Finance in the Dark

In October 2025, the Ohio-based auto parts manufacturer First Brands ran into trouble with its debt load. The financial press picked up on the story not because First Brands was particularly unique, or particularly important to the US economy, but because various financial institutions began to realize that their exposure to this company—through their private credit funds—was higher than they had previously thought. Because, unlike banks, private credit funds are unregulated, it was difficult to see the potential for intertwined risks, or to carry out due diligence, or to assess the reasonableness of the loans. As the UK’s financial regulator Simon Walls, the executive director of markets, pointed out: “There isn’t a very clean distinction between the banking sector and the non-banking sector”—yet regulators can only deal with one or the other. 

The First Brands episode turned out to be the harbinger of a broader trend. Now, in early 2026, the financial press has begun to ring alarm bells about the “stress” in private equity and private credit. Private-equity firms hold $3.7 trillion in unsold companies, and sales are slowing down, prompting leading pension funds and other institutional shareholders to lower their private-equity portfolio allocations. These are symptoms of a structural change. Unregulated finance is becoming the center of gravity in financial markets, which are increasingly drawing non-wealthy households into their vortex.  Our entire financial system is moving not just into the shadows, but into the dark, with the activities of such firms highly opaque and largely protected from public scrutiny.

High-risk, high-reward

How did we get here? Ever since the reforms following the Great Crash of 1929, securities law has separated regulated banks and exchanges on the one hand from so-called “private” markets on the other. “Public” markets are those regulated under the Securities Act of 1933 and the Securities Exchange Act of 1934, the landmark legislation that established the Securities Exchange Commission (SEC), which oversees the issuance of financial securities and requires regular (quarterly) disclosure of the issuing corporations’ financials. 

The 1933 and 1934 Acts established a highly regulated public realm, based on the premise that a lack of information about underlying financials had enabled speculators to fleece ordinary shareholders. Trustworthy information was thought to make markets more liquid, and therefore reliable. Since it had been swindling speculators with insider knowledge who lulled the public into positions prone to bank runs, credit crunches, and the drying up of liquidity, disclosure by those issuing investment products was thought to guard against such confidence games.  

But the exclusion from those laws also established a lightly regulated private realm. Private markets were the domain of wealthy expert shareholders able to engage in dealmaking without public disclosure. This distinction initially limited who could participate—institutional shareholders, such as public pension funds, for example, could not purchase securities unless they were sold on public markets. New Deal financial regulation limited the kinds of deals pension funds could engage in; funds have to be managed by fund managers, “registered advisors” in the SEC’s parlance, who are required to disclose certain information about their activities. But the Investment Company Act of 1940, which defines an “investment company” in the US Code, laid out two exceptions—Section 3(c)(1) and Section 3(c)(7)—that allow fund managers to deal outside public markets if they have fewer than 100 participants or if they are determined to be a “qualified purchaser.”1250 clients for venture capital funds with less than $10 million in capital. Cf. Clayon 2020, Public Investors, Private Funds, and State Law. “Under the Securities Act of 1933, all of a fund’s investors typically must be “accredited investors” meeting certain net worth thresholds (generally $5 million for certain entities and $1 million for individuals)…. Under the Investment Company Act of 1940 (the “Investment Company Act”) all of the fund’s investors must be “qualified purchasers” who satisfy a different set of net worth thresholds (generally $25 million for certain entities and $5 million for individuals)….Alternatively, the Investment Company Act of 1940 allows a private fund to operate as long as it has fewer than 100 investors….Various other exemptions to the Investment Company Act exist, but these are the most commonly used. Furthermore, if managers want to charge incentive-based compensation, their investors must also meet the “qualified client” standard set forth in Rule 205-3 of the Investment Advisers Act, which currently requires entities and natural persons to have a net worth of at least $2.1 million or an investment with the manager of at least $1 million.”

Funds have used these exceptions for a long time for their high-risk, high-reward profile. Because the market for these investments has been, by definition, much smaller and without disclosure requirements by the issuers or the fund managers, it is considerably less liquid—hence, high risk. Non-wealthy households did not have access to them. During the Nixon administration, large corporate employers had too often failed to meet their pension obligations, and Congress had passed the Employee Retirement Income Security Act (ERISA). After the long inflation of the Vietnam War era, however, that same law was interpreted to enable pension funds to invest in more speculative securities, including venture capital. Just two weeks before the White House announced Paul Volcker’s appointment as Chairman of the Federal Reserve Board of Governors, the Department of Labor revised its rules governing the standards for trustees of pension funds, enabling them to purchase illiquid assets for the first time.

From $69 million in 1978, 15 percent of all funds raised, pension fund investments in “independent venture partnerships” increased to $1,808 million in 1983 (measured in constant 1997 dollars; $138 million and $3.6 billion in 2025 dollars). In the 1980s and 1990s, “pension funds provided anywhere from 31 percent to 59 percent of the funds raised by independent venture-capital partnerships, which in turn increased their share of all venture funds raised from 40 percent in 1980 to 80 percent a decade later.”2William Lazonick, “The Functions of the Stock Market and the Fallacies of Shareholder Value,” Institute for New Economic Thinking, Working Paper No. 58, June 20, 2017. This change enabled private markets, the purveyors of illiquid assets, to grow. For the first time, the largest pools of institutional financial assets—pensions—could be their customers. 

The new conjuncture

The Great Financial Crisis ushered in a new reality. As banks became more regulated to prevent future meltdowns, capital flowed increasingly to other financial institutions. Private equity thus increasingly took control of sectors like housing, daycare, and infrastructure. According to the SEC, private funds held $26.5 billion gross and $16.7 trillion net in the second quarter of 2025 (this most recent available). Of this $16.7 trillion, $7.3 trillion was held across twenty-five thousand private equity funds and another $5.7 trillion by nine thousand hedge funds. Management of these funds, however, is concentrated: the $16.6 trillion in net assets were ultimately managed by just four thousand registered advisors. Private credit funds have been growing especially rapidly. According to Moody’s, private credit funds held $217 billion in 2010, and grew to $1.2 trillion by 2023. Crypto is the hardest to pin down: CoinGecko, estimates global crypto market cap as $2.4 trillion today, down from $4.4 trillion in just October 2025.

Yet as the big wins from private funds have been squeezed out by the “smart money” which has bid values high, private equity firms are having a harder and harder time selling their portfolio companies for a gain. This has made institutional investors wary of continuing to invest. One of the industry’s primary goals is thus to break down the bulwark separating private fund investments from the life savings of ordinary Americans. The estimated $12 trillion held in employer-sponsored defined contribution plans is a great prize for unregulated financial actors. Here the Trump Administration has been an ally, placing the growth of this unregulated finance at the center of its agenda.

Last summer, the White House issued an Executive Order, “Democratizing Access to Alternative Assets for 401(k) Investors,” which frames access to “alternative” assets as a barrier that must be breached. While these assets are available to the wealthy and public pension fund beneficiaries, it states, 401(k) holders are deprived of “the opportunity to participate” in them—which it denounces as an unjust exclusion from the wealth-building opportunities in private markets.  The Order makes no mention of the reason this barrier has existed since the spread of defined-contribution plans during the 1940s. The Department of Labor, the regulator of employer-based retirement plans, followed the Order up in late September by rescinding a Biden-era statement that “discouraged fiduciaries from considering alternative assets in 401(k) plan investment menus.” The White House has given no word on whether the federal government’s own Thrift Savings Plan, which holds $1 trillion in assets, would invest in “alternative assets.” 

These moves to deregulate middle-class savings came after the SEC, in May 2025, said that it will no longer require funds that propose to invest more than 15 percent of net assets in private funds to limit the sale of their shares to accredited investors with a minimum investment of $25,000 (Ropes & Gray 2025). This limit was based not on statute but rather on comments on disclosure filings. As a result, these funds can now market their investment products to households. In parallel, the SEC has reportedly been considering changes to the accredited investor rule itself. Already, BlackRock has been offering 401(k) plan members of retiree administrator Great Grey Trust access to private equity assets in target date funds. “Including private market assets in retirement accounts,” says Martin Small, BlackRock’s CFO, “could add 50 basis points of additional returns annually and generate 15 percent more retirement assets by the end of life.”

It is the interaction of private markets and credit that poses the greatest systemic risk. In private markets, the borrowing companies themselves do not have to disclose their financials to the public. Private credit firms do their own loan valuations in lieu of the banks and asset managers who ultimately own the loans, and creditors have been extending loan times and terms to keep default rates low.

One factor currently putting private credit’s value at risk is the future of software company securities, particularly subscription-based software. With the ascent of AI, billions of dollars of loans to these companies are falling precipitously, and about 20 percent of loans in private credit funds are to tech companies. The risk is not only to older software: Larry Ellison’s Oracle has borrowed at least $56 billion in construction loans from banks for its expansion of data centers to be leased by OpenAI; banks are now looking to sell these loans to private credit firms and insurance companies. UBS predicts that under “aggressive AI disruption scenarios,” defaults in private credit would rise by from 12 percent to 13 percent. Barclays analysts find it “nearly impossible” to know the total risk of such a downturn. But with the nation’s pension funds and 401(k)s invited to participate, the illiquid assets of unregulated finance can be traded off of fund managers’ books onto those of households—who will have to absorb the losses.

The new Congress has also passed the Trump-approved GENIUS Act into law. Following up on the President’s promise to “make America the crypto capital of the world,” the law opened the door to tech platforms issuing their own money—despite the “crypto winter” of 2022-23, in which $2 trillion in value was wiped out fairly quickly. Before long, Morgan Stanley announced that any of their customer accounts, including retirement accounts, could now hold crypto. Within just three months of this announcement, bitcoin fell forty-five percent from its peak value—heralding the return of crypto winter.

An alternative framework

The growth of private markets threatens not only greater financial risk, but increasing economic power for some of the worst actors in the US political economy. The activities of private equity firm leaders are well-documented: they buy up companies, load them down with debt, and cut costs so aggressively that those companies fall apart. The campaign by workers at Toys R US for the severance they were promised, organized by United for Respect and documented by Megan Greenwell, brought this to many people’s attention. Innumerable communities from the Rustbelt in the Northeast and Midwest, to the oil and refinery towns of the South and Southwest, and the white-collar offices of the sunbelt, have seen the same obligations broken by outside finance taking control of major employers.

Over the past two decades, private equity firms have steamrolled into healthcare, buying up hospitals, home health care companies, and even hospice providers because of their dedicated public revenue streams. Increasing the profitability of these assets requires aggressively cutting costs and reducing the quality of care; this has been well documented by Eileen Appelbaum and Rosemary Batt. And most recently, private equity has become the biggest landlord, worsening the housing affordability crisis. 

The takeover of more and more of the real economy by unregulated finance threatens to supercharge this process. Businesses will mainly borrow from private credit funds or be held in private equity fund portfolios. Most household retirement portfolios will be allocated to unregulated financial assets. The behemoths of regulated finance see the threat to their business models and are trying their best to catch up and partner with unregulated financial institutions wherever they can. Jamie Dimon of JP Morgan Chase—“the most successful banker in generations”—has openly denigrated the risks of private credit funds and at the same time allocated $50 billion to private credit. Despite financial regulatory institutions from the IMF to the Federal Reserve to the Bank for International Settlements calling out the risks, little heed has been taken. Despite growing awareness of potential harms, unregulated finance will continue to grow until something stops it. 

There is no shortage of proposals for financial regulatory reform. But the solutions offered, even by aggressive reformers like Senator Elizabeth Warren, mainly take an incentives-based approach. Practices are not outlawed; they are made less attractive through equalizing the capital gains and income tax rates, and adjusting the fees that can be charged. Extending the perimeter of public markets regulation to include crypto and private credit, or even private equity, however, will not on its own bring the financial sector into service of the real economy. If private equity firms were made to disclose quarterly reports alongside those of the SEC-regulated corporations, it would not prevent many of the kinds of abuses we hear about financial extraction. After all, public markets disclosure is what enables us to know where values are most clearly driven by stock buyback programs. Public markets are what allow us to see the absurd price-to-earnings ratio of many stocks, without guarding against them. Disclosure has not redressed the problems of predatory finance—its ability to manipulate securities markets, centralize economic control, cut wages, and raise prices.

Protecting individual savings and promoting investment in productive enterprise requires prohibiting the kinds of legal market manipulation that characterize the industry and its increasingly political plays. This means seeing all of finance as one sector with a common set of problems. It requires revisiting the securities and investor protection laws that came out of the Great Depression. Many reformers have reasonable doubts about the risks of this approach; if we open up these laws to Congressional scrutiny today, it is unlikely that we have the political power for something better. But what the politics of private finance teaches is the inadequacy of considering only what we can achieve in the short term, given the political constraints. Unregulated finance has grown by promising the public a future far different from the present. Developing a general framework for regulating finance, holistically and structurally, which could be put to use when reformers have the necessary leverage, is no more utopian than what private markets themselves promise.