Financial Crisis Warnings Flash as Private Credit, Energy, and AI Risks Converge

On the morning of September 15, 2008, Bobby Seagull arrived at his desk in Canary Wharf before dawn, unaware it would be the last time punctuality mattered. Lehman Brothers was collapsing. The American bank had filed for bankruptcy over the weekend, and when the London office opened, the machinery of crisis became visible: colleagues pocketing paintings from the walls, claiming them as compensation; phones going unanswered; the slow realization that the institution itself was dissolving. By day's end, Seagull and thousands like him carried their careers out in cardboard boxes—an image that would define the global financial crisis, one of the deepest recessions since World War Two.

Now, nearly two decades later, warning lights are flashing across the world's financial system again. The pattern is different, the architecture has changed, but the underlying fragility feels uncomfortably familiar. Sarah Breeden, deputy governor of the Bank of England responsible for financial stability, sees the echoes clearly. Private credit—a market that barely existed fifteen years ago—has exploded to $2.5 trillion. These funds, which lend money outside the traditional banking system, were supposed to be safer, more stable alternatives to the banks that nearly destroyed the global economy. Instead, they have become a new source of systemic risk. Several major funds, including those managed by BlackRock, Blackstone, Apollo, and Blue Owl, have faced billions in withdrawal requests from nervous investors. The problem is structural: much of the money these funds lend has itself been borrowed, creating layers of debt stacked upon debt. "There is leverage on leverage on leverage," Breeden warns. "What we want to make sure is that everybody understands how that layer cake of leverage adds up."

Mohammed El-Erian, chief economic adviser to the German financial firm Allianz and former CEO of PIMCO, describes a scenario that keeps him awake. After the 2008 crisis, regulators forced banks to be more cautious. This created a vacuum. Money flooded into private credit funds, and companies, seeing capital available everywhere, made mistakes. Then suddenly, everyone wants their money back at once. "Something that started out as a really good idea grows into something that risks instability, and rather than benefitting the economy, it actually risks pulling the rug out from under it." It resembles a slow-motion bank run—no queues outside branches, but a steady line of people demanding their savings.

Energy prices compound the danger. Oil has risen above $100 a barrel, driven partly by a conflict with Iran that has effectively closed the Strait of Hormuz, the world's most critical energy chokepoint. Fatih Birol, chief executive of the International Energy Agency, has called this "the greatest energy security crisis in history," more severe than the oil embargoes of 1973, the Iranian revolution of 1979, or even the Ukraine shock of 2022. In 2007 and 2008, surging oil prices contributed to the financial collapse. Today, while prices have risen 50 percent since before the Iran conflict, they have not yet reached the $147-per-barrel peak of 2008 (equivalent to nearly $190 in today's money). Stock markets, still near all-time highs, seem to assume peace will prevail.

Yet another risk lurks in the valuations of artificial intelligence companies. Over $2 trillion has poured into AI investments—what Bill Gates has called "a frenzy" and others describe as a bubble. Seven mega-cap companies, including Nvidia, Microsoft, Alphabet, and Amazon, now account for 37 percent of the entire S&P 500 index. Millions of ordinary savers, investing through index funds, are unknowingly concentrated in these stocks. The dotcom bubble burst in 2000, the NASDAQ fell nearly 80 percent by 2002, and a recession followed. A similar collapse in AI valuations would devastate pension funds and consumer confidence across the world.

Breeden articulates the true nightmare: "What happens if a number of these risks crystallise at the same time? Major macroeconomic shock, at the same time as confidence in private credit goes, at the same time as AI valuations and other risky asset valuations readjust. What happens in that environment and are we ready for it?" The question cuts to the heart of the problem. In 2008, governments responded by pumping billions into banks and raising deposit guarantees. Central banks cut rates in a rare coordinated move. But the tools available then may no longer exist. UK government debt has nearly doubled from less than 50 percent of national income in 2008 to close to 100 percent today, after bank bailouts, Covid wage support, and energy subsidies. El-Erian uses the analogy of a fire brigade that has run out of water. Governments and central banks have responded to crisis after crisis, eroding their capacity to respond again.

International cooperation, which proved essential in 2008, is also weaker now. Gordon Brown, the prime minister who helped coordinate the global response, has said that strong international cooperation stopped the crisis from becoming a depression. Today, disagreements over trade policy, NATO, and even the status of Greenland divide rich countries. The IMF warned earlier this month that "international cooperation is weaker" now than in previous years—a pointed observation in an era of US-China trade wars and America First policies. In 2008, leaders met at emergency summits in Washington and London to hammer out their response. Such coordination seems far less likely today.

There are some reasons for restraint. Banks are better capitalized now, holding higher reserves rather than relying on borrowed money. Breeden believes that if stress arrives, it will not reach 2008 scales. El-Erian agrees that the banking system itself is not at immediate risk, but warns that financial instability could still trigger a recession by aggravating underlying economic fragilities. And if that happens, the burden will fall hardest on those least able to bear it. "Economic and financial fragilities tend to expose the most vulnerable segments of the population," El-Erian says. "They have the least resilience and tend to get hit particularly hard." Bobby Seagull, now a mathematics teacher, reflects on how much more complex financial instruments have become. "You're sort of passing on financial instruments from one person to the other, not sure what's inside it. And I think the worry is if things happen, they escalate very quickly in financial markets. And that's where you don't want to be the last person left holding that package."