By HERMAN MORRIS

The world of private finance and the political struggles that make it up can be boiled down to two basic tendencies found within free market capitalism. On the one hand, all existing industries are slowly approaching unprofitability as competition drives down costs and new innovations to accelerate production run out, forcing financial institutions to speculate into new industries and find more profitable ventures to invest in and reap a profit. On the other hand, the speculative nature of financing new ventures leads to the possibility of bubbles and inevitably, crashes.

This push and pull reacts off one another as one crisis spurns another. If a big enough crash happens and threatens the entire system with bankruptcy, then regulators step in to try and “tame” the system through guardrails like a central bank, restrictions on lending, or bans on certain kind of financial investments. If profitability looks like it is in trouble, then the opposite can happen where regulations get suspended in the pursuit of propping up financial markets, or the captains of finance look for more profitable ventures outside of the traditional investing avenues. Most famously, banks over investing in high-risk mortgages known as subprime home loans became the trigger point of the Great Recession in 2008. Since the great recession, new laws have been passed to reduce the possibility of speculative crashes in the style of 2008. However, the decreasing rate of returns in U.S. finance has forced the hands of big investors to seek new avenues for higher profits, including one major new market known as private credit.

Private credit markets represent one of the fastest growing financial markets after the Great Recession. BNY estimates it has grown ten times in size from 2007, growing from ~$250 billion to nearly $2.5 trillion in market capitalization in 2023. The roots of this growth can be found in the Dodd-Frank act, a landmark post-2008 Wall Street regulatory bill. Dodd-Frank put stricter requirements on bank loans, requiring banks to hold more capital on their balance sheets rather than invest it, and put limits on banks’ abilities to invest in high-risk funds such as hedge funds or private equity. These requirements have made banks more stable, but less profitable. This leads to investors seeking higher returns through riskier investments such as private credit.

What is private credit?

Private credit loans are any loans extended to corporations that are done outside of the public market (where they would be subject to bond market regulations) and without the use of the bank (which would be subject to banking regulations). Since it is so unregulated, companies raising debt through private lenders need to offer higher interest rates to offset the additional risk that lenders are taking on, leading to higher payouts if the debtor does not default.

Morgan Stanley estimates that private credit investments can provide 10-year returns twice as high as high-yield public bonds, and three times as high as bank loans. This higher rate of return makes private credit an attractive investment for capitalist investors who were thwarted by the lower returns they were getting in the traditional finance sector post-2008.

Being unregulated also lends private credit to higher rates of fraud. First Brands, a conglomerate of automobile parts manufacturers with more than $12 billion in debts against less than $1 billion in assets filed for bankruptcy in 2025. The reason behind its high debt to asset ratio was its fraudulent pursuit of loans in the private credit market through lying to lenders, often either falsifying financial information or listing the same items twice as loan collateral to different lenders. Financial Times reports that the payout of the bankruptcy proceedings could lead to $200 million recovered from the $12 billion in outstanding debt.

There is also pressure on the borrowing side of the economy to increasingly seek private credit for investment. For speculative industries such as AI data center construction, private credit has extended more than $200 billion in loans to AI companies, with major loans to Meta, Oracle, and CoreWeave earmarked for building AI data centers. This buildout has become an albatross for private credit firms, as AI data center profitability is non-existent. For the biggest tech companies—like Amazon, Meta, and Google—there is still a large amount of profit and savings they can pour into construction directly or through paying down debt they are taking on. Middle to small-size tech companies such as Oracle and CoreWeave that have taken on private credit to build out their data centers are facing a much more existential risk for paying back what they owe and have both had their valuations halved since their peak on the stock market last year.

These risks are developing into systemic threats to private credit as a market, with private credit loan default rates hitting 9% in 2025. Two of the biggest private credit funds, Blackrock and Blue Owl Capital, have both stopped withdrawals from their funds due to the high volume of investor flight.

The Great Financial Crisis of 2008 was triggered by mortgage default rates hitting only 9%. While private credit remains a smaller part of financial markets than mortgage loans at roughly 1/10 the size, their specific exposure to growing markets such as AI represents a key strategic risk for financial markets, with the potential to spill into other sectors of the economy as corporations who took on too much debt either accidentally or fraudulently fail to pay back their lenders and trigger unwinds that threaten other sectors of the U.S. economy. The exposure to AI is especially salient, as the seven largest tech companies in the U.S. are responsible for most of the stock-market growth in the SP500 post 2008 and today make up 1/3 of the market capitalization of the 500 largest companies.

Understanding private credit, or any other highly financialized asset, is a headache for the average working person. This is intentional; as more obvious and easily scrutinized methods of investment become non-viable for immediate financial returns, investors find it necessary to plough social wealth into difficult to understand investments to hide what they are doing from the wider public. Most famously, collateralized debt obligations or CDOs were the chosen subprime mortgage investment vehicle in the lead-up to 2008, and an entire cottage industry of books and movies sprang up trying to explain what these even were.

Beyond the immediate risks to the U.S. and global economy, the incredibly complicated and difficult to understand nature of finance is a direct outgrowth of capitalist leaders trying to manage the inherent chaos of the free market, which inevitably trends towards lower profits as markets mature, and toward financial crises as speculation leads to over-production of un-needed commodities. Understanding how this system fully works is not really important for the biggest masters of capital. After all, only one banker actually went to jail in 2008; all the rest of the executives at the firms who went bankrupt in 2008 got golden parachutes in the form of huge severance payouts, while workers were told to foot the bill in the form of a bailout.

What is really needed as an alternative is worker’s democratic control of finance. At this point, less than 5000 banking corporations in the U.S. still exist in the U.S., with most of the assets concentrated in the top five banks. Since running an economy the size of the U.S. necessarily requires concentration of wealth management to centrally plan the economy, let’s be done with it and take control of the big banks and large private corporations through nationalization and place them under workers’ control. Investment decisions could be made through workers reviewing and proposing how to direct planning of the economy, and carried out through democratic votes on economic plans that involve informing and including the working class in the decision-making process of planning the economy, instead of leaving it to a small privileged caste that repeatedly squanders social wealth while hoarding more for themselves.

It has been less than 20 years since the Great Recession. The paltry reforms that Dodd-Frank introduced have failed to stop Wall Street from finding ways to gamble with the wealth of society. As working people stare down the barrel of another recession, the age-old question is repeated: “Socialism or Barbarism”? Behind one door awaits another bailout, more wars to boost domestic production, and a lower standard of living for working people, while capitalists hoard more of the wealth than ever before. Behind another door lies the opportunity for workers in the U.S. to begin to take control of their own economic destiny and set a standard for working people across the world. Capitalist politicians and media will try to convince workers that barbarism is the only choice when the next recession comes, so the responsibility lies with working people and socialists everywhere to raise demands for workers’ control of finance and industry.

The post Private credit: Wall Street’s best idea since subprime loans first appeared on Workers’ Voice/La Voz de los Trabajadores.

From Workers’ Voice/La Voz de los Trabajadores via This RSS Feed.