President Donald Trump made light of a global crisis Friday when he jokingly called the Strait of Hormuz the “Strait of Trump” during a speech in Miami, even as Iran’s blockade of the waterway threatens to trigger the biggest financial shock since the pandemic.
The president drew laughs at the Future Investment Initiative when he said Iran must “open up the Strait of Trump, I mean, Hormuz.”
He later insisted it was no accident, saying “there’s no accidents with me, not too many.” The New York Post reported Friday evening that Trump is actually considering taking control of the strait and renaming it after himself.
But there’s nothing funny about what’s happening in global markets. The strait normally moves 20 million barrels of oil each day. With that flow blocked as the war enters its second month,
Brent crude prices have jumped nearly 50% to over $110 per barrel. The S&P 500 has fallen more than 7% this year. The Nasdaq has entered correction territory. The VIX fear gauge has climbed above 30 as of March 27, its highest level in a year.
Wall Street’s biggest worry isn’t the stock market, though. It’s what’s happening in private credit, the $3 trillion shadow banking sector that operates outside traditional banks.
Shadow banking’s broken business model exposed
The industry was already struggling before the war started. Now, soaring oil prices threaten to push it over the edge.
Private credit has grown by more than a trillion dollars since 2020, with Morgan Stanley predicting it could hit $5 trillion by 2030. But the business model has a fatal flaw when oil prices spike. Many lenders borrow short-term and invest long-term, which works fine when interest rates are falling.
Rising oil prices mean rising inflation, which means higher interest rates, and that leaves private credit funds paying more to borrow money than they earn from their loans.
The numbers tell a grim story. Defaults on loans among mid-sized companies jumped from 8.1% in 2024 to a record 9.2% in 2025, according to Fitch Ratings. This includes shadow defaults where creditors extend deadlines or swap debt for equity to avoid calling a loan.
Lloyd Blankfein, the former Goldman Sachs boss, has warned of a fire risk in the sector. Jamie Dimon at JP Morgan said there would likely be more cockroaches, as reported by Cryptopolitan previously.
Investors are running for the exits
More than $13 billion has been pulled from private credit funds run by BlackRock, Apollo, Morgan Stanley and others since January, Bloomberg reported. Over $4.6 billion is now trapped by withdrawal limits that funds imposed to stop the bleeding.
Stock prices for private credit firms have collapsed. Blackstone is down 31% this year. Apollo has fallen 25%. KKR dropped 30%. Blue Owl plunged 41%.
The withdrawal caps only last three months, and few expect the rush to get out will stop when the limits lift. That’s when things could get really bad.
Private credit funds can’t easily sell their loans to raise cash. They’ll have to turn to US regional banks for emergency credit lines.
Higher oil prices also raise recession risks
The probability of a US recession in the next 12 months jumped from 35% in January to 49% in February, according to Moody’s Analytics. That was before oil prices spiked.
Mark Zandi, chief economist at Moody’s Analytics, said the fallout from the war makes things worse for highly leveraged companies. “I would expect defaults and maybe at some point bankruptcies. If you’re thinking about what fissure could turn into a fault, could turn into an earthquake, that would be one place to look, for sure.”
A recession would be new territory for private credit. The sector was much smaller during the COVID crisis and had massive government support backing it up.
Robin Brooks at the Brookings Institution wrote that highly leveraged positions in all corners of the market blow up as volatility increases. “It looks to me like we’re nearing a breaking point on this front.”
Global contagion risks loom as crisis spreads
If private credit collapses in the US, the damage will spread globally. Private equity invests heavily in Europe. Insurance companies in the US, Europe and the UK have large exposures to private credit.
Some voices on Wall Street are trying to calm nerves. Torsten Sløk, chief economist at Apollo, argued markets are overreacting to what will likely be a four to six-week period of volatility.
But Zachary Griffiths at CreditSights offered a darker view. “The longer we are in this situation, the more vulnerable and the bigger risk it becomes to private credit and the overall economy.”
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