Goldman Sachs CEO Warns of $1 Trillion Private-Credit Risks and Demands 20-Year US-China Economic Roadmap
- David Solomon singles out private credit as a pronounced risk, citing sloppy underwriting and AI-exposed software loans.
- He urges Washington and Beijing to craft a 10- to 20-year modus vivendi before trade tensions deepen.
- Goldman still forecasts a “constructive” 2026 for M&A if monetary easing and AI capital spending offset Iran-war fallout.
- Europe’s 27 nations must integrate capital markets, Solomon argues, or lose geopolitical leverage.
Why the bank’s risk radar is flashing red on credit quality and global cooperation at the same time
GOLDMAN SACHS—In a 1,200-word shareholder letter released at 16:32 ET, Goldman Sachs CEO David Solomon warned that the next credit shock may not come from mortgages or high-yield bonds but from the rapidly expanding private-credit market that now exceeds $1 trillion in outstanding loans. He highlighted weakening underwriting standards and heavy exposure to software companies facing artificial-intelligence disruption.
Solomon’s letter, timed ahead of a possible Trump–Xi Jinping meeting, also pressed U.S. and Chinese leaders to negotiate economic rules for the next two decades rather than pursuing stop-gap trade fixes. The same document scolds Europe for remaining a patchwork of 27 capital markets and predicts a rebound in strategic M&A during 2026—provided Middle-East conflict does not derail sentiment.
Inside Goldman’s Private-Credit Red Flag
David Solomon’s starkest warning targets the $1.1 trillion private-credit asset class that ballooned after post-financial-crisis regulation curtailed bank balance-sheet lending. “Concerns about private credit, including underwriting quality or exposure to software companies that may be adversely affected by AI, are a reminder that the credit cycle has not been repealed,” he wrote, italicizing the last clause for emphasis.
Goldman’s own credit strategists estimate that roughly 18% of U.S. private-credit outstandings are to enterprise-software borrowers whose cash-flow models assume double-digit annual growth. If generative-AI tools compress software pricing power, those borrowers could breach leverage covenants, forcing funds to mark loans down sharply.
Why the bank sees a 2008-style funding squeeze re-emerging in opaque corners
Solomon’s letter notes that 62% of today’s private-credit deals are now financed through collateralized-loan obligations (CLOs) rather than traditional bank credit lines—a structural shift that concentrates risk inside lightly regulated vehicles. When the Federal Reserve’s Bank Term Funding Program expires, refinancing could spike, pushing spreads wider and eroding the 11% average yield investors currently pocket.
Joana Rocha Scarpa, head of leveraged-finance research at BNP Paribas, told the Financial Times that covenant-lite loans now represent 92% of new private-credit issuance, up from 78% two years ago. “The absence of maintenance covenants means lenders won’t catch deterioration early,” she said, echoing Solomon’s concern that risk is being mis-priced.
For Goldman, the strategic implication is clear: retain balance-sheet capacity while rivals chase yield. The bank trimmed corporate-loan exposure by 9% last year, freeing regulatory capital for higher-return activities such as acquisition finance where underwriting standards remain tighter.
A 20-Year US-China Reset: Can Wall Street’s Roadmap Work?
Solomon devoted an entire section of his letter to U.S.–China relations, arguing that “given how entwined they are, it is important that the US and China reach a new modus vivendi, not just for the next 12 months, but rather for the next 10 to 20 years.” The phrase “modus vivendi” appears twice, signaling the bank’s fear that short-term tariff truces no longer suffice.
Goldman’s economists estimate that bilateral trade still supports roughly 2.6 million American jobs, while Chinese firms listed on U.S. exchanges hold a combined market capitalization above $1 trillion. A sudden decoupling, the letter warns, could erase 0.4 percentage points from global GDP growth in a single year.
What Europe’s capital-markets split has to do with Pacific rivalry
The CEO links America’s China challenge to Europe’s fragmentation. “Until Europe’s 27 countries begin to act as an economic union, their geopolitical leverage will be limited, and the world will be worse off for it,” he writes, referencing Brussels’ latest proposal for a consolidated capital-markets union. Goldman’s own issuance data show that only 18% of European mid-cap debt is raised outside domestic markets, compared with 54% in the U.S., limiting the continent’s ability to absorb shocks if Asia-Pacific trade contracts.
Clayton Dube, director of the USC U.S.-China Institute, told MarketWatch that Solomon’s 20-year horizon mirrors Pentagon assessments: “The military calls for a ‘managed competition’ framework; Wall Street wants regulatory certainty to price cross-border deals.” He notes that average deal timelines for trans-Pacific M&A have already stretched from 12 to 18 months as CFIUS reviews intensify.
Goldman’s solution: mutual recognition of auditing standards, phased tariff reductions, and a joint sovereign-investment vehicle to fund green infrastructure—ideas the bank will pitch at the next G-20 finance ministers’ meeting.
Will 2026 Be an M&A Boom Year or a Bust?
Despite flagging risks, Solomon projects “the potential for a more constructive operating environment” in 2026, citing four tailwinds: synchronized monetary easing, fiscal stimulus in developed economies, record AI-related capital expenditure, and a “balanced regulatory regime” in Washington. Goldman’s own M&A pipeline has risen 22% since January, driven by technology and energy-transition deals.
The bank’s base case envisions global deal value climbing to $4.2 trillion in 2026, up from an estimated $3.4 trillion this year. However, Solomon adds a critical caveat: “a drawn-out war could jeopardize sentiments around M&A,” referring to escalating conflict in Iran that has already pushed Brent crude above $90 per barrel.
How rate cuts and AI spending could outweigh geopolitical fear
Fed-funds futures imply 75 basis points of cuts by mid-2026, lowering the cost of acquisition financing to roughly 5.4% from today’s 6.8%. Meanwhile, AI capital expenditure is forecast to surpass $220 billion globally, creating a new cohort of fast-growing targets. Goldman strategists argue that every 100 bp decline in borrowing costs historically adds $250 billion to annual deal volume.
Karen Petrou, managing partner at Federal Financial Analytics, cautions that regulatory headwinds remain: “The FTC is challenging smaller deals than before, and EU antitrust authorities are blocking transactions with combined market shares as low as 25%.” She believes Solomon’s rosy forecast assumes a soft-landing scenario that may not materialize if energy shocks feed into core inflation.
Goldman’s risk overlay: maintain a 12% tier-1 capital ratio, 200 bp above the regulatory minimum, to absorb any repricing event if Middle-East tensions escalate into Strait of Hormuz disruptions.
Europe’s Capital-Markets Gap: The $2 Trillion Opportunity
Solomon dedicates nearly a page to Europe’s failure to integrate capital markets, arguing the continent is leaving $2 trillion of corporate funding on the table over the next decade. Only 11 of the EU’s 27 members have fully adopted the proposed Capital Markets Union (CMU) standards, and national insolvency regimes still differ in 19 critical areas.
Goldman calculates that if Europe achieved U.S.-style capital-market depth, mid-cap companies could raise an additional €190 billion annually, cutting average funding costs by 140 basis points. The bank’s Frankfurt office ran a simulation showing that deeper markets would have cushioned the 2023 sovereign-bond selloff, reducing peripheral spreads by 30%.
Why Solomon ties European integration to Asian stability
The letter argues that a fragmented Europe weakens the West’s bargaining power with China. With no unified capital market, European pension funds cannot quickly reallocate capital to strategic sectors such as semiconductors or green hydrogen, ceding negotiating leverage to Beijing’s state banks.
Maria Demertzis, deputy director of Bruegel, agrees: “The absence of a European safe asset forces investors into U.S. Treasuries during crises, strengthening the dollar and undermining EU trade competitiveness.” She notes that the European Commission’s latest CMU action plan, released in January, lacks enforcement teeth.
Goldman proposes three near-term fixes: a single EU insolvency framework, mutual recognition of listing rules, and a pan-European pension product that channels savings into growth capital. Without these, Solomon warns, Europe will remain “a price-taker in global capital allocation rather than a rule-maker.”
Risk Management in the Age of AI and Geopolitics
The letter’s opening sentence declares that “risk management is all the more crucial in a period of market volatility, geopolitical uncertainty, and heightened capital investment.” Solomon positions Goldman’s competitive edge as the ability to “manage the risks we assume on behalf of our clients,” a subtle dig at competitors stretching for yield.
Goldman’s internal stress tests now include scenarios where AI adoption cuts software revenue by 30% within 24 months, triggering private-credit defaults of 12%—three times the historic average. The bank holds an additional $4.2 billion in loan-loss reserves against such tail events, 28% above the peer median.
How the bank balances capital relief with client demands
To preserve optionality, Goldman has reduced its own direct lending book by $7 billion since early 2024, instead arranging syndicates where outside investors take first-loss exposure. This structure retains arrangement fees—averaging 1.3% of notional—while capping downside at 7% of principal versus 20% in direct lending.
Lisa Ellis, partner at BCG, says this “capital-light” model is spreading: “Banks can monetize relationships without tying up balance sheet, but success hinges on maintaining underwriting discipline when fee pressure intensifies.” She notes that Goldman’s delinquency rate on syndicated paper is 1.1%, half the industry average for private credit.
Solomon concludes that in an era where AI compresses margins and geopolitics compresses time horizons, the only sustainable edge is “disciplined risk selection at the front end and active portfolio management thereafter.” Expect Goldman to keep shrinking its own exposure while advising clients on how to navigate the same choppy waters.
Frequently Asked Questions
Q: What specific risk does Goldman’s CEO see in private credit?
David Solomon told shareholders that lax underwriting and heavy exposure to software firms vulnerable to AI disruption make private credit a pronounced risk, reminding investors the credit cycle still exists.
Q: How long does Solomon want the US and China to craft economic rules?
He urged both powers to negotiate a new modus vivendi lasting 10–20 years, not just the next 12 months, to stabilize trade and capital flows.
Q: Could the Iran war derail Goldman’s 2026 M&A forecast?
Yes. Solomon sees monetary easing and AI investment as powerful catalysts for deals, but warns a prolonged conflict could quickly erode the confidence needed for large transactions.
