The Great American Hazard

Image Source: Joshua Hoehne on Unsplash

On Thursday, JPMorgan Chase and a handful of the largest banks on earth announced they are launching a new credit-default swap index tied to private credit. The product, called CDX Financials, developed with S&P Global, includes exposure to Apollo, Ares Management, Blackstone, a handful of insurers, some regional banks, and a few credit card companies.

Private credit managers make up about 12% of the index. The rest is the ecosystem that feeds them.

If you don’t know what a credit-default swap is, here’s the short version. It’s insurance on someone else’s debt. You pay a premium, and if the borrower defaults, you get paid. You don’t have to own the debt. You just have to believe it’s going to go bad -- and be willing to put money behind that belief.

Credit-default swaps were the instrument that let a small number of people make billions during the 2008 financial crisis. They were also the instrument that nearly destroyed AIG, which had sold so many of them that when the defaults came, it couldn’t pay.

The Fed stepped in with $182 billion to keep AIG alive -- not because they cared about it, but because every major bank on the planet was on the other side of those trades. That was the moment most people learned what “moral hazard” means.

Not that someone takes a risk, it's that someone takes a risk knowing the system can’t afford to let them lose. Now we’re doing it again. Isn’t the financial system just wonderful?

What Changed?

Private credit has grown from a niche corner of finance into a $1.8 to $3 trillion industry, depending on who’s counting.

The money came from everywhere -- pension funds, insurance companies, sovereign wealth, retail investors through non-traded BDCs, and individuals who were told this was “stable income with low correlation to markets.”

The problem is that private credit doesn’t trade on an exchange. There’s no daily price and no bid-ask spread that tells you what something is worth. The funds mark their own books, report their own NAVs, and tell their investors what the return is.

And for a long time, that worked because the economy was cooperating. Now it’s not.

Redemption requests hit $20.8 billion in the first quarter of 2026. The Fed is asking banks how much exposure they have. The Treasury is asking insurers the same question.

Then hedge funds, led by people like Boaz Weinstein at Saba Capital, have been scrambling to find a way to short the sector, but couldn’t, because there was no clean instrument to use. Until now.

Why This Matters

The CDS index doesn’t just give hedge funds a way to bet against private credit. It gives the entire market a mechanism to price stress in real time. And that’s what we actually can use to see what is happening.

When the index widens, it means the market expects defaults. When it tightens, it means the market thinks the system is holding.

Either way, it surfaces information that private credit has kept quiet for a decade. That’s the first problem. The second is bigger.

The U.S. economy is dramatically more financialized than it was in 2008. Household wealth is more concentrated in financial assets. Insurance companies are deeper into private credit, and that is where I think the next crisis lives. Retirement accounts are more exposed to alternative strategies. And the linkages between banks and non-bank lenders are tighter than regulators can easily track.

Jamie Dimon said in his latest CEO letter that private credit has “a lack of transparency and poor valuation standards,” and then suggested he didn’t think it was systemic.

But let me stress something. Dimon said that private credit probably does not present a systemic risk. Do you see the keyword in that sentence? "Probably."

That means it presents a systemic risk, and he doesn’t want to admit it.

The Endgame

The banks aren’t launching this index because they want to blow up private credit. They’re launching it because they want to reduce their own exposure and let someone else hold someone else. And the hedge funds buying the other side aren’t doing it because they think private credit is fine. They’re doing it because they think it’s not.

So now you have the banks hedging, the hedge funds shorting, and the retail investors still sitting in the funds collecting a yield that’s marked by the people running the fund.

When the stress arrives, and it will, because it always does, the question won’t be whether the system can absorb it. The question will be whether the system is so interconnected that even a small event can cascade faster than anyone has modeled.

And in a $3 trillion market with leverage, duration mismatches, and opaque pricing, nobody knows. Because nobody has tested it under stress. And when it breaks, we already know what happens next.

The Fed steps in. The money printer fires up. The moral hazard machine ignites. Because by then, there’s no other option.

Judge the system not by its intentions, but by its outcomes. And the outcomes of the last 18 years have been greater monetary policy expansion, more currency erosion, and the never-ending process of the Cantillon Effect, which rewards people for taking unnecessary risk while they get bailed out and turn around with new money to buy scarce assets before the inflation fueled by the new money hits everyone else.

Once again, isn’t the financial system terrific?