Banking giant JPMorgan Chase warns that a maturing market could pose a systemic risk capable of triggering a meltdown reminiscent of the 2007 Global Financial Crisis.
In a new interview on CNBC, Bill Eigen, the CIO of JPMorgan Asset Management’s absolute fixed income division, says there’s a speculative fever spreading throughout markets, as evidenced by the hot crypto and meme stock markets.
He also warns that the private credit market looks to be following in the footsteps of subprime mortgage-backed securities (MBS) over 20 years ago.
Subprime MBS are stacked with housing loans given to high-risk borrowers with poor credit and were marked safe by credit ratings agencies, allowing institutions to invest heavily in the asset class. When the borrowers started to default en masse, MBS prices collapsed and institutions with billions of dollars in exposure imploded.
Eigen sees a similar pattern repeating in the private credit market.
The JPMorgan executive says private credit, or loans given by non-bank lenders such as hedge funds to riskier borrowers like small companies, are highly illiquid assets that are hard to sell because they don’t trade in the public markets. He notes that there’s now a “big push” for these assets to be sold in public vehicles that would expose institutions to stacks of loans given to riskier borrowers.
“Boy, you know what, I’m getting shadows of ’07 a little bit. Not to the extent of back then, but the thing I’m nervous about is that there’s this big push to put private assets in mutual funds, ETFs (exchange-traded funds) and things like that – things that trade by appointment and putting them in vehicles that trade by the second.Â
Whenever I start to see things like that, I just personally get a little bit nervous… This huge push to take illiquid assets and [make them liquid or semi-liquid]. Some of these things trade by appointment, there’s a lot private credit out there that should not be trading at par value but that’s where it’s marked…Â
You remember what happened back in the day, the ABX index (subprime MBS) and taking illiquid mortgages and putting them in liquid vehicles and the rest is history.”
But for now, JPMorgan Chase is staying bullish on the stock market, noting that the Trump administration is doing everything it can to “turbocharge” the economy and get equities higher.
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