Former Goldman CEO Lloyd Blankfein says markets are due for a 'reckoning,' and private credit could be the catalyst

• Former Goldman CEO Lloyd Blankfein says he's worried markets are headed for a "more severe reckoning."
• He spoke of the growing risks of another financial crisis, and pointed to problems in private credit.
• Investors may realize one day that assets in the sector are mispriced, he said.

The executive who led Goldman Sachs through the Great Financial Crisis is sounding a warning about America's private credit machine.

Lloyd Blankfein, the former CEO of Goldman Sachs, said he's worried about problems brewing in the private credit sector when speaking to Bloomberg on the "Big Take" podcast over the weekend. The market could be the flashpoint for a bigger crisis in markets, he suggested, pointing to the growing risks of another financial crisis given the decade of relative calm since the 2008 downturn.

"We're due for kind of a reckoning," Blankfein said. "Because we haven't had a problem for such a long time, undoubtedly we've put money in places where write-offs are going to need to happen. And when you're dealing with opaque, illiquid assets like credit, that's a place that one would clearly have to look," he added.

Blankfein flagged the growing risks of a financial crisis as recently as September. In his latest remarks, he outlined a possible scenario in which problems in private credit escalate into a more severe market event. Private credit, which has boomed in recent years, is a less liquid and less transparent market compared to public equities. Those qualities make it difficult to know how much the investments are truly worth until they're finally sold.

Knowledgeable buyers should be doing their due diligence on private assets, but investors may have lost some discipline given how well markets have done in recent years, Blankfein suggested.

In a separate interview with the Financial Times published Monday, Blankfein speculated that investors could be headed for a "more severe reckoning" as they realize some assets have been mispriced.

"Everybody is — you know — goes into shock, and then all of a sudden everyone gets very careful about how they allocate capital, at least for a little while," he told Bloomberg of a possible credit event he envisions.

Blankfein added that he was most concerned about the potential consequences for retail investors, who have gained greater access to private credit funds in recent years.

"Is this the absolute end of the cycle? I don't know. But after so many years of a bull market and a bull run and all these assets, we're getting close," he said. "We're in the later part of the cycle, I'm sure."

The private credit sector has emerged as a particular area of concern for investors in recent months, but worries intensified after Blue Owl Capital said it would halt withdrawals from one of its retail-focused private credit funds. The move drew some comparisons to the moments leading up to the 2008 crash.

Anxiety over the sector's health has also swelled amid the sell-off in software stocks, a subsector of tech that private credit markets are heavily exposed to.