In Top Takeaways from Oaktree’s Quarterly Letters (December), Howard Marks revisits a recurring but often misunderstood theme in credit markets: the difference between structural fragility and behavioral excess. In his quarterly Takeaway, Market Outlook: Systemic or Systematic?, Marks challenges the instinct to extrapolate isolated credit failures into broader conclusions about the health of the financial system.
He begins by reframing recent stress in sub-investment grade debt as neither surprising nor unprecedented. “The well-publicized credit episodes of the last few months aren’t an indictment of the whole sub-investment grade debt market, or the whole private credit market.”
Instead, Marks argues they serve as “a reminder that the yield spreads people care about so much are there for a reason: because sub-investment grade debt entails credit risk.”
This distinction is critical, particularly after long stretches of benign conditions, when risk premiums can feel theoretical rather than real.
Marks emphasizes that complacency tends to build gradually. “When times have been good for a while, the possibility of loss recedes from consciousness.”
As that happens, “investors’ risk tolerance grows, and they tend to focus less on due diligence and more on bidding aggressively for deals.” The consequence, he notes plainly, is “a lowering of standards.” This process doesn’t require malice or recklessness—only human nature responding predictably to prolonged success.
A central contribution of the Takeaway is Marks’s clarification of systemic versus systematic risk.
He acknowledges the question he is frequently asked: whether current credit events are “systemic.” Drawing a clear comparison to the Global Financial Crisis, he explains that true systemic risk arises when “one bank’s weakness weakened the others, impacting the system overall.”
By contrast, today’s problems do not reflect structural failure. “I don’t think today’s issues are systemic in the sense that there’s something wrong with the lending system, or that they will trigger other defaults and lead to a breakdown of the system.”
The issue, instead, is behavioral repetition. Marks writes that “imprudent loans and business frauds often occur in clusters for the simple reason that people who make investments and loans are highly prone to error in good times.”
This pattern, he concludes, “isn’t part of the plumbing of the financial system but rather a regularly recurring behavioral phenomenon.” For that reason, “it isn’t ‘systemic,’ but it is ‘systematic.’”
Looking ahead, Marks suggests the adjustment phase may be constructive. After “generally good times in the last 16 years,” the next period “is likely to be more ‘interesting,’ as errors that were made in those good times come to light.”
Still, he sees grounds for cautious optimism, noting that recent events have likely “chastened lenders and investors,” encouraging “a re-elevated level of prudence.” If sustained, Marks believes, “this would be a positive development.”
You can read the Roundup here:
Top Takeaways from Oaktree’s Quarterly Letters (December 2025)
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