Jamie Dimon, CEO of JPMorgan, recently issued some harsh warnings about the state of corporate lending. His warnings were prompted by two recent auto-industry bankruptcies, including one involving a company in which JPMorgan had a significant investment.
The bankruptcy caused JPMorgan to charge off $170 million, which means the bank acknowledged that the loans would not be paid as a result of the auto company’s inability to come up with the funds.
Unfortunately, Dimon believes that these two recent bankruptcies could be just the tip of the iceberg and that an industry-wide problem may be brewing.
The two bankruptcies that prompted Dimon’s concern included:
First Brands, an auto parts firm
Tricolor Holdings, a subprime car lender.
The companies experienced financial problems amid ongoing industry pressure from tariffs.
While JPMorgan did not suffer losses due to the bankruptcy of First Brands, it did provide loans to Tricolor, which is what led to the charge-offs.
Related: 63-year-old bankrupt retail chain closes all stores permanently
“It is not our finest moment,” Dimon said, referring to the losses that the bank suffered due to loaning funds to Tricolor.
“You can never completely avoid these things, but the discipline is to look at it in cold light and go through every single little thing.”
JPMorgan was not the only large financial institution with exposure to the two auto companies entering bankruptcy.
Jefferies, an investment bank, said companies that bought First Brand inventory owe $175 million to the funds the investment bank runs.
UBS said its funds had approximately $500 million in exposure.
Fifth Third Bank disclosed last month that it had $200 million in impairments from allegedly fraudulent activity by a borrower, which turned out to be Tricolor.
With so many large banks exposed to these two businesses, the bankruptcies have raised concern about the amount of money private banks have lent to companies that potentially were not as stable as they seemed.
So, why are these auto companies and bank losses so concerning? That’s where Dimon’s warning comes in.
As Dimon told analyst Mike Mayo during JPMorgan’s earnings conference call:
When you see one cockroach, there are probably more.
This colorful metaphor refers to Dimon’s fear that other companies may have large outstanding loan balances, be in worse shape than anticipated, and be vulnerable to collapse if the economy goes south.
