Is the $5 trillion credit powder keg sounding the alarm? Goldman Sachs president warns of a systemic crisis caused by defaults.

Goldman Sachs Group President John Waldron stated that the explosive growth of credit over the past decade could have a disastrous knock-on effect if the situation worsens. Waldron noted that total borrowing in high-yield bonds, leveraged loans, and private credit has reached approximately $5 trillion, with private credit being the primary driver of this growth.

“There has been a significant surge in credit issuance over the past decade, primarily in private credit—there has been some growth within the banking system, but the vast majority has come from private credit,” Waldron said during a panel discussion at the Semafor event in Washington on Thursday (October 16). “We could, and likely will, see some defaults in that sector, and if we do, it will be very problematic.”

In recent weeks, three alleged fraud incidents have emerged in the credit market, heightening concerns about potential deeper risks. On Thursday, both Zions Bancorp. and Western Alliance Bancorp. said they had become victims of fraudulent lending to funds investing in distressed commercial mortgages. Last month, subprime auto lender Tricolor Holdings went bankrupt, followed shortly by auto parts supplier First Brands Group, both cases linked to fraud allegations.

Waldron cited the risk of a "two-speed economy," suggesting that recent business failures could indicate "difficulties facing the bottom of the economy, where previously there was a flood of credit."

The recent wave of bankruptcies has disrupted credit markets and led to losses for banks and investment firms. JPMorgan Chase & Co., which took a $170 million loss from the Tricolor Holdings incident, warned that "there may be more such 'cockroaches' (potential risks) out there."

Dimon's comments sparked outrage among rival private equity firms, which interpreted them as a scathing comment on insufficient due diligence in their deals. Marc Lipschultz, CEO of Blue Owl Capital Inc., responded that the problem lies in bank-dominated lending practices and that they should perhaps first examine their own books to identify more "cockroaches."

"I have to say, I'm very concerned about this cockroach discussion," Waldron said Thursday. "It seems to me that there's some antagonism between the private credit community and Dimon."

But Waldron ultimately emphasized that private credit institutions and banks are part of the same ecosystem and shouldn't be pitted against each other.

"I really don't understand why people treat private credit and lending within the banking system as two separate things. They're part of the same ecosystem," he said. If a crisis occurs in the future, "everyone involved in the system will be affected."