A quick programming note: Dry Powder will be off on Sunday and back in your inbox on Wednesday. Happy Thanksgiving to all. Now, the main event…

Last week, I sat down with Mike Mayo, the esteemed longtime bank analyst at Wells Fargo, to discuss the $2 trillion elephant in the room. As my readers well know, there’s metastasizing concern on Wall Street about the fast-growing private credit industry, where high leverage and a lack of transparency are fueling fears of potential financial contagion as the economy shows signs of stress. Jamie Dimon has been talking about “cockroaches” in the credit markets. Howard Marks has referenced the “cockroaches in the coal mine.” Jeffrey Gundlach has described an epidemic of “garbage lending” akin to the subprime mortgage shenanigans of 2006.

Mayo, for his part, is neither an alarmist nor a champion of private credit. “I don’t cover, nor have conviction about, private credit, or non-banks,” he told me. But the debate has been intense, to put it mildly. Mayo said he hears it all the time from the Wall Street banks he covers as an analyst, and from the institutional investors who have material equity stakes in Wall Street banks. All they want to talk about, Mike said, is private credit.

I’ve learned quite a bit about private credit as part of the research and writing for my new book, out next year, about Apollo, perhaps the leading progenitor of this surging shadow market. Of Apollo’s $908 billion in assets under management these days, some $723 billion is in private credit, with most of the rest in its traditional private equity business. (Apollo has originated $273 billion in credit-related assets in just the last 12 months.) And Marc Rowan, the C.E.O. of Apollo, is perhaps the most vocal cheerleader for the industry, and the leading critic of what he has deemed “hysterical” headlines about America’s financial health.

To get to the bottom of the matter, Mike and I had a conversation with a group of his traditional bank institutional investors about the ramifications of private credit’s explosive growth. A transcript of the conversation, published by the Wells Fargo research department, can be found here. “The reason this matters,” Mike said, “is that private credit is not just a competitor to the banks. It’s a potential systemic factor. If something breaks, the ripple effects could be significant. So for now, the debate is fierce, the stakes are high, and the future credit markets may hinge on how these two worlds coexist.”

After Mike circulated the transcript of our conversation more broadly, he got an earful. “The reaction to that was nothing short of, ‘Wow,’” he said. “I have not seen this level of polarization in years—private credit versus the banks. It’s certainly a debate that’s heating up at the extremes, and with some hyperbole.” I wasn’t surprised: The cockroach discourse has become one of the most divisive issues in the industry since… 2008.

The view among private credit advocates, Mike said, is that the Wall Street banks “don’t understand how to run their business.” They cite the recent bankruptcies of First Brands and TriColor—deals that originated in the banking sector, not among the alternative asset managers. (Indeed, Apollo made a killing by shorting the First Brands debt.) Put another way, the private credit guys’ attitude toward the banks is, “We’ve eaten your lunch for the past 15 years.” The banks counter that “private credit is reckless and greedy, period, and they’ll get their comeuppance,” Mike said. What is abundantly clear, he continued, is that “the battle lines are being drawn, and even the greatest minds in finance seem split across both ends of the spectrum.”

The polarization reminds him of what occurred leading up to the 2008 financial crisis, when the debate centered on whether housing was a bubble and whether mortgage-backed securities were going to be a problem. (Yes and yes, in retrospect.) “I’m not a non-bank analyst,” Mike reiterated. “I cover a regulated industry, not the unregulated shadow banking sector. Banks look fine today. What happens outside that space isn’t my day job, right? However, I can’t ignore this debate, because banks and private credit are frenemies.”

The crux of the disagreement, Mike suggested, is both philosophical and temperamental. “The one word that sums up the concern from the bank investor side would be ‘opaque,’” he said. “I think a lot of investors and banks don’t know what they don’t know, whereas what I hear from the experts on the private credit side is, ‘You just have to do your homework, dig deeper, and you’ll better understand the business models and why they make the money they do.’” Bank investors are “on edge,” he said, while alternative asset investors are “much more confident.”

But of course, he added, “Somebody’s wrong.” And however long the stalemate lasts—a few weeks, or many months—“eventually something will happen.” The general consensus among the bank investors he talks to is that Wall Street banks should be fine, regardless. And there shouldn’t be contagion risk among the non-bank players like Apollo, Blackstone, KKR, Ares, Blue Owl, etcetera, which typically have a wide range of risk profiles and underwriting standards.

But as private credit has grown, and some lenders have taken on higher-risk loans in search of higher returns, there are fears that the market has actually become less diversified. “I think the concern is that in times of risk, the correlation among many players is often one, and there’s a lack of differentiation,” Mike said. “People are just much more aware and attuned to the potential risks.”

A few days after Dimon made his comment about “cockroaches” in the credit markets, Mike had a meeting with the JPMorgan C.E.O. to discuss his concerns. Dimon, he said, “doubled and tripled down” on his worry that “the markets are too complacent about the quality of credit, that competition has been aggressive, and that the next cycle is likely to see a greater-than-expected level of losses.” Nobody Mayo has talked to worries about private credit becoming a “systemic” problem, he stressed. “Many have asked the question, however.”

No surprise, the folks at Apollo have a very different view of the private credit dynamic, and they were concerned that my concerns about it, shared with Mike’s institutional investors, were leaving some investors with the wrong impression. In a presentation to research analysts and investors on Monday, Rowan sought to bust some of the myths that have emerged about the private credit market. Noah Gunn, Apollo’s chief of investor relations, said the firm is “continuing a longer-term story here, one of tremendous success, profitable growth and value creation delivered consistently over time.”

Marc himself opened by quoting from the 1841 book by Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds, about financial bubbles through the ages. “We tend to go mad in herds, but only regain our sanity one by one,” Marc said, paraphrasing Mackay. “Let’s have this be the start of that process, including for many people who have covered us, followed us, been engaged with us for a long time.”

Further, Marc made it clear he had no patience for the doubters. “You don’t get to be large in any market unless you are serving a societal good,” he said. “We are large and we are serving a societal good everywhere in the world, not just in the U.S., but everywhere you look.” He said the firm’s trajectory continues to be “upward and to the right” and he does not expect the private credit market to peak until 2050. “This, again, is not a surprise. We have been doing this a long time. We were very, very fortunate to have gotten to scale and to have built the origination of machinery before anyone even thought about retirement services and linking to asset management.”

He also spoke about the differences among the alternative asset managers—firms that prefer a so-called “asset-lite” model, such as Blackstone and BlackRock, which invest in private credit on behalf of the limited partners in their funds but do not take principal risk; and firms like Apollo, which is eager to own as much as 30 percent of the credit assets it originates while syndicating out the rest. “We have spent more than $12 billion and nearly 15 years, and have 5,000 people doing this,” Marc said of Apollo’s origination business. “No one else has done this. No one else is close to it.”

He then went on to attack various misconceptions about the private credit business. “Investment-grade private credit is almost always rated,” Marc said. “It’s not opaque. It’s actually totally transparent. You actually get borrower-level financials and real due diligence.” And as for people who complain that private credit is not priced on a daily basis? “Nah,” he said, pointing to the private credit E.T.F. that Apollo has created with State Street. “It’s priced every single day.” In another part of Apollo, he noted, there is $6 billion worth of trading in private credit daily. “If we sent you a trading run for private [investment-grade debt] and public [investment-grade debt], you would not be able to tell the difference in market depth, market pricing, market anything,” he said.

Marc also brushed off concerns about systemic risk. “Rather than concentrating credit on the balance sheet of government-guaranteed, short-dated funded, levered institutions, you are now democratizing credit and the need for credit throughout the financial system,” he argued. “As I said, I think people have really just lost their minds, and the headlines get more and more hysterical and have almost nothing to do with the substance.” (These are just some of the highlights from Apollo’s 90-minute presentation. Aficionados can find the full 100-page PowerPoint on Apollo’s website.)

I’m not smart enough to know whether we really are in the golden age of private credit or whether the seeds of the next financial crisis have already been sown. Is Rowan right? Or Dimon? Or Gundlach? I honestly couldn’t tell you. But, as Mike Mayo said, one of them is wrong. And it’s going to be a lot of fun—as long as it’s not calamitous and “systemic”—finding out who.

Happy Thanksgiving, everyone. I’ll see you in a week.

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