Fed May Bail Out Private Credit

 In the video from Bloomberg Podcasts, Danny Moses (the investor featured in The Big Short) argues that the Federal Reserve would be forced to bail out the private credit market because it has become so deeply intertwined with the broader economy and the banking system that its failure would create a systemic crisis.

According to Moses, here are the key reasons why a bailout would be inevitable:

• Systemic Interconnectedness: While the risk is often described as non-systemic because it isn't held directly by traditional banks, Moses points out that banks are still lending heavily to private equity and private capital firms. This "rhymes" with the 2008 crisis, where banks provided warehouse lines to mortgage companies.

• Liquidity and Leverage: If liquidity dries up, it exposes the massive leverage in the sector. When Wall Street sees credit turn, they may pull back credit lines, leaving firms with assets they cannot sell (a "chair being pulled" scenario), leading to sharp markdowns and a collapse in the asset class.

• Moral Hazard: Moses believes there is a "moral hazard" where market participants assume the Fed will step in if things go wrong, which encourages even riskier behavior.

• Economic Impact: Private credit heavily fuels economic growth and employment. A collapse would likely lead to a massive spike in unemployment and a contraction in the economy, forcing the government to intervene with new "acronym" programs (like TARP or TALF) to subsidize the sector.

• Retail Exposure: Moses highlights a growing concern: private credit is being "democratized" and pushed to retail investors. If everyday investors' 401ks and retail accounts are hit by a private credit collapse, the political pressure for a bailout would be immense.

Moses sums it up by noting that since 2008, the U.S. has effectively moved risk to the government balance sheet. If a $3–4 trillion private credit crisis occurred, he believes the Fed would have "no choice" but to add that to the national debt to prevent a total economic meltdown.