Private credit crisis: how shadow banking echoes 2008

0:00There's a $3 trillion shadow banking system that's completely bypassing the safety rules put in place after 2008. And if you own any stocks or a 401k or any ETFs or index funds, what I'm about to teach you could either protect your wealth or, if you choose to not watch it, leave you financially devastated because this hidden bubble is going to burst.

0:25According to the Federal Reserve, banks have quietly lent $300 billion to private credit funds. Lenders that don't follow the same rules as your bank. And these funds now control $3 trillion in loans to struggling companies. And the scary part is this. 47%, almost half, of these borrowers can barely afford their interest payments. So your bank's money, and by extension your deposits, are now tied to this shadow system designed to circumvent regulation.

1:01This is not doom and gloom. This is not fear-mongering. These are facts from literally the Fed, the banking regulator. My name is Felix Prehn. I'm a former investment banker who's in a hotel room somewhere in the world. And I've actually seen the shenanigans that Wall Street plays with again and again and again because they have an incentive to make a lot of money quickly and they don't really care all that much about the risk because the risk gets passed on to you.

1:30That's one of the reasons I founded the GOAT Academy where we taught over 20,000 students so far. I'm also the co-founder of trademission.io where we give you the kind of news and data that you actually need as an investor. So check that out. But what I now do with my retirement is I share this with you guys. My hope is to educate more tens of thousands of people so more of you actually know what to do. You get confident, you get the skills, you can do this on your own and you don't need me.

1:56So what have I done? I've analysed the Federal Reserve reports, the bank lending data, the private credit default stats. I compared this to 2008. What was the playbook back then? And the parallels are very concerning. Now, while I fact checked every single thing I'm about to tell you, this isn't financial advice. I'm not telling you what to do. My hope is that this research, this understanding, this education will get you to a place where you can make better decisions.

2:21So I'm going to break down 3 critical things for you. First, how private credit funds are circumventing bank regulations that were put in place to prevent another 2008. Second, how your bank is secretly exposed to this entire shadow system. And then third, and most importantly for you, how you can protect your portfolio and your retirement and your family by positioning yourself before this unravels. So by the end of this, you'll understand exactly how to safeguard your wealth no matter what actually happens here next.

2:54Now, let me put this into perspective, and this terrified me slightly. I double checked this number like 3 times. The private credit market has exploded from just $300 billion about 15 years ago to over $3 trillion today. 10x increase. And here is where it gets dangerous. Banks have lent these private credit funds hundreds of billions of dollars. Literally about $900 billion for every single American man, woman, and child. So that's $25,000 for the average household as exposure.

3:30But it gets worse. These private credit funds are lending to highly indebted companies. Leverage they call it. These businesses have debt averaging 5.6 times their annual earnings. So we're talking about a massive pile of risky debt, far bigger than you had in 2008, by the way. And you're probably thinking it's a lot of big numbers, it's a bit abstract, how does it bother me?

3:57Well, imagine your neighbour comes to you and says, "I make $100,000 a year, but I owe $560,000 in debt. My monthly interest payments are so high, I can barely keep the lights on." Would you lend them money? No. Right? Because you're not a lunatic. But that's exactly what's happening here. Except instead of your neighbour, it's happening with 47%, almost half, of all private credit borrowers. And your bank is lending them the money.

4:27Now, this isn't the first time we've seen this play out. Let me take you back. In 2008, we had the subprime mortgage crisis. Banks made risky loans. They packaged them into these complex securities that were called CDOs, and then they sold them to investors. Everything looked fine on paper until it wasn't. When borrowers started to default, the whole system collapsed. Banks like Lehman Brothers went under. I had friends who were working there. And your 401k, your portfolio went probably down, what, 40%. The global economy nearly collapsed.

5:03So we fast forward to today. We have a very, very similar position. In 2008, the banks made these risky mortgages. Basically, you could say, "I've got no income. I have no hope in hell ever paying back this mortgage. Will you lend me to buy this house?" And the bank would say, "Yeah." Right? So what do we got today? Private credit funds are lending to companies that have no hope in hell of paying back the loans. Yet they're lending.

5:30So in 2008, how do they cover it up? Well, they took 10,000 crappy mortgages that were never going to get repaid and they bundled them together and then they paid one of the rating agencies a nice big fat envelope of money and they said, "Can you rate this as AAA?" And the guy at the rating agency was either an idiot or he was like, "Yeah, if you have 10,000 just dead-end borrowers, that would make them better if we had lots of them." What? Right. So that's what they did. And then obviously that unravelled.

6:06So what are we doing today? Well, these corporate loans, basically money lent to companies that can't afford to pay them back, they put them into these very weird opaque private credit funds. So in 2008, the credit rating agencies gave AAA ratings to just garbage. Today private credit funds value their own loans with zero oversight, right?

6:30And people say, "Oh, it doesn't matter. It's private. Doesn't really matter." Well, there is an interconnectedness. That's a long word, isn't it? Banks are not insulated from private credit. It's not on their books, but they're literally directly lending to these shadow banks who are then lending to these crummy borrowers. So when, not if, but when these private credit borrowers start defaulting, those losses flow back to the banks. And when banks are in trouble, what happens? Your deposits, your 401k, your portfolio, retirement, it's at risk, right?

7:06The Bank of England governor just warned worrying echoes of 2008. Jamie Dimon, the CEO of JP Morgan Chase, has raised literally the red flag. Even the Fed, not the fastest people, but even the Fed put out a report on the systemic risk in private credit. History doesn't repeat, but it sure rhymes, especially on Wall Street, where greed is good and there are no consequences to collapsing the economy, right? Who went to jail in 2008?

7:38Did any of these rating agencies who were clearly corrupt at the time or incompetent, one or the other, choose whichever way you want, rating agencies, did anything happen to them? Nope. What about the banks? Did anybody lose their bonus? Nope. Did anybody sell the yacht? No. Anybody have to turf out the third mistress out of a summer house and then tuck it? Nope.

7:57So what's happening here? What's the solution? Well, let me tell you what actually won't work. First option is you could regulate private credit like banks, right? It won't happen. These funds have massive lobbying power and the whole point of their existence is this regulatory nana. We stay outside of the rules. By the time the regulators act, the crisis has already happened.

8:23Option 2 would be banks stop lending to the private credit companies. Well, it's a bit late for that. They're $300 billion down the rabbit hole. So they're not going to pull that out because they know if they did, they'd lose most of that money. So they're locked in.

8:37Option 3, let's hope the economy stays strong forever, right? Yeah. If you're going to bet on no recession ever, no interest rate shock ever, no economic downturn ever, no banker doing something daft and risky, well, it's wishful thinking, isn't it?

8:56So what else we got? What's the 4th option? Look, is this industry gonna wake up tomorrow, watch my video, and say, "You know what? We've been irresponsible. We shall mend our ways." Why would they? They're making billions of dollars in fees. Their investors are locked in for years. There is zero incentive to reduce risk until, well, it all collapses.

9:19And then the more likely scenario is bailout, right? Yeah. The government might bail out the banks again, but your tax dollars will fund it. Inflation will spike. They have to print more money. And the normal investor who doesn't understand this will be the one who pays for it. Just like 2008.

9:38So the reality is there is no institutional government solution that's going to protect you. The system is going to do what it's going to make the people in the system the most money. The question is this. Are you going to be prepared or are you going to be caught off guard like millions of investors were in 2008? Or are you going to make money out of it when it collapses?

9:59Can you put that in the comments down below? Option 1, unprepared. Option 2, prepared. Option 3, prepared to make money. Put it in the comments. 1, 2, or 3.

10:11So here's what I blunt. You can't control what Wall Street does. You can't control what the Fed does. You can't control when this private credit bubble is going to burst. But what you can control is your actions, your positioning. And to me there is only one viable path for regular investors like you and me. Understand the risk, audit your exposure, and build a rulebook to protect your portfolio when the cracks start showing, which they will.

10:36So most investors are really, really obsessed with what? What to buy. It's backwards. The real skill is actually how to protect yourself, how to protect your gains, how to keep your gains. Right now, Wall Street has mechanisms for that. Most people don't.

10:52Something that you're going to want to learn. I tell you that now. I'm going to give you a lot more of that education. Not in this video because it would make it tediously long, but there is a free workbook you can literally download for this. We have a free community, tons of education on exactly this topic. Go to felixprehn.org/resource. There's a link down below as well. Literally no credit card required, nothing at all. Just pure joy, learning. Go there, links down below and let me know in the comments that you've done that.

11:21If you go in here, you will literally get all the rules, all the strategies and it'll put you into a much much better position to navigate what's coming. And as I said, it's free of charge. The question is just do you want to learn, right? So let me just show you how we actually got here. It's important to understand.

11:35So it starts with the 2008 financial crisis. Let me see if I can get a pen. There we go. Right, that's where we were. 2008. Who remembers 2008? Put a 2008 in the comments. Lehman Brothers collapses, right? Some of my friends lose their jobs. They struggle terribly to pay for the Ferrari and the penthouse. I know we all did a collection for them.

11:56The government then decides never again, right? They passed what's called the Dodd-Frank Act. Boring piece of legislation, but it was basically intended to force banks to be safer, hold more capital, reduce risky lending. So banks now need to hold, say, $10 of capital for every $100 in risky loans they make. 10%, right? Which is still balmy if you ask me.

12:24But they don't like it. So they want to make more money, right? So what do they do? Well they stop making risky loans. So they retreat from this whole market and that then creates a huge gap in the lending market because there are companies that are very risky who want to borrow money, right? So they still need the money.

12:42So what do they do? Well, the banks say, "No, no, no, no. We don't do that kind of stuff anymore. It's not profitable enough." So then these investment funds pop up. They're not banks. They're called private credit funds. They come out and they fill the gap.

12:56Now, of course, the people who run those typically come out of banking. So they understand exactly how this works and they're going to lend these risky companies money. They're going to charge higher interest rates because borrowers have nowhere to go. So therefore they're just going to pay it. And what happens? Does the risk disappear? No. But it moves from the regulated banking system to the unregulated shadow banking system. They just don't use the word bank. They say private credit.

13:26So does it protect the market? Does it protect the economy? The banks have stopped lending directly to the risky companies. But guess what they did? They're lending to the private credit funds. They basically just put a middleman in between who's probably an ex banker and said, "Well, it's not on our books. No one's going to ask any questions. We can leverage this to the hilt. We're just going to let someone else do it. It's a private company."

13:52Right? So the banks basically provide these funds the credit lines, and I'm talking over $300 billion here. So banks have a massive exposure to private credit even though they're not making the loans directly to the crummy companies. So it's contagion, right? The private credit borrower defaults on that. The private credit funds suffer losses or the funds suffer losses. They won't be able to repay the bank loans and the bank takes the losses. What happens? Well, you get the financial system that collapses like we had in 2008.

14:22So they created the same thing that we had in 2008. They just called it something different. Now what is private credit? What's in these funds? So it's small companies that are too small to go to the market directly. It's private equity which is insanely leveraged. So say you have a business that's worth $100 million. Private equity wants to buy you. They're not going to give you $100 million of their own money. They're going to put in like $10 million or $5 million and they're going to borrow the rest. It's this massive leverage on there.

14:58And then also distressed companies, struggling businesses that are just up to debt like this. You've got some real estate businesses who've been having a tough time and all of those are just maximum leverage, maximum risk, and that's what's in there. So it's junk. It's rubbish. It's junk. It's just garbage.

15:18And half of those companies that they're lending to, they're struggling to make their repayments, right? There is no regulation. There's no transparency. They're private loans. There's no public reporting. The fund managers, they come up with their own valuations for these assets. They don't have to say, "Oh there's a high likelihood they won't pay." No, they just say, "Oh, I think it'll be fine." That's literally it. So we literally will not know how bad it is until the whole thing collapses, just like 2008.

15:45And look, every financial crisis is preceded by someone saying, "Oh, but this time it's different." In 2007 they said subprime was contained. In 2000 they said tech stocks had permanently higher valuations. In 1929 they said the market had reached a permanently high plateau. Of course people are wrong every time.

16:06So I'm not predicting the collapse here tomorrow. I'm saying there is a huge vulnerability here. Very very similar parallels that are very uncomfortable and I believe that you need to be positioned to protect yourself and that starts with understanding how this actually works.

16:22So what does it actually mean to protect yourself? Most financial education fails you, right. They tell you the problem, they scare you and then they leave you hanging. We aim to do the opposite. I'm going to give you the framework that I think is reasonable. It's not financial advice. I'm not telling you to do it. I'm just saying this could be a way to approach it. You got to talk to your god and your financial adviser on the details.

16:46So first there are 3 principles that guide everything. Don't predict, prepare. You can't predict when this unravels. Nobody can. So stop worrying about it. Instead build a portfolio that's resilient regardless of when this happens. Principle 2, assets not cash. Investing not saving. Holding too much cash is dangerous. It is the only path that guarantees you losses because inflation is going to whiplash you badly. So you want to be in quality assets with some protection.

17:22Third principle is have a sell discipline. Hope is not a strategy. You need clear rules for when you take profits, when you cut losses, and when you reduce risk.

17:35So this is the way I look at it. You have 3 tiers in your portfolio. Let's keep it really simple. First tier are your high quality, stable assets. Think large cap stocks, index funds, the S&P 500, that kind of thing. They have always recovered. They survive every crisis. Examples would be VOO or VTI or SPY or something like that. And they have a moderate risk level. They will drop in a crisis, but they will recover as long as you don't bottle out and sell them.

18:06The second tier I have inflation hedges. They protect you if the crisis leads to currency debasement which is basically inflation which is already happening with or without this crisis. We have the dollar losing value, your purchasing power of your salary going down every day and you have massive inflation that's being hit.

18:24So what can you own in those spaces? Well, gold and precious metals. You could buy a gold ETF. You can buy the physical thing. You got to figure out the storage and insure it and so on. But that has generally been a good inflation hedge. Has made us a lot of money this year. Now you can also look at real estate. You got to be careful with that. There are REITs in essential sectors. Think residential, data centres. I would stay the heck away from commercial and retail and all that stuff because who's going to go out shopping? Who's going to go to a mall when Amazon delivers in 2 and a half minutes?

19:00So why are real estate assets inflation protected? Because it's a physical asset and it can pass the inflation through to rent levels. But REITs are a little bit complicated. Want to be transparent on that. Avoid the ones with heavy debt. Avoid the ones with commercial office space because who's going back to the office?

19:16I put Bitcoin on there as well. I think the real bull run in Bitcoin is kind of behind us. Probably going to keep going up in the long run, but again, be a little bit careful on that one. They say it's decentralised. I think it's actually the most centralised thing there ever was. You can track exactly what everybody does, which makes you think about who actually created it. But that's a conspiracy theory for another day.

19:41And then the third tier, which is what most people do with 100% of their money. This is your, let's swing for the fences type allocation. Individual stocks that you claim to understand, sector bets on themes you believe in like AI, energy transition, all that kind of stuff. Maybe option strategies if you understand what you're doing. You want this to be a small part of your portfolio. I say 5 to 15%. Not financial advice, just some guidance, right?

20:12So there is also some stuff we want to exclude. Long-term government bonds, inflation will kill them. High yield corporate bonds, those are the junk bonds, they are private credit's cousin, right? Marriage to the cousin, that's how close this issue is. Cash, lots of cash is definitely going to lose you money. Be careful with leverage. Leveraged ETFs, you got to be careful with those. You got to really understand what the risks are.

20:41Bank stocks, especially some of the small ones, you got to really know what you're doing. You got to really tight risk management if you want to be in those. And then obviously private credit funds. Just don't give them your money. They're going to lock you up. You have no idea what the heck's going on in there. So be careful.

20:57So what do we watch out for? Well, you may not follow the private credit markets newsletters, and that's understandable because you actually have friends. But what you can do is you can follow us here and I'll keep you informed on it. But there's a couple of things we look at. Default rates, major funds suspending withdrawals. That's not a very good sign.

21:16And then we have a really easy indicator called the VIX, which is the fear indicator. When that stays above 30 for a little while we get worried. We readjust how we handle our portfolio in those moments. So this is some warning signs to monitor and you might want to write them down or take a screenshot of that.

21:30So what do you do right now? Well, go grab yourself the workbook because it'll literally take you through all of this step by step because I know it's a little overwhelming. It's a lot of information. We start with an audit of our portfolio. Right now, my formatting skills on presentations are a little not quite up there yet apparently. Little bit all over the place, isn't it?

21:52We balance to something like the 3 tier framework that I walked you through. Again, you obviously you're responsible for your decisions on that. You make sure you have your selling rules set out. And again, tons of other stuff in our private community and you start watching for those warning signs, right?

22:07But I would actually start at number 5 which would be download the free workbook, which it'll walk you through all the other steps. And most people won't do it because it doesn't sound very exciting, does it? Let's find the one stock that 10,000x Friday, right? That's more exciting. I get that.

22:23But what I've learned from assessing thousands of portfolios of students of mine and also what I've seen from the institutional side, the money is made in protecting yourself. The money is made in keeping the profits. The money is actually not really made in finding that one glorious winner. People always think that, right?

22:41And look, if you want some personal help with that, some personal guidance with that, we run something called the Wall Street Protocol, which is a mentorship where you have access to my Wall Street mentors, guys who've been investment bankers for decades, guys who've managed billions of dollars for hedge funds, who are super nice guys and who are retired, and enjoy the thrill of improving people's skill levels in investing.

23:05We're going to pause enrolment on this because we're basically almost full, which is a glorious thing because it means lots of people are learning and that's fantastic. But we teach one on one so it's not scalable. It never has been, it never will be. But we're going to be pausing the enrolments there probably by the end of the week because we want to make sure we can look after our existing students well.

23:27So if you've been thinking about maybe doing that, been thinking about maybe finding yourself a mentor, I can offer you a free strategy call with us where we'll walk you through what that would look like, if that's the right thing for you. You can ask us all the questions you want. There's zero pressure. It's completely free. You can go to felixfriends.org/freedom because my hope is that'll lead you to freedom and you can book a call at your time and place just through that little calendar thing there.

23:53And you can then potentially if it is the right fit for you and if you feel that it's the right thing you can get some one on one guidance and coaching from my mentors, the guys I look up to, the guys I talk to. So check it out. There's a link down below in the description for that as well.

24:07But remember, preparation is what we can do. Prediction will only take us so far because we don't have crystal balls, right? I always say my golden retriever ate mine. He eats a lot of things. But there is a $3 trillion shadow banking system there which is entirely unregulated which the banking system has fed and created and half of their borrowers are on the edge of default.

24:28So it just takes one little thing for them to start defaulting and then the whole thing unravels just like we saw in 2008. So yes, you can't control the market. My hope is that I didn't scare you out of investing because the opposite is what I want to do because if you are not invested, you will definitely lose money, right?

24:47Think about it. The market this year is up what? 15%. Last year 25%, the year before 25%. So if you haven't been invested, you were down 70%. Right? So not investing is a guarantee to losing money. You just want to be smart about how you invest. You want to be smart about how you manage your risk.

25:07And if you got some value out of this, then let me know in the comments. Share it with somebody who might not understand this yet. That will be the greatest gift I think you can give someone and book yourself that call. It's free. It's risk free and it'll get you to more clarity no matter what you decide. I wish you all the best.

25:26Well, everyone's freaking out about this AI bubble. You've got JP Morgan, the most important bank in the world. Just ask and they'll tell you.