Transcription
When you hear 2008, you probably picture something like this. It was the worst day on Wall Street since the crash of 1987. The American financial system was rocked to its foundation as top Wall Street institutions toppled under a mountain of debt. I wake up every single night thinking, "What could I have done differently? This is a pain that will stay with me for the rest of my life."
But what if Wall Street has found a new way to play the same game, only this time they're hiding it with different methods and players? So, what does private equity even do? In theory, they buy struggling businesses—like toy stores, daycares, to your favorite European football club—then try to sell them a few years later for profit.
So, what's wrong with that? Well, there's a darker reality. Take Joan Fabrics. Private equity bought them, took out millions in loans under the company's name, paid themselves from the loan, and by 2025 and two bankruptcies later, every Jones store in America was gone. But that's one story from a bigger picture. Over 100 companies—Chuck-E-Cheese, Payless, Hooters—were crushed after private equity took control. And oh yeah, all that happened in just one year.
But why should you give a damn? Well, now they're creating the next 2008-level economic collapse. And that bubble is about to pop. And soon enough, your savings, your job, and your future may end up like Joan Fabrics. If you did the same, you'd go to jail. But when Wall Street does it, they call it financial engineering.
So, I spent weeks digging into this playbook, talking to experts, reading filings, and following the money just to figure out what's happening. And I'll break it all down in a way that's actually easy to understand, just like Margot Robbie did, but better. So, to explain what's happening, the best way is by showing you right here on my desk.
So, I'll be private equity in this demonstration because once you see how this works, you'll understand why so many companies are suddenly going bankrupt and how that can lead to a major collapse. So, again, I'm private equity and let's say I want to buy this company for $100 million, but I don't want to risk much of my own money. So, what I'll do is I'll put in just $20 million of my own cash and borrow the other $80 million from the bank.
But here's the risk. The company I'm buying is the one responsible for paying back that $80 million because look, I own them now. They have to do what I say. So, what I just did is called a leveraged buyout or LBO. The great thing about it is that the company is now on the hook, not me. But I'm not done. This is where it really gets started.
Now that I own the company, I go back to the bank and say, "Can the company borrow even more?" And this is key here. So now the company takes out a second loan, not to grow it, not to improve it, but to pay me as the private equity owner. And this loan is called a special dividend. And just like that, boom, I already made money. But the company has even more debt. Now it's drowning twice as deep. And the company itself hasn't changed at all.
That's exactly what happened at Toys R Us. In 2005, private equity firms bought it, loaded it with debt, and made it borrow even more just to pay private equity $470 million in special dividends. Two years later, the company was spending over $400 million a year just on interest payments alone. And soon enough, it never recovered, and 33,000 people lost their jobs.
Now, here's where the system gets really dangerous. Remember when I, as private equity, bought the company, I borrowed most of the money from a bank. So, the banks figure out a way to pass this risk to someone else. The best explanation is Anthony Bourdain. He explained it in *The Big Short* as taking the fresh fish he bought at the market on Friday and taking the old pieces of fish that couldn't sell and, instead of throwing it away, reselling it as fresh new fish stew on Sunday.
So that's exactly what the banks did. They take all these risky loans that are under multiple different companies and bundle them together into one big package to sell it to others. That stands for collaterized loan obligation. Basically, just a bunch of company loans all packed into one box. So you might be thinking, why would anyone want to buy loans from a bank?
So what they do is split that bundle into layers rated by how safe each one is based on how likely that loan is to be paid by whoever it's under. The top layer gets labeled AAA safe. So it looks super low risk. And this is the part that gets sold to pension and retirement funds because they're only allowed to invest in things that look safe so they can guarantee returns for old people. The middle layer is called medium risk. That usually goes to insurance companies. In the bottom layer? Yeah, that's the junk sold to hedge funds hoping for big payouts. Pretty much high-risk, high reward.
But here's the thing. From the top being the safest and the garbage debt underneath, it's all connected. In 2008, it was the same trick, but with mortgages instead of companies. They took a bunch of risky home loans, mixed in with a few safe ones, and sold the whole thing as a safe investment. And just like then, people bought it because they didn't see the risk hiding underneath.
So now you understand the stakes. But for any financial bubble to burst, you need a trigger. And in doing so, you'll see if this collapse is really going to happen, or is this all just fear-mongering. And with summer coming up, things are going to start to heat up in many ways.
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And now back to the video. The reason I'm actually making this video is because I saw a viral TikTok and they're hiding the bubble inside a private equity black box. It makes it almost impossible to see what they're doing. Almost. In this video, she claims that what I just spent time explaining will bankrupt the entire American pension system and create an even bigger collapse than 2008. If she's 100% right, that would be a disaster. But if she only cherry-picked the facts, then all due respect, it's fear-mongering. And I only care about the truth.
So to put this to the test, I decided to speak with somebody in the industry and the person behind this YouTube channel. I started my career as a consultant, transitioned into various different private equity roles, including working, funny enough, at a pension fund, uh, in private equity. So, I've, uh, I have a context there, worked at a family office in private equity, and now I'm doing something kind of in and around, uh, private equity as well.
So, first, let's start with one of our claims that's pretty undeniable. Guys, in the last few years, private equity has taken out $3.88 trillion in adjustable-rate loans. These are adjustable-rate loans, which, simply explained, are loans where when interest rates go up, so do the payments. So when a bunch of people couldn't afford their homes anymore in 2008, it's because interest rates went up. Now fast forward to today. The Fed raised interest rates from 0% to around 5% over the last 2 years. And we're starting to see similar things but with companies. During COVID times, everyone bought a ton of different businesses; they put up a lot of debt, and it was all fun and dandy because interest rates were low. But then as interest rates rise, the debt became more expensive, and that's why we're seeing things like increasing bankruptcies as an example.
So to break it down, if a company was paying $10 million a year in interest, now it's paying $30 million. And it's getting to a point where five to six out of every 100 companies now can't pay back their loans. That's over twice as many since the pandemic and the highest level since 2010. So there's no arguing it. Interest rate shock is a worrying trigger. But this next one is where we really start to see the cracks and how true her claims are. They're going to bankrupt the entire American pension system. Maybe she was just saying this more so as a hook, just like how I have hooked you to this point in this video, but I wanted to check, will this private equity bubble destroy your grandma's retirement in the country at large?
But private equity as an investment for pension funds is like maybe 10 to 15% of all pension funds. So it's a smaller component than debt. So like let's call it high-yield debt. Some of the riskier debt is an even smaller component. It's like less than 5%. And then even in that portion, not all of these private equity investments are doing poorly, right? It's a small, small portion of it. And so even if that small portion all does go bankrupt, most of the investments are, are probably fine.
So remember how that AAA safe is the top slice that your grandma's retirement fund manager is investing in? And remember how it's all still connected to the risky loans underneath? What he's saying is yes, more companies default, investors panic, and money stops flowing; pension checks and insurance payouts will shrink, but if we look at the numbers, it's most likely not going to bankrupt the entire American pension system. But don't get it twisted. That doesn't mean that there aren't true other risks. High-quality businesses in maybe healthcare are a lot more insulated than something like consumer discretionary retail four-wall kind of box businesses. The bigger concern is that a lot of these businesses are really important to these communities, and if they go bankrupt, that leads to employment issues in those communities. They have a bunch of different investments. So if one goes south, you know, they have nine others that they can fall back on. But if you're working at one of these companies, you don't have nine other jobs you can fall back on.
So more of the 12,000 US companies owned by private equity continue to collapse. It's not just your grandma nearing retirement. That could mean potentially 12 million jobs at risk. And with that, that's absolutely going to impact your job, your savings, and your future. And it may come soon. In the next one to three years, companies, especially ones owned by private equity, have to pay back nearly $1 trillion in loans. To survive, they'll either need to pay the money back or get a new loan to replace the old one. That only works if interest rates are low and lenders have confidence. If not, imagine a bunch of buses speeding towards a cliff. And if they don't find a new bridge in time, they go off the edge. That cliff, it's called the maturity wall, and a lot of companies are heading straight to it.
So, it's clear that she isn't wrong. There are absolutely real risks. But the question remains, is this really the next 2008? Personally, I think it's probably overblown. Like, uh, it's just the debt. The debt is what really leads them to these like, uh, tricky places, and it impacts low-income communities and and folks like that more than it would, you know, you or me. The chances of this becoming some sort of contagion like it was in the great financial crisis, it's probably not going to happen. And unlike 2008, there's no massive web of side bets or credit default swaps. And banks aren't holding as much of the risk this time, which means it's pretty unlikely that this will be a bigger crash than 2008 like she claimed. But what all three of us agree on is that it will hit regular people first.
And the most frustrating part is that just like in 2008, the risk is hiding in plain sight. And private equity is doing everything to keep it in the shadows. Because if the truth got out, people might start asking who this economy is really built to protect. But Wall Street has already been working 10 steps ahead to prevent that. In fact, they're reusing the same exact playbook from 2008. Because after the collapse, public outrage actually forced the government to crack down on banks. Despite Wall Street's heavy lobbying, some new regulations actually passed. But as we're seeing, money still talks because risky behavior didn't just disappear. It just got spread out.
Because here's the truth. Private equity may have built this new machine, but the whole system helps keep running it. In fact, the pension funds themselves are that perfect example. The reason why pension fund managers that should be investing conservatively are investing in private equity is because it promises higher returns, and pension fund managers are incentivized to beat their benchmark because that's how they get bigger bonuses. Since private equity-owned companies aren't publicly traded like a Meta or Google where you can read their financials, no one really knows what they're worth. So private equity usually inflates these companies' values sometimes to a point where, in reality, these companies are weeks away from bankruptcy. So it becomes a two-fold win-win system. It makes private equity look good when the returns look good, and pension fund managers also get richer. And just like that, the real risk gets hidden until it's too late.
So this is just one example. But the real reason how private equity can keep their game going: easy money and lobbying. In the 2023-2024 election cycle alone, $296 million in campaign contributions came from private equity. As you can imagine, the biggest firms—Blackstone, KKR, and Apollo—spend the biggest money. And who they pay the checks to is not random. It's strategic. They attack committees that control tax policy in both the Senate and the House. But they're also strategic when it comes to parties. As you can see, it's not partisan. Both Democrats and Republicans gladly take their money.
And there's many reasons private equity donates so much money, but the biggest one can be found in what shows up in most of their lobbying filings. This line item here: issues related to taxation of carried interest. It's in reference to a special tax break called the carried interest loophole, which helps private equity make and keep so much money. Here's how it works. When you earn a salary or bonus, you pay up to 37% in taxes. But private equity calls their bonuses when selling a company carried interest. So instead, they only pay 20%. That's not a small difference. It cuts their tax bill nearly in half and saves the industry billions every year. It's one way the CEO of Blackstone has made over $1 billion in a single year. And the people they donate to protect the loophole when it matters. In 2022, the Inflation Reduction Act was supposed to finally close this loophole, but three lawmakers who received six-figure checks from private equity stripped it out at the last minute. In 2023, the SEC passed a rule requiring private equity funds to give investors detailed information about fees and risks. Pretty reasonable. Six industry groups immediately sued. And in May 2024, a federal court struck down the rule completely.
Closing down this loophole would save taxpayers like you and I $14 billion over 10 years. But Wall Street spends just hundreds of millions to keep it open. Say what you want, but private equity is so damn good at making money, and that's a pretty damn good return on investment.
And on top of donations and lobbying, there's a main reason why regulators don't regulate. Jay Clayton used to be the head of the SEC, the agency in charge of regulating Wall Street and protecting investors. But after leaving that job, he joined Apollo Global Management, one of the biggest private equity firms in the world, as their lead independent director. Think about that. The guy who was in charge of regulating the entire industry just years later works for one of the biggest ones in the industry. And just like 2008, this revolving door is exactly how and why the system is kept in the dark.
The solutions are simple: close tax loopholes, require transparency, limit debt, and hold these firms accountable. But until enough people understand how the system works and demand change, Wall Street will keep winning, even if it all falls apart. Because in this world, money doesn't just talk. It writes the rules. And it's always been that way. Corruption repeats, the playbook repeats, and without fail, history repeats.
But there's hope because if you watch *The Big Short*, you'll know a few guys made millions betting against the 2008 collapse. And it's controversial, but I respect the hell out of them because just like you and I, they couldn't change the system, but they understood it and decided to win. While everyone else chose blind ignorance, not because it represents them, but because it feels familiar. And today, we're seeing the same patterns again.
So, what can you do? Learn how power moves and don't be the spectator with your hands in your pants while everything falls apart. Because in a world of money and power, ignorance is the most dangerous position of all.