Last month, the collapse of subprime auto lender Tricolor and auto parts supplier First Brands set off alarm bells across Wall Street about the health of the consumer credit market. These concerns deepened today (October 14) when JPMorgan CEO Jamie Dimon warned during the bank’s quarterly earnings call that “everyone should be sounding the alarm about the recent bankruptcies.”
“When something like this happens, my antenna goes up,” Dimon told analysts. “I probably shouldn’t say this, but when you see one cockroach, there’s probably more.”
Tricolor filed for bankruptcy in September amid fraud charges. The Dallas-based company specializes in providing auto loans to so-called “subprime” lenders with lower credit scores. Rochester, Michigan-based auto parts manufacturer First Brands went bankrupt soon after, leaving more than $2 billion unaccounted for. Both companies received financing from multiple Wall Street banks, raising concerns that financial institutions could be increasingly exposed to risks from exposure to non-bank lenders.
JPMorgan Chase said it had no contact with First Brands. But it was affected by the collapse of Tricolor, which took a $170 million write-off (recognized as a loss when a loan cannot be repaid) as the company went bankrupt. The blow comes during a strong quarter for JPMorgan, which saw revenue and profit in the July-September quarter beat analysts’ expectations. Revenue increased 9% year-on-year to US$47 billion, and net profit increased 12% to US$14.4 billion.
Dimon said the bank was currently reviewing “all processes, all procedures, all underwriting – everything” in light of Tricolor’s collapse. “It seems to me that there was clearly fraud in these matters. But that doesn’t mean we can’t improve our procedures,” he added.
Dimon, who led JPMorgan Chase for nearly two decades, also warned that weakness in credit markets could worsen if the economy worsens. “We’ve had good credit conditions for a long time, and I think you’re probably going to see a bit more credit deterioration elsewhere than people thought, and the fact that the economy is going down,” he said, adding that he hoped for a “fairly normal credit cycle.”
Even so, most of JPMorgan’s loans to non-bank financial institutions (NBFIs) are not particularly risky, said Jeremy Barnum, the bank’s chief financial officer. “The vast majority of these loans that we do are highly secure or structured or securitized in some way,” he told analysts today. “I’m not sure that the loans that we make to the non-bank financial institution community fall into what we consider to be a higher risk area than other risk areas.”
