Brian Judge warns that the financial system is increasingly exposed to complex deals that few can assess

A defining feature of financial markets is that the most important information is often held by those least likely to reveal it. The system’s inner workings are invisible to outside observers – which makes it all the more striking when leading Wall Street executives start sounding the alarm.

In October, JPMorgan Chase CEO Jamie Dimon warned of “cockroaches” lurking in the private credit market. His remarks quickly reverberated across the industry, with UBS Chairman Colm Kelleher pointing to the “looming systemic risk” posed by poorly regulated private credit, which he likened to the rating-agency failures that helped trigger the 2008 financial crisis.

At its core, private credit is lending that takes place outside the traditional banking system. Loans are made by investment funds, often managed by firms that specialize in corporate buyouts.

Unlike bank loans or publicly traded bonds, these deals lack transparent pricing, an active secondary market, and meaningful regulatory oversight. Terms are negotiated privately, valuations are set internally, and the investors whose money is at risk – often pensioners and insurance policyholders – have virtually no ability to verify any of it.

Despite – or perhaps because of this opacity – private credit grew rapidly after the 2008 crisis, as banks pulled back from riskier lending and private credit funds rushed to fill the vacuum. Today, the industry manages roughly $3.5 trillion.

The rise of private credit is often framed as a story of financial innovation, with traditional banks retreating and nimbler private lenders stepping in. But a closer look reveals a troubling, eerily familiar pattern: layers of leverage, widespread self-dealing, offshore regulatory arbitrage, and a feedback loop that ties the savings of millions of retirees to risky bets on AI data centers, leveraged software companies, and bundled loans marketed as safe investments.

Much of this activity is driven by private equity. When private-equity firms acquire companies, they typically rely on debt provided by private credit funds. But the initial buyout is just the beginning, as portfolio companies often undergo multiple rounds of borrowing to finance additional acquisitions, refinancings, dividend recapitalizations, and restructurings.

A single deal can therefore generate several separate transactions. In many cases, the lender and the private-equity sponsor are affiliated, allowing the same parent company to collect fees on both sides of the deal while deploying other people’s money – namely, retirees who believe their savings are safe.

Over the past decade, large alternative-asset managers have taken this model a step further by acquiring life-insurance companies. Apollo’s 2022 merger with Athene, which has roughly $400 billion in assets and serves more than 535,000 policyholders, helped set the template: insurers provide a steady stream of capital, and affiliated asset managers channel it into private credit, with profits generated at every step, from insurance float to deal fees and carried interest. Nearly every major alternative-asset manager has since followed suit.

Traditional banks making similar loans operate under strict capital requirements. Unlike private credit funds, they must hold reserves against potential losses, submit to regulatory scrutiny that can force write-downs, recognize losses before borrowers default, and undergo stress tests whose results are publicly disclosed. Against this backdrop, it is hardly reassuring that roughly one-third of the US life-insurance industry’s $6 trillion in assets is now invested in private credit.

To boost returns, these firms employ what industry analysts call the “Bermuda Triangle” strategy, whereby a single sponsor controls three interlinked entities: a life insurer, an asset manager, and an offshore reinsurer. The insurer gathers premiums; the asset manager channels those funds into private credit deals it originates and prices; and the reinsurer – typically based in Bermuda or the Cayman Islands – assumes the insurer’s liabilities under looser capital requirements than those imposed by US regulators.

The system is already showing signs of strain. Software companies, long a favored target for private-equity buyouts because of their steady revenues and low capital expenditures, are being repriced as AI threatens widespread disruption. Private credit funds’ exposure to the sector is an estimated $600-750 billion, fueling liquidity pressures. Blue Owl recently restricted withdrawals from a $1.7 billion retail fund, and Blackstone’s BCRED has recorded its largest net outflows since its inception. The shares of publicly traded alternative-asset managers have also fallen sharply.

These developments highlight a deeper structural problem. When the same firm originates a loan, holds it in a fund it manages, values it using its own models, and reports that value to an insurer it owns, the result is unlikely to reflect what an independent buyer would pay.

Whether turmoil in private credit markets could trigger a broader financial crisis is impossible to know in advance, but that uncertainty is itself part of the risk. Before 2008, few observers understood how vulnerabilities in the US subprime-mortgage market could cascade through the global financial system. There is no reason to assume that we have a better view of the risks in private credit markets today.

To be sure, none of this means a financial crisis is inevitable. But it does suggest that risk has migrated into less transparent structures, subject to lighter regulation yet still tied to government guarantees. The gains accrue to Wall Street, while the potential losses may once again fall on retirees and state insurance systems. In that sense, the echoes of 2008 are becoming hard to ignore.

Brian Judge is Research Director of the Program on Finance and Democracy at the University of California, Berkeley. Copyright: Project Syndicate, 2026, and published here with permission.