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Wall Street’s top prosecutor Jay Clayton has dismissed fears of a looming private credit crisis, arguing the fast-growing asset class has fuelled US economic strength while Europe has lagged behind.
Clayton, the US attorney for the Southern District of New York and a former board chair of Apollo Global Management, said there was no evidence of “excess leverage” in private credit. Apollo has been a leading investor in private credit over the past decade.
“Is this industry somehow a cancer for the rest of the financial system? No, in fact, it’s been a great benefit to the US,” Clayton said on Wednesday at a conference organised by the Managed Funds Association, an alternative assets lobby group.
“Compare the US coming out of the 2008 financial crisis to Europe,” he said. The US replaced some bank lending with private credit when Europe did not, he said. “We grew and they didn’t.”
Clayton’s defence of private credit contrasts with criticism from JPMorgan chief executive Jamie Dimon, who recently warned that losses for lenders to highly indebted companies could be higher than expected.
“This is because credit standards have been modestly weakening pretty much across the board,” Dimon, who has led JPMorgan since 2006, wrote in his annual letter to shareholders.
Clayton said financial crises were usually linked to either excessive hidden leverage or unexpected liquidity problems.
“I do not see excess leverage in the private credit world,” he said. “I just don’t see the transmission mechanism for the rest of the economy.”
Clayton, who chaired the Securities and Exchange Commission during the first Trump administration, added: “Are there problems in the industry that we should look at? Yeah . . . if people are mismarking in order to generate fees, that’s always been a no-no.”
Banks have helped fuel a private credit boom in recent years, extending hundreds of billions of dollars in financing that has boosted funds’ returns. Banks provide layers of leverage to the private credit ecosystem, lending to funds’ investors and to the funds themselves. They provide so-called back leverage through special-purpose vehicles tied to the funds.
The European Central Bank has said that links between banks and private credit create a way in which “shocks can be transmitted, amplified and redistributed” across the financial system.
SDNY prosecutors have separately brought fraud charges against executives from First Brands and Tricolor, two companies that collapsed with large exposure to asset-backed finance, a corner of the private credit industry. Those collapses caused losses at a number of big banks.
The executives, First Brands’ Patrick and Edward James and Tricolor’s Daniel Chu and David Goodgame, have pleaded not guilty.
Clayton’s remarks come as the fast-growing private credit market has suffered heavy losses over the past six months amid concerns that the debt-laden software companies it has lent to are vulnerable to AI disruption. Some borrowers have struggled to repay loans as interest rates have risen.
His comments echo the perspectives of many of the industry’s biggest players including Blackstone and Apollo. The industry has argued that the push of risky lending into private credit funds has taken leverage out of the financial system by spreading out credit risk to a far wider array of better-capitalised asset owners.
“I don’t think we’re talking about systemic risk,” Apollo chief executive Marc Rowan said earlier this month of recent private credit worries. He argued there was little difference in quality between loans originated between private and public markets and that performance ultimately came down to individual companies’ skill.
“[There] are good banks, there are bad banks, there are good asset managers, there are bad asset managers, there are good insurance companies, there are bad insurance companies,” he said.
During Blackstone’s first-quarter earnings call, chief executive Stephen Schwarzman said: “[The] Treasury secretary, leaders of the Federal Reserve and the SEC, and the heads of numerous financial institutions have now acknowledged they do not see systemic risk from private credit.”
Even as there have been a handful of high-profile private credit defaults over the past year, some of the biggest players in the industry have said that their portfolios remain sound and the worries are overblown.
The pressures in private credit have led in recent weeks to shareholder lawsuits filed against Blue Owl and a fund managed by KKR. The case against Blue Owl alleges investors were charged excessive fees and the case against the KKR fund alleges the managers made misleading statements about credit quality. Blue Owl and the KKR-managed fund have denied wrongdoing.
