October 6, 2025 • 34 mins
December 27, 1772. Clifford & Co.—one of Europe's most prestigious banking houses—shuts its doors with nearly $1 billion in liabilities (in today's money). Within weeks, the contagion spreads: 20 banks collapse across Amsterdam, London, Hamburg, and beyond. The world's first global financial crisis.
The culprit? Mortgage-backed securities on Caribbean plantations, marketed as "safe and stable" to Dutch middle-class investors who trusted the reputation of shadow banks operating outside any regulation.
In 2025, history is rhyming.
BlackRock, Apollo, State Street, and KKR are packaging private credit for Main Street investors using identical structures, promises, and marketing language. The SEC just loosened restrictions. Your 401(k) provider will likely offer it soon. And credit rating agencies are already sounding alarms.
This episode breaks down:
- How Amsterdam's shadow banks created negotiaties—pooled plantation loans with zero transparency
- Why maturity mismatches (short-term liquidity promises on long-term illiquid assets) always end the same way
- The information asymmetry that benefits insiders and destroys retail investors
- What Alexander Fordyce's £300,000 loss triggered across three continents
- The 6 structural flaws of 1772 that exist in modern private credit
- What Moody's warned about in June 2025 (spoiler: systemic consequences)
Critical Modern Parallels: The same reputation-based investing. The same opacity. The same carry trade dynamics. The same maturity mismatches. The same "this time is different" mentality.
Except now it's being sold to your retirement account.
Key Takeaways:
- If something promises high returns + low risk + low volatility, at least one of those is false
- Ask these questions before investing: What are the actual companies? How leveraged? What happens in a redemption freeze? How are assets valued?
- The investors who survive crises aren't the ones maximizing returns during booms—they're the ones who survive busts
- When Wall Street packages something for retail, it's often because institutional money is getting cautious
Episode Resources:
- Full show notes with sources at thetimelessinvestor.com
- Subscribe to The Timeless Investor newsletter for deep dives into financial history
- Previous episode: Overend, Gurney & The Panic of 1866
About The Timeless Investor Show: Real estate fund manager and financial historian Arie van Gemeren explores the wreckage of financial catastrophes past and present, extracting timeless lessons for modern builders and investors. Because the best way to navigate the future is to understand the patterns of the past.
Think well. Act wisely. Build something timeless.
Episode Length: ~34 minutes
Topics: Financial History, Private Credit, Shadow Banking, Investment Strategy, Retirement Planning, Financial Crisis, Wealth Preservation, Amsterdam 1772, M
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:00):
December 27th, 1772.
One of the most respectedbanking houses in Europe locks
its doors.
The lights go out.
Business is over for good.
Within two weeks, 20 banksacross three countries are gone.
Merchants are literally cuttingtheir own throats in the
(00:21):
streets.
And the world's first globalfinancial system is collapsing
under the weight of somethinginvestors thought was
mortgage-backed securities onCaribbean plantations.
Those words should soundincredibly familiar to anyone
listening to this.
Welcome to the Timeless InvestorShow.
I'm Ari Van Gemeren, real estatefund manager, student of
(00:44):
history, and your host todaythrough the wreckage of
financial catastrophes, past andpresent.
Today, we are diving into thecrisis that nobody knows about,
but everyone should know becauseWall Street is selling the exact
same product to your retirementaccount right now.
Here's something you need toknow.
This month, this year, 2025,BlackRock, Apollo, State Street,
(01:08):
and KKR are launching newinvestment products designed to
get Main Street investors intoprivate credit.
They are calling it, I'm usingair quotes, the democratization
of private markets.
Your 401k provider might offerit soon.
Your financial advisor is verylikely getting pitched on it.
You might soon see it in atarget date retirement fund.
And the marketing pitch, safe,stable, high returns with low
(01:31):
volatility, diversification frompublic markets.
Private credit has exploded from$1 trillion in 2020 to$1.5
trillion today, and it'sprojected to hit$2.6 trillion by
2029.
But here's what nobody istelling you, whether they are
aware of it or not.
We have seen this exact playbookbefore.
(01:53):
Same structure, same promises,same marketing language, same
end result.
And no, I am not talking about2008.
I'm talking about 1772,Amsterdam, the world's financial
capital at the time, a shadowbanking system built on
mortgage-backed securities,cheap credit, and zero
(02:15):
regulation.
Banking houses with venerablenames like Clifford Co., Hope
and Company, and the SeppenwoldBrothers were financing an
empire of Caribbean plantationsthrough a revolutionary
financial product callednegotiatees.
They marketed these securitiesto the Dutch upper middle class,
not the ultra-wealthy, regular,successful merchants, craftsmen,
(02:38):
professionals, people who wantedsteady income and thought they
were buying something safe.
These bonds were backed by realassets, plantations, land,
buildings, the banking housesthat represented them and
marketed them and sold them hadsterling reputations going back
generations.
The returns were attractive, butnot crazy.
(03:00):
Everything looked perfect onpaper until it all collapsed in
a matter of weeks.
So today, we're going to breakdown exactly what happened, why
it matters, and what it tells usabout the$2 trillion in private
credit that Wall Street is nowpackaging and preparing for you
and for retail investors acrossthis great country and across
(03:24):
the world.
Because the products being soldtoday have many of the same
structural flaws as 1772.
The marketing language is almostidentical, and credit rating
agencies are already soundingalarms.
Now that's a wild fact, right?
Knowing what we know aboutcredit rating agencies, already
sounding alarms.
So let's dive in to reallyunderstand this.
(03:44):
So first I want to set thescene.
Mid-1700s Amsterdam.
If you wanted to understandglobal finance, you had to
understand Amsterdam.
This was the city that inventedmodern capitalism.
The Dutch East India Company,the world's first publicly
traded corporation, was bornhere.
The Amsterdam Stock Exchange wasthe epicenter of international
trade.
(04:04):
And by the 17th century,Amsterdam had created something
revolutionary, a sophisticatedsystem of mortgage-backed
securities.
Here's how it worked.
Caribbean plantations, Suriname,Granada, the Danish West Indies,
they needed capital, massiveamounts of it.
Sugar and coffee were boomingcommodities, but running a
plantation required enormousupfront investment.
(04:26):
Land, enslaved labor, which costmoney to acquire, equipment and
processing facilities.
So Amsterdam's merchant bankinghouses created something new.
They pulled plantation mortgagestogether and they sold them as
bonds to investors.
They called them negotiatees.
(04:48):
This is literally the 18thcentury version of
mortgage-backed securities, andinvestors then as now loved it.
You could buy in for 1,000guilders, roughly$35,000 to
$50,000 in today's money, notpocket change, but accessible to
the upper middle class,successful merchants, skilled
(05:08):
craftsmen, and professionaltraders.
The returns were attractive.
The plantations generated steadycash flow from sugar and coffee
exports.
The bonds were backed by realassets.
So what could go wrong?
Between 1766 and 1772, just sixyears, over 40 million guilders
and new plantation loans wereissued.
That represented 22% ofHolland's entire GDP.
(05:32):
Nearly a quarter of the nation'seconomic output was tied up in
securitized Caribbean plantationdebt.
But here's where it getstwisted.
These were not traditional banksissuing the securities.
They were shadow banks.
The big names, Clifford Co.,Hope and Company,
DeSseppenwolds, Terborsch, thesewere merchant banking houses.
(05:53):
They didn't take deposits likeregular banks.
They operated in a regulatorygray zone using complex
financial instruments calledbills of exchange.
And a bill of exchange wasessentially an IOU, a promise to
pay a fixed sum at a futuredate.
But here's the trick (06:07):
you could roll them over again and again.
Therefore, you could useshort-term funding that you
anticipate continually rollingto finance long-term projects.
Classic maturity mismatch,which, as we know from every
modern financial crisis, isincredibly dangerous.
(06:28):
We just saw this blow up withSilicon Valley Bank and First
Republic, with long-dated bondportfolios not held for sale and
short-term deposits trying toleave quickly.
We also saw it with BearStearns.
But it gets worse in this 1772story because Amsterdam at the
time had the lowest interestrates in Europe.
(06:49):
You could borrow secured moneyfor as little as half a percent.
Meanwhile, investments inBritish colonies, Caribbean
plantations, and Europeansovereign debt were paying 5% or
more.
So, as capital does, a massivecarry trade developed.
Borrow cheap in Amsterdam, landexpensive everywhere else, and
pocket the spread.
(07:10):
And because Amsterdam's merchantbanks were not regulated, there
was no limit to how leveragethey could get.
No reserve requirements, nocapital ratios, no oversight,
just reputation, and thewillingness of the individual
partners to take exorbitantrisks in the pursuit of profit.
And this is critical.
When you bought a negotiate, youweren't really analyzing the
underlying plantations.
(07:31):
You couldn't.
The bonds had generic names likeLAA or LAB, incredibly vague.
You had no idea which specificplantations you were financing.
Instead, you just trusted thebanking house.
If Clifford ⁇ Co.
was offering it, it had to begood.
They had been around forgenerations.
They financed kings andmerchants.
Their word was gold.
(07:51):
The entire system was built onreputation, not transparency.
And for a while, as these thingsdo, it worked.
The plantations produced sugar.
The sugar sold in Europe.
The mortgage payments camethrough.
Everyone was making money.
And again, I have to point out,it always starts this way.
It always starts good.
(08:11):
A good like every bubble inhistory started as a good idea
and then it got out of hand,right?
And this is just the same thing.
And beneath the surface, asalways happens, risks were
accumulating.
Now, before we go further, Iwant to point out that this is
not just a history lesson.
In May 2025, literally a fewmonths ago, as of the date of
(08:32):
this recording in October, theSEC announced they're
reconsidering restrictions thatprevented retail investors from
putting more than 15% of theirmoney into private markets.
In February of this year, 2025,Apollo and State Street launched
the first private credit ETF forretail investors.
And right now, Hamilton Lane,BlackRock, KKR are creating
(08:55):
evergreen funds and semi-liquidvehicles designed to let regular
people invest in private creditthrough retirement accounts.
And what is the marketinglanguage?
Safe and stable returns, lowvolatility, diversification from
public markets.
But what is the structure?
Pooled loans to privatecompanies, generic fund names,
limited transparency intounderlying borrowers.
(09:17):
You trust the brand name,BlackRock, Apollo, State Street,
these are great firms withsterling reputations.
The promise they're providing,quarterly or annual redemptions,
liquidity when you need it.
The reality here is thatmulti-year loans cannot be sold
quickly without taking massivelosses.
That is the exact same playbookas 1772.
(09:40):
So let's talk about what wasreally happening beneath the
surface in 1972.
First, the plantation sector wasdeteriorating.
By the early 1770s, soildepletion was becoming a real
problem.
Hurricanes, yes, they've alwaysexisted.
They're just worse today, but wehad them then too, were damaging
crops, and operating costs wererising.
(10:01):
But investors didn't see this.
Remember, they had zerotransparency into the actual
assets.
They just saw the couponpayments coming in, the
quarterly distributions.
Everything looked fine on thestatements.
And the banking houses, thesevenerable institutions, were
representing that everything wasfine.
Everything's good, business asusual, we're all good.
They had no reason to suspectotherwise.
(10:22):
Secondly, the banking housesthemselves were getting
reckless.
Take Clifford Co., which, asI've mentioned, is one of the
oldest, most respected names inthe business at that time.
By 1772, they were not justfinancing plantations.
They had moved into purespeculation.
They formed a syndicate with theSeppenwold brothers and a banker
named Abraham Teborsch.
(10:43):
Together, they controlled 5.6%of the British East India
Company shares.
A massive position, massive, inone of the world's largest
corporations.
What was their bet?
They were betting that EICshares would rise.
Why?
Well, partly because they wereacting as what we call prime
(11:04):
brokers today.
They were lending money to otherspeculators who were also
betting on EIC shares.
Create the demand, ride the waveup, profit on both lending and
the equity appreciation.
Sounds like genius, right?
Except, except it only works ifthe stock keeps going up.
Thirdly, information asymmetry,a term I absolutely adore, was
(11:29):
everywhere.
When you're a plantation ownerin Suriname, you can borrow from
multiple Dutch banking houses.
Nobody's tracking your totaldebt load.
There's no credit bureau.
There's no way to know if you'reoverleveraged.
So when you're a merchant inLondon, you can get credit from
multiple sources.
Your British agent doesn't knowwhat you owe in Amsterdam.
Your Amsterdam banker doesn'tknow what you own in Hamburg.
(11:51):
The system was fragmented,opaque, and built on trust
rather than data.
And lastly, I hate to irritateall the anti-central banking
folks in my audience, and youknow, I'm certainly more in that
camp myself, but this is a goodthis is a true point.
There was no lender of lastresort in Amsterdam.
Amsterdam had the Whistlebank,the Bank of Amsterdam, one of
(12:13):
the world's first central banks,but it was not like a modern
central bank.
It couldn't expand creditfreely.
It had strict rules aboutmaintaining gold and silver
reserves.
So if a liquidity crisis hit,there was literally no safety
net.
Now it's arguable whether thereshould be one, right?
You're sort of rewarding banksfor taking excessive risk.
(12:34):
But you as an investor should beaware of what's undergirding the
entire system and what yoursecurity looks like.
And so by 1772, all of theserisks were building, but nobody
saw it.
Prices were stable, returns weresolid, credit was flowing.
Now let me read you somethingthat I found fascinating from a
(12:54):
September 24 article in theGlobe and Mail about modern
private credit.
Private credit strategies arebeing marketed and sold to
retail investors as safe andstable.
The high risk will not show upas volatility because it is an
illiquid asset class.
The result is what appears to behigh returns, low risk, and low
(13:15):
correlations to public markets.
But retail investors may nothave the tools or knowledge to
evaluate the risks they aretaking.
And here's Moody's credit ratingagency from June 2025.
If growth from retail investorsoutpaces the industry's ability
to manage such complexities,such challenges could have
systemic consequences.
(13:36):
Private asset managers also facereputational risk if in a
scramble to grow share, creditstandards slip or risk
management falters.
Let me translate all of thatfrom corporate speak.
Moody's is saying the exact samething is happening today that
happened in 1772.
(13:57):
Retail investors are being soldproducts they do not understand.
The risks aren't visible becausethese are illiquid assets.
Credit standards are looseningas firms compete for market
share.
And if there's a crisis, itcould have systemic
consequences.
But in 1772, nobody listened tothe warnings either, whatever
warnings there may have been,until June 9th, 1772.
(14:23):
On that date, infamous date infinancial history, a Scottish
banker named Alexander Fortaswalks out of his office and
disappears.
He flees to France.
Why?
Because he just lost 300,000pounds shorting East India
Company stock.
In today's money, that's about60 million US dollars.
(14:44):
A catastrophic loss.
His banking house, Neil JamesFortas and Down, was immediately
insolvent.
And within two weeks, eightbanks in London collapsed.
But that was just the beginning.
Because remember, Amsterdam'smerchant banks were deeply
exposed to British financialmarkets.
They'd lent money to Britishspeculators.
They held EIC stock themselves.
(15:05):
They had bills of exchange,those IOUs, floating everywhere
in the system.
And now counterparties weredefaulting.
So through the summer and fallof 1772, pressure built in
Amsterdam.
Plantation mortgage paymentsstarted coming up short.
Caribbean hurricanes had damagedcrops.
Commodity prices were tanking.
(15:26):
But the real problem wasClifford Co.
They had bet big, remember, onEIC shares rising and the shares
were falling.
They were getting margin callsand they couldn't meet them.
Side note, please, if youhaven't watched it, watch margin
call.
Fantastic movie.
I see it referenced all thetime.
(15:46):
I've watched it several times.
It is amazing.
So on top of this, margin calls,their plantation mortgage
portfolio was deteriorating.
Borrowers were missing payments.
Asset values were declining.
Clifford Co.
tried to hold on, as we allwould, right?
They sold some positions, theycalled in loans, they tried to
(16:07):
raise cash.
But in a leveraged system builton short-term funding, once
confidence cracks, it is over.
December 27, 1772, Clifford Co.
shuts its doors.
Total liabilities, 4.6 millionguilders, which comes out to
nearly a billion dollars intoday's money.
(16:28):
Claims on syndicate partners,3.2 million guilders, most of
which were worthless.
Good assets, barely 1 millionguilders.
They were catastrophicallyinsolvent.
And the contagion spreadimmediately like a wildfire.
Their syndicate partners, theSteppenwolf brothers, Abraham
Taborsch, they also collapsed.
Andre Pels and Sons, anothermajor house, went down in
(16:51):
flames.
Investors who thought they heldsafe, income-producing
plantation bonds, suddenlyrealized these bonds were backed
by insolvent banking houses withdeteriorating collateral,
absolute panic.
Here's what contemporarynewspapers reported.
Lurid tales abounded ofmerchants cutting their throats,
shooting or hanging themselves.
(17:12):
The crisis here was not justfinancial, it was existential.
And it spread beyond Amsterdam.
Banks in Hamburg collapsed,Stockholm saw failure, St.
Petersburg, even as far as theNorth American colonies.
This was one of the world'sfirst truly global financial
crises.
Governments tried to respond.
Amsterdam civic authorities setup a collateralized lending
(17:33):
facility.
If you had good commodities in awarehouse, they lend against
them.
The Bank of England startedproviding emergency liquidity to
London banks.
These were some of the world'sfirst bailouts.
And they worked, sort of.
By mid-1773, credit markets hadstabilized, banks reopened, but
the damage was permanent.
(17:53):
Amsterdam never recovered itsposition as the world's
financial capital.
Before 1772, if you were asovereign looking to borrow
money, you went to Amsterdam.
After 1772, London.
Why?
Because British banks hadsurvived better.
The Bank of England had acted asa lender of last resort.
The financial, the Britishfinancial system had proven more
(18:16):
resilient.
And critically, trust shifted.
It shifted.
And may I remind everybody, wewe published a video piece
earlier about this, about thesack of Antwerp, an event known
as the Spanish Fury.
Antwerp was, before Amsterdam,the center of finance for
Europe.
And 3,000 Spanish soldiers whohadn't been paid ransacked
(18:37):
Antwerp in search of money andfunds.
And they're just doing whatsoldiers will do when they don't
get paid by their sovereign.
And Antwerp disappeared becausetrust died in the city of
Antwerp, and Amsterdam becamethe beneficiary of this.
So again, when trust evaporatesor gets crushed by some external
large event, big things canhappen in the system.
(18:59):
So that's what happened.
London took over.
Hope and Co., the one greathouse that survived, completely
changed its business model.
They pulled back from riskylending, they focused on
commodities trading andgovernment bond underwriting,
conservative business, and theera of Amsterdam's financial
dominance was over.
(19:20):
Here's the thing, though.
The specific mechanisms thatcaused the 1772 crisis did not
disappear.
They just evolved.
Shadow banking, securitization,maturity mismatches, information
asymmetry, reputation-basedlending, cheap credit fueling
speculation.
The harsh reality about humannature is that people will
always find a way aroundwhatever system is put up in
(19:42):
their way.
We are ambitious, we're driven,we want to be wealthy.
So long, I always say this, asmen are inspired to have the
respect of their peers, havewealth, and impress women, the
system will simply never change.
So let's talk about what'shappening today in your
investment accounts.
This asset class, privatecredit, was historically
(20:05):
institutional money, pensionfunds, endowments, sovereign
wealth funds, sophisticatedinvestors who understood the
risks and could bear them.
But that is changing fast.
Wall Street has identifiedretail investors, you and me, as
the next great frontier.
The SEC is reconsidering ruleson how much retail money can go
(20:27):
into private markets, whichfrankly has been a dream of the
private markets industry for avery long time.
There are trillions of dollarslocked up in wealthy individual
household balance sheets thatWall Street wants access to.
Wall Street's gonna do what WallStreet's gonna do.
It is what it is.
Our duty and job as timelessinvestors, as people that look
(20:49):
to history to understand what'sgoing on, is to be educated and
make the right decisions forourselves and our families.
In the UK, starting April 2026,private assets will be available
through tax-advantagedretirement accounts.
Hamilton Lane has an evergreenfund with$1.6 billion in assets
just two years after launch,targeting individual investors.
(21:10):
And the marketing pitch isseductive.
I get it.
The structure lookssophisticated.
You have professionalmanagement, you have due
diligence teams, you have riskcontrols, you have brand names
you trust.
But here is what they are nottelling us.
First, the risk doesn't show upas volatility.
And why?
Because these are illiquidassets.
(21:30):
They are not traded daily.
There is no market pricefluctuation.
So on your statement, everythingalways looks good.
Smooth returns, no wild swings.
But it's not because the risk islow, it's because the risk is
hidden.
In 72, investors thought theirpositions were safe because the
coupon payments kept comingright up until the banks
collapsed and they realized theunderlying assets were
(21:52):
absolutely worthless.
The second thing, transparencyis extremely limited.
When you invest in these funds,you don't know exactly which
companies you're lending to.
You trust the fund manager'sprocess.
Now listen, if you're a largeinstitution, billionaire, family
office, or endowment that isinvesting like 20% of the
capital, you've got informationrights.
You're going to negotiate heavyrights for yourself.
(22:14):
Are you going to get any ofthese rights with a$100,000
ticket into a$1.7 billion fund?
I don't think so.
Just like 72, you just know thatthe bond or the fund was issued
by Clifford Co., or let's callit KKR or Goldman Sachs today,
and that was good enough formost investors.
Third, many of these funds havemassive maturity mismatches.
(22:37):
These funds often allowquarterly or annual redemptions,
but the underlying loans arethree to five year commitments,
sometimes longer.
What happens when investors wanttheir money back and the fund
can't sell the loans quicklyenough?
We actually saw this in 23.
When rates spiked, severalprivate credit funds had to
suspend redemptions.
They couldn't give investorstheir money back because they
couldn't liquidate theunderlying assets without taking
(23:00):
massive losses.
And that was just a small stresstest.
It's not even a real crisis.
Fourth, leverage is everywhere,not just in the funds
themselves, but in theborrowers.
These are middle marketcompanies that cannot get bank
loans.
Why can't they get bank loans?
Often because they're alreadyheavily leveraged or their cash
flows are questionable.
(23:20):
Fifth, and this is critical andwild if you really think about
it, there is no transparentpricing.
How do you value a loan to aprivate company?
There is no market.
There's no daily trading.
The fund manager uses their ownmodels to estimate value.
Consider that.
(23:58):
And when a crisis hits on thissort of investment, there is no
easy exit.
You cannot just sell like youcan with stocks or bonds.
You are locked in.
You are hoping the fund managercan navigate the storm.
You are hoping redemptions don'tfreeze.
And I want to add, it's not trueof all these funds, but many
private credit funds themselvesare leveraged.
(24:18):
Okay.
Many of them have warehouse lineof credits that they borrow from
to make their own loans.
Okay, so you're investing, butwhere do you stand in the
capital stack?
Probably behind the leveragethat they've taken on.
The parallels here are uncanny.
Now, to be fair, to be fair, andI always try to be fair, not all
private credit is created equal.
Some funds are well managed,some have good underwriting,
(24:40):
some are appropriate forsophisticated investors who
understand what they're gettinginto.
But Wall Street wants to sellthis to retail investors across
the world, to people investingfor their retirement, to people
like you and I who may not havethe sophistication to evaluate
what they're actually buying.
They are calling itdemocratization of finance or
whatever you want to say.
(25:01):
I'm gonna say what I think itreally is.
The same playbook as 72, 2008,over and over again, wrapped in
modern financial engineering.
So, in the timeless investorstyle, what are the timeless
lessons we can take away fromthis to make ourselves better
investors?
First, shadow banking systemsare fragile, inherently fragile.
They work beautifully in goodtimes.
(25:22):
I do not want to diminish that.
There's a reason they work andthey're attractive, and there's
a reason money flows into it.
Credit flows, returns lookgreat, everyone feels good.
But when stress hits, theycollapse faster than regulated
banks because there is no safetynet.
There is no lender of lastresort, no government backstop.
72, when the crisis hit, therewas no Fed to step in.
(25:44):
The Bank of Amsterdam couldn'texpand credit and the system
imploded.
Today we do have central banks,we have the Fed, but private
credit operates outside of thatsystem, hence, it's a shadow
banking system.
If there is a run on privatecredit funds, the Fed cannot,
and I would argue hopefully willnot, just bail them out the way
they can with a bank.
(26:05):
Secondly, reputation is nosubstitute for transparency.
People trusted, Dutch investorstrusted Clifford and Co.
They had 200 years of history,connections to royalty,
impeccable reputation, and theywere catastrophically insolvent.
We covered over in Gurney twoweeks ago, the creme de la creme
of London banking houses.
People invest with them despitetaking on incredibly speculative
(26:28):
and risky investments basedpurely on their reputation.
Today, we trust BlackRock, KKR,Apollo, Goldman Sachs because of
their brands.
Tens of billions in assets,trillions at times, professional
teams, sophisticated riskmanagement.
But trust does not protect youfrom bad underlying assets.
Reputation doesn't guaranteegood underwriting.
(26:50):
And when these firms receivebillions and billions of
dollars, they have to put itsomewhere.
They have to deploy it.
And what happens when you haveto deploy money?
Your standards slip.
Because here's the other thingmany of these funds don't get
paid until they deploy yourcapital.
So they have to put your moneyout there.
And if it becomes a real bigretail bonanza, which it
(27:11):
probably will, you know, becausemost investors are not, you
know, unfortunately are notwatching this channel or other
channels to talk about thisexact issue.
When they have excessive amountsof money, it will flow.
Credit standards will drop,it'll become a thing, everybody
goes for it, and we will gothrough the same exact cycle
again.
And the wheel turns everonwards.
Third, another timeless lesson: cheap credit creates moral (27:32):
undefined
hazard.
When borrowing costs are low,everyone takes more risk.
Banks lend to riskier borrowers.
Investors chase yield.
Speculation increases.
Amsterdam had 0.5% interestrates.
Money was practically free.
(27:53):
The banks levered up massivelyand financed increasingly risky
plantations.
We just had a 15-year period ofnear zero interest rates.
The private credit boom happenedbecause money was cheap and
investors were desperate foryield.
Now rates are higher, but theleverage that built up during
that cheap money era doesn'tjust go away overnight.
(28:16):
It sits there waiting for ashock to hit.
Fourthly, fourth timelesslesson, information asymmetry
benefits insiders and punisheseveryone else.
When you don't know what youown, you cannot properly assess
your risk.
And when a crisis hits, you'rethe last to know and the first
to lose.
In the crisis of 72, ordinaryinvestors had no idea that their
(28:40):
plantation bonds were backed byinsolvent banks and failing
plantations.
They found out when it was waytoo late.
Hence the suicides across thefield, from primo bankers down
to merchants who'd overleveragedthemselves on these air quote
great investments.
In 2025, you have limitedinsight into what companies your
private credit funds areactually lending to.
(29:00):
You won't know there's a problemuntil redemptions freeze.
So what does that mean for youas an investor?
If someone pitches you privatecredit, whether it's your
financial advisor, your 401kprovider, or a slick marketing
brochure, ask the hardquestions.
What are the underlying assets?
Not the asset class, the actualcompanies.
How leveraged are the borrowers?
What's their debt to eBit dollratio?
(29:22):
What's the redemption structure?
Can I get my money backquarterly, annually?
What happens if too many peopletry to redeem at once?
I'll give you a preview.
It's going to be a freeze onredemptions.
That's the quick answer to thatquestion.
Or what happens in a stressscenario?
If we hit a recession, a defaultspike, what's my downside?
Like, how much can we losebefore we're we're completely
wiped out here?
How are the assets valued?
(29:44):
Who's deciding what they'reworth?
Is there any independentverification?
Is the fund leveraged?
As I mentioned earlier.
Like, are they leveraging onleverage to make these
investments?
If you cannot get clear,specific answers to these
questions, and to be fair, I'malmost positive you will not.
That's a red flag.
Walk away.
More broadly, be extremelycautious about any investment
(30:05):
that promises high returns withlow risk and limited volatility.
Those three things, guys, do notcoexist in nature.
If something yields 10% whentreasury bonds yield four, there
is risk somewhere.
Either credit risk, liquidity,liquidity risk, or something you
are just not seeing.
Private credit offers attractiveyields with seemingly low
(30:28):
volatility because the assetsare illiquid and they are priced
by models.
You don't know what's wronguntil it hits you in the face.
And recognize, everyone, that weare still living through the
aftermath of the longest creditexpansion in modern history.
Yes, rates went up recently, butwe had 15 years of ultra low
rates fueling risk taking.
This does not unwind in twoyears.
(30:50):
The leverage, the speculation,the poor underwriting, it is all
still deeply embedded in oursystem.
The 72 crisis happened afterdecades of credit expansion.
The plantation mortgage markethad been growing since the
1740s.
Shadow banking had been thrivingfor an entire generation.
Everyone thought it wasdifferent this time.
(31:11):
They had sophisticated financialinstruments, professional
managers, diversifiedportfolios, and then in a matter
of months, it all came apart.
History doesn't repeatperfectly, but it sure as hell
rhymes.
I want to leave you with onefinal thought before we wrap
this episode up.
The Dutch investors who survived72 were not the ones who had the
(31:32):
most exposure to the highestyielding Caribbean plantation
bonds.
They were the ones whounderstood that sometimes boring
is better than exciting, thattransparency and knowing what
you're investing in matters morethan reputation.
And that liquidity has realvalue even when you don't need
it.
When you empty your bank accountto pursue yield, you're putting
(31:53):
yourself on a knife's edge.
And that doesn't usually endwell.
The survivors were likely theones who owned real estate in
Amsterdam, or even better,geographically diversified real
estate portfolios had indiversified income streams.
They weren't levering up tochase returns.
And when Clifford and Co.
collapsed and credit froze, theywere fine.
(32:15):
Uncomfortable, maybe, watchingtheir neighbors panic, and they
might have even lost some moneythemselves, but they were fine.
They survived.
The ones who got destroyed, thesophisticated investors, the
ones who thought they understoodthis new system, who trusted the
names on the door, who believedthe risk was managed and the
returns were real.
So when someone pitches you oneof these deals, understand.
(32:37):
I like to go back to thebuffetism, right?
Invest in what you know.
Don't touch the other stuff.
It's just not worth it.
That's why I like real estate.
It's actually fairly simple,generally, although there are
financial complexities in thisbusiness as well, and there's
many ways to cut these up withfinancial engineering to make it
look better, but also magnifythe risk.
(32:58):
And critically, then trust isimportant.
It is important.
You do want to trust the peopleyou work with, but please
verify.
And when in doubt, when you'rebeing pitched deals you don't
understand, just default toboring.
Own assets you get.
Keep enough liquidity, don'tlever up, don't chase yields.
Because in the end, theinvestors throughout history who
(33:21):
built lasting wealths are notthe ones who maximize returns
during the boom.
They're the ones who survivedthe bust.
Thank you for listening to theTimeless Investor Show.
If you found this valuable,please share it, send it out.
If you love this episode, hitsubscribe, notification bell, be
part of the Timeless Investorcommunity.
(33:42):
Leave your thoughts, forwardthis to your financial advisor,
why not?
Or send it to a friend who'sbeing pitched private credit.
Be educated, understand what'sgoing on.
Leave a comment for us if youfound this helpful, if you have
had your own experience lookingat private credit deals, or you
have other eras of history you'dlove for us to do a future
episode on, I would love to hearfrom you.
Thank you.
(34:02):
This is Ari Van Gemran, the hostof the Timeless Investor Show
and the founder of LombardEquities Group, multifamily
investment company spread acrossthe United States West Coast.
Thank you for your time today.
Think well, act wisely, buildsomething timeless.
December 27th, 1772.
One of the most respectedbanking houses in Europe locks
its doors.
The lights go out.
Business is over for good.
Within two weeks, 20 banksacross three countries are gone.
Merchants are literally cuttingtheir own throats in the
(00:21):
streets.
And the world's first globalfinancial system is collapsing
under the weight of somethinginvestors thought was
mortgage-backed securities onCaribbean plantations.
Those words should soundincredibly familiar to anyone
listening to this.
Welcome to the Timeless InvestorShow.
I'm Ari Van Gemeren, real estatefund manager, student of
(00:44):
history, and your host todaythrough the wreckage of
financial catastrophes, past andpresent.
Today, we are diving into thecrisis that nobody knows about,
but everyone should know becauseWall Street is selling the exact
same product to your retirementaccount right now.
Here's something you need toknow.
This month, this year, 2025,BlackRock, Apollo, State Street,
(01:08):
and KKR are launching newinvestment products designed to
get Main Street investors intoprivate credit.
They are calling it, I'm usingair quotes, the democratization
of private markets.
Your 401k provider might offerit soon.
Your financial advisor is verylikely getting pitched on it.
You might soon see it in atarget date retirement fund.
And the marketing pitch, safe,stable, high returns with low
(01:31):
volatility, diversification frompublic markets.
Private credit has exploded from$1 trillion in 2020 to$1.5
trillion today, and it'sprojected to hit$2.6 trillion by
2029.
But here's what nobody istelling you, whether they are
aware of it or not.
We have seen this exact playbookbefore.
(01:53):
Same structure, same promises,same marketing language, same
end result.
And no, I am not talking about2008.
I'm talking about 1772,Amsterdam, the world's financial
capital at the time, a shadowbanking system built on
mortgage-backed securities,cheap credit, and zero
(02:15):
regulation.
Banking houses with venerablenames like Clifford Co., Hope
and Company, and the SeppenwoldBrothers were financing an
empire of Caribbean plantationsthrough a revolutionary
financial product callednegotiatees.
They marketed these securitiesto the Dutch upper middle class,
not the ultra-wealthy, regular,successful merchants, craftsmen,
(02:38):
professionals, people who wantedsteady income and thought they
were buying something safe.
These bonds were backed by realassets, plantations, land,
buildings, the banking housesthat represented them and
marketed them and sold them hadsterling reputations going back
generations.
The returns were attractive, butnot crazy.
(03:00):
Everything looked perfect onpaper until it all collapsed in
a matter of weeks.
So today, we're going to breakdown exactly what happened, why
it matters, and what it tells usabout the$2 trillion in private
credit that Wall Street is nowpackaging and preparing for you
and for retail investors acrossthis great country and across
(03:24):
the world.
Because the products being soldtoday have many of the same
structural flaws as 1772.
The marketing language is almostidentical, and credit rating
agencies are already soundingalarms.
Now that's a wild fact, right?
Knowing what we know aboutcredit rating agencies, already
sounding alarms.
So let's dive in to reallyunderstand this.
(03:44):
So first I want to set thescene.
Mid-1700s Amsterdam.
If you wanted to understandglobal finance, you had to
understand Amsterdam.
This was the city that inventedmodern capitalism.
The Dutch East India Company,the world's first publicly
traded corporation, was bornhere.
The Amsterdam Stock Exchange wasthe epicenter of international
trade.
(04:04):
And by the 17th century,Amsterdam had created something
revolutionary, a sophisticatedsystem of mortgage-backed
securities.
Here's how it worked.
Caribbean plantations, Suriname,Granada, the Danish West Indies,
they needed capital, massiveamounts of it.
Sugar and coffee were boomingcommodities, but running a
plantation required enormousupfront investment.
(04:26):
Land, enslaved labor, which costmoney to acquire, equipment and
processing facilities.
So Amsterdam's merchant bankinghouses created something new.
They pulled plantation mortgagestogether and they sold them as
bonds to investors.
They called them negotiatees.
(04:48):
This is literally the 18thcentury version of
mortgage-backed securities, andinvestors then as now loved it.
You could buy in for 1,000guilders, roughly$35,000 to
$50,000 in today's money, notpocket change, but accessible to
the upper middle class,successful merchants, skilled
(05:08):
craftsmen, and professionaltraders.
The returns were attractive.
The plantations generated steadycash flow from sugar and coffee
exports.
The bonds were backed by realassets.
So what could go wrong?
Between 1766 and 1772, just sixyears, over 40 million guilders
and new plantation loans wereissued.
That represented 22% ofHolland's entire GDP.
(05:32):
Nearly a quarter of the nation'seconomic output was tied up in
securitized Caribbean plantationdebt.
But here's where it getstwisted.
These were not traditional banksissuing the securities.
They were shadow banks.
The big names, Clifford Co.,Hope and Company,
DeSseppenwolds, Terborsch, thesewere merchant banking houses.
(05:53):
They didn't take deposits likeregular banks.
They operated in a regulatorygray zone using complex
financial instruments calledbills of exchange.
And a bill of exchange wasessentially an IOU, a promise to
pay a fixed sum at a futuredate.
But here's the trick (06:07):
you could roll them over again and again.
Therefore, you could useshort-term funding that you
anticipate continually rollingto finance long-term projects.
Classic maturity mismatch,which, as we know from every
modern financial crisis, isincredibly dangerous.
(06:28):
We just saw this blow up withSilicon Valley Bank and First
Republic, with long-dated bondportfolios not held for sale and
short-term deposits trying toleave quickly.
We also saw it with BearStearns.
But it gets worse in this 1772story because Amsterdam at the
time had the lowest interestrates in Europe.
(06:49):
You could borrow secured moneyfor as little as half a percent.
Meanwhile, investments inBritish colonies, Caribbean
plantations, and Europeansovereign debt were paying 5% or
more.
So, as capital does, a massivecarry trade developed.
Borrow cheap in Amsterdam, landexpensive everywhere else, and
pocket the spread.
(07:10):
And because Amsterdam's merchantbanks were not regulated, there
was no limit to how leveragethey could get.
No reserve requirements, nocapital ratios, no oversight,
just reputation, and thewillingness of the individual
partners to take exorbitantrisks in the pursuit of profit.
And this is critical.
When you bought a negotiate, youweren't really analyzing the
underlying plantations.
(07:31):
You couldn't.
The bonds had generic names likeLAA or LAB, incredibly vague.
You had no idea which specificplantations you were financing.
Instead, you just trusted thebanking house.
If Clifford ⁇ Co.
was offering it, it had to begood.
They had been around forgenerations.
They financed kings andmerchants.
Their word was gold.
(07:51):
The entire system was built onreputation, not transparency.
And for a while, as these thingsdo, it worked.
The plantations produced sugar.
The sugar sold in Europe.
The mortgage payments camethrough.
Everyone was making money.
And again, I have to point out,it always starts this way.
It always starts good.
(08:11):
A good like every bubble inhistory started as a good idea
and then it got out of hand,right?
And this is just the same thing.
And beneath the surface, asalways happens, risks were
accumulating.
Now, before we go further, Iwant to point out that this is
not just a history lesson.
In May 2025, literally a fewmonths ago, as of the date of
(08:32):
this recording in October, theSEC announced they're
reconsidering restrictions thatprevented retail investors from
putting more than 15% of theirmoney into private markets.
In February of this year, 2025,Apollo and State Street launched
the first private credit ETF forretail investors.
And right now, Hamilton Lane,BlackRock, KKR are creating
(08:55):
evergreen funds and semi-liquidvehicles designed to let regular
people invest in private creditthrough retirement accounts.
And what is the marketinglanguage?
Safe and stable returns, lowvolatility, diversification from
public markets.
But what is the structure?
Pooled loans to privatecompanies, generic fund names,
limited transparency intounderlying borrowers.
(09:17):
You trust the brand name,BlackRock, Apollo, State Street,
these are great firms withsterling reputations.
The promise they're providing,quarterly or annual redemptions,
liquidity when you need it.
The reality here is thatmulti-year loans cannot be sold
quickly without taking massivelosses.
That is the exact same playbookas 1772.
(09:40):
So let's talk about what wasreally happening beneath the
surface in 1972.
First, the plantation sector wasdeteriorating.
By the early 1770s, soildepletion was becoming a real
problem.
Hurricanes, yes, they've alwaysexisted.
They're just worse today, but wehad them then too, were damaging
crops, and operating costs wererising.
(10:01):
But investors didn't see this.
Remember, they had zerotransparency into the actual
assets.
They just saw the couponpayments coming in, the
quarterly distributions.
Everything looked fine on thestatements.
And the banking houses, thesevenerable institutions, were
representing that everything wasfine.
Everything's good, business asusual, we're all good.
They had no reason to suspectotherwise.
(10:22):
Secondly, the banking housesthemselves were getting
reckless.
Take Clifford Co., which, asI've mentioned, is one of the
oldest, most respected names inthe business at that time.
By 1772, they were not justfinancing plantations.
They had moved into purespeculation.
They formed a syndicate with theSeppenwold brothers and a banker
named Abraham Teborsch.
(10:43):
Together, they controlled 5.6%of the British East India
Company shares.
A massive position, massive, inone of the world's largest
corporations.
What was their bet?
They were betting that EICshares would rise.
Why?
Well, partly because they wereacting as what we call prime
(11:04):
brokers today.
They were lending money to otherspeculators who were also
betting on EIC shares.
Create the demand, ride the waveup, profit on both lending and
the equity appreciation.
Sounds like genius, right?
Except, except it only works ifthe stock keeps going up.
Thirdly, information asymmetry,a term I absolutely adore, was
(11:29):
everywhere.
When you're a plantation ownerin Suriname, you can borrow from
multiple Dutch banking houses.
Nobody's tracking your totaldebt load.
There's no credit bureau.
There's no way to know if you'reoverleveraged.
So when you're a merchant inLondon, you can get credit from
multiple sources.
Your British agent doesn't knowwhat you owe in Amsterdam.
Your Amsterdam banker doesn'tknow what you own in Hamburg.
(11:51):
The system was fragmented,opaque, and built on trust
rather than data.
And lastly, I hate to irritateall the anti-central banking
folks in my audience, and youknow, I'm certainly more in that
camp myself, but this is a goodthis is a true point.
There was no lender of lastresort in Amsterdam.
Amsterdam had the Whistlebank,the Bank of Amsterdam, one of
(12:13):
the world's first central banks,but it was not like a modern
central bank.
It couldn't expand creditfreely.
It had strict rules aboutmaintaining gold and silver
reserves.
So if a liquidity crisis hit,there was literally no safety
net.
Now it's arguable whether thereshould be one, right?
You're sort of rewarding banksfor taking excessive risk.
(12:34):
But you as an investor should beaware of what's undergirding the
entire system and what yoursecurity looks like.
And so by 1772, all of theserisks were building, but nobody
saw it.
Prices were stable, returns weresolid, credit was flowing.
Now let me read you somethingthat I found fascinating from a
(12:54):
September 24 article in theGlobe and Mail about modern
private credit.
Private credit strategies arebeing marketed and sold to
retail investors as safe andstable.
The high risk will not show upas volatility because it is an
illiquid asset class.
The result is what appears to behigh returns, low risk, and low
(13:15):
correlations to public markets.
But retail investors may nothave the tools or knowledge to
evaluate the risks they aretaking.
And here's Moody's credit ratingagency from June 2025.
If growth from retail investorsoutpaces the industry's ability
to manage such complexities,such challenges could have
systemic consequences.
(13:36):
Private asset managers also facereputational risk if in a
scramble to grow share, creditstandards slip or risk
management falters.
Let me translate all of thatfrom corporate speak.
Moody's is saying the exact samething is happening today that
happened in 1772.
(13:57):
Retail investors are being soldproducts they do not understand.
The risks aren't visible becausethese are illiquid assets.
Credit standards are looseningas firms compete for market
share.
And if there's a crisis, itcould have systemic
consequences.
But in 1772, nobody listened tothe warnings either, whatever
warnings there may have been,until June 9th, 1772.
(14:23):
On that date, infamous date infinancial history, a Scottish
banker named Alexander Fortaswalks out of his office and
disappears.
He flees to France.
Why?
Because he just lost 300,000pounds shorting East India
Company stock.
In today's money, that's about60 million US dollars.
(14:44):
A catastrophic loss.
His banking house, Neil JamesFortas and Down, was immediately
insolvent.
And within two weeks, eightbanks in London collapsed.
But that was just the beginning.
Because remember, Amsterdam'smerchant banks were deeply
exposed to British financialmarkets.
They'd lent money to Britishspeculators.
They held EIC stock themselves.
(15:05):
They had bills of exchange,those IOUs, floating everywhere
in the system.
And now counterparties weredefaulting.
So through the summer and fallof 1772, pressure built in
Amsterdam.
Plantation mortgage paymentsstarted coming up short.
Caribbean hurricanes had damagedcrops.
Commodity prices were tanking.
(15:26):
But the real problem wasClifford Co.
They had bet big, remember, onEIC shares rising and the shares
were falling.
They were getting margin callsand they couldn't meet them.
Side note, please, if youhaven't watched it, watch margin
call.
Fantastic movie.
I see it referenced all thetime.
(15:46):
I've watched it several times.
It is amazing.
So on top of this, margin calls,their plantation mortgage
portfolio was deteriorating.
Borrowers were missing payments.
Asset values were declining.
Clifford Co.
tried to hold on, as we allwould, right?
They sold some positions, theycalled in loans, they tried to
(16:07):
raise cash.
But in a leveraged system builton short-term funding, once
confidence cracks, it is over.
December 27, 1772, Clifford Co.
shuts its doors.
Total liabilities, 4.6 millionguilders, which comes out to
nearly a billion dollars intoday's money.
(16:28):
Claims on syndicate partners,3.2 million guilders, most of
which were worthless.
Good assets, barely 1 millionguilders.
They were catastrophicallyinsolvent.
And the contagion spreadimmediately like a wildfire.
Their syndicate partners, theSteppenwolf brothers, Abraham
Taborsch, they also collapsed.
Andre Pels and Sons, anothermajor house, went down in
(16:51):
flames.
Investors who thought they heldsafe, income-producing
plantation bonds, suddenlyrealized these bonds were backed
by insolvent banking houses withdeteriorating collateral,
absolute panic.
Here's what contemporarynewspapers reported.
Lurid tales abounded ofmerchants cutting their throats,
shooting or hanging themselves.
(17:12):
The crisis here was not justfinancial, it was existential.
And it spread beyond Amsterdam.
Banks in Hamburg collapsed,Stockholm saw failure, St.
Petersburg, even as far as theNorth American colonies.
This was one of the world'sfirst truly global financial
crises.
Governments tried to respond.
Amsterdam civic authorities setup a collateralized lending
(17:33):
facility.
If you had good commodities in awarehouse, they lend against
them.
The Bank of England startedproviding emergency liquidity to
London banks.
These were some of the world'sfirst bailouts.
And they worked, sort of.
By mid-1773, credit markets hadstabilized, banks reopened, but
the damage was permanent.
(17:53):
Amsterdam never recovered itsposition as the world's
financial capital.
Before 1772, if you were asovereign looking to borrow
money, you went to Amsterdam.
After 1772, London.
Why?
Because British banks hadsurvived better.
The Bank of England had acted asa lender of last resort.
The financial, the Britishfinancial system had proven more
(18:16):
resilient.
And critically, trust shifted.
It shifted.
And may I remind everybody, wewe published a video piece
earlier about this, about thesack of Antwerp, an event known
as the Spanish Fury.
Antwerp was, before Amsterdam,the center of finance for
Europe.
And 3,000 Spanish soldiers whohadn't been paid ransacked
(18:37):
Antwerp in search of money andfunds.
And they're just doing whatsoldiers will do when they don't
get paid by their sovereign.
And Antwerp disappeared becausetrust died in the city of
Antwerp, and Amsterdam becamethe beneficiary of this.
So again, when trust evaporatesor gets crushed by some external
large event, big things canhappen in the system.
(18:59):
So that's what happened.
London took over.
Hope and Co., the one greathouse that survived, completely
changed its business model.
They pulled back from riskylending, they focused on
commodities trading andgovernment bond underwriting,
conservative business, and theera of Amsterdam's financial
dominance was over.
(19:20):
Here's the thing, though.
The specific mechanisms thatcaused the 1772 crisis did not
disappear.
They just evolved.
Shadow banking, securitization,maturity mismatches, information
asymmetry, reputation-basedlending, cheap credit fueling
speculation.
The harsh reality about humannature is that people will
always find a way aroundwhatever system is put up in
(19:42):
their way.
We are ambitious, we're driven,we want to be wealthy.
So long, I always say this, asmen are inspired to have the
respect of their peers, havewealth, and impress women, the
system will simply never change.
So let's talk about what'shappening today in your
investment accounts.
This asset class, privatecredit, was historically
(20:05):
institutional money, pensionfunds, endowments, sovereign
wealth funds, sophisticatedinvestors who understood the
risks and could bear them.
But that is changing fast.
Wall Street has identifiedretail investors, you and me, as
the next great frontier.
The SEC is reconsidering ruleson how much retail money can go
(20:27):
into private markets, whichfrankly has been a dream of the
private markets industry for avery long time.
There are trillions of dollarslocked up in wealthy individual
household balance sheets thatWall Street wants access to.
Wall Street's gonna do what WallStreet's gonna do.
It is what it is.
Our duty and job as timelessinvestors, as people that look
(20:49):
to history to understand what'sgoing on, is to be educated and
make the right decisions forourselves and our families.
In the UK, starting April 2026,private assets will be available
through tax-advantagedretirement accounts.
Hamilton Lane has an evergreenfund with$1.6 billion in assets
just two years after launch,targeting individual investors.
(21:10):
And the marketing pitch isseductive.
I get it.
The structure lookssophisticated.
You have professionalmanagement, you have due
diligence teams, you have riskcontrols, you have brand names
you trust.
But here is what they are nottelling us.
First, the risk doesn't show upas volatility.
And why?
Because these are illiquidassets.
(21:30):
They are not traded daily.
There is no market pricefluctuation.
So on your statement, everythingalways looks good.
Smooth returns, no wild swings.
But it's not because the risk islow, it's because the risk is
hidden.
In 72, investors thought theirpositions were safe because the
coupon payments kept comingright up until the banks
collapsed and they realized theunderlying assets were
(21:52):
absolutely worthless.
The second thing, transparencyis extremely limited.
When you invest in these funds,you don't know exactly which
companies you're lending to.
You trust the fund manager'sprocess.
Now listen, if you're a largeinstitution, billionaire, family
office, or endowment that isinvesting like 20% of the
capital, you've got informationrights.
You're going to negotiate heavyrights for yourself.
(22:14):
Are you going to get any ofthese rights with a$100,000
ticket into a$1.7 billion fund?
I don't think so.
Just like 72, you just know thatthe bond or the fund was issued
by Clifford Co., or let's callit KKR or Goldman Sachs today,
and that was good enough formost investors.
Third, many of these funds havemassive maturity mismatches.
(22:37):
These funds often allowquarterly or annual redemptions,
but the underlying loans arethree to five year commitments,
sometimes longer.
What happens when investors wanttheir money back and the fund
can't sell the loans quicklyenough?
We actually saw this in 23.
When rates spiked, severalprivate credit funds had to
suspend redemptions.
They couldn't give investorstheir money back because they
couldn't liquidate theunderlying assets without taking
(23:00):
massive losses.
And that was just a small stresstest.
It's not even a real crisis.
Fourth, leverage is everywhere,not just in the funds
themselves, but in theborrowers.
These are middle marketcompanies that cannot get bank
loans.
Why can't they get bank loans?
Often because they're alreadyheavily leveraged or their cash
flows are questionable.
(23:20):
Fifth, and this is critical andwild if you really think about
it, there is no transparentpricing.
How do you value a loan to aprivate company?
There is no market.
There's no daily trading.
The fund manager uses their ownmodels to estimate value.
Consider that.
(23:58):
And when a crisis hits on thissort of investment, there is no
easy exit.
You cannot just sell like youcan with stocks or bonds.
You are locked in.
You are hoping the fund managercan navigate the storm.
You are hoping redemptions don'tfreeze.
And I want to add, it's not trueof all these funds, but many
private credit funds themselvesare leveraged.
(24:18):
Okay.
Many of them have warehouse lineof credits that they borrow from
to make their own loans.
Okay, so you're investing, butwhere do you stand in the
capital stack?
Probably behind the leveragethat they've taken on.
The parallels here are uncanny.
Now, to be fair, to be fair, andI always try to be fair, not all
private credit is created equal.
Some funds are well managed,some have good underwriting,
(24:40):
some are appropriate forsophisticated investors who
understand what they're gettinginto.
But Wall Street wants to sellthis to retail investors across
the world, to people investingfor their retirement, to people
like you and I who may not havethe sophistication to evaluate
what they're actually buying.
They are calling itdemocratization of finance or
whatever you want to say.
(25:01):
I'm gonna say what I think itreally is.
The same playbook as 72, 2008,over and over again, wrapped in
modern financial engineering.
So, in the timeless investorstyle, what are the timeless
lessons we can take away fromthis to make ourselves better
investors?
First, shadow banking systemsare fragile, inherently fragile.
They work beautifully in goodtimes.
(25:22):
I do not want to diminish that.
There's a reason they work andthey're attractive, and there's
a reason money flows into it.
Credit flows, returns lookgreat, everyone feels good.
But when stress hits, theycollapse faster than regulated
banks because there is no safetynet.
There is no lender of lastresort, no government backstop.
72, when the crisis hit, therewas no Fed to step in.
(25:44):
The Bank of Amsterdam couldn'texpand credit and the system
imploded.
Today we do have central banks,we have the Fed, but private
credit operates outside of thatsystem, hence, it's a shadow
banking system.
If there is a run on privatecredit funds, the Fed cannot,
and I would argue hopefully willnot, just bail them out the way
they can with a bank.
(26:05):
Secondly, reputation is nosubstitute for transparency.
People trusted, Dutch investorstrusted Clifford and Co.
They had 200 years of history,connections to royalty,
impeccable reputation, and theywere catastrophically insolvent.
We covered over in Gurney twoweeks ago, the creme de la creme
of London banking houses.
People invest with them despitetaking on incredibly speculative
(26:28):
and risky investments basedpurely on their reputation.
Today, we trust BlackRock, KKR,Apollo, Goldman Sachs because of
their brands.
Tens of billions in assets,trillions at times, professional
teams, sophisticated riskmanagement.
But trust does not protect youfrom bad underlying assets.
Reputation doesn't guaranteegood underwriting.
(26:50):
And when these firms receivebillions and billions of
dollars, they have to put itsomewhere.
They have to deploy it.
And what happens when you haveto deploy money?
Your standards slip.
Because here's the other thingmany of these funds don't get
paid until they deploy yourcapital.
So they have to put your moneyout there.
And if it becomes a real bigretail bonanza, which it
(27:11):
probably will, you know, becausemost investors are not, you
know, unfortunately are notwatching this channel or other
channels to talk about thisexact issue.
When they have excessive amountsof money, it will flow.
Credit standards will drop,it'll become a thing, everybody
goes for it, and we will gothrough the same exact cycle
again.
And the wheel turns everonwards.
Third, another timeless lesson: cheap credit creates moral (27:32):
undefined
hazard.
When borrowing costs are low,everyone takes more risk.
Banks lend to riskier borrowers.
Investors chase yield.
Speculation increases.
Amsterdam had 0.5% interestrates.
Money was practically free.
(27:53):
The banks levered up massivelyand financed increasingly risky
plantations.
We just had a 15-year period ofnear zero interest rates.
The private credit boom happenedbecause money was cheap and
investors were desperate foryield.
Now rates are higher, but theleverage that built up during
that cheap money era doesn'tjust go away overnight.
(28:16):
It sits there waiting for ashock to hit.
Fourthly, fourth timelesslesson, information asymmetry
benefits insiders and punisheseveryone else.
When you don't know what youown, you cannot properly assess
your risk.
And when a crisis hits, you'rethe last to know and the first
to lose.
In the crisis of 72, ordinaryinvestors had no idea that their
(28:40):
plantation bonds were backed byinsolvent banks and failing
plantations.
They found out when it was waytoo late.
Hence the suicides across thefield, from primo bankers down
to merchants who'd overleveragedthemselves on these air quote
great investments.
In 2025, you have limitedinsight into what companies your
private credit funds areactually lending to.
(29:00):
You won't know there's a problemuntil redemptions freeze.
So what does that mean for youas an investor?
If someone pitches you privatecredit, whether it's your
financial advisor, your 401kprovider, or a slick marketing
brochure, ask the hardquestions.
What are the underlying assets?
Not the asset class, the actualcompanies.
How leveraged are the borrowers?
What's their debt to eBit dollratio?
(29:22):
What's the redemption structure?
Can I get my money backquarterly, annually?
What happens if too many peopletry to redeem at once?
I'll give you a preview.
It's going to be a freeze onredemptions.
That's the quick answer to thatquestion.
Or what happens in a stressscenario?
If we hit a recession, a defaultspike, what's my downside?
Like, how much can we losebefore we're we're completely
wiped out here?
How are the assets valued?
(29:44):
Who's deciding what they'reworth?
Is there any independentverification?
Is the fund leveraged?
As I mentioned earlier.
Like, are they leveraging onleverage to make these
investments?
If you cannot get clear,specific answers to these
questions, and to be fair, I'malmost positive you will not.
That's a red flag.
Walk away.
More broadly, be extremelycautious about any investment
(30:05):
that promises high returns withlow risk and limited volatility.
Those three things, guys, do notcoexist in nature.
If something yields 10% whentreasury bonds yield four, there
is risk somewhere.
Either credit risk, liquidity,liquidity risk, or something you
are just not seeing.
Private credit offers attractiveyields with seemingly low
(30:28):
volatility because the assetsare illiquid and they are priced
by models.
You don't know what's wronguntil it hits you in the face.
And recognize, everyone, that weare still living through the
aftermath of the longest creditexpansion in modern history.
Yes, rates went up recently, butwe had 15 years of ultra low
rates fueling risk taking.
This does not unwind in twoyears.
(30:50):
The leverage, the speculation,the poor underwriting, it is all
still deeply embedded in oursystem.
The 72 crisis happened afterdecades of credit expansion.
The plantation mortgage markethad been growing since the
1740s.
Shadow banking had been thrivingfor an entire generation.
Everyone thought it wasdifferent this time.
(31:11):
They had sophisticated financialinstruments, professional
managers, diversifiedportfolios, and then in a matter
of months, it all came apart.
History doesn't repeatperfectly, but it sure as hell
rhymes.
I want to leave you with onefinal thought before we wrap
this episode up.
The Dutch investors who survived72 were not the ones who had the
(31:32):
most exposure to the highestyielding Caribbean plantation
bonds.
They were the ones whounderstood that sometimes boring
is better than exciting, thattransparency and knowing what
you're investing in matters morethan reputation.
And that liquidity has realvalue even when you don't need
it.
When you empty your bank accountto pursue yield, you're putting
(31:53):
yourself on a knife's edge.
And that doesn't usually endwell.
The survivors were likely theones who owned real estate in
Amsterdam, or even better,geographically diversified real
estate portfolios had indiversified income streams.
They weren't levering up tochase returns.
And when Clifford and Co.
collapsed and credit froze, theywere fine.
(32:15):
Uncomfortable, maybe, watchingtheir neighbors panic, and they
might have even lost some moneythemselves, but they were fine.
They survived.
The ones who got destroyed, thesophisticated investors, the
ones who thought they understoodthis new system, who trusted the
names on the door, who believedthe risk was managed and the
returns were real.
So when someone pitches you oneof these deals, understand.
(32:37):
I like to go back to thebuffetism, right?
Invest in what you know.
Don't touch the other stuff.
It's just not worth it.
That's why I like real estate.
It's actually fairly simple,generally, although there are
financial complexities in thisbusiness as well, and there's
many ways to cut these up withfinancial engineering to make it
look better, but also magnifythe risk.
(32:58):
And critically, then trust isimportant.
It is important.
You do want to trust the peopleyou work with, but please
verify.
And when in doubt, when you'rebeing pitched deals you don't
understand, just default toboring.
Own assets you get.
Keep enough liquidity, don'tlever up, don't chase yields.
Because in the end, theinvestors throughout history who
(33:21):
built lasting wealths are notthe ones who maximize returns
during the boom.
They're the ones who survivedthe bust.
Thank you for listening to theTimeless Investor Show.
If you found this valuable,please share it, send it out.
If you love this episode, hitsubscribe, notification bell, be
part of the Timeless Investorcommunity.
(33:42):
Leave your thoughts, forwardthis to your financial advisor,
why not?
Or send it to a friend who'sbeing pitched private credit.
Be educated, understand what'sgoing on.
Leave a comment for us if youfound this helpful, if you have
had your own experience lookingat private credit deals, or you
have other eras of history you'dlove for us to do a future
episode on, I would love to hearfrom you.
Thank you.
(34:02):
This is Ari Van Gemran, the hostof the Timeless Investor Show
and the founder of LombardEquities Group, multifamily
investment company spread acrossthe United States West Coast.
Thank you for your time today.
Think well, act wisely, buildsomething timeless.
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