1980s and, more recently, the run on Silicon Valley Bank in 2023.
But one unintended consequence of the relative stability of the traditional banking system was the migration of runnable structures into non-bank financial institutions operating beyond the direct protections of the Federal Reserve. The Global Financial Crisis( GFC) of 2008 – 2009 was the most severe manifestation of those vulnerabilities.
The Great Shadow Bank Run
“ We knew the long boom in credit in general and mortgage credit in particular exhibited all the classic signs of mania, including the widespread belief that housing prices would never fall to Earth … But we didn’ t appreciate the extent to which non-banks were funding themselves in runnable short-term ways.”
— Timothy Geithner, 75th US Secretary of the Treasury
Postmortems on the GFC revealed many contributing factors, but at the most fundamental level, it was a classic financial run. One reason it caught nearly everybody by surprise may be because most people assumed systemic runs were a relic of the past. Ironically, this confidence was also a key contributor to the complacency that allowed a shadow banking system to grow larger than the traditional banking system itself.
Like traditional banks before them, many shadow banking institutions at the turn of the 21st century funded longduration or difficult-to-value assets using short-term liabilities that depended heavily on investor confidence. Several parts of the shadow banking system proved particularly vulnerable:
1. Mortgage Brokers: Independent mortgage brokers had strong incentives to prioritize loan volume over underwriting quality. Many borrowed heavily to fund mortgage inventory before selling the loans further upstream in the financial system. If financing suddenly disappeared, many could face insolvency.
2. Government Sponsored Entities: Government-sponsored entities( GSEs) such as Freddie Mac and Fannie Mae held or guaranteed several trillion dollars of mortgages while relying on relatively thin equity capital and extensive debt financing.
3. Investment Banks: Investment banks such as Lehman Brothers and Bear Stearns purchased mortgages from independent brokers, packaged them into securitized products and sold them to investors. Inventories were often financed with short-term commercial paper and repos. If this financing was suddenly withdrawn, the institutions could experience forced selling, severe liquidity stress and insolvency.
4. Money Market Funds: Money market funds accepted cash from investors and invested a portion in mortgage-backed securities from investment banks and in open markets. Under normal conditions, money market fund shares were expected to maintain a stable $ 1 net asset value( NAV). During periods of stress, however, investors could suffer losses if the value of the underlying securities deteriorated.
The danger of this structure becomes obvious when viewed as an interconnected financial supply chain. Yet within each segment, participants had clear and powerful incentives to continue extending credit and deploying capital. This explains how locally rational behavior aggregated into a collectively irrational outcome.
When the underlying narrative began to crack, a run began on mortgage brokers and quickly spread upstream throughout the financial system. The Federal Reserve aggressively expanded emergency interventions to stabilize the system, but the shadow banking system operated too far beyond the Fed’ s jurisdiction. This allowed runs to spread much further than otherwise would have been the case.
The GFC ended when the Fed combined use of emergency powers with government support to recapitalize the banking system. The vulnerabilities that the GFC exposed in the global financial system were shocking, but with the passage of nearly 20 years, it appears that similar vulnerabilities may be emerging once again.
Semi-Liquid Private Markets Funds
“ For practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind.”
— John Kenneth Galbraith
In the 2020s, the investment industry commenced an aggressive push to democratize private markets. As part of this effort, many firms launched a new class of funds offering private-markets exposure in a semiliquid vehicle. The stated value proposition is faster exposure to private assets than traditional drawdown funds, combined with the option for periodic redemption, typically on a quarterly basis. The problem, however, is that these funds suffer from several, well-known vulnerabilities.
• Capital Saturation: Private markets have experienced a multi-decade influx of capital, and multiple warning signs suggest significant overcapitalization. Examples include data suggesting congested exit environments for private equity, rising defaults in private credit and indicators of potential fraud in valuation practices.
• Optimistic Valuation Practices: Early returns of many private markets funds— particularly those investing heavily in secondary interests in private equity funds— may be reporting substantially inflated returns due to the use of valuation practices allowed under FASB’ s ASC 820 guidance. Specifically, this accounting practice allows funds to purchase secondary positions in private equity funds at a discount to NAV, immediately mark them back to NAV and then record substantial one-day gains. If the exit value of these investments fails to match expectations, realized gains may be significantly less than originally assumed.
• Vulnerability to Financial Runs: The final vulnerability is the most well understood historically. The liquidity offering of semi-liquid private markets funds functions well if liquidity demands are uncorrelated among investors. But if confidence suddenly evaporates, history demonstrates that liquidity demands can quickly become highly correlated.
On February 18, 2026, Blue Owl announced it had ended quarterly redemptions on its OBDC II private credit fund. The reaction in the market mirrored what many of their predecessors had experienced. Redemption requests from semi-liquid private markets fund investors spiked,
www. MoAF. org | Fall 2026 | FINANCIAL HISTORY 23