"Dimon Worries: Private Ratings Echo Pre-Crisis Mortgages"

Boston Brand Media brings you the latest - Jamie Dimon, alarmed by parallels between current private credit ratings and the pre-Great Recession mortgage crisis, warns of looming dire consequences.

Over the past ten years, the surge in private credit has been remarkable. However, Jamie Dimon, CEO of JPMorgan Chase, cautioned this week that certain segments within this expanding sector mirror the issues observed in the mortgage market before the 2008 Great Recession, notably concerning dubious credit ratings provided by rating agencies. "I've come across a few of these transactions rated by agencies, and I must admit, their ratings were quite surprising," Dimon remarked at a conference on Wednesday, as reported by Bloomberg. "It brings back memories of the mortgage crisis."

Dimon did not directly mention the Great Recession in his remarks, but he did delineate the critical issue surrounding subprime mortgages, which precipitated the collapse of the housing market in 2008, catalyzing the severe global financial crisis of that period. Specifically, Dimon asserted that banks were faulted for the flawed manner in which mortgages were evaluated, implying that private credit entities could encounter a comparable fate if there are issues with loans within their sector. "The rating agency endorsed them, claiming they were double A or triple A, but they were essentially not, as they did not conduct the requisite analysis regarding the subprime element," he noted. Following these observations, Dimon remarked that a similar pattern is unfolding in the realm of private credit today. "I don't anticipate it becoming systemic, but I do anticipate there being challenges," he appended.

Bad actors in private credit

The private credit market, where non-bank financial entities such as insurance firms and hedge funds extend loans to corporate borrowers, has experienced a resurgence lately as banks curtail lending amid regulatory scrutiny, inflation, and rising interest rates. According to IMF data, assets and committed capital in this sector have ballooned from approximately $500 billion a decade ago to $2.1 trillion last year. Preqin's 2024 Global Report anticipates that private credit assets under management will reach $2.8 trillion by 2028.

Boston Brand Media also found that despite this remarkable growth, Dimon did not adopt an entirely pessimistic stance towards the private credit arena. He acknowledged several advantages to private lending, including the capacity for lenders to provide loan modifications and reasonable covenants, facilitating swift access to cash for businesses. Dimon also highlighted the prevalence of long-term investors in the private credit sphere, noting that they are less inclined to pressure businesses into short-sighted decisions to meet immediate return targets.

"There's definitely a lot of positives," Dimon remarked, praising numerous "brilliant" private lenders, many of whom are clients of JPMorgan. However, he emphasized that not all private lenders are exemplary, pinpointing them as a source of concern in financial markets due to potential errors they may make.

Dimon expressed dismay over the absence of stress testing and transparency regarding valuations, or "the marks," in private credit. He questioned the adequacy of research conducted by some private lenders prior to extending loans, noting that certain private loans lack credit ratings entirely.

Moreover, Dimon cautioned that many investors may not fully grasp the impact of rising interest rates on the depreciation of private loan portfolios. He posed the question: "Do people truly comprehend the extent to which rising interest rates are affecting the present value of these assets?"

Retail investors won’t take private credit losses sitting down

Highlighting the significant risks inherent in the private credit market, Dimon cautioned that the entry of retail investors into the sector could compound issues. Given that investments in private credit typically entail long lock-up periods, Dimon expressed concern over potential adverse reactions from retail investors in the event of losses.

He pondered the repercussions of a scenario where "a little old lady" discovers she cannot retrieve her investment. Dimon contended that despite adequate disclosures from the private credit industry, retail investors are unlikely to react favorably to losses or the inability to access their funds.

"Retail clients tend to circle the block and call their senators and congressmen," Dimon remarked. "There could be hell to pay."

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Source: fortune‍