Tom Bilyeu

After the 2008 financial crisis, regulators told banks never again.

They imposed strict new rules known as Basel III that essentially forced banks to stop making these risky ass loans.

Problem solved, right?

not even close.

The risky lending didn't stop, it just moved somewhere the regulators couldn't see it.

The goal of Basel III was to make it expensive and difficult for banks to lend to mid-sized companies, the businesses too big for a local bank, but too small to issue public bonds.

Private credit funds stepped in to fill that gap.

They raise money from big investors, pension funds, insurance companies, wealthy individuals.

They then pool it and lend it out to these companies at higher interest rates than banks would charge.

For a while, this worked great.

Companies got funding, investors got high yields, and because the loans were held by sophisticated institutional players with long time horizons, the illiquidity wasn't actually a problem.

It went wrong when three things happened together.

One, the market exploded in size, the aforementioned $500 billion to $2 trillion plus in just five years.

With that much money pouring in, lending standards just dropped.

Also, lenders have to put the money raised to work.

They have that obligation.

But they quickly ran out of good borrowers and just started lending to riskier ones.

Remember the ultra-toxic subprime mortgages that almost destroyed the global economy?

That's exactly what subprime meant.

It's a nice way of saying people banks really should never have lended money to.