DoubleLine Capital Co-Founder & CEO Jeffrey Gundlach Talks Private Credit Risks

**Jeffrey Gundlach** (0:02)
Bloomberg Audio Studios. Podcasts, radio, news.

**SPEAKER_2** (0:07)
We're joined by the firm's CEO and CIO, Jeffrey Gundlach. Jeffrey, thank you so much for having us here.

**Jeffrey Gundlach** (0:13)
Yeah, it's good to be here. I'm glad you made a house call. It's easier to do.

**SPEAKER_2** (0:18)
Absolutely. I mean, we've got this nice rug, these nice chairs, so we couldn't be happier. But let's get right to the good stuff here. I want to talk about this moment in private credit. There's been a ton of different analogies and metaphors used. One of the ones that you've used, you said in early April on X that basically we're in 2007 for private credit. I want to talk about the potential dominoes effects here, because you think about any potential crisis in private credit, what is the actual read-through into markets more broadly, the economy more broadly, and what does that mechanism actually look like?

**Jeffrey Gundlach** (0:53)
I think the mechanism is already underway, and the mechanism is a decline or elimination of trust, because there's been so much reporting that is questionable in terms of the underlying activity.
When I point out the one that really grabbed my attention last fall was there was a fund that was marked at 100, and overnight it was marked at 81
Now that is a hard to understand markdown by a not insignificant sponsor, with a good reputation and a very large staff, supposedly doing underwriting and due diligence and tracking and all that sort of stuff, and yet it goes down 19% overnight. Now, many people don't quite fully understand the ramifications of that. They think about a stock that reports and it goes from 100 to 81, and that's a big move, but there was a big earnings miss or something. These are portfolios of hundreds of loans, maybe thousands of loans in some cases, and 100 to 81 means either all the loans were marked down 19 points, all of them, or say, since I keep being told that everything's largely fine, let's say 50 percent of the loans are absolutely rock solid. That means that the other 50 percent were marked down 38 points. What if 75 percent of the portfolio is absolutely rock solid, which is kind of what the messaging has been, that it's mostly all good. I think one said no red flags, no yellow flags, and mostly green flags. Wait a minute, where's the other slice of the pie? No red, no yellow, and mostly green. What about the not mostly? You know, that type of thing. But if 75 percent of the loans are absolutely rock solid, it means the other 25 percent were marked down to 24, right? So, but what if it's 10 percent of the loans? Oops, they'd have to be marked down to below zero. Right. Right. So, it's clear. And when we get these marked downs, it would be awfully helpful if they would say, this is how many loans we have, this is the dollar amount of loans we have, and this is how many were marked down.

**SPEAKER_2** (3:01)
Right.

**Jeffrey Gundlach** (3:01)
Because we know the dollar amount of the mark down, it's the percentage. So, how many are there? That would be a really big issue. But I've been saying, this is not just about private credit. This is something that is endemic to market cycles. This happened in the IPO of dotcoms back in the late 90s.
They had no revenue, no business plan, and they were selling for large prices. And then, of course, in the lead up to the global financial crisis, you had the mortgage market, the non-guaranteed mortgage market exploded in size to about where the private credit market is today, a little less, actually, for those securitized mortgages, about two trillion.
You know, and it boomed, and of course, that ended up blowing up.
It's all because the growth is so fast. That's what really drives it. And it can happen when there's a huge liquidity event, the money's pumped in from the government, some such thing as it wasn't during COVID. And suddenly, that money has to get deployed, and it can be indiscriminate. So I use the analogy of the Wild West. This one, I think, really explains it in simple terms. You've got a nice town, it's 1840, and out on the frontier, you've got a little town, mostly farmers living off the land, and they're all God-fearing people. And they've got a sheriff there, he's got a heart of gold, he's like Gary Cooper in High Noon. And there's very little crime. Every now and then, there'll be a murder of passion or something, but no one even locks their doors. You don't have to worry about it. And then, something happens. So maybe there's a discovery of gold three miles away. And all of a sudden, all the Fast Buck artists and con men and rapscallions, they come flooding in. Not everybody's a rapscallion, but a sufficient fraction of them are rapscallions. And they're coming in there to hit it big and then get out. And suddenly, there's murders. You have to lock your door, you have to barricade your door. The sheriff is completely overwhelmed.