It has been 16 years since the Wall Street crash in 2007-2008. Now, Wall Street is reportedly risking everything once again.
The New York Times reported Friday that billionaire investor Doug Ostrover has devised a new strategy for being the cash cow for risky loans that wouldn't normally pass muster in traditional banks.
"The new venture would not be a bank, but would operate almost like one — without the regulatory restrictions and government oversight that had made traditional banks skittish about this market," the Times said.
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"Unlike a bank, the firm would be amassing money not from individual depositors, whose savings are fiercely protected by the federal government and can be withdrawn at will, but from institutions like insurance companies and pension funds. Thus, the new firm would be legally permitted to finance tricky, highly speculative companies without reporting the details of such activities publicly," the Times continued.
Ostrover and two others collected $12 billion for the venture, "undercutting their would-be competitors by promising big pension funds and others, like the investment fund run by George Soros, low investment fees if they backed the new firm."
They have large investors like Brown University's endowment and New Jersey's pension fund.
Over the following years, Ostrover boasted to possible clients that their fund was "much more stable, year over year, than stocks or commodities." The firm then shifted to begin offering permanent investor loans that often tie up money for years or a decade.
The company, named Blue Owl, "has both caught and created a once-in-a-generation wave, one that has brought a sweeping change to Wall Street."
By 2021, the company was booming, managing more than $235 billion in investor cash. Its success has inspired other copycat investor firms eager to capitalize on the idea. Rival firm BlackRock claimed, "the private credit market would more than double to $4.5 trillion by 2030."
Over the past few years, private credit investment companies have raised as much as $1.8 trillion.
"That money has been lent to highly indebted companies in sectors like software, insurance and health care," said the report.
Now, big banks are forced to compete with lenders without regulations and operate in an investment free-for-all. The report noted that Goldman didn't meet its private credit goals for the year.
It's an unregulated, high-risk environment that purportedly resembles the "subprime mortgage" market bubble that burst in 2007, leading to a global financial crisis.
Last November, Sen. Sherrod Brown (D-OH), who chaired the Senate Banking Committee, asked regulators about these companies that "operate in the shadows." He was just voted out of office, however, and the incoming Donald Trump administration has indicated it favors fewer regulations across the board.
