"Back in the day, shorting Enron triggered the 2001 US stock market crash. 'Dr. Doom': Today's 'private credit' is similar to the subprime loans of 2008."

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Jim Chanos, the legendary Wall Street short-seller who rose to fame for accurately shorting energy giant Enron, has now set his sights on a massive $2 trillion market—private credit.

In his view, the current booming private credit market operates in a similar fashion to the subprime mortgage lending that triggered the 2008 global financial crisis. The greatest similarity between the two is the presence of "multi-layered structures between the source and ultimate use of funds," with this complexity masking the true risks.

Recently, the dramatic collapse of U.S. auto parts manufacturer First Brands Group, and the nearly $12 billion in complex debt it exposed, may well be the "first thunderclap" before an impending financial storm.

The Truth About the “Magic Machine”: The ‘First Warning Sign’ Behind High Yields

In recent years, the private credit market has rapidly risen, becoming a vital financing channel for companies—especially those unable or unwilling to tap public bond markets—and its stunning returns have caught the eyes of global institutional investors.

Chanos describes it as a "magic machine": Institutional investors pour money into it, take on senior debt risk exposures, yet manage to get returns comparable to equity investments.

“Such high returns offered by seemingly safe investments should themselves be the first warning sign,” Chanos said.

He believes these high yields are not due to value creation, but the result of carefully engineered complex structures. Like in the 2008 subprime crisis, risks are hidden within the "multi-layered structures between the source and use of funds". Through packaging and resales, multiple intermediaries stand between the ultimate lender and the real borrower, making the real risk of underlying assets obscure.

A very persuasive example: According to industry media, some private credit fund managers once optimistically projected that secured inventory-backed debt from First Brands—which should have been relatively safe—could yield returns of more than 50%.

Such abnormally high returns, in fact, suggest massive risks that have not been fully disclosed. Chanos believes that as the credit cycle reverses and the economy recedes, more issues like First Brands will come to light:

“I suspect that when the economic cycle finally turns, we’ll see more cases like First Brands.

Especially because private credit has inserted yet another barrier between borrowers and lenders.”

The “Black Box” Revealed by the First Brands Bankruptcy

If Chanos' warnings remain at the macro level, then the bankruptcy of First Brands provides a micro-level dissection of private credit risk.

This unlisted company, owned by the low-key businessman Patrick James, shocked the market when, after filing for bankruptcy, it disclosed nearly $12 billion in liabilities and off-balance-sheet financing.

More disturbing details surfaced during the bankruptcy investigations:

Common Ownership: Documents show that founder Patrick James controlled both the group and some off-balance-sheet special purpose entities (SPEs) via the same set of LLCs. Chanos calls this a “major warning sign.”
Collateral Doubts: The bankruptcy investigation into the company’s tangled off-balance-sheet financing is probing whether the same assets were pledged multiple times, and whether collateral related to the debt may have been "commingled."
Information Barriers: Unlike public firms, First Brands’ financial statements are not publicly disclosed. Hundreds of institutions holding its loans (such as CLO managers) can access reports, but only after signing NDAs. This opacity makes it hard for even top Wall Street credit pros to see the full picture. Goldman Sachs traders reportedly notified clients of signs of costly borrowing at First Brands just hours before it filed for bankruptcy, saying the details were “hard to explain.”

This scene reminded Chanos of his career highlight—shorting Enron. Like First Brands, Enron relied heavily on off-balance-sheet financing and its collapse triggered that year’s massive U.S. stock market crash.

Now, a similar script is playing out in private credit, but with even more secrecy. As noted, unlike Enron, which as a listed company was at least required to make filings public, First Brands is a private firm. While hundreds of CLO managers can access its financials, they must first sign confidentiality agreements. This strictly limits information to a small circle, preventing broader public and market oversight.

“We rarely get a firsthand chance to see how the sausage is made,” Chanos commented.

However, this inherent opacity is a key feature of the private credit model. The model was designed from the outset to enable more flexible, higher-risk lending out of view of regulators and the public, chasing excess returns. Chanos summed it up:

“Opacity is part of the process. It's a feature, not a bug.”

As early as 2020, Chanos declared that financial markets were in a “golden age of fraud.” Now, he believes, things have only gotten worse.

In this vast, under-regulated, and opaque private credit market, the seeds of the next “Enron” or “subprime crisis” may be quietly germinating—and this clearly warrants the highest level of vigilance from both investors and regulators.

Risk DisclaimerThe market carries risk—invest cautiously. This article does not constitute personal investment advice and does not take into account specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their circumstances. Investing accordingly is at your own risk. ```