail out or backstop when a private credit fund implodes? The Fed and other central banks have authority to lend to banks, but not so straightforwardly to an insurance company’s side fund or a private equity vehicle. As a result, coordination and speed of response could be slower. Authorities might find themselves trying to prop up parts of the market (like buying corporate bonds or CLO tranches) with less direct impact than, say, guaranteeing bank deposits.
Central bank constraints: In 2008-09 and again in 2020, central banks slashed rates to zero and unleashed trillions in quantitative easing (QE) to reflate markets. This time, they face higher inflation and already high debt levels, which complicate the calculus. As I speak, policy rates are relatively high (after aggressive hikes in 2022–2023 to tame inflation). If a crisis hit, yes, the Fed could cut rates – but from ~5% downwards, not from 5% to 0% as quickly as in past episodes without risking inflation flare-ups. They will be trying to ease monetary policy in a far more inflationary environment. The bond market may not tolerate unlimited QE if inflation expectations are unanchored. In short, the “central bank put” that everyone expects may not be as large or immediate, or if it is, it could bring its own side effects (currency volatility, inflation). This is a key theme in my work: policymakers inadvertently built a house of cards by always riding to the rescue – now that house is wobbling and their tools are less effective[61].
Scope of the bubble: We have multiple bubbles co-existing – stock bubble, credit bubble, real estate bubble (in certain markets), even a crypto bubble reborn in 2025. Containing one is hard; containing all at once is vastly more challenging. Back in 2000, the bursting of the Tech Bubble, while severe, was largely equity-focused and the Fed was able to cushion it by cutting rates (setting the stage for the housing bubble, incidentally). In 2008, housing and credit imploded, but stocks were actually not as overvalued beforehand. Now everything is tied together: if credit goes, housing and stocks fall; if stocks crash, it feeds back to the economy and credit. It’s a doom loop potential that’s broader than previous crises.
Psychological shock: This boom lasted so long – essentially 14 years from 2009 with one pandemic interruption – that a whole generation of investors believes central banks can always save the day and that dips are buying opportunities. A truly hard landing, triggered by a credit implosion, would shatter that confidence. Once sentiment flips to fear, controlling the downward spiral is hard. “Gradually, then suddenly,” as Hemingway wrote about bankruptcies – that’s how the crash could unfold[63]. We may well go from mild concern to full-blown panic in a matter of weeks. The velocity of modern markets (with algos, ETFs, instant data) means things could unwind faster than in past eras.
In my interviews and models, I have warned that the coming recession could be worse than the 1930s in some respects[61]. That’s not hyperbole; it’s looking at the debt and valuations versus the real economy. If the Everything Bubble pops, we are staring at the possibility of a deflationary bust of historic proportions – a true “recession of the century.” The quote I opened with isn’t just a catchy line; I sincerely believe the bust will match the bubble. We had the biggest bubble ever, so we must be prepared for one of the biggest crashes ever. The hidden fuse of private credit is likely what sets it off, but the explosive force comes from the massive excesses across all financial assets that have built up.
From here, the key is to watch those seemingly arcane corners of the market: the private BDC that delays its quarterly report, the credit index quietly spiking, the default of a mid-sized company you never heard of – these are the tells that the unravelling is accelerating. By the time the mainstream realizes the bubble is bursting, the markets will already be over the cliff.
Closing Reflection
Standing back from the minutiae, there’s an irony that isn’t lost on me. We reformed the system after 2008 to prevent another meltdown – higher bank capital, stress tests, oversight of derivatives. And indeed, the banks today are “safer” in those narrow terms. Yet, like water finding a crack, risk simply flowed into a new vessel. We ended up with an even larger edifice of debt, just resting on different pillars. In June, I described the situation as the Emperor’s new clothes – a naked bubble prancing around while most observers ooh and aah at its apparent finery. Now, a few months later, threads are coming loose, and some crowd members (investors, regulators) are starting to gasp in realization.
The Everything Bubble will not last; all bubbles pop. What matters is that we identify how and why this one will pop so we can prepare and perhaps mitigate the damage. The private credit boom, this great migration of risk off banks’ balance sheets and into the shadows, has gone from being the solution to 2008’s problems to being the cause of the next one. It is the hidden fuse that most will say “nobody could’ve seen coming” – but as I have chronicled, the warning signs are all around us if we choose to see them.
In my TEDx talk, I reminded people not to be lulled by the mantra “this time is different.” History may not repeat exactly, but it certainly rhymes. The excesses of the 1920s led to the crash of 1929. The excesses of the 2000s led to 2008. And the excesses of the 2010s–2020s – spanning every asset class – are leading us toward a reckoning now. We’ve lengthened the fuse compared to 2008, yes. We moved the powder keg out of the well-lit bank vault and into a dark corner of the financial system. But in doing so, we let it grow larger and drier. Now the spark has landed on that fuse.
As I finish writing this, I think of the closing chapter of The Monetary House of Cards, where I concluded that central bank hubris and collective denial would ultimately be tested by reality[60]. That testing moment is near. The coming bust will be painful, but perhaps necessary to purge the system of its illusions. My hope is that by shining a light on the hidden fuse, we at least won’t be surprised when the explosion comes. Forewarned is forearmed.
We are in the calm before the detonation. Use this time wisely – check your own financial safety exits, question the consensus, and be prepared for the fact that when the fuse hits the powder, the blast will be as big as the bubble itself.
Stay safe, stay rational, and as always – keep your eyes open.
Henrik Zeberg (October, 2025)
Notes
1. Post-2008 Shift to Shadow Banking: “Private credit… boomed after the 2008 financial crisis, when regulators cracked down on traditional banks and forced them to hold more capital.” Banks had to slow risky lending, opening a gap filled by non-bank lenders[2][3]. Ultra-low interest rates made it easy for private credit funds to leverage up with bank financing[7]. This migration of risk was especially pronounced in jurisdictions with strict bank rules[8].
2. Scale of Private Credit Boom: Private credit AUM grew from about $2 trillion in 2020 to $3 trillion by early 2025, and is forecast to reach ~$5 trillion by 2029[9]. By 2024, the industry was estimated around $3 trillion globally[10] – still smaller than banks (global banking assets ~$189 trillion)[64], but growing fast. BlackRock predicts $4.5+ trillion by 2030.
3. Regulatory Arbitrage and Opaque Risk: Unlike banks, private credit firms don’t hold capital buffers or disclose loan risks publicly, exploiting a regulatory arbitrage[6]. They operate in the “shadow banking” sector, raising money from pension funds, insurers, and wealthy investors to make loans[5][15]. This can lead to weaker underwriting standards in the chase for yield[14] and a lack of transparency – “we don’t really know what’s going on” inside many of these portfolios[56].
4. Hidden Subprime – Corporate Debt: Corporate credit risk has surged. Moody’s end-2024 data put the average one-year default probability at 9.2%, the highest since the financial crisis[11]. Fitch projects 2025 defaults of 5.5–6.0% on leveraged loans and ~4.5% on high-yield bonds[12], up from recent years. Many loans are covenant-lite and made to highly leveraged borrowers, analogous to subprime mortgages in risk profile. Meanwhile, CLOs (which bundle corporate loans) hold meaningful portions of troubled debts like First Brands[13], echoing the CDO structures of 2008.
5. First Brands Group Collapse: First Brands, an auto-parts conglomerate built via debt-fueled acquisitions, filed Chapter 11 in Sept 2025, listing $10–50 billion in liabilities[30]. It had used off-balance-sheet factoring to hide debt, turning itself into a heavily leveraged “shadow finance” company[31]. A creditor alleged $2.3B went “simply vanished” amid complex financing[33]. Big institutions exposed include Jefferies and UBS (with losses in the hundreds of millions)[65][54], and a Norinchukin/Mitsui venture ($1.75B exposure)[36]. Charts of First Brands’ $9.3B debt breakdown (ABL loans, term loans, unsecured/off-balance-sheet obligations) underscored the fragility of such opaque structures[66][67]. The case, though deemed “idiosyncratic,” heightened scrutiny of private credit’s lack of transparency[38][55].
6. Tricolor Auto Lender Failure: Tricolor, a Texas-based subprime auto lender, went bankrupt in Sept 2025 amid fraud allegations[40]. It specialized in loans to low-income borrowers, and its collapse left numerous banks on the hook – e.g. JPMorgan wrote off $170M and Fifth Third flagged ~$200M in potential losses[44][43]. Jamie Dimon warned on an analyst call, “When you see one cockroach, there are probably more… If we ever have a downturn, you’re going to see quite a few more credit issues,” likening Tricolor and First Brands to early signs of excess after a long credit boom[41][68].
7. BDC and Asset Manager Strains: Publicly traded Business Development Companies and alternative asset managers involved in private credit saw their stocks drop sharply in late 2025, underperforming the S&P 500. (See Chart 2 above.) This reflects investor concern about loan asset values and potential losses[16]. For example, Ares Management’s stock was down ~20% over Aug–Oct 2025 while the broad market rose (data per Reuters graphic)[69][70]. Such divergence signals skepticism about the valuation and liquidity of private credit loan portfolios.
8. SREIT Redemption Freeze: Starwood’s Real Estate Income Trust (SREIT), a $22.6B non-traded REIT, imposed “industry-leading limits” on redemptions in early 2023 amid a wave of withdrawal requests[71][22]. As of June 2025, it still had ~$850M in pending withdrawals and had sold $1.6B in properties to raise liquidity[25][24]. SREIT’s net asset value fell ~40% from its 2022 peak, and even with some easing of caps (monthly withdrawal limit raised from 0.33% to 0.5% of NAV)[26], investor confidence remained shaken. This episode highlights liquidity mismatches – investors expecting to cash out versus illiquid underlying assets – a scenario that could play out in credit funds if panic sets in.
9. Bank Exposure & “Cockroaches”: Large banks have intertwined exposure to the shadow credit system. Aside from direct hits via Tricolor and First Brands (noted above), regional banks like Zions and Western Alliance disclosed losses on fraudulent loans linked to non-bank lending deals[50][51][52]. JPMorgan’s CEO noted the bank has since “scoured every issue… to make sure it doesn’t take place from here”[72][73], implying a review of controls after their Tricolor loss. BlackRock’s CFO commented that the headline bankruptcies “look more like idiosyncratic pockets of stress” and claimed they’re mostly impacting syndicated loans and CLO markets rather than direct lending books[49] – but this underscores that the regulated market (syndicated loans) and unregulated market are connected (CLOs buy loans from both). Citi’s CFO similarly tried to allay concerns, saying they have “no exposure” to the names in question[58]. Nonetheless, regulators like the Bank of England see parallels to 2007 and are launching system-wide stress scenarios including banks, private equity, and other non-banks to gauge systemic risk[27][28].
10. Henrik Zeberg References: This article builds on my prior analyses. “Final Warning: The Emperor’s New Clothes and the Coming Economic Crash” (June 2025) outlined why the current environment is the largest bubble ever and highlighted that ignored warning signals and complacency would lead to a crash[19][20]. My book “The Monetary House of Cards – The Bust of the Everything Bubble caused by Central Bank Hubris” (2025) discusses the fragility of a financial system propped up by easy money[60]. I argue that years of zero rates created an unstable boom destined to collapse – a view reiterated in my interviews forecasting a severe recession, potentially worse than 1929[61]. In my Sept 2025 TEDx talk, “Is the AI bubble going to burst?”, I warned against the mindset of “this time is different,” urging awareness of historical boom-bust patterns[1]. All these pieces converge on the theme that the Everything Bubble’s pin may well be the seemingly arcane world of private credit – the hidden fuse now sparking toward detonation.
[1] Is the AI bubble going to burst? | Henrik Zeberg | TEDxLilla Torg
[2] [3] [4] [5] [6] [7] [10] [15] [18] [64] What is private credit, and should we be worried by the collapse of US firms? | Economics | The Guardian
[8] The global drivers of private credit - Bank for International Settlements
https://www.bis.org/publ/qtrpdf/r_qt2503b.htm
[9] Private Credit Outlook: Estimated $5 Trillion Market by 2029 | Morgan Stanley
https://www.morganstanley.com/ideas/private-credit-outlook-considerations
[11] US firms’ default risk hits 9.2%, a post-financial crisis high - Moody’s
https://www.moodys.com/web/en/us/insights/data-stories/us-corporate-default-risk-in-2025.html
[12] US Corporate Default Landscape Reshaped by Surprise Bankruptcy ...
[13] [34] [35] [36] [37] [38] [47] [48] [54] [55] [65] [66] [67] [69] [70] Mapping the scale of beleaguered First Brands’ debts and its creditors | Reuters
[14] [43] [50] [51] [52] [53] Rise of ‘shadow banking’ brings new financial risks, experts say - The Washington Post
https://www.washingtonpost.com/business/2025/10/18/first-brands-tricolor-shadow-banking-risk/
[16] [46] BDCs, Private Credit’s Most Popular Funds, Are Drawing Scrutiny - Bloomberg
[17] [30] [31] [32] [33] [40] [45] [56] First Brands: why a maker of spark plugs and wiper blades has Wall Street worried | Business | The Guardian
https://www.theguardian.com/business/2025/oct/10/first-brands-wall-street
[19] Final Warning: The Emperor’s New Clothes and the Coming ...
[20] Posts with replies by Raghav Tandon (@raghavtandon811) / X
https://twitter.com/raghavtandon811/with_replies
[21] ICE BofA US High Yield Index Option-Adjusted Spread - FRED
https://fred.stlouisfed.org/series/BAMLH0A0HYM2
[22] [23] [24] [25] [26] [71] Withdrawal Requests Climb at Starwood REIT - CRE Daily
https://www.credaily.com/briefs/withdrawal-requests-climb-at-starwood-reit/
[27] [28] [29] [39] [57] Bank of England’s Bailey says First Brands, Tricolor collapses may herald worse to come | Reuters
[41] [42] [44] [49] [58] [59] [68] [72] [73] First Brands, Tricolor collapses raise fears of credit stress, with Dimon warning of ‘more cockroaches’ | Reuters
[60] Henrik Zeberg: Everything Bubble Bust Coming After Final Blow-Off Top - Buyside Digest
[61] [63] Recession of the Century? Henrik Zeberg Warns of Massive Market Crash! - Wealthion
https://wealthion.com/recession-of-the-century-henrik-zeberg-warns-of-massive-market-crash/
[62] Henrik Zeberg on X: “I wrote this article in June. “The Emperor’s New ...
Henrik!
Great work as usual.
I have a really dumb question.
You work seems to be gaining traction in the mainstream.
Are you not worried that the popularity of your thesis will get Crypto and the Markets to top now and never put in a Blow Off Top?