JPMorgan CEO Jamie Dimon Sounds Alarm on a Troubling Corner of Subprime Lending
Photo: Noam Galai/Getty Images
Last month’s collapses of Tricolor and First Brands, a subprime auto lender and auto-parts supplier, respectively, sent alarm bells ringing across Wall Street about the health of the consumer credit market. Those concerns deepened today as JPMorgan Chase CEO Jamie Dimon warned during the bank’s quarterly earnings call that “everyone should be forewarned” by the recent bankruptcies.
Dimon’s Warning
“My antenna goes up when things like that happen,” Dimon told analysts. “I probably shouldn’t say this, but when you see one cockroach, there are probably more.” Tricolor filed for bankruptcy in September amid allegations of fraud, while First Brands, a car parts manufacturer, went bankrupt shortly afterward, with more than $2 billion in funds unaccounted for.
Both companies had received financing from various Wall Street banks, sparking fears that financial institutions could increasingly be put at risk due to their exposure to non-bank lenders. JPMorgan said it had no exposure to First Brands, but it was impacted by Tricolor’s collapse, taking a $170 million charge-off—a loss recognized when a loan won’t be repaid—stemming from the company’s bankruptcy.
Reviewing Procedures
Dimon said the bank is now reviewing “all processes, all procedures, all underwriting—all everything” in light of the Tricolor collapse. “There clearly was, in my opinion, fraud involved in a bunch of these things. But that doesn’t mean we can’t improve our procedures,” he added. The bank’s chief financial officer, Jeremy Barnum, noted that the vast majority of JPMorgan’s lending to non-bank financial institutions (NBFI) is not particularly risky, as it is “highly secured or in some way structured or securitized.”
Dimon also warned that weaknesses in the credit market could worsen if the economy deteriorates. “We’ve had a benign credit environment for so long that I think you may see credit in other places deteriorate a little bit more than people think when, in fact, there’s a downturn,” he said, adding that he is hoping for a “fairly normal credit cycle.” Despite these concerns, JPMorgan reported a strong quarter, with revenue rising 9 percent year-over-year to $47 billion and net income climbing 12 percent to $14.4 billion.
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Image Source: observer.com
