D. Ricardo on Private Credit & the Real Risk to Financial Markets

April 20, 2026 | First some important news. A working group at Financial Accounting Standards Board (FASB) finally has voted to explicitly include loan recapture in the valuation of mortgage servicing assets (MSRs). We suspect that the change, if adopted, will be used to support current MSR valuations instead of boosting fair values higher, but we appreciate the thoughts of our readers in this regard. The value of bank-owned MSRs over the past 30 years averages about 1.5% of the unpaid principal balance of the underlying loans, as shown in the chart below.

Source: FDIC/WGA LLC

As we pondered the Sunday media, the Strait of Hormuz remains closed to maritime traffic and the Trump Administration has decided to start boarding Iranian flag ships following the attacks last week on two Indian vessels. Truth to tell, Trump’s savvy decision to blockade the Strait of Hormuz is actually going to bring Iran to its knees economically, as Brandon Smith of Alt-Markets predicted in Zero Hedge last week.  

In the US, financial markets are doing their level best to ignore the Iran conflict, but the continued focus of attention is the slow collapse of the AI trade and its components in the world of private equity and credit. For those of us fortunate enough to ride the momentum trade up on Nvidia (NVDA) for some impressive triple digit gains, the latest musings about this tech darling from Shanaka Anslem Perera on Substack (“The NVIDIA Chokehold”) may cause people to toss their proverbial Cheerios. 

Perera describes a situation where NVDA has a potentially lethal concentration in terms of customers in the AI domain and captive company funding for said customers. Like private credit, AI is an opaque world where the number of planned data centers is rapidly being dwarfed by projects being cancelled. This imbalance in terms of debt, anticipated vs likely revenue and the sources of finance reportedly has caused a number of former NVDA cheerleaders to flee for the exits. Has SoftBank CEO Masayoshi Son really left the Nvidia building? Perera writes:

“SoftBank disclosed in November 2025 that it had sold its entire 32.1 million-share NVIDIA stake for approximately $5.83 billion as it reallocated capital toward OpenAI and related AI infrastructure bets. Peter Thiel’s Thiel Macro LLC separately exited its full 537,742-share NVIDIA position in the third quarter of 2025. NVIDIA insider sales aggregate in excess of three billion dollars across hundreds of transactions over the trailing window per Form 4 filings, with Chief Executive Officer Jensen Huang’s personal 10b5-1 plan liquidations above two billion dollars since mid-2024, with Chief Financial Officer Colette Kress and Executive Vice President Ajay Puri and Director Mark Stevens among the most active sellers, and with the single characteristic that unites every insider filing across the entire period: the complete absence of open-market purchases.”

To add further spice for our readers regarding the outlook for the coming week, below we feature a fascinating comment on the risk known as private credit from a prominent New York banker who writes for us on occasion under the nom de plume of D. Ricardo. Long-time readers of The IRA may recall his series of comments from 2019 ("China is Weak").

On Private Credit

By D. Ricardo

I’ve been following your posts in The IRA on private credit. Wanted to chime in. I’d start by asking a question: Is there more debt about, in aggregate, because of the growth of private credit, or would debt levels be the same had regulators not encouraged banks to shy direct lending to middle-market, non-investment grade debt following the GFC of 2007-08 and private credit funds/direct lenders, business development companies stepped in? I think the answer is a toss-up. And rather what we have seen is a shift in risk and a change in who is lending to whom, not an increase in how much risk is in the system, or how much is borrowed in aggregate.

Second question then would seem to be: What drives the term, quantity and quality of debt, in aggregate?  And to this I think we could point a finger at central banks, ZIRP and a decade of Modern Monetary Theory (MMT).  Low yields forced natural buyers of yield and duration into “alternative asset classes” and riskier debt (inc. Cov-Lite, increases in allowable PIK, etc.).  Private debt companies and instruments simply provided convenient mechanisms to gain exposure.  In this case, cheap money has increased risk in the system. 

Another question one could ask about private credit: Is debt issued in/by the private market riskier than debt issued by publicly regulated entities?  Here I think one can begin to raise legitimate questions about opacity of valuations and classifications of exposures. But having sat on innumerable loan and credit committees, I am not sure that which transpires on the regulated side of the credit market is any less variable, capricious or optimistic than that we see from the private side.  Yes, regulators and auditors through reviews can challenge risk assessments, but regulated institutions still have considerable latitude when assigning PDs, LGDs and expected recovery rates to credits. 

Which leads to the question: Is this market structure of private debt (CLO, BDC, etc.) replacing public debt more risky than the alternative structure (i.e. having these middle-market non-IG loans directly and wholly on Bank balance sheets)?  Here again, private credit works to shift risk, not amplify it, as in the structural covenants, like tranching, subordination, collateral tests and interest coverage tests work to make senior debt holders better off (though to the detriment of junior creditors and equity holders); and, other structural covenants, like gating, prevents simultaneous systemic wholesale liquidations less likely, making the system more resilient than the alternative of a bank-only marketplace for credit. 

What I think is underappreciated is the “normal credit cycle.”  We had brief credit pains in 2015-16 related to oil companies, some hard-hit sectors during Covid, and of course the GFC in 2007-08, but before that, what?  The 2001-03 recession following the Dotcom bust? Perhaps the last real normal cyclical credit event was the recession of 1991-93.  

How many current lending executives remember recessions in the early 1990’s or before?  Fast forward to GFC - which was nearly 18 years ago - how many senior finance executives were in a position of real power then to have learned lessons, and are still employed today - few, unless they are in the C-Suite like Jamie Dimon at JPMorgan (JPM), Colm Kelleher at UBS AG (UBS) or Ted Pick at Morgan Stanley (MS).  Very few senior executives in the credit space are experienced at managing a normal, let alone large market downturn.

To these points add the extraordinary levels of debt that exist today in the system, which limits central bank policy options. Add the hollowing-out of real value in companies by the private equity/private debt ‘extend and pretend’ discipline, which has extracted value from underlying assets at each turn, leaving less real value in the company, and making historical LGD estimates way off the mark from what we should expect from future recoveries in a bankruptcy event. 

And then add the increase in market velocity over the last twenty years (think: meme stocks); and the fact so few have experienced a slowdown or recession, given central bank practices over recent years, and we are primed for a nasty awakening when a slowdown eventually comes, whether global macro event driven, or otherwise.

“Private debt” gating retail investors is the whipping boy du jour, but not the canary in the coal mine, nor the real problem, nor the real risk. Over-investment and malinvestment in things like data centers or unprofitable business models that require cheap money and are based on hype and suspension of common sense, excessive government spending, inflation and currency debasement, populism and socialist rhetoric manifesting itself in real policy and tax decisions, these are the real risks. The public-private divide is merely a nuance.

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