The Next Financial Crisis Is Already Being Built… Quietly

Added: 2026-05-05

[00:00:02]Every financial crisis is remembered for what went wrong and almost nobody remembers what was done afterwards to fix it. This is a mistake or that is a mistake I'd say because the fix is from the last crisis is usually where the next one is quietly being built. Think about the American savings and loans crisis of the late 1980s. Most people today have forgotten about it completely. At the time it was catastrophic. Hundreds of small banks failed across the nation. The cleanup cost the American government roughly $200 billion dollar in 1993 money. It was one of the biggest banking collapses in American history. And yet if you ask a finance graduate today what caused the 2008 financial crisis, they will almost never mention savings and loans story.

[00:00:48]That is the interesting part and that is what I wanted to teach you today about investing where this comes from. The fix for savings and loans crisis did three things. It expanded the market for mortgage backed securities through a tax break that made securization far more attractive than it ever was. It pushed the industry towards deregulation saying too much red tape and created an environment which credit derivatives were invented by JP Morgan a few years later after Exxon Valdez cleaned up and left the banking siting multi-billion dollar exposure to a single client they said hm anyway all these three things responses looked sensible at the time a bigger securization market was supposed to spread the risk deregular eration was supposed to make banks more competitive.

[00:01:39]Credit derivatives were supposed to let banks insure themselves against bad loans. Makes sense. And all three of them played central roles in 2008 catastrophe of 20 years later. The fix became the cause. This is always true.

[00:01:56]This is not a new thing which I'm telling you but maybe some of you haven't realized this. This pattern is not new. It is not just in America. It is one of the oldest rhymes in financial history. Every time a policy maker plugs a hole, water finds another one. The system is a balloon. You press it down somewhere, it expanded somewhere else.

[00:02:14]It's just nature of the beast. So the question worth asking today, the obvious one, what are the reforms of 2008 doing now? 15 16 years later, where is the balloon expanding?

[00:02:29]The answer is in two places.

[00:02:32]And both of them should matter to anyone running a portfolio. You, me running a portfolio should matter. First, private credit. After 2008, regulators did exactly the right thing on paper. They forced the banks to hold more capitalical, limited their risk-taking, tightened the rules on leverage lending.

[00:02:53]Banking system became much much safer, objectively measurably safer. The stress test worked. CO was a genuine real world stress test. It was a world not even a stress test reality. Banks held up and collapsed. But the lending did not stop.

[00:03:10]The demand for capital did not disappear. It simply moved. Over the last 15 years, trillions of dollars of lending have shifted out of regulated banking systems into what everyone now calls private credit. Direct lending funds, business development companies, private credit, BDC's, Blue Owl, Apollo, Blackstones, BC D, Aries. They are now enormous pools of capital doing the kind of lending the commercial banks used to do with one important difference. They're light on regulation. The valuation are market quarterly rather than daily. And the liquidity terms are generous to the fund manager and very restrictive to the investor. We have already started to see the cracks. Bred gated redemptions in a quiet but telling way. Blue owl marked have been questioned. Apollo has had its own episodes. Howard Marx wrote a memos specifically flagging that part of this market are behaving exactly the way pre208 mortgage market behaved. We spoke about it. the same underwriting slippage and the same willingness to assume the collateral holds up in every scenario. H is what I say. Second place where the balloon has expanded is the repo market.

[00:04:28]Repo is short for repurchase agreement.

[00:04:31]It is a way for financial institutions to borrow money by pledging bonds as collateral. So you sell me a bond today with an agreement to buy it back tomorrow at a slightly higher price. The difference is effectively the interest rate on a day loan, one day loan. So that is what you are making or paying.

[00:04:53]The American repo market alone is now close to 13 trillion. The European repo market is about 14 trillion euros. Those are numbers that makes subprime market 2007 look insincy small. The repo is the plumbing underneath everything. Pension funds use it. Hedge funds use it. Banks use it. Money market funds use it. We're all using it. When repo works, nobody thinks about it. When it stops working, the system seizes. Fast turns did not fail because of its uh loan book. It failed because the repo lenders walked away. Leman, the same story. Long-term capital management in 1998.

[00:05:32]Very much the same story. So here is why this should matter to an Indian retail investor sitting in Chennai or Bangalore or even Dubai. You do not need to care about the technical details of repo but you do not need to track which BDC is getting redemptions this week. But what you need to understand is the principle because that principle is what protects your portfolio across decades not months. You know when we retire decades the principle is this risk never gets destroyed it gets relocated when regulators announce that something has been fixed the announcement should make you more suspicious than less ask where did the risk go it doesn't disappear like I said it did not evaporate somebody is still holding it and usually by the time the announcement has been made the risk has already migrated to a place where the regulators are not looking the system is just that it's just nature of it. Ma had a prompt for exactly the situation he called it inversion. Do not ask what will make an investment work. Ask what would destroy it. Don't ask why the system is safer now. Ask where the unsafety went. There is a second manga prompt which is very useful that applies here which is called the incentive map. Both of which we have spoken about. Follow the incentive maps.

[00:06:58]Regulated banks in 2026 have an incentive to look safe because regulators are watching them constantly.

[00:07:05]Private credit funds in 2006 have an incentive to look safe because their marks are set by themselves quarterly and not because their fees are dependent on asset under management growing. Same appearances of safety. Very different mechanisms producing it. One of them is verified by an external auditor with teeth. The other one is not. This is where we're sitting in 2026.

[00:07:32]Now, none of this is a call that private credit is about to blow up the next month. That is not the point. The point is that when it does start to show stress, and it will at some point of time in the cycle, nobody should be surprised. The warning signs are already there in the data. That's what Howard Mark's memo has already written. The BDC gating has already started. Playbook familiar if you have been reading history would be like, "Huh, I know what this happens in the story." Pretty much like a lot of our Bollywood movies. What does that mean for your portfolio? Three things and I'll keep it simple. First, be skeptical of any asset class where the returns are described as high yield, low volatility at the same time. Those things don't go together. That combination does not exist in nature.

[00:08:23]It's like oil and water. It exists only because someone has chosen not to mark the volatility to the market. The volatility is there. You just can't see it. At least you're not being told about it. Second, when someone tells you a market is too big to fail, that is historically the exact moment the failure becomes most likely. Too big to fail is a statement about political consequences. It's not about a statement about financial reality. You must understand that every two big failed to institution of 2008 story was in fact allowed to fail or absorb the fire sale prices. Baston Leman, Maryland, Washington Mutual the third and this is the Tiffen Coffee version of the argument which I want you to digest.

[00:09:05]Keep your accumulation small regular into businesses you actually understand.

[00:09:10]You don't understand it, don't invest.

[00:09:12]Learn about it. Do not you do not need to have a view on private credit to protect yourself from it. You just need to be not leveraged to it. Most Indians Indian retail investors are not directly exposed to blue owl or big red but they are exposed to banks that are exposed to them to mutual funds which are exposed to them to the global financial conditions that will tighten when particular story starts to break. Being disciplined and lowle leveraged is the protection. It always has been historically. Those are the guys who are the ones we look back and say, "Wow, what great investors." The Babylonians 4,000 years ago used to break clay tablets to forgive debts when the system got stretched. They understood that something that every generation since has done to relearn the hard way. Debt accumulates faster than the economy that it's meant to service. The plumbing that distributes debt keeps getting more complicated. And the fix for the last crisis is almost always when the next one is being built. I hope you understood this. Watch the facts, not the statements as they say on Twitter and everywhere else nowadays. Nothing more else to say. I hope you had a wonderful day and a wonderful evening.

[00:10:26]Be safe out there. See you tomorrow with another