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"History does not repeat itself but it does rhyme." - Mark Twain (Quoted by Howard Marks) [00:08:34]
"In real life things fluctuate between pretty good and not so hot, but in the minds of investors they go from flawless to hopeless." - Howard Marks [00:18:06]
"For that which a man wishes, that he will believe." - Charlie Munger quoting Demosthenes (Quoted by Howard Marks) [00:19:54]
"As long as the music is playing you've got to get up and dance." - Chuck Prince (Former Citigroup CEO, Quoted by Howard Marks) [00:25:16]
"The enduring lesson is not that booms can be prevented or that busts can be fully averted. It is that we need to remember how easily we forget." - Andrew Ross Sorkin (Quoted by Howard Marks) [00:24:17]
"The antidote to irrational exuberance is not regulation by itself, nor skepticism, but humility." - Howard Marks / Andrew Ross Sorkin [00:24:22]
Speakers & Credentials
Howard Marks - Co-Founder and Co-Chairman of Oaktree Capital Management, a leading global alternative investment management firm. Renowned author of highly regarded "Memos" assessing market cycles, credit risk, and investor psychology.
Oaktree Executives Mentioned: Bruce Karsh (Co-Founder/Co-Chairman), Armen Panossian (Co-CEO/Head of Performing Credit), Craig Packer (Co-CEO/Head of Private Credit), and Bob O'Leary (Portfolio Manager / Global Head of Special Situations).
Voices/Mentions: The audio is read by an AI voice reproducing Howard Marks's memo. Marks references notable historical and financial figures such as Warren Buffett, Charles P. Kindleberger, Andrew Ross Sorkin, Michael Milken, Lewis Ranieri, and Charlie Munger.
1. Executive Summary
Credit Market Evolution: Over the past 50 years, the global credit market has shifted dramatically from a quaint system of high-grade bonds and stocks to a complex web of high-yield debt, syndicated loans, collateralized loan obligations (CLOs), and direct lending, fundamentally enabling the rise of Private Equity [00:00:17].
The Anatomy of a Bubble: Marks identifies direct lending as exhibiting classic symptoms of a financial bubble—initial success driving an influx of capital, lowering of underwriting standards, and ultimately, exposing vulnerability to external shocks, exacerbated by human envy and FOMO [00:06:17].
The AI Software Shock: A hyper-specific crisis has recently emerged within direct lending due to massive exposure to software companies. The release of advanced AI coding tools severely threatens the enterprise value of these historically "safe" software moats, triggering fear, redemption limits, and liquidity concerns in public direct lending vehicles (BDCs) [00:12:52].
Lessons from 1929: Drawing parallels to the Great Crash, Marks warns that introducing heavy leverage, selling highly illiquid assets to retail investors, and suffering from human psychology's tendency to mistake "hope for certainty" reliably leads to cyclical destruction [00:20:31].
The "Sea Change" Macro Reality: The private equity and direct lending boom relied heavily on a 40-year tailwind of declining interest rates. The recent 400-basis-point shock to interest rates fundamentally alters the math for buyouts, dropping PE returns, shrinking coverage ratios, and signaling a transition to an environment where only disciplined, conservative underwriting will survive [00:29:36].
[00:24:56] - Oaktree's Defensive Strategy: What's a Manager to Do?
[00:29:36] - The Intertwined Fates of Direct Lending and Private Equity
3. Detailed Thematic Summary
The Historical Evolution of Credit Markets [00:00:17]
The Quaint Beginnings: In the summer of 1968, the investment universe consisted almost entirely of high-grade bonds and standard equities [00:01:12]. Until 1977-1978, it was impossible for a company without an investment-grade rating (BBB or above) to publicly issue bonds [00:01:44].
The Milken Revolution: Michael Milken fundamentally changed finance in the late 1970s by applying risk/return frameworks to non-investment grade debt, arguing that speculative companies could issue bonds if yields were high enough to offset default risk [00:02:08]. This birthed a $1.5 trillion US high-yield bond market [00:02:21].
Private Equity is Born: High-yield bond capital in the 1980s enabled Leveraged Buyouts (LBOs), letting takeover artists acquire massive companies, effectively founding the industry that renamed itself Private Equity in the 1990s [00:02:51].
Securitization and Syndication: By the 1990s, banks syndicated non-investment grade loans to institutions, creating a broadly syndicated loan market now worth roughly $1.5 trillion in the US [00:03:29]. Tranching risk was spearheaded in the 70s and 80s by Lewis Ranieri at Salomon Brothers with mortgage-backed securities [00:03:06].
The Turning Point (2000s): After the tech bubble imploded in 2000, it led to the first three-year decline in the S&P stock index since the Great Depression [00:03:44]. This pushed investors toward "Alternative Investments," birthing the first $10 billion private equity funds [00:04:25].
The Direct Lending Boom: Post-2008, banks became heavily regulated. The booming PE industry experienced a lending vacuum, which was filled by "Direct Lending" (a subset of private credit), scaling the private credit sector from just $150 billion 20 years ago to over $2 trillion of direct loans issued over the last 15 years [00:11:06].
The "Grain of Truth" Foundation: All bubbles begin with a legitimate premise—the Nifty Fifty were indeed great companies, and the internet did change the world [00:06:48]. Direct lending initially offered high returns with robust structural protections.
The Envy Engine: Early success without the test of bad times spurs intense envy among outsiders. As Charles Kindleberger noted, seeing a friend get rich destroys rationality [00:07:15].
Erosion of Standards: Latecomers enter the asset class, demanding volume. Capital providers lower their underwriting standards and narrow yield spreads to deploy massive influxes of cash, operating under the illusion of low risk because private assets lack daily "mark-to-market" price volatility [00:09:38].
False Safety via Non-Volatility: Advocates touted high "risk-adjusted returns," when in reality, they were merely seeing high "volatility-adjusted returns" (Sharpe Ratios). Marks insists that lack of volatility does not equate to a lack of underlying fundamental credit risk [00:09:46].
The Software Debt Crisis and AI Disruption [00:12:52]
The Pivot to Tech: Historically, credit markets avoided tech due to a lack of hard assets. However, as PE grew desperate for scalable targets, they realized market-leading software companies had predictable subscription revenue (ARR), making them bankable [00:13:20].
Concentration Risk: Direct lenders funded massive software buyouts at extraordinary EBITDA multiples of around 20x [00:15:27]. The debt composition of software shifted drastically:
The Cockroaches in the Coal Mine: The mid-2025 bankruptcies of First Brands and Tricolor caught credit investors by surprise, raising questions about relaxed underwriting standards and public BDC vehicle carrying values [00:11:41].
The AI Shockwave: In November 2025, Anthropic released a devastatingly capable AI coding model, followed by task-automating plugins in January 2026 [00:15:58]. This proved humans were no longer essential for writing code, crushing the fundamental equity value and "moat" of thousands of PE-backed software companies [00:16:19].
Liquidity Panics in BDCs: By February 2026, retail investors in semi-liquid Business Development Companies (BDCs) realized the underlying assets were deeply exposed to this AI software risk. When redemption limits triggered, panic ensued regarding the validity of the reported Net Asset Values (NAVs) [00:16:40].
Lessons from the 1929 Crash Applied to Today [00:20:31]
The Three Pillars of Ruin: Reading Andrew Ross Sorkin's book on 1929, Marks highlights three structural parallels between the 1929 stock market and modern retail direct lending:
Selling complex financial instruments without regard for investor suitability [00:21:28].
The massive provision of leverage to magnify yields [00:21:28]. In the 1920s, margin loans funded up to 90% of stock purchases [00:21:51].
A severe mismatch between the fundamental illiquidity of the asset and the short-term redemption rights of the capital providers [00:21:28].
Oaktree's Contrarian and Defensive Stance [00:24:56]
Resisting the Pressure to Deploy: Marks admits that watching peers gather billions in AUM while staying disciplined is agonizing [00:25:28]. Nevertheless, Oaktree intentionally constrained growth. Their total AUM only doubled over the last decade, allowing them to reject sub-par underwriting [00:27:44].
Prudent Diversification Constraints: Oaktree restricted direct lending to just 20% of its performing credit portfolio, and it makes up less than 15% of the firm's total AUM [00:27:28].
Software Avoidance: Oaktree's software exposure is substantially less than peers, heavily weighted to first-lien debt, with virtually zero Payment In Kind (PIK) structures [00:28:37].
Institutional Priority: While mega-managers raised $40 to $50 billion from public retail vehicles, 80% of Oaktree's private credit capital remained strictly institutional, with just over $10 billion in public vehicles [00:28:44].
The "Sea Change": Private Equity's Reckoning [00:29:36]
The Great Tailwind: The perceived genius of private equity over the last several decades was heavily subsidized by a 40-year trend of collapsing interest rates, plummeting 2,000 basis points from 22.25% in 1980 to 2.25% in 2020 [00:30:42]. From 2009 to 2021, the Fed Funds Rate averaged just 0.5% [00:31:33].
The Rate Shock: Central banks broke the cycle, raising the Fed Funds rate to 5.25 - 5.5% [00:32:31]. A sudden 400 basis point increase threw "sand in the gears" of PE capital structures that were never stress-tested for higher servicing costs [00:33:09].
Shattered Valuations and Exits: Higher rates compress exit multiples and lower coverage ratios. Consequently, US PE funds only generated annualized returns of 5.8% between 2022 and Q3 2025, getting crushed by the S&P 500's 11.6% return over the same period [00:34:15].
The Reference Vault
4. Data & Figures
Data Point
Value
Context
Timestamp
US High Yield Bond Market Size
~$1.5 Trillion
Developed following the acceptance of non-investment grade debt in the late 70s.
The Cycle of Innovation and Bubbles (The Innovator, Imitator, Idiot Framework)
Application: Every financial innovation (like direct lending) starts with excellent returns for early adopters (Innovators). This breeds envy, drawing in massive institutional capital (Imitators). Finally, retail investors and desperate managers pour in at the peak, abandoning standards to deploy cash (Idiots), leading to inevitable collapse [00:08:13].
Volatility vs. Risk Disconnect
Application: Private credit assets don't have active public secondary markets, meaning they don't fluctuate daily in price (low volatility). Marketers weaponized this optical stability as "high risk-adjusted returns" (Sharpe Ratios) when, fundamentally, lending to levered sub-investment grade companies retains extreme underlying default risk [00:09:46].
The "Flawless to Hopeless" Pendulum of Investor Psychology
Application: Investors are rarely analytical weighing machines. When an asset class is popular, every flaw is ignored (flawless). When a shock happens (like AI disrupting software), the entire market pivots to sheer terror and treats every asset in the sector as doomed (hopeless) [00:18:06].
The Weighing Machine
Application: Sourced from Benjamin Graham and David Dodd, it is the mental model of the ideal investor—informed, methodical, and dispassionate. Marks points out that in the short run, especially during panic around software debt, investors rarely act as this weighing machine [00:17:52].
The 1929 Ruin Triad
Application: Total financial ruin occurs when three specific variables overlap: 1) Selling assets to financially unsophisticated retail investors, 2) Applying heavy structural leverage, and 3) Misaligning the fundamental illiquidity of the asset with the short-term redemption demands of the investors [00:21:28].
The "Sea Change" Macro-Tailwind
Application: Asset classes like Private Equity do not exist in a vacuum; they operate on macro tectonic plates. PE's historical success was largely driven by a 40-year macro tailwind of declining interest rates rather than pure operational alpha. A permanent shift to a higher interest rate regime fundamentally breaks the math on leveraged buyout models [00:30:37].
6. Anecdotes
The Quaint 1968 Baseline: Marks reflects on his entry into finance in 1968, noting the total absence of the exotic credit instruments we know today. The entire market consisted of standard stocks and ultra-safe high-grade bonds, providing a stark contrast to today's $2 Trillion direct lending universe [00:01:12].
The GFC Subprime Parallel: Marks recalls how banks structured residential mortgages into RMBS, obtaining AAA ratings on "liar loans." This anecdote serves as a historical warning for how financial engineering to meet demand inevitably sacrifices underwriting standards [00:04:57].
Anthropic's Shock to Software Debt: To illustrate technological creative destruction, Marks details the events of late 2025 and early 2026. Anthropic released an advanced AI coding model in November 2025, followed by automation plugins in January 2026. This changed the market's perception of software developers' moats overnight. Lenders instantly realized the underlying equity cushion protecting their software debt was evaporating [00:15:58].
Chuck Prince and the Urge to Dance: Marks recounts Citigroup CEO Chuck Prince's infamous 2007 quote on the eve of the GFC: "As long as the music is playing you've got to get up and dance." This perfectly encapsulates the agonizing peer pressure conscientious fund managers face when trying to stay disciplined while competitors raise billions by engaging in reckless behavior [00:25:16].
The 1980 Bank Loan: Discussing the "Sea Change," Marks shares a personal story of receiving a slip in the mail in 1980 notifying him that the interest rate on his bank loan had spiked to 22.25%. Comparing this to his ability to borrow at 2.25% in 2020 perfectly illustrates the 40-year super-cycle that enabled Private Equity's massive historical returns [00:30:42].
Bruce Karsh's Fall 2022 Trip: Marks recalls a trip he and Bruce Karsh took right after the pandemic ended. Karsh perfectly summed up the looming danger to PE: "A lot of private equity companies have been saddled with capital structures that didn't anticipate a 400 basis point increase in interest rates" [00:33:09].
Bob O'Leary's Gulf War Parallel: Bob O'Leary recently pointed out to Marks that the current direct lending panic mirrors the late 1980s and early 1990s when Oaktree started its first Special Credits fund. Back then, a new innovation (high yield bonds) was overindulged, and the market panicked due to a war in the Middle East. High yield ultimately recovered and performed great, suggesting direct lending will too—but only after it goes through a cleansing credit cycle [00:36:09].
7. References & Recommendations
People:
Michael Milken (Pioneer of non-investment grade debt / high-yield bonds)
Lewis Ranieri (Pioneer of Mortgage-Backed Securities at Salomon Brothers)
Charles P. Kindleberger (Author/Economist)
Warren Buffett & Charlie Munger
Mark Twain
Benjamin Graham and David Dodd
Andrew Ross Sorkin
Demosthenes (Ancient Greek statesman and orator)
Chuck Prince (Former CEO, Citigroup)
Books & Literature:
Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger
Security Analysis by Benjamin Graham and David Dodd
1929: Inside the Greatest Crash in Wall Street History and How It Shattered a Nation by Andrew Ross Sorkin
A Short History of Financial Euphoria by John Kenneth Galbraith (1994)
Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor (2000)
Specific Howard Marks Memos Referenced:
Cockroaches in the Coal Mine (November 2025)
What Does the Market Know? (2016)
The Race to the Bottom (February 2007)
Give Me Credit (2023 / "A year ago")
Sea Change (December 2022)
Companies & Tools:
Anthropic (AI models & plugins for automating software code)
Oaktree Capital Management / Brookfield
First Brands and Tricolor (Prominent mid-2025 bankruptcies triggering credit investor surprise)
References & Recommendations: Context and Relevance
People
Michael Milken: Cited as the architect of the high-yield bond market in the late 1970s. Marks credits Milken with the foundational framework that speculative companies could issue public debt if the yields compensated for default risk, essentially birthing the modern credit industry.
Lewis Ranieri: Mentioned as the pioneer of mortgage-backed securities (MBS) at Salomon Brothers in the 1970s. Marks uses Ranieri to trace the historical origins of "tranching" debt by seniority and risk.
Charles P. Kindleberger: Quoted to explain the psychological engine of financial bubbles. Marks uses Kindleberger's observation that "seeing a friend get rich" destroys rational judgment to explain the massive influx of retail and institutional capital into untested direct lending vehicles.
Warren Buffett & Charlie Munger: Buffett's "innovator, imitator, idiot" framework is used to map the lifecycle of the direct lending boom. Munger is referenced for his focus on human psychology, specifically how investors blindly trust new asset classes because they desperately wish for high, risk-free yields.
Mark Twain: Quoted for the famous adage, "History does not repeat itself but it does rhyme." Marks uses this to underscore that while direct lending is a "new" asset class, the progression of its bubble and subsequent panic is a perfectly predictable historical cycle.
Benjamin Graham and David Dodd: The fathers of value investing are referenced for their "weighing machine" analogy. Marks points out that during the AI software panic, credit investors acted purely on emotion and sentiment, failing to act as the dispassionate weighing machines Graham and Dodd described.
Andrew Ross Sorkin: Author of 1929. Marks relies heavily on Sorkin's analysis to draw a direct line between the structural flaws that caused the Great Crash (retail investors, heavy leverage, illiquidity) and the exact same dynamics present in modern public direct lending vehicles.
Demosthenes: Ancient Greek statesman quoted by Charlie Munger. Used to emphasize the danger of confirmation bias in investing: "For that which a man wishes, that he will believe."
Chuck Prince: The former Citigroup CEO is quoted for his infamous 2007 remark, "As long as the music is playing you've got to get up and dance." Marks uses Prince as the ultimate avatar for the agonizing peer pressure fund managers face to deploy capital recklessly during a bubble rather than sit on the sidelines.
Books & Literature
1929: Inside the Greatest Crash in Wall Street Historyby Andrew Ross Sorkin: Served as the core mental model for the latter half of the memo. Marks uses it to warn that human nature never changes, and the exact same mechanisms that destroyed retail investors in 1929 are currently active in direct lending BDCs.
Manias, Panics, and Crashesby Charles P. Kindleberger: Referenced as foundational reading for understanding the mechanics of financial euphoria, envy, and the inevitable erosion of underwriting standards.
Security Analysisby Benjamin Graham and David Dodd: Cited as the gold standard for methodical, fundamental valuation—a practice Marks notes was completely abandoned during the recent panic over software debt.
A Short History of Financial Euphoria(John Kenneth Galbraith) &Devil Take the Hindmost(Edward Chancellor): Mentioned in passing by Marks as his other favorite texts on historical market excesses, grouped alongside Sorkin's 1929 to emphasize that bubbles are a permanent feature of human nature.
Specific Howard Marks Memos Referenced
Cockroaches in the Coal Mine (November 2025): Referenced to show that Oaktree was actively tracking early warning signs of relaxed underwriting in direct lending, specifically citing the surprise bankruptcies of First Brands and Tricolor.
What Does the Market Know? (2016): Cited to explain market volatility. Marks uses this memo to explain how investor perception of software debt violently swung from "flawless" (ignoring all risks) to "hopeless" (ignoring all fundamentals) following the release of AI coding tools.
The Race to the Bottom (February 2007): Written right before the Global Financial Crisis. Marks references it to compare the pressure managers felt to deploy capital into bad subprime loans in 2007 with the pressure managers recently felt to deploy capital into overpriced software debt.
Give Me Credit (2023): Used to highlight Oaktree's contrarian stance during peak hype. While the rest of the market was exclusively obsessed with private credit, Marks insisted on maintaining a balanced portfolio of both private and liquid credit.
Sea Change (December 2022): The most macro-critical reference. This memo outlined the end of the 40-year tailwind of declining interest rates. Marks uses it here to explain why the fundamental math of Leveraged Buyouts and Private Equity returns is currently breaking down under the weight of higher borrowing costs.
Companies, Events & Tools
Anthropic: The AI research company whose November 2025 release of a powerful AI coding model acted as the "black swan" event for the credit markets. It proved human coders were becoming obsolete, instantly destroying the perceived enterprise value and "moats" of thousands of highly-levered, PE-backed software companies.
Oaktree Capital Management / Brookfield: Marks's own firm. Used extensively as a case study in disciplined portfolio construction. Marks highlights Oaktree's deliberate constraint on AUM growth, strict avoidance of software concentration, and refusal to aggressively market to retail investors.
First Brands and Tricolor: Two companies that unexpectedly went bankrupt in mid-2025. Marks cites them as the initial catalysts that caused credit investors to realize underwriting standards in direct lending had severely degraded during the boom years.
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Private Credit Sector Value (2006)
~$150 Billion
The total size of the private credit market 20 years ago.