Private credit risk? This is fine
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Illustration: Lindsey Bailey/Axios
Big banks are sending basically the same message on private credit risk this earnings season: It's totally fine, nothing to see here. Over $1 trillion in risk is peanuts, actually, in the grand scheme of things.
Why it matters: There's a lot of nervousness in this corner of the lending market. Retail investors are looking for the exits. The shares of investment firms with private credit funds are slumping and at least some regulators appear concerned.
Zoom in: On JPMorgan Chase's earnings call on Tuesday, CEO Jamie Dimon acknowledged that there has been "weak underwriting" in these loans, and if there's a credit cycle — an economic downturn — "losses will be worse than people expect."
- But he also noted that private credit lending is "like $1.7 trillion," a relatively small market given that mortgage debt and investment-grade lending are each $13 trillion — and "there's a lot of other stuff out there."
- "I don't think it's systemic," Dimon said. "It almost can't be systemic at that size relative to anything else."
Goldman Sachs CEO David Solomon said private credit has been a strong business, pointing to investor demand for its largest non-traded business development company.
- "Overall, we feel good about the long-term opportunity in private credit and our ability to deliver attractive risk-adjusted returns for clients," he said on the firm's earnings conference call on Monday.
Between the lines: Both banks have come up with new ways for hedge funds to bet against the sector.
Citigroup added a slide to its investor presentation this quarter to head off questions about the hot topic.
- The bank's $22 billion in private credit exposure was "not significant," chief financial officer Gonzalo Luchetti said on the earnings call.
BlackRock, the asset management behemoth, joined the calming chorus. CEO Larry Fink said:
- "There's been a lot of attention on private credit, but the headlines do not reflect what clients are telling us, what our portfolio data shows or where we see the market going."
- He said the turmoil is happening in a narrow part of the market — the retail piece, essentially. Institutional demand for private credit is growing, he said, particularly among insurance companies.
Zoom out: Financial regulators in the current administration are similarly showing little sign of concern. The White House is pushing to add private credit to 401(k)s.
- SEC chair Paul Atkins said earlier this week he was a private credit investor — and that it's a risky investment, but that's part of the deal.
- "The risk should be fully disclosed," he said. "Just like anything else with Wall Street or whatnot, when a good thing gets going, money piles in, quality starts to go down because there's too much money chasing fewer good deals. That is when you have to watch out."
- He added: "I think as we have been looking at this area, at least as of now, it is not a systemic risk."
Yes, but: Bank of England governor Andrew Bailey told Reuters earlier this month the current moment recalls the run-up to the financial crisis in 2008 — when folks said the meltdown in subprime mortgage lending was isolated.
- "If you then learn there is a lemon — it's called a failure — you lose confidence in the whole system because you say, 'There's more lemons in there than I thought, more weak companies in there than I thought, and I don't know where they are,'" Bailey said.
- "I'm not saying it's going to happen," he added. "But we've had this experience before, so we have to watch for this."
What to watch: Punchbowl News reported Wednesday that the Treasury Department is asking private credit firms for data, amid rising concerns.
- Meetings with Treasury are on tap for the summer.
