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The part that rhymes with 2006-2008 is that Banks were providing warehouse lines to Mortgage Co.'s who would then originate mortgages & Wall Street would buy them, repackage them (MBS/CDO's) & sell them to the world. When delinquencies spiked, the Banks pulled the lines & companies like Countrywide & New Century were left holding the mortgages on their balance sheets and the rest is history. The Banks benefit from lending to Private Equity/Credit in similar/different ways: fees related to IPO's/M&A, fees related to offering/selling these products to retail investors on their platforms, offloading assets from their balance sheets etc. As soon as liquidity is reduced/pulled, it exposes leverage & pockets of poor underwriting. While regulators & investors take comfort in thinking that deterioration in "Private Credit" doesn't pose a significant risk to Banks, it could still reverberate through many other areas of the markets and economy.
Mohamed A. El-Erian@elerianm
Following JPMorgan’s announcement earlier this week (please see earlier post), here’s Bloomberg on “back leverage:” “Private credit funds, already on the defensive amid an unprecedented investor exodus and a number of defaulting borrowers, are now bracing for a battle with their go-to lenders: major banks.” #economy #markets #privatecredit #banks
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