"Subprime Crisis" Reemerges? Wall Street "Catching Cockroaches" Debate: PE and Banks Blame Each Other

Wall Street is witnessing a fierce debate over loan risks.

With the successive collapses of auto lender Tricolor Holdings and auto parts supplier First Brands Group, tensions between traditional banks and private equity institutions have come out into the open, sparking clashes over who should bear responsibility for credit market turmoil.

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

These remarks triggered a strong backlash from private institutions. Blue Owl Capital Co-CEO Marc Lipschultz countered that linking private credit to these bankruptcies is "a strange act of manufacturing panic," and suggested banks should "check behind their own refrigerators."

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

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

Private Giants: Banks Are the Source of Risk

Apollo Global Management CEO Marc Rowan, speaking at the Financial Times Private Capital Summit in London, said the two collapses were the result of lenders pursuing high-risk borrowers for years. "I'm not surprised to see late-cycle accidents emerge," Rowan said. "The desire to win in highly competitive markets sometimes leads to shortcuts."

Rowan explicitly pointed the finger at banks. "In some highly leveraged credit cases, there are those willing to cut corners," he said. Prior to First Brands' bankruptcy, Apollo established a short position against the group's related debt, meaning Apollo would profit if the company defaulted on its loans. "Most of the disclosed holders of risk are actually financial institutions," Rowan said.

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

Banks Under Pressure: Admitting Mistakes but Warning of Risks

On Wednesday, JPMorgan Chase CEO Dimon, while announcing strong financial results for the bank, also voiced warnings about risks. "When things like this happen, my alertness increases," he said, "I probably shouldn't say this, but when you see one cockroach, there may be more."

Dimon admitted the Tricolor incident exposed problems within banks. "I think it obviously involved fraud, but that doesn't mean we can't improve our procedures," he added, acknowledging that the Tricolor exposure was "not our finest hour."

The two bankruptcies have already triggered a cascade effect in credit markets. Institutions like Blackstone and PGIM, as well as major banks like Jefferies, have suffered significant losses. JPMorgan alone lost $170 million due to Tricolor's collapse.

According to the Financial Times, the First Brands and Tricolor bankruptcies exposed how banks and private capital companies became intertwined through complex financial structures, which may obscure who is actually holding underwriting risk, especially as bank lenders strive to maintain market share.

The Market Landscape Behind the Exchange of Fire

Relations between banks and private capital companies have been tense in recent years as more businesses turn to private credit to meet borrowing needs. Traditional lenders call this shift regulatory arbitrage and complain that non-bank financial institutions are regulated too loosely.

But Blue Owl Capital's Lipschultz believes linking private credit with bankruptcies is "manufacturing panic." He hints that banks are the real source of problems.

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

Akshay Shah of distressed debt firm Kyma Capital said: "Landmines are beginning to pop up everywhere. Marc says on the banks' side, Jamie might say it's elsewhere. I would say both sides are exploding."

On Tuesday, the International Monetary Fund called on regulators to pay attention to banks’ exposure to the private credit sector. The organization pointed out that "banks are lending more and more to private credit funds because the net asset returns on these loans are often higher than those of traditional commercial and industrial loans."

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