"Subprime crisis" reappearing? Wall Street "cockroach" debate: PE and banks blame each other

Wall Street is witnessing a fierce debate over loan risks.

With the successive bankruptcies of auto lender Tricolor Holdings and auto parts supplier First Brands Group, the conflict between traditional banks and private equity firms has become public, with both sides clashing over who should bear responsibility for the turmoil in the credit market.

JPMorgan Chase CEO Jamie Dimon warned that "when you see one cockroach, there may be more," implying systemic risks in the $1.7 trillion private credit market.

This statement triggered a strong backlash from private equity firms. Blue Owl Capital co-CEO Marc Lipschultz countered that linking private credit to these bankruptcies is "a strange panic-inducing behavior," and suggested that banks should "look behind their own refrigerators."

Apollo Global Management CEO Marc Rowan also pointed the finger at banks, stating that the bankruptcies of the two companies are the result of lenders chasing high-risk borrowers for years.

This debate highlights the deep-seated contradictions between old and new forces on Wall Street. In recent years, companies have increasingly turned to private credit financing, which traditional banks view as regulatory arbitrage, complaining that non-bank financial institutions are too lightly regulated. The International Monetary Fund called on regulators on Tuesday to pay attention to banks' exposure in this area, noting that "banks are increasingly lending to private credit funds because the net asset returns on these loans are often higher than traditional commercial loans."

Private Equity Giants: The Source of Risk Lies with Banks

Apollo Global Management CEO Marc Rowan stated at the Financial Times Private Equity Summit held in London that the bankruptcies of the two companies are the result of lenders chasing high-risk borrowers for years. "I am not surprised to see late-cycle incidents occurring," Rowan said, "the desire to win in a competitive market can sometimes lead to cutting corners."

Rowan clearly pointed the finger at banks. "In some highly leveraged credits, there are situations where there is a willingness to cut corners," he said. Apollo established short positions against the debts related to First Brands before its bankruptcy, meaning that if the company fails to repay its loans, Apollo will profit from it. "Most of the disclosed risk holders are actually financial institutions," Rowan said.

Blackstone President Jonathan Gray also blamed banks at the same conference. "Interestingly, both incidents were bank-led processes," Gray said, and "100%" denied the notion that "this is a canary in the coal mine" or a systemic issue.

Banks Under Pressure: Acknowledge Mistakes but Warn of Risks

On Wednesday, JPMorgan Chase CEO Dimon, while announcing strong earnings for the bank, also issued a warning about risks. "When these kinds of things happen, my alertness goes up," he said, "I probably shouldn't say this, but when you see one cockroach, there may be more." "Dimon acknowledged that the Tricolor incident exposed issues within the bank. 'I think there is clearly fraud involved, but that doesn't mean we can't improve our processes,' he added, admitting that the Tricolor exposure 'was not our finest hour.'

The two bankruptcy events have triggered a chain reaction in the credit market. Investment institutions such as Blackstone and PGIM, as well as major banks like Jefferies, have suffered significant losses. JPMorgan alone has incurred a loss of $170 million due to the Tricolor collapse.

According to the Financial Times, the failures of First Brands and Tricolor have revealed how banks and private equity firms are intertwined through complex financial structures that may obscure who holds the underwriting risk, especially as bank lenders attempt to maintain market share.

The Market Landscape Behind the Crossfire

The relationship between banks and private equity firms has been tense in recent years, with companies increasingly turning to private credit to meet borrowing needs. Traditional lenders refer to this shift as regulatory arbitrage, complaining that non-bank financial institutions face too lenient regulation.

However, Lipschultz of Blue Owl Capital believes that linking private credit to bankruptcy cases is 'creating panic.' He suggested that the banks are the real problem.

The complexity of this debate lies in the fact that both sides are deeply intertwined. According to the Financial Times, the two bankruptcy incidents have exposed how banks and private institutions are connected through complex financial structures that may confuse who truly holds the risk, especially when banks are trying to maintain market share.

Akshay Shah of distressed debt firm Kyma Capital stated, 'Landmines are starting to appear everywhere. Marc might say something on the bank side, Jamie might say something elsewhere. I would say both sides are exploding.'

The International Monetary Fund called on regulators on Tuesday to pay attention to banks' exposure to the private credit sector. The organization noted that 'banks are increasingly lending to private credit funds because the net asset returns on these loans are often higher than traditional commercial and industrial loans.'