In the five minute video below are some key points by CNBC contributor Ron Insana, who named private credit as the key problem that's rising.

At one point he says, “... bank lines of credit going out to private credit firms, which, by the way, a lawyer who's involved in structuring these products told me the lines of credit from banks are secured by the loans that the private credit firms are making. So you almost have a second lien position for the bank. So it's not the first one to get the asset if something goes wrong… And I would not fully compare this to the great financial crisis where collateralized debt obligations were the problem. But this involves collateralized loan obligations or CLOs.”

On September 18th, 2024 exactly 17 years apart - from September 18, 2007 - the Federal Reserve cut rates by ½ bp. The same rate cut on each day. These exact patterns occurring in 2007 as it did in 2024, have a total of three rate cuts exactly in each year. First it was 50 bp, then 25, and another 25. A total of 1% cut.

Pouring over the interest rate swaps through ISDA since 2019, has shown that investors in the secondary market were taking good positions. That was until April 11, 2025 most tried to short the market, but ultimately were forced to sell their Treasury positions. People got greedy because of policy announcements, but tariffs won that hand. However, their intelligence still remains sound when following Fed rate cuts or increases.

Moreover, COVID wasn't exactly what caused western world to shut down businesses. This was from the repo market completely stopping up in September 2019. I received confirmation from Scott E.D. Skyrm from his book ‘The Repo Market, Shorts, Shortages & Squeezes’, and from another trader who was trying to hold his short. I'm not saying the bio agent doesn't exist, but why would the Feds make emergency rate cuts in March 2020 to effectively 0%, then aggressively hike rates between March 2022 - July 2023 to 5¼ - 5½%?

Now we're seeing investors, economists, even Trump calling on the Federal Reserve to cut rates more; even betting that it occurs. While Dallas Fed CEO, Lorie Logan, and former Dallas Fed CEO, Robert Kaplan, are cautious about further rate cuts warning against such.

Although, this will be interesting to see what investors plan to do once BOJ increases rates. Will they continue to invest in US Treasurys, or will they begin to notice that shorting personal loan ABS is the move?

The housing bubble, which occurred between 2002 - 2006, launched many things:

Now let's take a look at the tech bubble, beginning around 2019 - present:

While there are key differences between the two, the concept still remains with underlying concerns. As Ron pointed out the private credit market is having problems, and personal loans securitized as an ABS now backed up by private credit is just the beginning.

Before going into the main event, let's go back to the worldwide economic loss that rallied -10% to -35%, depending on the industry, -$20T.

When looking at 2007, this was the average family involved who went to the bank. The investors were scarce in this group, but they had a feeling something was up so why not take the risk and hold it as a rental. It was moderate for many investors, but too many people with lack of financial knowledge over leveraged themselves, combining $450B in total borrowing for real estate. While including those who used the opportunity to invest, hidden leverage was the tipping point for firms like Lehman Brothers.

Now when we look at the current year, the total borrowing for potential use of investing far exceeds $1T with combined personal + margin. With the ease of technology, people use online lenders instead of banks because it's easier and less strict. However, the reinvestment is going towards things like tech stocks, AI, crypto - which a large share is being borrowed against - and ETFs. Even though this is visible, there's a lot more everyday John and Jane Doe’s participating than last time.

When looking at the top online lenders - SoFi, LendingClub, Prosper Marketplace, Upstart, Avant, LightStream, and Marcus by Goldman Sachs - we can see a pattern of not only securitization of general-purpose personal loans into ABS, but an overcollateralization. That's good and all, but when there's little to no boundaries being enforced, allowing “any personal use”, you have the same pattern emerge with people reinvesting into the market.

Sounds good right? Buy. Borrow. Die. The perfect strategy GenZ and Millennials are taking, sometimes adding on debt consolidation loans, and credit card refinancing loans. They take it to reinvest into the market, even though the contract specifically states not to. And yet they're still doing it.

Of course the market and banking industry works in economic cycles, it's historically accurate through time. However, the current state of affairs is vastly different with securities used frequently. Aside from overcollateralization that breeds a typical 5-15% return, there's still subordination (10-30%), excess spread (3-8%), and reserve accounts (½-1%). While there are performance triggers, there's absolutely no external insurance if and when things go completely south. Just like in 07-08, overcollateralization and other credit enhancements aren't enough. It's a ticking time bomb.

The top online lenders paving the way for others, believe the cheaper option now is safe because of built in cash flows with no extra premium, predictable via modeling, and scales easily for large pools. We heard that same thing with MBS pre-2007.

While they and many top officials believe this is transparency, it isn't. Just like in 2007-2008, trash securities made an illusion to everyone; investors and people alike. Even though there was “transparency”. It can only be predictable if people have a job, but if they default and can't pay it, it affects their ability to work which means they wouldn't be able to work for seven years. Just because it's scalable, so was the subprime mortgage crisis that was triggered by the yen carry trade crash. That means these can be affected by a similar scenario that affects crypto as well. 

At the end of 2024, the total size of the crypto lending market was estimated to be in the tens of billions of dollars. JPMorgan Chase is the only US institution since June 2025, to allow people borrow against their Bitcoin ETF. Worldwide market position is $254B, while US market position is $140B.

With the recent crypto crash on October 11, 2025 - $19B liquidation event - this has made a serious consequence to 1.6 million investors taking a long position. Their total loss of collateral is just the beginning of what's to come. While not as hard with Bitcoin, Ethereum, and Dogecoin (total combined of -60%), others like XRP, Altcoin, and AAVE took huge blows. As DeFi now calls it the “death spiral”. With Trump announcing potential 100% tariffs increase on China, this was bound to happen in one of the markets.

Unless new companies switch up, these are the ones to watch for:

When we look at the derivative types there's only one that we can see that moves: Interest Rate Swaps (IRS). It doesn't mean CDS, Index CDS, and Total Return Swaps aren't indirectly connected, but in almost all cases, major online lenders’ ABS are connected to interest rate swaps. The underlying loans are fixed rate (such as to the borrower), and the tranches issued to investors are floating rate (coupon resets to benchmark, i.e. SOFR +2%).

As mentioned earlier we're seeing a SPAC boom, because the ABS special purpose vehicle issues floating notes to investors. This gives the underlying loan pool a fixed rate income, as the SPV pays fixed (matching loan cash flows) and the swap counterparty pays floating (matching bond payments). As this ensures the ABS can pass through stable and predictable payments to investors regardless of rate volatility, some ABS deals may omit swaps. That would only happen if both the loans and the issued tranches themselves are fixed rate, or the term is very short (interest rate exposure minimal). Here's the key though: most consumer loan and online lender ABS, the interest rate swap is standard - it's disclosed right in the prospectus! 

Private credit lenders (like direct lending, fintech lenders, or specifically finance firms) often rely on lines of credit from banks to fund their loan originations before these loans are securitized (i.e. turned into ABS). The private credit firm originates the loans (say personal, SME, asset backed loans), to fund that it draws on a warehouse line of credit from a bank. Once enough loans accumulate, the firm packages them into an ABS, pays off the line, and recycles the capital. The line of credit is the bridge financing that keeps origination running until securitization.

The bank line of credit is usually floating rate - typically priced at SOFR + a spread. Meanwhile, the loans being originated are often fixed rate to the end borrowers. That creates the same interest rate mismatch that securitization faces later on: 

So if market rates rise, the private credit lender’s funding costs go up, but the interest income stays fixed - squeezing margins. This is where interest rate swaps come in.

The private credit lender can enter into an interest rate swap or cap with a bank (often the same one providing the credit line). The lender pays fixed and receives floating (SOFR), this offsets the floating rate exposure on the warehouse line. The result is when rates rise, the lender’s increased cost on the line of credit is offset by gains on the swap. When rates fall, the reverse happens, but overall exposure stays balanced. So the swap hedges the interest rate exposure on both the warehouse line of credit, and later the ABS structure once those loans are securitized.

The ABS trust itself often enters a new interest rate swap to manage its own rate mismatch. The old hedge on the warehouse line might be unwound, replaced, or novated to the new ABS structure. In other words, the hedging strategy “migrates” from the private credit stage to the securitization stage - but the logic stays the same: protect margins from interest rate volatility.

When the investor borrows cheap funding in one currency, those proceeds are used to buy ABS backed by private credit or consumer loans, earning a higher yield, so the ABS is effectively the high yield asset in the carry trade.

As foreign rates rise, the funded currency becomes more expensive. When the Fed lowers rates, the USD yields drop, and ABS yield may not move immediately, but funding cost in USD terms can drop. The effect means the spread (carry) narrows or can even invert, and investors who leveraged heavily can face margin calls because the value of their leveraged position falls.

Rising foreign rates means borrowing on foreign currency costs more, and leveraged exposure becomes riskier. Failing USD rates shifts the market value of fixed rate ABS may decline if hedged poorly. Lenders/brokers will require additional collateral for margin calls. When that happens as investors aren’t able to meet margin calls, they may be forced to liquidate ABS positions, which can depress ABS prices further - spilling over into private credit markets if the ABS are backed by illiquid loans.

ABS acts as the high yield asset in the middle, so it bears the brunt of liquidation. While private credit backing ABS may not be liquid, forced selling can create fire sale risk. This, then, the carry trade amplifies sensitivity to interest rate mismatches between funding currency and asset currency.

Bottom line: In a carry trade involving ABS backed by private credit, a divergence between foreign interest rates rising and Fed rates falling can trigger margin calls, forced selling of ABS, and potential stress on private credit markets. ABS acts as the leverage conduit, amplifying rate and liquidity shocks.

This ladies and gentlemen, will be what we see as a 4X larger event than 2007-2008.

Images are AI generated and in no way portray realistic situations or people, aside from the first picture which is a screenshot from CNBC.

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