By The Briefcase Team | Tuesday, October 6, 2026 | 7 min read

After 2008, the big banks swore off risky lending the way your uncle swore off gambling. Then he started lending money to his buddy who runs the poker game.

That, in one sentence, is the story the Federal Reserve is now quietly investigating.

The New York Fed has been visiting JPMorgan, Wells Fargo, Barclays, and Morgan Stanley since the spring, asking about their loans to private credit firms, according to a Semafor scoop. Examiners wanted to know three things: how much the banks have lent, how they manage the risk, and how good the collateral is. Everyone involved declined to comment, which is the banking equivalent of "no reason, just curious."

To be fair, Fed visits are not unusual. Regulators show up whenever the headlines get loud. But these headlines have been loud for about a year. Loans from banks to nonbank financial firms have grown from $300 billion in 2016 to more than $1.5 trillion, now 11% of all bank loans outstanding, per FDIC data cited by Semafor.

Wall Street didn't leave the casino. It just started financing the house.

Here's how the machine works. We can't afford Margot Robbie in a bathtub, so you're getting a turducken.

The duck: A private credit fund lends $100 million to a mid-sized software company. No bank, no bond market, no public price. Just two parties and a spreadsheet.

The chicken: The fund then takes that loan to a bank and says, "Lend me money against this." That is called "back leverage." It's like using your mortgage as collateral to borrow more money for another mortgage.

The turkey: The bank lends against the loan, and everybody books a nice yield. Loans inside of loans, stuffed into a bank, roasted at 400 degrees.

Delicious, until someone checks whether the duck is still alive. CNBC described back leverage as a structure that "layers leverage upon leverage" and can amplify losses if the underlying loans sour, in its report on JPMorgan's pullback.

A "mark" is what a lender says a loan is worth. With a stock, the price is on your phone. With a private loan, there is no price. The lender, sometimes with a third-party valuation firm, decides what the loan is worth.

Imagine if your ex graded your relationship, and the grade was always a B+. That's a Level 3 asset: valued on "significant unobservable inputs," in the SEC's own words. In plain English, vibes.

On September 28, the SEC's chief accountant issued a rare statement reminding funds to be rigorous about those marks. It specifically flagged "payment in kind" interest, where a borrower pays interest with more debt instead of cash. That's paying your Visa bill with your Mastercard and calling it income. PIK now shows up in about 11% of outstanding private credit loans, per Lincoln International.

Even insiders are squinting. Apollo's John Zito told UBS clients in February that "all the marks are wrong," referring to software valuations, per CNBC. When a guy who sells the product says the price tags are wrong, believe him.

In March, JPMorgan marked down software loans that private credit clients had pledged as collateral, according to CNBC. The worry was AI: if new models can replace a chunk of enterprise software, a loan to a software company is a loan to a horse-and-buggy maker in 1910.

A lower mark means the fund can borrow less against its loans and may have to post more collateral. That's a margin call. JPMorgan said it was being disciplined "rather than waiting until a crisis comes." That review is part of what sent the Fed knocking, per Semafor.

Meanwhile, investors stampeded. Some funds saw withdrawal requests of nearly 40% in a single quarter. Most capped payouts at 5%, per Semafor. Blackstone's flagship credit fund got requests for about 10% of its shares last quarter and held to its 5% cap, per Reuters. Imagine asking for your coat at a restaurant and the waiter bringing back one sleeve.

You might think this is a software problem. It isn't, at least not only.

The same banks back real estate lenders. Banks provide back leverage to mortgage REITs, private debt funds, and other real estate lenders. JPMorgan has about $65 billion in loans to mortgage lenders, Wells Fargo about $38 billion, and Morgan Stanley about $31 billion, per Fitch data via The Real Deal. Three of the four banks the Fed visited are on that list.

The rules encourage it. Under capital rules, a direct loan to an office building counts as riskier than a credit line to a mortgage REIT that lends to the office building, per The Real Deal. So banks hold less capital by lending to the middleman. Regulators didn't remove the risk. They moved it one floor down and turned off the lights.

Banks quit mortgages and lent to mortgage lenders instead. At America's eight biggest banks, residential real estate loans fell from 11.7% of assets in 2011 to 5.8% this year. Over the same stretch, "other loans," led by lending to nonbanks, more than doubled to 12.6%, per the St. Louis Fed. The bank isn't your lender anymore. It's your lender's lender.

Private lenders now finance a big piece of commercial property. CRE debt funds and mortgage REITs made 40% of non-agency commercial real estate loans in late 2025, mostly bridge and transitional loans, per CBRE. That's the money that keeps half-leased buildings and value-add apartment deals alive.

And here's the part that should make you put down your coffee. Many bank facilities to real estate lenders are marked to market, which can trigger margin calls when prices fall. So some banks now offer to mark loans down only after a missed payment or default, per The Real Deal. Blackstone Mortgage Trust moved nearly $6 billion of its facilities to non-mark-to-market terms. That's the financial version of agreeing not to step on the scale until after the heart attack.

All of this would be manageable at 4% rates. We are not at 4%.

The 10-year Treasury hit 5.3% last week, its highest since 2002, capping its biggest quarterly jump since 1994, per Bisnow. Commercial buyers are now "retrading," which means demanding price cuts on deals they already signed. One Midwest apartment buyer got $600,000 knocked off a roughly $20 million purchase after borrowing costs jumped. "Rates went up, what, just a few days ago and I'm already getting calls where they're talking retrade," said Cushman & Wakefield's Jeff Powers, per Investing.com.

In August, 11.42% of loans in commercial mortgage-backed securities were with special servicers, the debt-collection ICU. That is the highest rate since February 2013, per Trepp data via Investing.com. More than $800 billion in commercial real estate debt matures this year, per CBRE. Every one of those borrowers has to refinance at today's rates, with lenders whose own lenders are being visited by the Fed.

The preview already happened in Europe. In March, UBS froze withdrawals from a $469 million real estate fund for up to three years, per Reuters. Three years. Your money is now a toddler.

Here is the honest part, which The Big Short would cut for time.

This is not subprime 2.0. Business development companies, a big chunk of private credit, are capped at 2x leverage, versus the roughly 30x seen during the financial crisis, and most have limited direct real estate exposure, per CBRE. Real estate debt funds lend against actual buildings, not vibes. Many don't face quarterly redemptions. Withdrawal requests have eased at many firms, per Semafor.

The real lesson of 2008 was not that housing crashed. It was that nobody knew who was holding the bag until the bag exploded. Private credit has the same flaw: opaque marks, layered leverage, and loans that move from fund to bank to fund like a hot potato. The Fed's tour of the banks is an attempt to draw the map before the potato drops.

Bridge and value-add debt gets pricier first. If banks squeeze back leverage, private lenders pass the cost to borrowers through higher spreads, lower leverage, and more equity required.

Refinancing is the danger zone. The borrower with a 2026 or 2027 maturity on a transitional asset is the one who feels this. Talk to your lender now, not in month eleven.

Cash is king again. Retrades and forced sellers mean opportunities for buyers who don't need a lender's lender to say yes.

Watch the marks. When private lenders' reported loan values finally fall, appraisals and property prices follow. Panelists at Bisnow's finance event said appraisals haven't caught up yet. They will.

The banks didn't take the risk out of the system after 2008. They just put it in a turducken and served it through a middleman. Now the Fed is in the kitchen asking what's inside.

Bon appétit.