If any more leaders of finance want to warn about the imminent bursting of the private credit bubble, they will have to get in line. Jamie Dimon, the always opinionated head of JPMorgan Chase, has spoken of “cockroaches” in the system, which allows asset managers to make huge, lightly regulated loans to corporations. Danny Moses, who predicted the 2008 financial crisis in “The Big Short,” has warned that the flood of nonprofessional investors entering the market reminds him of the run-up to that crash, while UBS raises the possibility of the default rate hitting an alarming 15 percent.
And if the market crashes, it will present a defining challenge to President Donald Trump: Does MAGA believe in bailouts? And even if it does, could the movement survive the humiliation of rescuing Wall Street?
Ask anyone in the markets today to name the biggest immediate risk to financial stability and the answer will be the explosion of the private credit industry, now estimated to be worth as much as $3 trillion. This is Wall Street doing what it has always been very good at: repackaging risky loans. Sure, it is profitable, in the way that lending money at high rates to people who badly need it usually is. But it is also precarious: It operates in the margins, with little transparency and even less oversight.
Signs of potential collapse are emerging: In February, the asset manager Blue Owl Capital shuttered one of its funds. Last year, auto parts supplier First Brands filed for bankruptcy with billions in debts to investors. Shares in big names such as Blackstone and Apollo have plungedon fears over their exposure to private credit. The KKR private credit fund just reported a big increase in troubled loans.
True, it may well be different this time. The MBAs may have tuned their AI systems so well that they can assess the risks perfectly, and all the good loans will more than pay for the few that turn sour. We will find out over the next few months. And if the bubble does burst, we will find out whether Trump is willing to rescue Wall Street.
Trump’s political following was built, at least rhetorically, on suspicion of the financial establishment. MAGA is the movement of the steelworker in Pennsylvania, the small-business owner in Ohio, the manufacturer who watched their industry get hollowed by cheap imports while the financiers got rich. MAGA is not supposed to be on the side of the private equity barons and credit fund managers of Manhattan. It is supposed to be their nemesis.
Its leading thinkers, if that is not too grand a word, have a long record of condemning finance. Vice President JD Vance, when he was still a senator, introduced the Bank Failure Prevention Act and teamed up with Sen. Elizabeth Warren (D-Massachusetts) on legislation to claw back bonuses from executives at failed financial institutions. As a MAGA stalwart in the U.S. House, Marjorie Taylor Greene was among the harshest critics of the 2023 rescue of Silicon Valley Bank (“The fools running the bank were woke and almost became broke”). The tea party movement, the political godparent of MAGA, grew out of its opposition to TARP, the 2008 Troubled Asset Relief Program.
Trump himself, as is often true, has been more ambivalent. But there is no mistaking the general impression. If MAGA has any coherent worldview, admittedly a debatable point, then surely it is on the side of small businesses and the ordinary working man, and not the slick financial engineers of the financial markets. This White House will find it very hard to start writing out 10- or 11-figure checks to rescue a private credit fund about to collapse.
And yet if private credit collapses, the pressure on Washington to intervene will be enormous. The contagion would not stop with the funds that made a fortune from the boom. It would roll through the pension funds that millions of ordinary Americans depend on for their retirement, it would hit the insurance companies that underwrite their lives, and it would freeze the credit markets and strangle the small businesses that MAGA claims to champion. Most of all, the companies that had borrowed funds would perish, throwing hundreds of thousands of blue-collar workers out of a job. The ideology might say “let it all burn.” But once the consequences become clear, that won’t look so easy.
After all, financial crises are not merely events that happen. They are, at least in part, self-fulfilling prophecies. If investors start to worry the White House and the Federal Reserve will not ride to the rescue, the only rational response will be to get out now before everyone else does. And if everyone makes that calculation simultaneously, the rescue that was never promised turns into a crash that can’t be stopped. A bailout of private credit would look, to much of the MAGA movement, like the ultimate betrayal: Wall Street, having gorged itself on a decade of easy money and light-touch regulation, demanding that ordinary taxpayers pick up the tab once again. A rescue would tear the movement apart and destroy the credibility of many of its leaders. The trouble is, the only alternative would be a full-scale depression.
At some point over the next few months, Trump might have to choose between the survival of his political movement and the survival of the American economy. That’s a tough choice. Which way will he jump? Your guess is as good as mine.
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