Blankfein Warns of Hidden Leverage in Private Credit. Regulators Aren't Ready.

Lloyd Blankfein steered Goldman Sachs through the wreckage of 2008, and sixteen years later, the billionaire banker is warning of hidden dangers in a sector that barely existed during the last crisis. His concern centres on private credit, the largely unregulated cousin of traditional banking that has ballooned to £138bn in Britain alone whilst operating in the shadows with increasingly systemic influence. When two of banking's most battle-hardened chiefs start sniffing the wind and speaking publicly about hidden leverage, markets would be wise to pay attention.

Speaking to Citadel's Pablo Salame, Blankfein reached for a telling metaphor about sensing trouble before it arrives. 'I don't feel the storm, but the horses are starting to whinny in the corral,' he said, before posing the question that should keep regulators awake: 'I wonder where there's hidden secret leverage.' His answer suggests it's lurking in the very places oversight doesn't reach—precisely the blind spot that turned subprime mortgages from a niche problem into a global catastrophe.

The scale of what's hiding in plain sight deserves attention. Private credit in the UK has expanded 56 per cent since 2015, according to research from the House of Lords, making Britain the world's second-largest market after the United States. That's £138bn in lending activity operating outside the capital requirements, stress tests, and disclosure obligations that constrain High Street banks. When institutions can lend without holding the same reserves their regulated competitors must maintain, leverage accumulates where regulators can't measure it.

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The Democratisation Problem

What makes Blankfein's warning particularly urgent is the timing. Private credit firms are rushing to open their products to retail investors—ordinary savers with pension pots and ISAs—at precisely the moment when seasoned crisis veterans are raising red flags. The strategic calculation is transparent: firms need deeper pools of capital to sustain growth, and retail money represents an enormous untapped reserve. The risk calculation is murkier.

These aren't straightforward loans. Private credit instruments often involve complex terms, limited liquidity, and opacity that makes valuation difficult even for sophisticated investors.

Blankfein's critique of retail access isn't paternalistic hand-wringing; it reflects a practical concern about what happens when assets 'carried at prices that can't be realised in the market'—his words—suddenly need to be sold in a downturn. If retail investors rush for exits simultaneously, the resulting fire sale could expose just how optimistic those valuations were.

His reference to Iceland's mortgage exposure before 2008 is instructive. Few observers initially understood how a small Nordic economy had accumulated outsized exposure to American subprime mortgages through complex financial instruments. The connection seemed improbable until it wasn't. Blankfein's point is that today's system likely harbours similar hidden linkages—leverage chains that connect seemingly unrelated assets and institutions in ways that only become visible under stress.

When Two Crisis Veterans Agree

The weight of this warning increases when considered alongside recent comments from Jamie Dimon, JP Morgan's chief executive. Dimon noted parallels to 2005-2007, when 'the rising tide lifts all boats, everyone was making a lot of money.' His observation that 'people are getting a little comfortable that this is real' captures the dangerous psychology that precedes corrections: the mistaken belief that current conditions represent a new normal rather than a late-cycle phenomenon.

When Blankfein and Dimon align on systemic risk, dismissing their concerns as reflexive pessimism from battle-scarred veterans seems unwise. Both men have every incentive to project confidence; their institutions and personal wealth depend on functioning markets. That they're speaking publicly about hidden leverage and pre-crisis parallels suggests they're seeing data points that genuinely worry them.

The longer it takes between reckonings, there is a potential for a more severe reckoning.

Blankfein told the Financial Times this week that the absence of a major 'shakeout' since 2008 has made market participants 'more complacent' and 'less scared.' The insight cuts deeper than it might appear. Extended calm breeds assumption that risk has been engineered away rather than merely deferred. His statement is supported by research showing that financial crises following longer expansions tend to be more damaging.

The Regulatory Vacuum

Here's where the governance gap becomes troubling. The House of Lords Financial Services Regulation Committee flagged Treasury 'passivity' on private credit risks in early 2024. A cross-party group of 13 peers expressed concern that when pressed on mitigation efforts, Treasury ministers offered little beyond highlighting regulators' existing work. That response—essentially 'we're monitoring the situation'—suggests an absence of proactive policymaking at a moment when the sector's growth trajectory demands it.

The regulatory arbitrage is straightforward: private credit can offer attractive returns partly because it operates without the costly compliance infrastructure traditional banks must maintain. This creates competitive pressure on regulated lenders whilst concentrating risk in less visible corners of the system. Without capital requirements comparable to banking regulations, private credit firms can deploy more leverage per pound of equity. That works brilliantly in benign conditions.

The test will come when private credit loans—many extended to mid-market companies at floating rates during a low-interest era—face refinancing in a higher-rate environment. If borrowers struggle and private credit funds face redemptions simultaneously, the lack of liquid secondary markets could turn orderly repricing into panic. The question isn't whether private credit can weather normal volatility; it's whether the system can handle a concurrent shock to asset values and funding liquidity without triggering the cascading failures that define systemic crises.

Blankfein isn't predicting when or how the next crisis arrives. His warning is more fundamental: leverage is accumulating somewhere regulators aren't looking, and the assumption that 'the world's not leveraged'—an assertion he attributes to current market consensus—is likely wrong. History suggests that hidden leverage remains hidden only until it doesn't, and the revelation typically arrives at the worst possible moment. Whether policymakers act on that insight before the horses stop whinnying and start bolting remains the uncomfortable question Treasury has yet to adequately answer.

More articles by Ross Williams