The $40T Credit Crisis

Situation Report by Jim Rickards

(And the news just gets better and better! this is a long read but has some good information in it. Sighing as I look at my portfolio!)

There’s a massive financial crisis heading our way… and it has nothing to do with Iran.

Yes, the Iran war is a big deal. It’s not only raising energy prices but also creating energy shortages that may lead to major industrial shutdowns in Japan, South Korea, China and Germany.

The world may tip into a global recession in the next month or so. With that hanging over the economy, what could possibly be worse?

The Financial System’s Weakest Link

The greater threat is a $40 trillion meltdown in private credit.

Private credit funds (also referred to as non-bank financial institutions or NBFIs) are a $40 trillion market in loans to companies that offer financing for everything from software start-ups to subprime auto loans to vendor finance in tech equipment and more.

Most of these loans are to junk borrowers, but at least some are investment grade. Or at least they were investment grade before this crisis began.

A $40 trillion market meltdown does not mean $40 trillion in losses. But even a 20% loss rate, which some analysts project, translates into $8 trillion in losses. And that’s not counting derivatives.

Recall that the subprime mortgage meltdown in 2008 involved about $1 trillion in subprime and Alt-A mortgages. The S&L crisis of the 1980s involved about $800 billions of bad commercial real estate loans.

This private credit crisis could be eight to ten times worse, and it’s just getting started.

Timeline of a Terminal Chain Reaction

The meltdown began on September 10, 2025, with the bankruptcy of Tricolor Auto Acceptance, a subprime auto lender. Losses at Tricolor may exceed $900 million.

Top executives have been charged with fraud and other crimes related to pledging the same collateral multiple times. JPMorgan Chase alone lost $170 million in the alleged fraud.

Also in September 2025, subprime lender First Brands filed for bankruptcy, showing it has liabilities of $10–$50 billion against assets of only $1–$10 billion. UBS had exposure of over $500 million to First Brands. Criminal fraud is also alleged in this case.

Initially, Wall Street treated these two private credit failures as coincidence or bad luck. Only slowly did investors and lenders realize that Tricolor and First Brands were just the first dominos to fall in a long line of private credit failures.

A chronological list of the private credit meltdowns, following the Tricolor and First Brands failures, will be useful in understanding how quickly this crisis has come to pass:

• Feb. 3, 2026: Goldman Sachs and Barclays release research showing weakness in the software sector will be worse than expected due to AI-related disruptions
• Feb. 21, 2026: Private credit fund Blue Owl falls to multi-year lows amid limited liquidity and rising redemptions. Saba Capital offers to buy certain assets at a 20%–35% discount to estimated net asset value (NAV)
• Feb. 26, 2026: UBS Asset Management estimates total credit losses could reach $1.8 trillion, with 40% tied to private credit exposure
• Feb. 26, 2026: FS KKR Capital Corporation, with $13 billion in assets, falls 15% after slashing its dividend and marking down portfolio assets, particularly in software
• Feb. 27, 2026: UK private credit fund Market Financial Solutions (MFS), with a £2.4 billion loan book, collapses and enters insolvency proceedings
• **March 1, 2026:** Invico Capital ($2.9 billion in assets) suspends redemptions and implements what it calls a “structured liquidity management plan,” effectively gating withdrawals
• **March 3, 2026:** Blackstone Private Credit Fund (BFCF), with $82 billion in assets, faces redemption requests equal to 7.9% of shares outstanding. It meets them with buybacks and internal capital, but future pressure remains uncertain
• **March 6, 2026:** BlackRock gates redemptions in its $26 billion HPS Corporate Lending Fund, trapping investor capital while assets are liquidated over time
• **March 6, 2026:** Blue Owl drops again after disclosing a $48 million exposure to Century Capital Partners, which has entered UK administration
• **March 11, 2026:** JPMorgan limits lending to private credit funds after marking down its own exposure
• **March 12, 2026:** Morgan Stanley’s North Haven Private Income Fund ($8 billion) and the Cliffwater fund ($33 billion) both suspend redemptions.

No doubt there will be more defaults, more gates and more asset mark-downs by the time you read this.

Collapse Is Contagious

Fraud, double-pledging of collateral and poor risk management account for many of the private credit losses reported so far. But one little-known source of contagion in any financial meltdown, including private credit, is the role of mark-to-market accounting.

Private credit funds carry assets on their books at a specified value. This is usually what they paid for the asset minus any depreciation or depletion that applies or any distributions received. This means that if there are no sales or exchanges of the assets, a fund manager can carry the assets at close to historical cost even if the market value is much lower.

In a market where prices are declining, the practice of carrying assets near historical cost is called “extend and pretend” — in other words, pretending the asset is worth more than the market says it is.

The difficulty arises when investor redemption requests exceed the fund’s available cash, forcing the manager to sell assets to meet withdrawals. In a declining market, those sales are typically made at a loss. That does bring in cash to pay investors, but it also locks in losses, drags down overall fund performance and can reduce performance fees — in some cases, wiping them out entirely.

The Hidden Multiplier

If a manager has ten highly similar assets, such as buildings in the same vicinity or multiple series of notes from the same issuer, accountants may require a fund to write down all of the like assets even if only a small slice of them has been sold. This means the mark-to-market loss in the fund on like assets can be far greater than the realized loss on the lone sale.

The situation rapidly deteriorates when one takes into account other private credit funds.

Those funds have their own accounting firms who see what happened when the first fund sold an asset at a loss. They look at the holdings in their other clients’ funds and may require them to write down similar assets even if they haven’t sold any.

This is the real meaning of contagion in financial meltdowns.

The write-downs not only spread from asset to asset in a single fund, but they also spread from fund to fund based on similar assets. This is exactly the way a virus spreads from patient zero to a large population.

Interestingly, the math in a virus contagion (the SEIR model) is exactly the same as the math in a financial contagion. In both cases, the risk spreads exponentially.

This cascade of mark-to-market accounting explains why credit losses can be hidden for so long (because no one sold anything) and why the eventual collapse happens very quickly (because once one asset is sold, all similar assets must be re-marked).

We’re now at the quick-collapse stage of the cascade. Private credit losses will now grow incredibly quickly.

Private credit fund business practices go beyond mark-to-market accounting into areas that may be regarded as fraud. These include double pledging of collateral, essentially taking one asset and pledging it multiple times to different lenders to obtain loans that exceed the asset’s value.

The entire private credit or NBFI system is now in a state of panic.

The Transmission to Banks

What’s more dangerous is that NBFIs get their funding from major commercial banks. When private credit funds go bankrupt or cannot pay their lines of credit, the losses quickly transfer from the funds’ books to the books of the lending banks.

Moody’s estimates bank exposure to private credit may be $300 billion in direct lending to providers, $285 billion in lending to funds, plus $340 billion in unutilized bank lending commitments. That’s a total of $925 billion in direct credit exposure to the private credit sector.

The largest bank exposures to private credit are Wells Fargo ($60 billion), Bank of America ($33 billion), PNC ($29 billion), Citigroup ($26 billion), JPMorgan Chase ($22 billion) and Goldman Sachs ($21 billion).

Only some of these exposures have been written off, so expect more write-offs and lower bank stock prices in the months ahead.

Again, we emphasize that all these developments — global recession, higher unemployment, stock market declines and a private credit collapse — were already in motion before the war. Now that war is here, investors can expect all these trends to grow worse.

In my experience, financial crises are never caused by a single event. They are caused by two or three events happening at the same time. Those events may not be correlated in the steady state, but they become correlated in a crisis.

This is known as conditional correlation.

It’s what happened when the Russian credit failure landed in the lap of Long-Term Capital Management in 1998. And it’s happening again now as the Iran war and the private credit meltdown start to feed on each other.

Exit Here

If one compares this to the 2007–2009 global financial crisis, we’re not yet at the Lehman Bros. stage (September 2008). We’re closer to the Bear Stearns credit fund stage (July 2007).

There’s still time to get out of any private credit stocks and go to cash. But don’t wait.

The cascade is gaining momentum and the avalanche will soon bury the investors who did not get out in time.

The next edition of Situation Report will be available in two weeks. In the meantime, please look for new trade recommendations and close-out alerts. These alerts are issued when entry and exit points look best. based on our analysis and predictive analytics.