The $3 Trillion Shadow Banking Bomb is About to Explode

Jamie Dimon doesn't mince words. He never has.

So when he told analysts on JPMorgan Chase's October earnings call, "I probably shouldn't say this, but when you see one cockroach, there are probably more," it wasn't a throwaway line.

It was a warning flare.

Dimon was talking about Tricolor Holdings, a Dallas-based subprime auto lender that imploded in September and forced JPMorgan to swallow a $170 million loss (small potatoes for the giant bank).

But Dimon wasn't signaling about Tricolor's web of worries. He was warning about what Tricolor represents: something ugly spreading beneath the surface of credit markets.

He was talking about the private credit shadow banking system. An iceberg on the horizon.

The 'Cockroach' Metaphor Has a Dark History

That "cockroach" metaphor has a long and dirty history in finance.

Bankers, analysts, and short-sellers use it when they uncover an accounting inconsistency or discover that an earnings report must be delayed, because experience teaches there's never just one issue.

Tricolor had been packaging subprime auto loans made mostly to credit-impaired Hispanic buyers, securitizing them, and pledging the same loans to multiple banks at once.

You read that right: double-pledging the same collateral to secure new credit lines from different lenders. When the fraud surfaced, liquidity evaporated. Regulators and prosecutors pounced.

JPMorgan, Barclays, Fifth Third, and others now face an estimated $500 million in collective losses.

That's not a "one-off" or "idiosyncratic" event, as it's been called. It's a flashing red signal that underwriting standards in certain corners of the credit market are disintegrating.

The Problem Goes Beyond Bad Loans

Tricolor's Chapter 7 liquidation didn't just expose bad loans... it exposed bad plumbing.

It showed how easy it has become to move risk off balance sheets, out of sight, and into the shadows where no regulator's flashlight shines.

Then came cockroach No. 2...

First Brands Group, maker of Fram oil filters and Autolite spark plugs, filed for bankruptcy in early October. The company carried roughly $6 billion in junk-rated debt against earnings that wouldn't cover a small-cap tech firm's lunch tab. Most of that debt came from private-credit lenders, not banks.

When tariffs squeezed margins and interest costs climbed, the whole house of cards collapsed.

What shocked creditors wasn't just the default, but the revelation that $2.3 billion in assets had simply "vanished," according to court filings.

Lenders from Jefferies to UBS couldn't even map their collateral – a rerun of the same "who owns what" chaos that marked the run-up to 2008.

The Contagion Spreads to Regional Banks

So in the space of a few weeks, Wall Street watched one subprime lender blow up, one highly leveraged industrial borrower implode, and one of the world's most conservative CEOs issue a blunt warning about cockroaches.

Dimon's remark hit just as regional banks were stepping on the same rake. Western Alliance Bancorp disclosed losses tied to alleged loan fraud involving Cantor Group V, a web of companies linked to the same credit network that ensnared Tricolor.

Zions Bancorp took a $50 million charge-off tied to two commercial loans it called "isolated irregularities."

Their disclosures landed right after Dimon's comment, and the market connected the dots. Zions plunged about 12% in a day. Western Alliance sank nearly 11%. Investors didn't wait for footnotes. They hit the sell button and asked questions later.

Analysts tried to calm things down, calling the losses "contained." But Dimon's line stuck in investors' heads: when you see one cockroach, start checking behind the fridge.

A $3 Trillion Monster

Here's where the real story lives – not in Tricolor or First Brands or the banks that got burned, but in the $3 trillion global private-credit machine that financed them.

Fifteen years ago, this market barely existed. It has mushroomed from $200 billion in 2010 to more than $3 trillion today, rivaling the entire U.S. high-yield bond market.

Private credit is Wall Street's Frankenstein: born from zero-rate policy, engineered by private-equity firms, and unleashed into an economy starved for yield.

It's seductive because it lives outside the regulatory spotlight. No capital requirements. No stress tests. No public disclosures.

When Money Was Free, Nobody Cared

That freedom has fueled explosive growth – and with it, corner-cutting and opacity. Loans are sliced, leveraged, and repriced in mostly private quarterly reports that investors can't audit.

Valuations are "mark-to-model," not mark-to-market. When money was free, no one cared. Now that money costs 5%, the cracks are spreading.

Wells Fargo's credit strategist Timur Braziler summed it up perfectly: "If something grows like a weed, maybe it is one."

Dimon wasn't being dramatic. He was diagnosing the disease.

The collapse of Tricolor and First Brands shows how easily leverage has migrated from banks to shadow lenders – and how quickly those losses migrate back when things blow up.

A Web of Cross-Exposure

Private credit was supposed to diversify risk away from the banking system. Instead, it has become a web of cross-exposure…

• Private-equity sponsors lend to their own, often floundering and always leveraged portfolio companies

• Hedge funds fund those loans with repo lines from banks

• Banks provide direct warehouse lines of credit to credit funds

• Pensions and insurance firms chase the yield, trusting models that don't price liquidity risk.

It's leverage on leverage. It's "structured finance 2.0." And it's the reason Dimon's cockroach comment landed like a thunderclap.

This Is Just the Beginning

If Dimon's right – and history says he usually is – Tricolor and First Brands aren't the infestation. They're the early scouts.

Each failure exposes another layer of hidden leverage, another loan book built on "alternative data" and hope.

Private credit has become the modern equivalent of subprime mortgages circa 2007: too big to ignore, too complex to unwind, and too intertwined with mainstream finance to quarantine.

The difference this time is that it's happening in the dark, outside the banking system's regulatory field of vision.

When those losses start migrating back onto bank balance sheets through warehouse lines, securitizations, and credit-linked notes, the illusion of isolation disappears.

The damage won't stay "private" for long.

You don't panic when you see one cockroach. You start looking for where they're breeding. Because by the time you can see them all, it's too late.

- Shah Gilani, Total Wealth

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