(The Telegraph) - The boss of JP Morgan has said there are “cockroaches” in the debt markets in comments that will fuel concerns about problems in the $3tn private credit industry.
Jamie Dimon, chief executive of America’s biggest bank, said he was worried about more corporate collapses in the wake of the bankruptcies of subprime car lender Tricolor and auto parts supplier First Brands.
JP Morgan lost $170m in the collapse of Tricolor. Speaking with analysts in a conference call, Mr Dimon said: “My antenna goes up when things like that happen. I probably shouldn’t say this but when you see one cockroach, there’s probably more.”
He added: “First Brands I’d put in the same category, and there are a couple other ones out that I’ve seen that I put in similar categories.”
The comments will fuel mounting concerns about the health of the opaque $3tn private credit market, often referred to as shadow banking. Private equity companies and other money managers in this corner of finance extend loans to companies rather than banks. Regulation is far lighter compared to traditional banks and the sector is far less transparent.
US-based Tricolor and First Brands both collapsed last month with little warning. Both were heavily reliant on private credit, having borrowed tens of billions of dollars between them.
The bankruptcies have led to concerns about the possibility of other hidden problems lurking in the market. Observers worry lending practices have gotten looser and fear the true performance of loans is being masked by financial engineering. Deutsche Bank has suggested First Brands could be a “canary in the mine”.
Mr Dimon said: “When something like that happens, you can assume that we scour every issue, every universe, everything about how it could be taking place to make sure it doesn’t take place here.”
His comments came as the International Monetary Fund (IMF) also warned about growing dangers in private credit, following a boom in lending by specialist funds.
The warning came in its Global Financial Stability Report, which also warned that a surge in the value of artificial intelligence (AI) stocks may have inflated a bubble more dangerous than the dotcom mania around the millennium.
Asset prices are at risk of “collapse” if tech stocks fail to live up to investors’ sky-high expectations, the watchdog said.
Surging share prices mean that on some metrics “concentration risk… is now substantially higher than during the dot-com bubble”, the IMF said, evoking the boom and bust which followed the launch of internet companies around the turn of the millennium.
Dangers are also growing in bond markets, the IMF said at its annual meeting in Washington DC.
Federal Reserve Chair Jay Powell separately warned of a sharp slowdown in the US jobs market.
Speaking at the National Association for Business Economics (NABE) annual meeting, Mr Powell said: “Both supply and demand in the labor market have come down so sharply, so quickly, and the fact that the unemployment rate has barely moved is kind of remarkable in and of itself.”
The Fed chairman signalled that the central bank would continue to cut interest rates to support the economy, helping stocks rally on Wall Street.
The S&P 500 was up by 0.2pc after Mr Powell’s comments, while the Dow Jones Industrial Average rose by 0.8pc. The Nasdaq Composite index pared back some earlier losses after Mr Powell spoke but was still down by 0.2pc, as the IMF’s bubble warning stoked pre-existing concerns.
Mr Powell said that the central bank would also likely soon stop shrinking its balance sheet by selling off bonds bought during the pandemic through a process known as quantitative tightening. The statement eased investor fears over tighter financial conditions.
By Chris Price
