Remember 2007? Yeah, that year when everyone thought housing prices only went up and Bear Stearns was still a thing. Well, Mohamed El-Erian—the guy who used to run PIMCO and basically predicted every financial hiccup since the dawn of time—is getting some serious déjà vu vibes.
Here’s what’s got him spooked: Blue Owl Capital, one of those fancy private credit firms that manages money for rich people (and increasingly, regular people too), just permanently froze withdrawals on one of their funds. Think of it like your bank suddenly saying “Sorry, you can’t access your savings account anymore. Forever.”
Now, before you panic-Google “how to stuff cash under mattress,” let’s break this down. Private credit is basically lending money to companies that can’t or won’t go through traditional banks. It’s been the hot new thing on Wall Street—assets under management have exploded from $1.2 trillion to $2.2 trillion in just five years. That’s a lot of zeros.
But here’s where it gets interesting (and by interesting, I mean potentially terrifying). El-Erian is drawing parallels to August 2007, when BNP Paribas froze three of their funds because they couldn’t figure out what their assets were actually worth. That little move is now considered the opening act of the 2008 financial crisis. You know, the one that made “too big to fail” a household phrase.
The problem with private credit is it’s like that trendy restaurant with no prices on the menu—you never really know what you’re paying until it’s too late. These investments are illiquid (fancy talk for “good luck selling them quickly”) and opaque (fancy talk for “who knows what’s actually in there”).
El-Erian thinks we might be dealing with what economists call a “market for lemons” situation. Imagine if all the good used cars disappeared from the lot because sellers knew buyers couldn’t tell the difference between a gem and a lemon. Eventually, you’re left with just the lemons, but everyone’s still paying premium prices.
Jamie Dimon, JPMorgan’s CEO and professional pessimist, has been warning about “cockroaches” lurking in private credit. And if there’s one thing we’ve learned about cockroaches, it’s that where you see one, there are probably dozens more hiding behind the financial equivalent of your kitchen cabinets.
So what does this mean for you? Well, if you’ve got money in private credit funds (maybe through your 401k or some investment advisor’s “alternative strategy”), it might be time to ask some hard questions. Like, “Can I actually get my money out if I need it?” and “What exactly am I invested in?”
The good news? We’re not in 2008 territory yet. The bad news? El-Erian rarely sounds the alarm for fun. When a guy who’s been right about pretty much every major financial crisis starts using phrases like “canary in the coal mine,” it’s probably worth paying attention.
The private credit boom has been fun while it lasted, but all parties eventually end. The question is whether we’re looking at a gentle wind-down or another “hold my beer” moment for the financial system.