00:00I want to talk about this moment in private credit. There's been a ton of different analogies
00:03and metaphors used. One of the ones that you've used, you said in early April on X that basically
00:10we're in 2007 for private credit. I want to talk about the potential domino effects here because
00:17you think about any potential crisis in private credit, what is the actual read-through into
00:22markets more broadly, the economy more broadly, and what does that mechanism actually look like?
00:28I think the mechanism is already underway and the mechanism is a decline or elimination
00:35of trust because there's been so much reporting that is questionable in terms of the underlying
00:43activity. When I point out the one that really grabbed my attention last fall was there was
00:49a fund that was marked at 100 and overnight it was marked at 81. Now that is a hard to
00:56understand
00:56marked down by a not insignificant sponsor, one with a good reputation and a very large
01:01staff, supposedly doing underwriting and due diligence and tracking and all that sort of
01:06stuff. And yet it goes down 19% overnight. Now, many people don't quite fully understand
01:13the ramifications of that. They think about a stock that reports and it goes from 100 to
01:1981. And that's a big move, but there was a big earnings miss or something. These are portfolios
01:24of hundreds of loans, maybe thousands of loans in some cases. And 100 to 81 means either all the loans
01:31were marked down 19 points, all of them, or say, since I keep being told that everything's largely fine,
01:37let's say 50% of the loans are absolutely rock solid. That means that the other 50% were marked
01:43down 38 points. What if 75% of the portfolio is absolutely rock solid, which is kind of what the
01:52messaging has been, that it's mostly all good. I think one said no red flags, no orange, no yellow
01:58flags, and mostly green flags. Wait a minute, where's the other slice of the pie? No red, no yellow,
02:05and mostly green. What about the not mostly type of thing? But if 75% of the loans are absolutely
02:10rock
02:10solid, it means the other 25% were marked down to 20 to 24. Right? So, but what if it's
02:1710% of the
02:18loans? Oops, it'd have to be marked down to below zero. Right. So it's clear. And when we get these
02:26markdowns, it would be awfully helpful if they would say, this is how many loans we have, this is the
02:32dollar amount of loans we have, and this is how many were marked down. Right. Because we know the
02:37dollar amount of the markdown is the percentage. So how many are there? That was really, really big
02:42issue. But I've been saying, this is not just about private credit. This is something that is
02:49endemic to market cycles. This happened in the IPO of dot-coms back in the late 90s. They had no,
02:56they had no revenue, no business plan, and they were selling for large, large prices. And then of course,
03:02in the lead up to the global financial crisis, you had the mortgage market, the non-guaranteed
03:08mortgage market exploded in size to about where the private credit market is today, a little less
03:13actually, for those securitized mortgages, about $2 trillion. And it boomed. And of course,
03:20that ended up blowing up. It's all because the growth is so fast. That's what really drives it. And
03:27it can happen when there's a huge liquidity event, that money is pumped in from the government,
03:32some such thing as it wasn't during COVID. And suddenly, that money has to get deployed,
03:38and it can be indiscriminate. So I use the analogy of the Wild West. This is what I think really
03:43explains it in simple terms. You've got a nice town. It's 1840. And out on the frontier, you've got a
03:48little town, mostly farmers living off the land. And they're all God-fearing people. And they got a
03:53sheriff there. He's got a heart of gold. He's like Gary Cooper in High Noon. And there's very
03:58little crime. Every now and then, there'll be a murder of passion or something. But no one even
04:02locks their doors. You don't have to worry about it. And then something happens. And maybe there's
04:07a discovery of gold three miles away. And all of a sudden, all the fast buck artists and con men
04:13and
04:13rapscallions, they come flooding in. Not everybody's a rapscallion, but a sufficient fraction of them are
04:19rapscallions. And they're coming in there to hit it big and then get out. And suddenly,
04:24there's murders. You have to lock your door. You have to barricade your door.
04:28The sheriff is completely overwhelmed.
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