Jamie Dimon Doubts Private Credit Poses a Systemic Risk

Add the voice of the chairman of JPMorgan Chase, Jamie Dimon, to the chorus of concern over the health of the private credit markets. Tremors in this slice of the finance sector, also known as shadow banking, center on the risk of a broader contagion along the lines of the financial meltdown of 2008. Mr. Dimon, in his annual message to shareholders, counts the $1.8 trillion in private credit lending as one of the “larger risks we should keep our eyes on.”The banking titan has cautioned that the rise of private credit loans — in part a response to the regulatory burdens put on banks under the Dodd-Frank law — “reminded him of the craze in subprime mortgages that sparked the 2008 financial crisis,” as the Wall Street Journal summed up Mr. Dimon’s views. These columns have been tracing recent jitters, with outfits like Black Rock, Ares Management, Apollo, and Blue Owl capping withdrawals. Moody’s, too, downgraded to “junk” a private credit fund run by Future Standard and KKR. These developments can be traced to nerves over what the Guardian calls “potentially risky loans arranged by private credit firms” making loans “using investor money outside the traditional regulated banking system.” This is the context in which Mr. Dimon is warning that “credit standards have been modestly weakening pretty much across the board.”Mr. Dimon warns that “private credit does not tend to have great transparency or rigorous valuation ‘marks’ of their loans.” As a result, he adds, “this increases the chance that people will sell if they think the environment will get worse — even if actual realized losses barely change.” This is one reason why, he says, “when we have a credit cycle,” which he expects, “losses on all leveraged lending in general will be higher than expected, relative to the environment.”The message to shareholders from Mr. Dimon asserts that “not everyone providing credit is necessarily good at it,” and while “we have not had a credit recession in a long time,” it seems like “some people assume it will never happen.” He reminds asset managers of their “fiduciary responsibility” to ensure that loans they make “are suitable for that specific fund,” and that, in the event of a crunch, “those who do not do this properly are likely to get into trouble.”The qualms mooted by Mr. Dimon speak to the dilemma of how to evaluate potential risks in shadow banking without a neutral monetary yardstick — honest money. In other words a currency whose value is defined by law as a fixed weight in specie. After all, we’ve noted, the rise of private credit has been made possible in part as a result of a fiat money regime that fuels asset bubbles — and a vast debt binge. So, we said, private credit is best termed “fiat debt.” It’s not our intention to unduly stoke fears over the private credit sector. Nor does that appear to be Mr. Dimon’s aim. Private credit lending, he says, is on a par with “the U.S. high yield bond market,” at $1.5 trillion, and the $1.7 trillion in the “bank syndicated leveraged loan market.” Zooming out, he pegs at $13 trillion the “market size of investment grade bonds,” the same level as the “value of all residential mortgage securities and loans.” That said, Mr. Dimon reckons that “in the great scheme of things, private credit probably does not present a systemic risk.” That echoes assurances by the Fed chairman, Jerome Powell, who did allow that a correction was afoot. Yet Warren Buffett noted how private credit was an element “of the banking system” and “the troubles from one can spread over to another.” Quoth the Oracle of Omaha: “Well, you saw what happened, I mean, in 2008.”

Jamie Dimon Doubts Private Credit Poses a Systemic Risk

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