MARY LOUISE KELLY, HOST:
When companies need a loan, traditionally, they turn to a bank. But increasingly, they are turning to financial firms that are not really banks but do have a lot of cash. This is the private credit market. It has exploded in the past 15 years. It's now valued at around $2 trillion. Natasha Sarin is president of the Yale Budget Lab, and she argues that these private credit firms are making risky loans - so risky they have got her thinking about the 2008 financial crisis. Natasha Sarin, welcome.
NATASHA SARIN: Thanks so much for having me.
KELLY: So you wrote a piece. This was for The New York Times. And the headline - which I loved - was, "How Bad Is Finance's Cockroach Problem? We Are About To Find Out." Unpack that for us. Who were the cockroaches in this scenario?
SARIN: So the cockroach I can't take credit for because it comes from Jamie Dimon, the CEO of JPMorgan Chase, as he was commenting on something that many of us who aren't deep in the finance industry may have even missed over the course of the last many weeks, which is that two auto-related firms went bankrupt over the course of a few weeks in September. That, in and of itself, is not necessarily all that interesting. They're relatively small firms. But what is kind of interesting and pretty important is that it turns out that they had borrowed much more money in ways that were ultimately pretty opaque and kind of hidden, even from their own investors, than people had previously realized.
KELLY: So we're not talking Ford. We're not talking GM. What is it that you see happening that has you so worried?
SARIN: One piece that's interesting is about the way they were ultimately borrowing. And it turns out that they were borrowing in part from traditional banks and public markets, but they were also borrowing in part from private markets and from these private credit firms. And importantly, when they ultimately went bankrupt, it had to do with learning more about the fact that these firms had allegedly committed fraud by doing things like offering the same collateral to multiple people who lend it to them. And that type of opacity, such that the lenders themselves didn't even realize how much borrowing these two particular firms had done, is a feature of what you can see happening these days in private credit markets. But because of regulation that we did in the aftermath of the financial crisis, it is happening much less in public markets and much less in banks.
KELLY: OK. So we've mentioned the 2008 financial crisis a couple of times. What is it you see that feels the same as 2008? What is it you see that maybe is not parallel? Start with what's the same.
SARIN: Yeah. And Andrew Bailey, who runs the central Bank of England, said, anyone watching these two particular bankruptcies, like, alarm bells should be going off if they were anywhere near the 2008 financial crisis. We are starting to see the same kind of slicing and dicing of literally everything. Think car loans, think leases on AI data centers, think of bills that are owed from plastic surgery patients - literally everything - and turning it into allegedly relatively safe slices of financial securities. But the other piece is there too. We're also starting to see really significant lending, and it's happening very substantially in these private credit markets.
KELLY: So how much are ordinary people at risk of being caught up in all this? 2008 was about a lot of things, but among it was ordinary people's mortgages. I know you have been thinking about 401(k)s potentially down the road being caught up in this private credit, the riskiness that you see.
SARIN: Private credit - in some sense, when you hear the word private credit, you think private.
KELLY: Right.
SARIN: And so it sounds different to you than a bank or public markets. But the challenge is, where is private credit ultimately getting the dollars that are coming its way to invest? And those dollars are coming from things like pension funds. Those dollars are coming from things like private equity firms buying insurance companies. As a result, ordinary people's dollars are on the line just like they were in 2008.
KELLY: So what can we do? As we see the train coming down the tracks, what can be done now by the government, by Congress, by the administration to try to prevent it from going off the rails?
SARIN: Congress needs to think about ways in which to better regulate these markets. And we, as sort of consumers, need to do our own due diligence about the ways in which our dollars are ultimately exposed to potential risks down the road.
KELLY: Lay the traps for the cockroaches, to bring it...
SARIN: Sure.
KELLY: ...(Laughter) home.
SARIN: We'll do our best.
KELLY: Natasha Sarin, thank you so much.
SARIN: Thanks so much for having me.
KELLY: She is president of the Yale Budget Lab. Transcript provided by NPR, Copyright NPR.
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