Wall Street credit worries intensify after Dimon's 'cockroach' warning

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Wall Street credit worries intensify after Dimon's 'cockroach' warning.

general :: 1day ago :: source - yahoo finance

By David Hollerith

Wall Street's credit worries are intensifying after a warning from JPMorgan Chase (JPM) CEO Jamie Dimon about cockroaches in the US economy. Investors on Thursday punished the stocks of regional banks and an investment bank exposed to the bankruptcy of an auto parts maker.

The regional banks that plummeted Thursday were Phoenix-based Western Alliance Bancorporation (WAL) and Salt Lake City's Zions Bancorporation (ZION). Zions' stock fell 13% and Western Alliance's stock fell nearly 10%, though both were clawing back some of that loss in Friday's premarket.

Their pullbacks came after Zions on Wednesday said it took a $50 million charge-off — a measure of unpaid debt written off as a loss — for two business loans extended through its California Bank & Trust division.

The regional bank said it made the decision after it "became aware of legal actions initiated by several banks and other lenders" affiliated with two of its borrowers and an internal review of its own portfolio.

The drop in Western Alliance came after it said on Thursday that it filed a lawsuit "alleging fraud by the borrower" over a revolving credit facility to an entity called Cantor Group V LLC.

The disclosures are the latest in a series of developments that have worried Wall Street as investors look for signs that credit among commercial customers is weakening.

The concerns started with two recent and sizable bankruptcies in September: subprime auto lender Tricolor and larger auto parts supplier First Brands.

A spokesperson for Zions said the disclosed loans “in question are not related to First Brands or TriColor.” A spokesperson for Western Alliance said its disclosed loan is "not related to First Brands or TriColor and is an isolated credit incident."

The aftermath revealed a web of exposures among large Wall Street players, including Jefferies Financial Group (JEF). A fund controlled by Jefferies' asset management unit has $715 million in receivables owed by First Brands customers, according to court filings published earlier this month.

Executives have been trying to assure investors that the impact on the firm will be manageable.

The company published a letter to shareholders from Jefferies CEO Richard Handler and president Brian Friedman, noting that Jefferies' exposure was "readily absorbable" and that the impact to the company's stock and credit perception was "meaningfully overdone."

The Jefferies Financial Group logo is displayed on a screen on the floor of the New York Stock Exchange on July 30. (Reuters/Jeenah Moon)

The firm's investment exposure is effectively "$43 million in accounts receivable" and "$2 million of interest on First Brands' bank loans," the executives said.

Yet, investors still sent the company's stock down more than 10% Thursday.

"We take the elephant in the room very seriously and we're going to do our work to do what needs to be done to optimize the result for our stakeholders, and also learn ourselves how we can be better," longtime Jefferies CEO Richard Handler said Thursday during its annual investor day.

"I personally talk to a lot of investors, a lot of CEOs, a lot of operating businesses. I think the environment is generally pretty darn good. I don't see this as the canary in the coal mine," Handler added.

Another event that may have spooked some investors came during JPMorgan's earnings day, as the CEO of the largest US bank issued both a mea culpa and a stark warning when discussing the losses his bank experienced from the downfall of Tricolor Holdings, saying it was "not our finest moment."

The bank said Tuesday that it took a $170 million charge-off related to its wholesale lending to Tricolor.

JPMorgan Chase CEO Jamie Dimon. (Noam Galai/Getty Images)

"My antenna goes up when things like that happen," Dimon told analysts Tuesday morning. "I shouldn't say this, but when you see one cockroach, there's probably more. Everyone should be forewarned on this one," he added.

A number of analysts asked big banks this week about the risk of their exposure to non-bank financial institutions. That lending category has been the US banking industry's fastest area for loan growth so far this year, according to Federal Reserve data.

"Following the prominent bankruptcies of Tricolor and First Brands, bank investors are rightfully on high alert for any change in asset quality trends," KBW analysts wrote in a note.

Non-bank lending "exposures are getting attention, but we believe the way these loans are structured should protect the banks and lead to overall solid credit results," Jefferies regional bank analyst David Chiaverini wrote Thursday.

Story updated with comments Zions and Jefferies.

David Hollerith covers the financial sector, ranging from the country's biggest banks to regional lenders, private equity firms, and the cryptocurrency space.