JPMorgan CEO Jamie Dimon Sounds Alarm on a Troubling Corner of Subprime Lending
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 (Oct. 14) as JPMorgan Chase CEO Jamie Dimon warned during the bank’s quarterly earnings call that “everyone should be forewarned” by the recent bankruptcies.
“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. The Dallas-based company specialized in providing auto loans to so-called “subprime” lenders with low credit scores. First Brands, a car parts manufacturer headquartered in Rochester, Mich., 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. The hit took place during an otherwise strong quarter for JPMorgan, which beat analyst expectations on both revenue and profit for July through September. Revenue rose 9 percent year-over-year to $47 billion, while net income climbed 12 percent to $14.4 billion.
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.
Dimon, who has led JPMorgan for nearly two decades, 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.”
Even so, the bulk of JPMorgan’s lending to non-bank financial institutions (NBFI) is not particularly risky, said Jeremy Barnum, the bank’s chief financial officer. “The vast majority of that type of lending that we do is highly secured or in some way structured or securitized,” he told analysts today. “I’m not sure that our lending to the NBFI community is an area of risk that we see as more elevated than other areas of risk.”
