JPMorgan Chase CEO Jamie Dimon has issued a warning that recent bankruptcies in the U.S. auto sector are the “early signs” of excess in the world of corporate lending. The longtime CEO now at the helm of the biggest U.S. bank by assets noted the recent failures of auto parts maker First Brands and subprime vehicle lender Tricolor Holdings as “canaries in the coal mine for the overall credit market.”
And Dimon is far from alone as worries ramp up over potential chinks that may have formed by a decade of aggressive corporate lending. I mean, we have had a credit bull market for almost a decade, right? That is 14 years, “Dimon said. That extended period, he suggested, may have made standards less stringent. They are a consequence of more lenient conditions in corporate lending as late as last week.
Dimon said, “Those are early signs there could very well be some excess out there as a result of it.” He provided a dire forecast for a possible economic slowdown, saying, “If we ever have a recession, you going to see a lot more credit problems.” Going a step further, he wrote in response to an analyst, “Seeing one cockroach means you will probably see others,” reflecting that, as the failure of Tricolor is probably not an isolated case in corporate lending.
The twin bankruptcies have stoked concerns over the unknown exposures banks are accumulating when they enter the corporate loan market for private companies. Despite JPMorgan having a solid quarter, the vast majority of questions posed to Dimon from analysts and reporters circled back to credit losses and the status of its corporate loan portfolio. Even JPMorgan was not spared from its spillover impact. The bank’s corporate lending unit, meanwhile, took a $170 million loss from its Tricolor exposure, even as it avoided losses from First Brands.
The CFO Jeremy Barnum spoke about the charge-offs, and Dimon more or less admitted to the error. The Tricolor episode is “not our finest moment,” Dimon said. Such large scale corporate lending mistakes prompt an extensive review at the bank, he added: “you can presume that we pick over each and every issue… the discipline is to look at it very much in the cold light of day and go through everything little thing.”
The ripple effect of these car sector disasters has sucked in a whole bunch of banks with exposure to corporate loans. Earlier this month investment bank Jefferies revealed that funds it manages were at $715 million owed by First Brands related companies. UBS said its funds had roughly $500 million of exposure too. Tricolor was identified last month as the borrower at regional bank Fifth Third that said it projected $150 million to $200 million of impairments from alleged fraud at the company. Such sweeping problems highlight the interlinked and problematic nature of corporate lending, especially when the qualifying criteria eases up.
But Barnum also observed that overall credit indicators at JPMorgan — particularly early-stage delinquencies — are still solid. The company is closely monitoring the labor market for any signs of weakness that might bleed over into consumer credit and, in turn, corporate lending portfolios. For now, Dimon’s warning remains a cautionary message for the entire financial space — perhaps the time of easy corporate borrowing is showing signs of wear and tear?
