Major US financiers are sounding the alarm over lending standards

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Major US financiers warned of eroding lending standards after credit markets were shaken by the collapse of First Brands Group and Tricolor Holdings.

Mark Rowan, CEO of Apollo Global Management, said the breakup of the two companies came after years in which lenders sought riskier borrowers.

“It doesn’t surprise me that we’re seeing incidents of late menstruation,” Rawan said Tuesday. “I think it’s the desire to win in a competitive market that sometimes leads to shortcuts.”

The failure of First Brands and mortgage auto lender Tricolor last month has reverberated across credit markets and left investors such as Blackstone and PGIM, as well as major banks including Jefferies, suffering huge losses.

It has also led to greater scrutiny of the private capital industry and a lack of transparency regarding borrowers, who tend to rely heavily on debt.

“In some of these more widely used credits, there has been a willingness to cut back,” Rowan said at the Financial Times Private Capital Summit in London.

Both Rowan and Blackstone’s president, Jonathan Gray, pointed the finger at the banks for accumulating exposure to First Brands and Tricolor, but said the collapses were not signs of a systemic problem. “What is interesting is that both of these operations were bank-led,” Gray said at the same Financial Times conference, rejecting “100 percent” “the idea that this was a canary in the coal mine” or that it was a systemic problem.

Far from backing First Brands, Apollo went so far as to build a short position against debts linked to the group before its collapse, meaning it would profit if the company failed to repay the loans. “Most of the declared risk holders are actually financial institutions,” Rowan said.

Banks and private capital firms have been at loggerheads in recent years as companies increasingly turn to private credit to meet their borrowing needs. Traditional lenders have called this shift regulatory arbitrage, complaining that non-bank financial institutions are too lightly regulated.

But First Brands and Tricolor have revealed how the two sides are intertwined through complex financial structures that can obscure who bears the underwriting risks, especially as lending banks aim to maintain market share.

JPMorgan Chase CEO Jamie Dimon echoed some of the concerns on Tuesday, as the bank reported strong earnings marred by a $170 million loss from Tricolor’s collapse.

“My antenna goes up when things like this happen. Maybe I shouldn’t say this but when you see one cockroach, there are probably more,” he said. “It’s clear, in my opinion, that there was fraud in a bunch of these things, but that doesn’t mean we can’t improve our procedures,” he added, admitting that the trichome exposure “wasn’t our finest hour.”

Meanwhile, the International Monetary Fund on Tuesday called on regulators to focus on banks’ exposure to the sector, noting that “banks are increasingly lending to private credit funds because these loans often achieve higher returns on equity than traditional commercial and industrial lending.”