Auto bankruptcies reveal ‘early signs’ of surplus lending

JPMorgan Chase Bankruptcies in the U.S. auto market are a sign that corporate lending standards have become too lax over the past decade, CEO Jamie Dimon said Tuesday.

Dimon, who has long headed the largest U.S. bank by assets, was speaking about the recent collapses of auto parts company First Brands and subprime auto lender Tricolor Holdings.

“We’ve had a credit market that’s been bullish now for the better part of, since 2010 or 2012? That’s like 14 years,” Dimon told CNBC on a call with reporters.

“These are early signs that there may be some redundancy because of this,” Dimon said. “If we ever have a downturn, we will see more credit issues.”

Dimon used more colorful language about the Tricolor failure later Tuesday.

“When you see one cockroach, there are probably more,” Dimon told analyst Mike Mayo during the bank’s earnings conference call. “Everyone should be warned about this.”

These two bankruptcies raised concerns about the hidden risks involved with banks such as JP Morgan, Jefferies and Third Fifth Providing financing to private companies. In a quarter in which JPMorgan easily beat expectations, thanks to booming activity in institutional trading, questions from reporters and analysts about credit losses took center stage.

While JPMorgan was able to avoid losses from First Brands, it did lend to Tricolor, causing a $170 million charge in the quarter, Chief Financial Officer Jeremy Barnum said. Chargebacks occur when a bank realizes that loans it has made will not be repaid.

“It’s not our finest moment,” Damon said of the Tricolor episode. “When something like this happens, you can assume we look at every issue… You can never completely avoid these things, but the discipline is to look at it in a cold light and look at every little detail.”

Barnum said credit metrics monitored by JPMorgan, including early delinquencies, are stable and are actually better than expected. He said the company is closely monitoring the labor market for signs of weakness that could trickle down to consumer credit, which has not yet happened.

The auto companies’ failures, which came amid strains on international supply chains due in part to escalating tariffs imposed by President Donald Trump, have ensnared a constellation of banks.

This month, investment bank Jefferies said funds it manages were owed $715 million from companies that bought First Brand shares, while UBS said its funds were exposed to about $500 million.

Last month, regional bank Fifth Third revealed that it expects up to $200 million of impairment due to alleged fraudulent activity at a borrower; Bloomberg reported that the client was tricolored.