Dimon sees roaches, market panics

Wall Street has a pest control problem. And no, it’s not all the interns this time—it’s bad loans.

Auto parts retailer First Brands and subprime auto lender Tricolor both imploded in September, and investors are beginning to worry that they’ll bring the entire financial system down with them. JPMorgan Chase CEO Jamie Dimon only added fuel to the fire when he was asked about the bankruptcies on an earnings conference call earlier this week, telling reporters that, “When you see one cockroach, there are probably more.”

Earnings announcements from two regional banks yesterday seemed to prove Dimon correct. Investors believed the mess was contained to Jefferies, whose exposure to First Brands has spurred on a 22% selloff over the past month. But when Zions Bancorp and Western Alliance Bancorp disclosed loans gone wrong related to the two auto industry companies, shares of both companies tumbled lower, and the entire banking industry and the rest of the stock market sank with them as investors fretted that this was just the beginning.

All told, the 74 largest banks in the US watched $100 billion in market value disappear yesterday.

Zoom out: The private credit market has ballooned over the past year, creating an entire class of newly minted billionaires with it. But the opaque credit business can be tricky, and the implosion of these auto companies reveals how difficult it can be to spot credit fraud until it's too late.

SVB PTSD

The combination of bad loans, high interest rates, and contagion fears reminded investors of the collapse of Silicon Valley Bank in spring 2023, which led to the biggest bank failure since 2008. And while it may be Halloween season, there’s nothing spookier to Wall Street traders than the threat of bank failures.

So is this a momentary crisis of confidence, or the beginning of the next market crash? Analysts argue that we’re not yet in danger.

“One cockroach does not a trend make,” explained Moody’s Ratings analyst Marco Pinto today on CNBC’s Squawk Box. “When we dig deeper here and look to see if there’s a turn in the credit cycle, which is effectively what the market seems to be focusing on, we can find no evidence,” Pinto added.

The market perked up today as traders decided an SVB-style crash was indeed unlikely. Western Alliance Bancorp recovered 3.07%, while Zions Bancorp rose 5.84%.

Looks like those roaches got squashed.—LB