The list is not small.
Private Equity Fudged Asset Prices
First, we could start with how pricing is fudged in private credit. We described the accounting rules and the wrong incentives for fudging the numbers, which are very similar to the GFC.
We described in an earlier post the regulatory arbitrage.
The infamous FAS 157 (the infamous mark-to-model that was widespread in Basel II before the GFC and then converged to IFRS 13). Today, it has been replaced by ASC 820, and its use is widespread in private equity.
Not mark to model, just mark to fudge.
https://x.com/GraphCall/status/1979673257273139338
And we are happy that Mr. Gundlach is picking up on that, but our earlier post was about why it is so.
He also said:
“
Eight managers having the same position. One is marking it at 95 and one at 7.
”
Delinquency reporting Fudged
The next fudge is how bank analysts are left in the dark with delinquencies.
The new rules were finalized in mid-2025 by the FDIC, Federal Reserve, and OCC, under the FFIEC. These changes were a response to the FASB’s Accounting Standards Update (ASU 2022–02), which revised how troubled debt restructurings (TDRs) and vintage disclosures are handled.
Timing
Announced / finalized: July 2025
Effective: Dec 31, 2025 Call Reports
Early adoption: Q3 2025
BEFORE
A modified loan (TDR-style) stayed flagged essentially for life (legacy practice since the ~1970s).
AFTER
Banks only report loan modifications for 12 months after modification.
After 12 months → it disappears from the “modified loan” disclosure bucket.
https://www.globest.com/2025/09/04/new-rule-lets-banks-drop-troubled-loans-after-one-year
WHAT HAPPENS
In practice:
Loan modification = proxy for borrower stress.
Removing it after 12 months → makes the loan look “clean” again, even if structurally weak.
A borrower can:
Get terms reduced (distressed)
Pay for 12 months
Disappear from modified / stressed categories
Re-enter the “performing-looking” universe
BAFFLE THEM WITH BULLSHIT
Why regulators did it (official rationale)
The regulators’ justification:
Alignment with accounting changes
- In 2022, FASB eliminated TDR (Troubled Debt Restructuring) accounting
- Replaced it with broader “loan modifications to borrowers in financial difficulty”
Reduce reporting burden / simplify disclosure
Old system was seen as:
- “Overly complex”
- “Inconsistent across banks”
Overly complex? How do analyst track the delinquencies now?
CUT THE NONSENSE!, WILL YOU?
Industry pressure
The banking lobby (e.g., BPI) pushed for:
- Shorter observation windows
- A more “current” snapshot of stress
THE 1st ANALYTICAL PROBLEM THIS CHANGE CREATES:
You can’t track evolution properly (it’s called horizontal analysis).
Previously:
- You could track cumulative stress
- Modified loans = stock of past distress
Now:
- You only see a rolling 12-month flow
Result:
A loan modified 13 months ago = invisible, even if still fragile
As one critique puts it:
It allows banks to “roll off” troubled loans from reporting.
THE 2nd ANALYTICAL PROBLEM THIS CHANGE CREATES:
Artificial improvement in credit metrics
Metrics impacted:
- Non-performing loans (NPLs)
- Special mention / criticized loans
- Modified loan ratios
These can now improve mechanically, not economically.
Example:
Bank modifies $10bn in loans in 2024
By 2026:
Most vanish from disclosure
Even if still risky
Once again, it will show indirectly via shrinking NIM while NPLs “improve.” Yeah, right.
Why deteriorating?
Because the borrower is paying a lower negotiated amount.
THE 3rd ANALYTICAL PROBLEM THIS CHANGE CREATES:
This will show in deteriorating NIM, but it is delayed and kind of a “ghost,” not an early warning signal you can track with cumulative NPLs.
THE 4th ANALYTICAL PROBLEM THIS CHANGE CREATES:
Throw your ratios away!
Very large headache:
Pre-2025:
“Modified loans” = lifetime stock
Post-2025:
“Modified loans” = last 12 months only
You cannot compare:
2024 vs 2026 ratios
Without major adjustments
CRE book zombification
This is where it matters most:
CRE loans often:
Get extended
Are restructured repeatedly
“Extend and pretend”
With a 12-month window:
Chronic stress can look like resolution
Coincidences and lenient language on the use of fair value accounting?
Martin Gruenberg was ousted on allegations of “sexual harassment,” and after that you have this letter from the FDIC going into effect.
Another interesting point:
The broader shift aligns with:
A pro-industry regulatory tone (2025 onward)
Multiple deregulatory moves (capital, supervision, reporting)
Before 2025, the language on fair value accounting was pretty harsh for institutions using it.
This language was removed in the middle of 2025. It ties to the short position we put on in October/November last year.
More flying blind: no CDS signal for private credit
Credit Default Swaps (CDS):
A standardized reference entity
Transparent pricing
Frequent trading
Private credit loans are:
Bilateral (or small club deals)
Illiquid
Customized (covenants, structure, seniority)
So you can’t really build a tradable CDS on them.
You have maybe covenant signals like amendments, waivers, and PIK toggles. Boy, people should have read into PIK toggles for the contagion in consumer lending securitization.
So those changes in terms are lagging and opaque, but they were there, and everyone was happily ramping in la-la land. Everything is fine in ABS and junk bonds.
Please. Shoot me.
Fudging CDS Pricing with Absurdities
h/t @Macronomics1
In credit default swaps (CDS), the treatment of restructuring as a credit event differs significantly between standard contracts for European (and many non-North American) reference entities versus those for North American (primarily US) corporate reference entities. This stems from ISDA documentation conventions, market practices, and regional differences in bankruptcy/restructuring laws.
Since the 2009 “Big Bang” Protocol, standard single-name CDS on North American corporate reference entities (and related indexes like CDX.NA) generally exclude restructuring as a credit event. This is often denoted as “XR” or “No Restructuring” (or XR14 under 2014 Definitions).
Like restructuring is not a credit event? It defies all logic. It’s delirium, really.
And then the INFAMOUS SOFR: A Fudge in and of Itself
SOFR’s backward-looking nature
What does “backward-looking” mean?
SOFR is published daily by the Federal Reserve Bank of New York, based on actual overnight Treasury repurchase (repo) transactions that occurred the previous business day.
Unlike LIBOR, which was forward-looking (i.e., banks estimated borrowing costs for future periods), SOFR reflects rates that have already been paid. This makes it backward-looking.
Why is SOFR backward-looking?
“Transparency and reliability”: SOFR is based on observable, transaction-level data from the Treasury repo market, which is one of the most liquid and transparent markets in the world.
“Reduced manipulation risk”: Since SOFR is based on actual transactions, it is much harder to manipulate compared to LIBOR, which relied on expert judgment and estimates.
The LIBOR scandal and the manipulator is not who you think it was.
What happened: LIBOR (London Interbank Offered Rate) was the dominant global benchmark for short-term interest rates. It was set based on submissions from a panel of banks, which estimated the rates at which they could borrow from each other.
Manipulation: During the 2008 financial crisis and beyond, it was revealed that banks were submitting false rates to benefit their trading positions or to appear healthier than they were. This led to widespread manipulation and legal action.
False incriminations: Some traders and bankers were wrongly accused or pressured into admitting wrongdoing, meaning they were wrongly accused and pressured into admitting manipulation.
Overturned convictions in the US and UK
In 2022, the US Court of Appeals for the Second Circuit overturned the convictions of Matthew Connolly and Gavin Campbell Black, ruling that prosecutors had not demonstrated “fraudulent intent” in their LIBOR submissions. This led to other similar convictions in the US being overturned.
In the UK, the Supreme Court allowed the appeals of Tom Hayes and Carlo Palombo in July 2025, quashing their convictions for conspiracy to defraud related to LIBOR manipulation. The court found that the original trials had not properly considered the broader context, including evidence that central banks and governments were aware of and even encouraged rate-setting practices during the financial crisis.
Many traders initially admitted wrongdoing to prosecutors, but these admissions were later used against them in trials. There is evidence that prosecutors focused on low-ranking employees rather than pursuing top-level executives, and that some admissions were made under pressure.
Suppressed evidence and broader context
The BBC and other investigations revealed that evidence implicating central banks and governments in pressuring banks to set LIBOR at certain levels was suppressed during the trials. This context was not presented to juries, which may have led to wrongful convictions.
https://www.bbc.com/news/articles/cr5vgqr8p14o
So not only the manipulation cases were overturned but the BBC investigation implies that the Governments and the central banks were putting pressure to “set LIBOR at certain levels”.
SO THE MANIPULATOR IS NOT ALL WHO YOU THINK IT WAS !
But post Libor enteres a new way to set the benchmark that is ridiculous
But then interbanking signals of problems are basically suppressed if a backward-looking system is used, because rates are supposed to anticipate and be forward-looking. That is clearly explained by Thomas Tooke, an eminent monetary writer of the 19th century who had a chair of statistics named after him.
This is how he asks the question.
Past profits are irrelevant, yet we are using an irrelevant set of data. In other words, the SOFR rate that is used as a benchmark is irrelevant.
The SOFR system is a gigantic violation of interest rate theory as explained by Thomas Tooke. Setting rates in LIBOR actually provides a signal of what market participants expect about the future—different parameters and variables that market operators expect in the future.
So the market signal is supposed to be SOFR futures now, instead of what has been for centuries to role of a market for interest rates WHICH HAS TO BE FORWARD LOOKING.
SUMMARY:
The mark-to-market of private equity is a fantasy due to ASC 820.
The reporting of delinquencies has been made deliberately opaque.
The exclusion of restructuring as a credit event in US CDS is an absurd joke.
Regulators have removed incriminating language on the use of fair value accounting.
The supposed manipulation of LIBOR by traders, used to justify the shift to SOFR, is undermined by reversals of legal decisions and data showing that governments were pressuring banks to “fix” LIBOR. (the manipulator was not who it was initially portrayed to be)
And the new benchmark used (SOFR), justified by a flawed LIBOR manipulation narrative, is fundamentally flawed.
It’s only fun for as long as the credit cycle does not reverse anyway, despite all the lipstick on the pig
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