Generally speaking, the SEC exists to regulate communications about the underlying realities driving security values.
Any mechanism involving “the bank invested (lent) my deposits to organizations that avoid SEC scrutiny, and used an instrument that spreads culpability for fraud across many unrelated and unwitting organizations” will eventually lead to investment bubbles and fraud.
If I knew (and chose to have) 5% of my savings in private debt funds, where the holdings were public and had reporting duties, that’d be fine.
Instead, that money is being lent behind closed doors. If the loans pay out, then the ultra wealthy make money. If they default, they’ll be bailed out to prevent contagion. (And they still make money, since the lent money went somewhere before the loan default.)
This has happened at least a dozen times in the US, including in living memory.
Also, my example is not sound. Here is a counter example with a basket of investments with different risk profiles: I hold A directly. I hold A’, which is a leveraged fund that only holds A. I also hold B which is a business whose only customer is A. I hold C, which has a contract with A and is securing the loan with future revenue from the contract. Finally, I hold D which is A’s primary customer and a majority shareholder of C.
Note that my example describes actual privately held companies that are probably the ones providing the private debt in the article.