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JPMorgan CEO Jamie Dimon has issued a warning about hidden financial risks as signs of deeper cracks begin to emerge in the credit markets.
Dimon cited recent bankruptcies like Tricolor and First Brands as potential signals of broader instability, likening the situation to seeing “one cockroach” and knowing there are more. Among Dimon’s concerns are over-leveraged subprime borrowers, particularly in auto loans and credit cards, where asset values no longer match outstanding debt.
Dimon’s statement is again another example of why some experts are comparing the present moment to the 2008 financial crisis, recalling how early failures at Bear Stearns were dismissed before the full collapse.
Douglas McIntyre: So Jamie Dimon, the king of all global bankers, head of JP Morgan Chase, had some harsh words for people when it comes risk. You want to pass some of that on?
Lee Jackson: Well, and I don’t think that Jamie Dimon’s the Lone Ranger. I think, you know these, these bankruptcies, you know, there was two that were, were significant. First there was our friends, Tricolor, which were kind of, they were like lending to the lowest, you know, the kind of sub submarket credit guys for, for lending and First Brands, which was a company that had acquired tons of other auto parts distributors that, you know, smaller O’Reilly’s or you know, those kind of guys.
And they just kept adding, adding debt, adding debt, and then it just blew up and there was money that couldn’t be found and things of that nature. And Jamie Dimon, you know, he’s been around, he, he, he’s, he’s seen this, this play before, you know, he saw it, you know, in, in no uncertain circumstances in 2007 and ‘08, he saw it in 2000, and God knows he saw it when long-term Capital blew up because that was a very dicey situation that could have gone either way. And, you know, his comment, which I think is good as that is that, “If you see one cockroach, there’s usually more.”
And you know, and then everybody comes out and says, oh, the credit markets are fine. And, uh, regional banks are fine and everything’s copacetic and all that. But the thing is, I was sitting on a trade desk at a hedge fund in 2007, and then we saw the news on TV, Bear Stearns to close two of their, you know, CMO mortgage funds. We looked at each other, looked back at the tv, looked at each other, and we went, uh oh. Uh oh, ’cause those are all CMOs. They’re stacked up on them. And, and they bailed out in the summer of 2007. But everybody then was saying the same thing. Why is this happening? But everybody had seen a wild mortgage market for like four years, and I remember Barney Frank going, there is no mortgage problem. There’s none. Well, you know, it took a full year after the collapse of those Bear Stearns funds and I knew people there ’cause I worked there and not at that time obvious. But, you know, we all looked at each other, you know, on the trade desk there and we’re like, “Wait a minute…” And these were big funds, so what if Jamie Dimon’s, right? What if there is more First Brands and more Tricolor, and there’s regional bank failures like we saw at Silicon Valley Bank, and what if this is the tip of the iceberg? Because, you know, this has gone on pretty unabated for the last four years plus.
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McIntyre: The economy faces two default risks. The first one is, is that for what you and I used to call junk bonds, the Michael Milliken invention, they still exist. So it’s been easier for them to borrow in a lot of ways. It’s easier to borrow at 8% than it is at 15. The other thing is, is you now have these subprime who’ve gotten great credit card deals, they’ve gotten 0%, 72 month financing on their cars. The value of their car loans is worth way, way more than the cars themselves.
Jackson: Absolutely.
McIntyre: It’s a domino effect. You know, you start to see lots of subprime car people because the economy slows, lots of defaults there. Lots of defaults in areas about what we’ve been talking about now.
Jackson: You’re right. You’re exactly right.
McIntyre: Then you get shotgun size holes blown in pieces of the economy that nobody expected to be there. I mean, it’s like the old saying, well, I didn’t loan anybody money on the supposition they wouldn’t pay me back, you know? Well, guess what?
Jackson: Well, you know, I think that people and Dimon, I think is, is not just talking about defaults that have happened recently. I think he’s looking big picture, you know, and he’s basically, your Capitalist Democrat, for lack of a better term, you know, he’s pretty much leaned that way. But, you know, he’s a real centrist smart guy. And if they, the Democrats were smart, they’d maybe consider running him for president. I don’t think he would take it, but I think he’s worried about a more systemic, you know, failure and spread through the economy for all the reasons you just mentioned, and kind of pull the rug out from the positives in the economy, which for the most part has been, you know, stronger this year than, certainly than Wall Street expected and the GDP higher than Wall Street expected.
But boy, if we start to go into a bunch of defaults and credit spreads get real tight. I don’t know. I think we, we’ve had a long run and, you know, you and I have been in this business for a long time and there, there’s always something out there, you know, like Roseanne Roseannadanna used to say on Saturday Night Live, it’s always something and it is always something, especially in the credit markets.
McIntyre: What will kill it first, a collapse in the equity market or a collapse in the credit market.
Jackson: Well, and Bessant was literally saying, you know, we’re gonna continue with our plan even if the stock market crashes, or you know, he said that recently. So, which was a veiled threat to everybody. It’s like, okay, you know, if we’re gonna continue, even if the stock, you know, we’re not gonna bail you out. And you know, the president tends to use kind of a shotgun approach. And so when he said raise the terms on, on China to a 100-150%, well boom. That’s why we had the huge sell off last Friday. And it’ll be interesting to see because there’s a lot of, there’s a lot on the margin and at the scale size it’s big because, because the, if we, I’ll tell you one thing though. If we can solve the China problem and the China trade problem, we may see a big continuation of this rally.
McIntyre: If the anxiety about a trade war with China disappears, if there’s some settlement, even if it’s not incredibly favorable, it’s just. You’ve put the cows down for the night, you don’t have to worry about stampedes. I think the market gets a very positive benefit even out of a mediocre trade deal with China.
Jackson: Yeah, I agree. And, you know, Besson’s smart because he, you know, and everybody that’s even a dime story economist knows this. China depends far more on our economy to strengthen theirs that we do on, on theirs to strengthen ours. I mean, they have to have the ability to, you know, sell products into the United States. And so, I think you’re right. Even a tacitly nice agreement would set for smooth sailing and then they can get the rest of these tariffs at whatever level they’re gonna be settled out, and then things can settle down a little bit. But I mean, the stock market’s had a huge run. We’re, we’re fixing to start the – there’s the Mississippi and Southern in me – we’re fixing to start the fourth year of what’s been a pretty strong bull market.
McIntyre: You will see a deal with China within two weeks. Okay? It’s the 17th, so as we move into November, I’m predicting that they will have a relatively comprehensive trade deal.