Secretary Bessent,

I am writing to you about nearly $13 trillion that marks its own homework. $9.4 trillion in private equity. $3.5 trillion in private credit. The largest pool of self-marked capital in the history of global finance.

I am nobody. I have no institutional backing, no fund, no lobbyist. I am a recovering alcoholic who spent years learning to be a part of society rather than apart from it. I rebuilt myself from nothing. Then I broke into the game with no credentials, no pedigree, and no permission.

I have no subpoena power. I have no regulatory authority. I have a few computers, a parser, and the SEC's own documents. Every institution in this chain already knows what I am about to tell you. They built it. It was not always built this way. They know how it works. They do not know how it ends.

If you zoomed out far enough and looked down at humans as though they were ants, it would all look much more clear. You would see the little ants building elaborate structures. You would see them moving capital from one hill to another, packaging it, repackaging it, collecting a fee at every step. You would see them convinced they are making independent, mold-breaking decisions. And from up there, you would see that it was almost predetermined — the limited options provided by their past decisions funneling them into exactly the same behavior, over and over, across centuries of financial history.

A close friend — one of the underappreciated and underfunded financiers of my generation — once described it to me this way: all humans are automatons. We believe we are making independent decisions. We are not. Even the smartest, most independent thinkers among us are herded eighty or ninety percent of the time. Not twenty or thirty, as they assume. Eighty or ninety.

You do not know just how much of your analysis — your careful, diligent, institutional work — is being infiltrated and infected by the system around you. Because to really break the mold, to really get outside of it and not be an automaton, you would have to so determinately say screw the entire structure of this that it would be hard for you to build a business. It would be hard for you to operate in society. Especially in an institution.

This matters because it explains how an entire industry can build on a flawed premise and never question it. Not because the people inside it are stupid. Because they are human. There is enormous pressure inside these firms to not lose market share. Not lose assets under management. And so even if you are genuinely trying to rest your hat on doing the best quality of deals, you are probably adopting some rather aggressive practices — practices that were innovated by people who are not trying to defend market share but to gain it. People who have a completely different set of risk-reward judgments to make. People with nothing to lose.

This is how it happens. Every time. When there is a tremendous amount of acceleration in something — where it is a little bit disorienting how fast it all feels like it is happening, and there are a lot of careers and money on the line — the big firms adopt the practices of the small, aggressive ones. Apollo pioneered many of the aggressive lending structures that now define private credit. Blackstone felt the heat and adopted them to defend market share. And then firms like Cliffwater — smaller, more agile, with nothing to lose — pushed the practices even further to carve out their own piece. Each tier imports the risk calculus of the tier below it. This is how the most aggressive mortgage practices at Bear Stearns and Lehman Brothers ended up on Citigroup's balance sheet in 2008. The practices did not improve as you moved up the chain. They propagated. And through financial engineering and innovation, we have found such remarkably fast and dynamic structures for deploying capital that the cycle compresses. The bubble inflates faster. The practices get worse faster. The reckoning comes faster.

My friend put it simply: even if you are the best guy at shoveling shit — the most diligent, the most competent, the best form of anyone in the yard — you are still shoveling shit.

The question is not whether private credit firms execute well. Some do. The question is whether the practice itself should exist in its current form. That first question — should we be doing this, and why? — those assumptions are completely unchecked. They skipped it. They went straight to step two — how are we doing it? — and convinced themselves that better execution fixes a broken model. It does not.

I wrote on February 21st that these people are not investors. They are dealmakers. The distinction matters. An investor underwrites risk and lives with the outcome. A dealmaker builds the model, gets the deal done, books the fee, and moves on. The money is made in the doing, not in the being right.

Private equity controls $9.4 trillion. Private credit has reached $3.5 trillion, nearly doubling in two years. They charge two percent management fees and twenty percent carry. On the private equity side alone, that extracts approximately $188 billion per year in management fees — before a single dollar is returned to investors. Then add the carried interest. Then add the bank fees — the origination fees, the syndication fees, the restructuring fees. Then add the advisory fees, the consultant fees, the legal fees. Then add the private credit management fees and the BDC operating expenses. Then add the auditing fees — for whatever those are worth. The all-in extraction across PE, PC, and the banking infrastructure that services both probably quadruples that number. We are talking about something approaching three-quarters of a trillion dollars per year pulled out of the system in fees — regardless of whether the underlying assets are worth what they claim.

The machine does not need performance. It needs assets. Assets need marks. Marks need methodology. Methodology needs assumptions. Assumptions need to hold. So they hold. Not because the evidence supports them. Because the fees depend on it.

The industry designed the methodology. It hired the valuation agents. It reports the results. It collects fees on the marks it creates. This is not oversight. This is a loop. And the management fees and carried interest that have already been extracted will not be clawed back when the music stops. They never are. The extraction has already happened. The only question is who absorbs the loss.

And here is the unvirtuous cycle that makes this a matter of national concern. Private credit deployed $593 billion in 2024 alone — a 78 percent year-over-year increase. Morgan Stanley projects $5 trillion by 2029. You can safely assume that the fastest-growing, highest-margin, best-paying desks on Wall Street are exactly where the problems are most likely to be found. That is not a coincidence. That is the pattern. It has always been the pattern.

They ran out of institutional capital. The endowments were full. The sovereign wealth funds were allocated. The family offices were tapped. So they went downstream. They went to 401(k)s. They went to retail interval funds. They went to the retirement savings of ordinary Americans who have no idea what a unitranche is, who have never seen a private placement memorandum, and who trusted that somebody — anybody — was watching the gate. The headline default rate is 2.0 percent. The real default rate — when you count distressed exchanges, PIK conversions, and amend-to-extend deals that never show up in the official numbers — is 6.4 percent. More than three times the reported figure. Add-on deals now represent 76 percent of all PE-backed buyouts — buying small companies at five to eight times earnings and bolting them onto platforms valued at twelve to fifteen times. The “value creation” is paper arbitrage. The marks are fake. The fees are real. And the capital that funds both comes from people who were never told what they were buying.

And you know better than almost anyone what underlies it all: hypothecation and rehypothecation. The same collateral pledged and repledged across counterparties, each layer trusting the mark below it. Treasuries re-hypothecated inside BDC structures. Private credit assets used as collateral for insurance reserves. Insurance reserves backing pension obligations. Each link in the chain assumes the asset at the bottom is worth what someone else's valuation agent said it was worth. When one link reprices, every link above it reprices. And the people at the top of that chain — the pensioners, the 401(k) holders, the retirees — have no idea they are sitting on a tower of recursive collateral that has never been independently marked.

I love capitalism. I love markets. I have grown up admiring the men and women in this playground. I am not writing this letter because I want the system to fail. I am writing it because I want it to survive. But it will not survive by reinventing the wheel in a slightly more unstable version and calling it innovation. It will not survive by packaging zombie companies into acronyms and selling them to retirement accounts. It needs reform. Not because reform is convenient. Because reform is the only alternative to collapse.

Let me be clear about something: there will always be a market to lend to a business that is not public. Private lending is not inherently wrong. It used to be that lenders would really dive in, find an interesting situation, do deep diligence, and fund it with strict covenants. Banks used to do this with a hundred mortgages on their balance sheet. They knew their borrowers. They had the financials. They had the guardrails.

That is not what is happening. What is happening is that we are packaging sausages. We are bundling up highly leveraged, mostly zombie companies with no free cash flow and playing hot potato on exits and refinancings. We are doing the worst part of lending with standards that are built on bad logic — and we are doing it at industrial scale. The idea that you take these businesses, lever them six or seven turns, charge them ten percent cost of capital they cannot service, strip them of covenants, and then call it a diversified portfolio is stupid. I do not care how many nose-down, acronym-heavy justifications you dress it up in.

In five or ten years, we may see almost no lending practices that resemble what is happening in this era. We will look back and say: that was a really bad way of conducting business. The question is whether we learn that lesson the clean way or the hard way.

In 1906, Upton Sinclair published The Jungle. He showed America how the sausage was literally made. He had no government authority. He had a notebook. The result was the Pure Food and Drug Act and the Meat Inspection Act.

Ida Tarbell dismantled Standard Oil with receipts. Not subpoenas. Receipts.

I published a conversation with a former Lincoln International valuation professional under the title “How the Sausage Is Made.” Because that is what it shows — the private credit valuation machine, from the inside, when no one is watching.

This person — now in the RIA space — has direct experience valuing Cliffwater Corporate Lending Fund's $31.5 billion portfolio. Lincoln is the third-party firm Cliffwater pays to mark its book. The professional defended the marks. I pushed back. What emerged was a thirteen-step mechanical breakdown of how the valuation machine actually functions — from who gets hired to mark the book, through the methodology shield that insulates marks from market reality, to the output: a fund that has never had a losing year.

The professional's core defense was this: if nothing has materially changed in the underwriting thesis, the mark does not need to change. Spreads move. Markets reprice. Credit benchmarks drop. But if the original assumptions still hold — in the valuation agent's judgment — the mark sits at par.

I asked: what about the possibility that you were wrong in your underwriting to begin with?

I published the full sanitized transcript and analysis. What follows is what the evidence shows. And this is not an isolated issue. It is endemic. The structure is the same everywhere.

I parsed Cliffwater's SEC filings loan by loan. Every filing from inception, including December. PIK notes only appear semi-annually, buried in footnotes that are not indexed, not searchable, and not structured for analysis. EDGAR was not built for this moment — and quite frankly, it seems intentional how obscure and obnoxious the reporting is. Since I began this process, I have been told by numerous industry members and even fund managers that nobody even attempts this. Let that sink in. Billions of dollars in pension capital allocated to vehicles whose own filings are so impenetrable that the people who manage money for a living do not bother to read them.

Nemo ausus est. — Nobody dared.

Cliffwater reports less than one percent of its assets in payment-in-kind status. I found 189 PIK loans in the portfolio. Fifty-eight of those were amendment PIKs — loans where the borrower could not pay cash interest, so the terms were restructured to roll interest into principal. Over fifty were unreported non-accruals. Not PIK reclassifications. Non-accruals. Borrowers who are not generating enough cash to service their debt, carried at par on the books of a fund that has never reported a losing month.

In April 2025, the day after Liberation Day tariffs were announced, credit spreads blew out across every index. The Morningstar Leveraged Loan Index dropped. Every major credit benchmark reflected the shock. Cliffwater marked up.

They marked up a website — Sleep Number's URL — from thirty-five cents to forty-two cents on the dollar. The business has been functionally eliminated by Google and artificial intelligence. There is no scenario in which that URL generates enough revenue to service the debt. They marked it up anyway.

The fund's borrowers pay an all-in cost of capital of SOFR plus 700 basis points — 10.6 percent. The vast majority of these businesses cannot generate enough free cash flow to unleverage from that rate. Practically the entire portfolio is unitranche — every dollar of loss hits the fund dollar for dollar. There is no structural protection. No first-loss tranche absorbing defaults. No sleeves. No diversification. Every loss goes straight through.

The fund has maintained a forty-one-month win streak. It has never reported a losing year. It has zero reported non-accruals.

I found over fifty. One person. One laptop. From public filings.

Now consider the statistics. CCLFX reports a Sharpe ratio of 3.75. Bernie Madoff — who could pick any return he wanted because he was fabricating them — fudged a Sharpe of roughly 3.5. That is how he got caught. The returns were too smooth. The volatility was too low. Harry Markopolos looked at the numbers and said: this is not possible. No legitimate portfolio produces these risk-adjusted returns. CCLFX is penciling a higher Sharpe ratio than Madoff on a portfolio of leveraged loans to PE-backed companies.

I have been told privately that Cliffwater advertised a Sharpe ratio above 11 on their enhanced fund. Eleven. Consider that for a moment. High-frequency trading firms — firms that know they are going to win, that operate in microseconds with near-perfect information — do not produce a Sharpe of 11. There is too much volatility in the execution, too much friction in the plumbing, even when you know the outcome. Even if someone solely insider-traded — perfect information, every single time — the volatility of the underlying markets would still prevent a Sharpe of 11. The greatest quantitative hedge fund in history — Renaissance Technologies' Medallion Fund — ran a Sharpe in the range of five to six, and they employed some of the finest mathematical minds alive. Cliffwater is claiming risk-adjusted returns double the best quant fund on earth on a unitranche credit portfolio. And nobody asks questions. Oh, it's just stale marks, but it's still a good vehicle.

Nobody with any amount of intelligence would put that statistic out in public with the clear excess kurtosis of 14.4 and skewness of -2.45 sitting right behind it. A kurtosis of 14.4 means the tails are hiding extreme events that do not show up in the monthly returns — until they do, all at once. A skewness of -2.45 means the distribution is catastrophically asymmetric to the downside. The returns look calm 96 percent of the time. Then they gap. The Sharpe ratio is an output of the marks. If the marks do not move, volatility is near zero. If volatility is near zero, any positive return produces an infinite Sharpe. The “11 Sharpe” is not evidence of superior risk management. It is evidence that the marks are not reflecting risk.

You can see Michael Saylor doing the same thing with his special preferred securities at Strategy — manufacturing an impossibly smooth return profile on an inherently volatile underlying. But at least he is derided for it. At least the market pushes back. In private credit, there is no market to push back. There is no trading. There is no price discovery. There are only marks. And the marks say everything is fine.

I am not even picking on Cliffwater particularly. Go ask around. Some people will tell you it has a good reputation. That may be true. S&P just announced they see a one-in-three chance of downgrading CCLFX from its A rating within the next two years. Kalshi should get into credit ratings. But that is not the point. The point is that this practice is everywhere in private credit, and the marks are just as bad in private equity. The incentives that produce this outcome at Cliffwater produce it at every fund in the space. Every fund that pays its own valuation agent has the same conflict. Every interval fund that reports monthly NAV on illiquid assets has the same temptation. Every BDC that books PIK as income and pays cash dividends on phantom revenue is running the same death spiral. The acronyms change. The structure does not.

Ares Capital — the largest BDC in the country — claims that private credit is safer than corporate bonds with over fifty percent more yield. I am asking you to consider the left tail. Anyone with an inkling of statistical understanding knows it exists. A skewness of -2.45 is not ambiguous. An excess kurtosis of 14.4 is not ambiguous. These numbers are screaming that the risk is there — it is just not showing up in the monthly returns because the marks are absorbing it. When the marks finally converge to reality, the losses will not arrive gradually. They will arrive all at once. And the people holding these assets in their retirement accounts will have no warning and no exit.

I published this research under the title Marked to Fantasy. I followed it with Your Retirement Is the Collateral, because that is where the money comes from. I scored every loan in Cliffwater's portfolio. Two thousand three hundred and thirty positions. I hand-researched hundreds.

Bloomberg confirmed fourteen percent redemptions at CCLFX forty-eight hours after my second piece was published. The fund's auditor has PCAOB deficiency findings on Level 3 fair value measurements. Cash on hand fell seventy-six percent in six months.

None of this required a subpoena.

Humans asymptote at all times toward the greatest amount of risk they can take. It is almost like calculus. It just happens. Nobody stops and asks why are we doing this? They are too busy asking how do we do it faster? And regularly, we push past the limit. That is where the government is supposed to come in. Not after the problem. Before it. That is the entire point of regulation. That is the entire point of your office.

But the government rarely acts until after. This is a time-immemorial, repeated failure that will happen forever unless someone breaks the pattern. And this is not just about private credit. This is about credit broadly. The same structural incentives — the same opacity, the same self-marking, the same fee extraction — exist across leveraged lending, across CLO markets, across the insurance system that sits on top of all of it. The rot is not in one tree. It is in the soil.

There are two ways this ends. I am writing to you because which one we get depends on whether people in your position act before the market forces the answer.

The first outcome is clean. It is 2008. Everyone ends up in the same room at Treasury at the same time, asking for help for the same problem. Nobody can hide. The way the human mind works: whoever is not in the room when there is a problem is not part of the problem. So if they are all there at once — every fund, every lender, every valuation agent — the diagnosis is immediate. The reform is specific. The system heals.

This is what happened with mortgage-backed securities. One practice, central to the financial system, broke catastrophically and forced a response. And here is the important part: packaging mortgages into securities was actually not a tremendously flawed idea. It is a relatively reasonable concept. Mortgages are ubiquitous. You put enough high-quality ones together and the bond is good. The execution was terrible. The guardrails were nonexistent. But because the idea was reasonable, it found its way to the center of the financial system as collateral. When it broke, it broke everything. And because it broke everything at once, we could diagnose it. Fix it. Regulate it. Move on.

Or so we thought. We just moved the risk into the shadows.

But it worked. For a while.

The second outcome is Japan. It is the nightmare.

Japan's banking crises of the 1990s all had the same genesis — a massively overleveraged financial system built on loose monetary policy and deregulated lending during the 1980s. The bull market of the 1980s resembled the Roaring Twenties. The Nikkei went up four or five times in the final years. Then the Bank of Japan had to tighten. The ball started rolling down the hill. And it rolled from a very high place.

But it did not break all at once. Over the course of twenty years, there were periodic banking crises in different lending pockets of the economy. One branch fell. Six weeks of quiet. Another branch. Each time, they assumed it was an isolated event. The Bank of Japan would cut rates. The fiscal authorities would do something. The regulators would do something. They thought they fixed it. Then three months later, another pocket blew up.

The government never connected it. Neither did the voting public. There was no political momentum to solve the root cause because the public could not see it. They would just say: it seems like the bankers are having more problems recently. But nobody understood why.

To admit the root cause would have been to admit that the entire 1980s boom was a bubble. There was enormous political and financial resistance to that. Because that was considered the good times. You would have had to tell people who built their lives during that era that the whole thing was a farce. That they did not waste a decade of their life inflating asset prices. Most people are not willing to do that. They will say: maybe the last quarter of it was an excess. But everything else had meaning.

So they clipped branches for twenty years while the tree died. They never admitted the entire tree was poisoned. That is what a lost generation looks like. Not an explosion. A slow rot.

Private credit is a fundamentally flawed premise. It is also more isolated than mortgage-backed securities were. What this means is that it could produce a full explosion of something that is not central to the economy — or, more likely, a slow bleed that never reaches the critical mass required to force reform.

Picture it. Marc Rowan goes on TV. There is a problem at Cliffwater. Six weeks later, some issue with another fund. A month after that, a BDC gates redemptions. One at a time. And every time one of them is not in the room when the problem surfaces, they are not part of the problem. So they point a finger and say: that was them, not us. And three months later, they are the ones asking for a bailout. But the government never connects it. And neither does the public.

The market would chop. Down ten percent. Up twenty. Down fifteen. For five to ten years. Nobody would understand why. The financial system would keep trying to run and getting its knee shot out. Rehab quickly. Try to run again. Something else breaks. And it would just be five to ten years of that. Like the 1970s, when my grandfather left the business and telling people you worked in stocks was like saying you worked in insurance. Oh, the oil. Years before Milken and Greenberg became kings of the hill.

The people most damaged would not be hedge fund managers or private equity partners. They would be the people in retirement accounts. The ones who sell at the bottom and buy at the top because nobody told them the tree was poisoned. The ones who will be turned off from the market at the exact wrong time and turned on at the exact wrong moment. It would do to a generation of savers what the 1970s did to theirs.

Seven hundred and eighteen billion dollars in American pension money is allocated to private equity and private credit. Oregon's Public Employee Retirement System has 26.9 percent of its portfolio in private equity — the highest of any state pension in the country. $1.1 trillion sits in offshore insurance reserves, much of it in Bermuda, structured to avoid domestic regulatory scrutiny.

The marks determine the NAV. The NAV determines the fees. The fees come from the pensions. The pensions come from paychecks. The paychecks come from firefighters, teachers, and nurses who will never read a private placement memorandum in their lives.

These people did not choose to fund the private credit machine. Their pension boards chose for them. And the marks that justify those allocations are produced by valuation agents who are paid by the funds they mark. When this unwinds — slowly or quickly — the pensions will take the hit. The insurance system, which is deeply entangled in this, is highly likely to blow up alongside it. And the carried interest and management fees that have already been extracted will not be clawed back. They never are.

That is the core of it, Secretary Bessent. The extraction has already happened. The only question is who absorbs the loss. Right now, the answer is: the people with no voice.

I am not writing to you because the timing is convenient. It is not. There is a war. There is an election cycle. There are a thousand reasons to defer this. I am writing because the convenience of this issue is irrelevant. It should have been addressed sooner. It is better now than later. Damn the Iran situation. Damn the polls. Damn the insider connections and the invested interests and the people who have your personal number. This is bigger than all of that. This is bigger than any administration. This is bigger than any of us.

The elite know not what is best for their long-term security, just as the financiers know not what is best for their long-term shareholders. This is the automaton problem applied to power itself. The people at the top of these institutions are herded by the same forces as everyone below them — the pressure to not lose market share, the pressure to not lose assets, the pressure to not be the one who admits the last decade was a mistake. They will never stop and ask why are we doing this? because asking that question threatens everything they have built. So someone from outside has to ask it.

I understand the administration's instinct is to deregulate the banks. Fine. Open them up. Move some of this junk onto bank balance sheets where it can be examined, stress-tested, and regulated. But deregulation without recognition of the problems at hand is not deregulation. It is abdication. We do not need less oversight. We need a modicum of understanding of how risk flows through this system — from the originator to the CLO to the BDC to the insurance reserve to the pension fund to the paycheck of a nurse in Portland who has never heard of any of these entities.

If this waits until the midterms, we have no chance of mitigating it. The political calculus will shift. The lobbying will intensify. The special interests will make their case that their pocket of lending is fine, that it was the other guys, that reform would kill jobs. And by then, more branches will have fallen. More pensions will have taken hits they do not yet understand. And the window for a clean diagnosis will have closed.

I am asking it. There are two paths. I am imploring you to pick the one that is best for this country. Not the one that is easiest. Not the one that defers the pain. The one that diagnoses the problem while there is still time to fix it without a catastrophe. The one that recognizes how this affects the average American — not the fund manager, not the partner, not the banker — the average American whose retirement is collateral for a machine they never consented to.

I am asking for proactivity. I am asking for the government to do its job.

Specifically, I am asking for four things.

1. Direct the SEC and the Financial Stability Oversight Council to examine Level 3 fair value practices across interval funds and BDCs. If one person with a laptop can find over fifty unreported non-accruals in a single fund's SEC filings, your agencies can find what is hiding across the full $3.5 trillion landscape. This is not an isolated case. The structure is identical across the industry. The incentives are identical. The outcome will be identical.

2. Require that valuation agents be independent of the funds they mark. Lincoln International marks Cliffwater's book. Cliffwater pays Lincoln. This is not a conflict of interest. This is the business model. No valuation firm has ever been fired for marking too high. The incentive structure guarantees the outcome.

3. State publicly that the current self-marking regime creates systemic risk. The silence is the permission. As long as no one in authority says it, every fund manager in America can point to the silence and say: if it were a problem, they would have said something.

4. Mandate position-level mark disclosure for every fund that accepts pension capital. The people whose retirements are collateral for this machine deserve to see what they own — not a net asset value number produced by the same people who collect fees on it.

I wish financial pain on no one. If the bottom was yesterday and none of this gets worse, nothing would make me happier. But the probabilities do not favor that. And the model was flawed from the very beginning. Even if it is not going to get worse, that should still be the takeaway: this was structurally wrong from the start. Let us try to have a conversation about that.

There are silent voices and unheard wisdom everywhere in this country. Particularly among those younger than our leaders. This opacity — nearly $13 trillion of it — was beaten by one highly motivated person sitting in a one-bedroom apartment with a team of tireless helpers who may never have a name or a voice in this debate. If we could find it, your department can too. The filings are public. The math is not hard. The will is what is missing.

I am not asking you to take my word for it. I am asking you to look at the filings.

I am asking you to invest in this voice. And then investigate this abyss.