The Wall Street Craze Jamie Dimon Can’t Resist. Even If It Blows Up.

0:05It's February in Miami. Blue skies, a balmy day. And inside a luxury hotel on South Beach, the ballroom is packed with Wall Street types. It's an escape from the wintry weather in the Northeast, which is where most of these guys are based. And, you know, they come out, they bring their polos and their swimsuits. They're here for a working vacation. If your idea of a vacation is J.P. Morgan's leveraged finance conference. And they come to talk about how to make a lot of money and then have a lot of cocktails, court some business, toast the deals of last year. Our colleague Alexander Saidi was there, taking it all in, including the conference's main event, a keynote address by the high priest of American banking.

0:56Well, the star of the show is none other than the celebrity CEO himself, Jamie Dimon. Jamie Dimon is the CEO of JPMorgan Chase, the biggest bank in America. Dimon is a legend in the banking world, partly because of how successfully he steered JPMorgan through the 2008 financial crisis. He's known for his level head, his discipline, and his caution. And in the midst of this sunny finance party, he was about to be a buzzkill.

1:32Jamie Dimon said he was worried about a trend he was seeing in financial markets, in something called private credit. It's a type of lending to companies that's largely unregulated, growing like gangbusters, and that to Dimon at least feels like deja vu. So he gets on stage and he told this audience that what he was seeing reminded him of the frenzy in mortgages around 2008. and made it clear that what he's seeing in private credit, he thinks has many of the signs and symptoms of the lead up to a financial crisis. Wow. So this guy who was a hero of the financial crisis is now warning that this thing, private credit, could blow up.

2:17Yes. But there is a twist to this story. Well, the twist is that the same day that Diamond was making this keynote address, the bank had announced that it was investing$50 billion of its own money into private credit. Wait, wait, wait. So this thing that Diamond was just warning against, he's getting into it. That's right.

2:46Welcome to The Journal, our show about money, business, and power. I'm Annie Minoff. It's Wednesday, July 23rd.

2:59Coming up on the show, why the head of America's biggest bank is jumping into a trend he says is dangerous. And why you should care.

3:22All right, Alex, you have called private credit the hottest thing on Wall Street. What is it? What is private credit? Private credit at its core is lending. It is lending money to a company. Now, you would be fair to ask, why is lending money a hot new trend? Well, the reason why is that it's largely unregulated. So, when banks loan money, they follow strict rules. Because the money they're lending, it ultimately ties back to customer deposits. From you, from me, from your grandma. Banking regulations are there in part to protect that money. But with private credit, it's not a bank that's making the loan.

4:11It's a private fund. Some of the biggest are run by Blackstone, Apollo Global Management, and Aries Management. The money that these firms are loaning comes from private investors. And because they're not banks, these funds don't have to follow banking rules. They can operate more in the dark. Shadow banks. That is a term that is used. Why is that? Well, if it looks like a bank and it lends like a bank, it's essentially because they are acting as replacements to banks. As for how this whole wild west of private credit even started, the trend actually sprung out of an effort to make financial markets safer.

4:58The market is not functioning properly. There has been a widespread loss of confidence. Lehman Brothers is going bankrupt. And major sectors of America's financial system are at risk of shutting down. Oil down more than$4. Traders here working the phone say a lot of their customers are freaked out. After the 2008 financial crisis, a lot of the blame fell on banks for making too many risky loans. And in response, lawmakers strengthened banking regulations. Our financial system only works. Our market is only free when there are clear rules and basic safeguards. Under these tighter rules, banks pulled back from riskier lending.

5:40But the slowdown in lending didn't stop companies from wanting those risky loans. People realized there was this demand for corporate credit that banks were just not fulfilling in the same way anymore. And into that void steps the shadow banks. That's right. That's right.

6:02These unregulated private investment funds have been offering more aggressive and risky debts to companies that banks have historically shied away from because of the risk that's involved. Private credit funds are satisfying that demand for riskier loans. But in exchange for taking on that risk, they're charging higher interest rates. They're lending at really like 10%, you know, 11%, maybe 9%, which is still relatively high, but it's serving a need. And that's essentially how the private credit boom got started. Meanwhile, Jamie Dimon was paying close attention to this explosion in private credit.

6:46At first, he kind of shrugged it off. He didn't see it as a serious threat to J.P. Morgan's business. Like, we're J.P. Morgan Chase. We are the biggest bank in America. the most influential in the world. We make money too, doing all kinds of things. We bank the biggest companies in the world. We have the biggest retail bank in the country. So we're good. And he said in a 2016 interview, you know, we make money anyways, so I'm not that worried about the growth in the competition. That would eventually change. Because then these deals get big. Very big. In the beginning, private credit funds were making loans to smaller companies.

7:24Loans that J.P. Morgan might not have been interested in making anyway. But then loans and deals started to be worth billions. Airbnb says private equity firms Silver Lake and Sixth Street Partners will invest a billion dollars in a combination of debt and... Blackstone saying it signed a private credit partnership with Legal & General that the two firms aim to grow to up to$20 billion over the next five years. Private funds were making loans to companies that, just a few years earlier, would have been knocking at the doors of a traditional bank. And for J.P. Morgan, it started to look like private credit was eating its lunch.

8:03You can look at data that shows the percentage of acquisitions that companies are doing financed by banks versus private funds. And it goes from majority bank to majority private fund in the span of about 10 years, I would say, between like 2015 and 2023. You see a total inverse happening. Wow. So now the shadow banks aren't just this sideshow. They're the show. Exactly. Exactly.

8:34As private credit grew, Diamond was sounding alarm bells. In 2023, he told Congress that private credit was pushing lending out of sight of regulators. And last year, he warned that there would be, quote, hell to pay if a bunch of private credit loans went bad. There could be hell to pay. And, you know, and the transparency around the marks and the lack of research. But at the same time, his bank was getting sidelined. One big example? Last year, J.P. Morgan put in a bid for a mega deal involving Intel. The tech giant was looking to finance a new data center in Ireland. And they went with Apollo instead.

9:15It was the kind of multi-billion dollar loan that would have been in J.P. Morgan's wheelhouse. And the bank lost out. You could almost feel the FOMO. So I think that was a moment where they saw, wow, now they're coming for even bigger and bigger opportunities and companies. We should be doing these deals. Like, we have the breadth, we have the scale. how are we losing out? And we need to act. But how do you compete with shadow banks without becoming one? That's after the break.

10:06Jamie Dimon had a problem. He'd watched the private credit market explode from under$10 billion in 2006 to over a trillion dollars today. Diamond wanted a piece of that action. But J.P. Morgan is a bank, not a shadow bank. And it has to follow bank rules. So he's had to figure out a way to thread the needle, offer more bespoke and kind of riskier financial products, even though he's doing it inside of a bank structure. Diamond's team had to figure out a way to make riskier private credit-style loans, but to do it without running afoul of regulators. The bank found its answer in a giant pool of money called excess capital.

10:53So, J.P. Morgan, very profitable bank. They generate billions of dollars in profit annually. And they've been sitting on a stockpile of around$100 billion in excess capital that they've decided, okay, we're going to take a chunk of this, We're going to mobilize it and create a private credit strategy. This$100 billion in excess capital, think of it as bonus profits. Banks like J.P. Morgan are required to keep a certain amount of money on hand, kind of like an emergency fund. And luckily for J.P. Morgan, it's been doing really well. So well, in fact, that they have more excess capital in their emergency fund than is required by law.

11:39Diamond's plan is to take$50 billion, worth half the bank's excess capital, to fund a private credit strategy. It's not your money itself, but the profit they made from managing it, maybe the fees you paid or the, you know, new service you signed up for, credit card or whatever, all of those extra fees that wind up as this excess capital, they've deployed into this private credit strategy.

12:08J.P. Morgan's private credit team has already been out making deals. Walgreens is being bought by a private equity firm in a multi-billion dollar deal. As part of a larger Walgreens deal, J.P. Morgan helped fund a$2.6 billion loan for a specialty pharmacy called Shields. And it was kind of risky compared to other types of loans it would do. The Shields loan in total was worth nine times what Shields earns in a single year. So that's like, just think about that. Like, think about the total amount of profit a company would make, multiply that by nine, and that's the amount of debt that they borrowed.

12:49Okay. This is not the kind of vanilla loan that maybe an old JP Morgan would have made. Right. And the regulators had specifically not wanted banks to do loans like that. But even as J.P. Morgan has started offering loans like the other guys, Diamond hasn't abandoned the idea that this whole private credit thing could be a bubble. And if it pops, he wants J.P. Morgan to make money off that too. They have created a reputation for themselves at J.P. Morgan as being a great caller of downturns. They have bought firms at the down cycle opportunity on more than one occasion. I mean, most famously, it was in 2008.

13:39They essentially acquired these storied banking franchises for next to nothing when these firms collapsed. And then again in 2023, J.P. Morgan stepped in and bought First Republic Bank during the regional banking crisis. So they have a pretty good reputation of coming in when things look really tough and hairy and choppy and buying things at a discount and making a lot of money from it. So they've essentially said they think they could do something like that again in the private credit markets. That is a very interesting stance. So on the one hand, you're saying we see big opportunities in this market, we're going to get into it.

14:18And you're also saying if there's a big bubble and if it goes bust, we're going to make money. 100%. As one J.P. Morgan exec put it, there could be some pain. But, he said, we're remaining disciplined.

14:37But what happens if a crash doesn't just affect the private credit market? What if it affects everyone? Alex says as the industry has grown, more regular people are exposed. If your pension fund has invested in private credit, then, you know, you are yourself connected to the private credit world. But what's actually been happening more recently is that as the funds have gotten bigger and bigger and bigger, they are looking for more sources of money to keep fueling the growth. As private credit funds look for more money for giant deals, they're increasingly turning to regular people. There are now carve-outs being made where your 401k, your contributions, you know, it's usually like some stock, some bonds, maybe some like foreign equities.

15:24Now, like a carve-out that's being advocated for to be put in is private credit. So conceivably, soon I could invest part of my retirement plan in private credit. Yes. As the trillion-dollar private credit market touches more people and more of the financial system, the blast radius from any potential blowup, that gets bigger too. And that's the very scenario that Diamond has been warning about. More and more of the economy is being subsumed in it. more and more of how your local grocer, the smoothie chain in your strip mall plaza, private credit is touching more and more of these companies, and they're taking your money to pump loans into it.

16:15So, in essence, your savings and also the money you spend at these companies is going to fuel an industry that is taking a level of risk that many economists think is unsafe. So if it blows up, you know, if your 401k has private credit inside of it, that could take a dent. If a bank takes the wrong side of a bet or is given the wrong money to a certain private credit fund and that goes south, you know, that could impact where your money is and it's kept safe. If I'm just a regular person, why do I care about this private credit trend? If you care about the safeness and soundness of our economy and our financial system, you need to be clued into how private credit is growing and the extent to which it's doing so safely.

17:08Because if it's too risky, you could wind up seeing something like we've seen in past financial crises where institutions blow up and everyday people get hurt because of it. Often, big booms are precursors to big busts.

17:47We're out every weekday afternoon. Thanks for listening. See you tomorrow.