JPMorgan, Growing Large Bank Risk & Private Credit

December 11, 2025 | At the Goldman Sachs financial services conference this week, the JPMorgan (JPM) consumer banking chief made a surprise earnings pre-release that startled the audience and not in a good way. Marianne Lake stated that the bank expects its 2026 expenses to reach approximately $105 billion, a figure that surpasses Wall Street analysts' estimates (and JPM guidance) of around $101 billion. Somehow between the end of Q3 and today, JPM's estimate of expenses grew by $4 billion. How's that for effective systems and controls?

The surprise pre-release of Q4 results led to a significant drop in JPMorgan's stock price and took down the entire sector along with it. But is this the only negative surprise likely to come from JPM? We think not. CNBC’s Jim Cramer said on X yesterday that investors should buy JPM on the dip, but we disagree. In fact, the markets seem to know something about JPM. Maybe this explains why Citigroup (C) has outperformed the House of Morgan all year.

Source: Yahoo Finance (12/10/25)

Below we discuss why we think that JPM and other large banks may have some additional negative surprises in store for shareholders in coming months, in part due to the growing carnage in private equity and credit. The US has not seen a credit led recession in over a decade and the rot is getting monumental. The deteriorating metrics in corporate debt, and private equity and credit, suggest that a correction long overdue is now arriving. And we also provide some ideas for our Premium Service readers about mortgage stocks that will benefit in a falling interest rate environment in 2026 and beyond.

First Brands, Tricolor and Private Credit

Major banks and financial firms like Jefferies Financial Group (JEF), UBS Group AG (UBS), Bank of America (BAC), Goldman Sachs (GS), and a slew of private credit funds including Marathon Asset Management, Monroe Capital, Evolution Credit Partners, and Onset Financial provided significant financing to the now-bankrupt First Brands Group. This private credit came primarily through complex debt structures, inventory financing, and off-balance sheet lending.

JPMorgan and Fifth Third Bank (FITB) were major lenders and facilitators for another fraudulent borrower, Tricolor, a subprime auto lender that went bankrupt in September 2025. JPM and FITB were the enablers for Tricolor, providing crucial short-term "warehouse" financing and helping package Tricolor's risky auto loans into asset-backed securities for investors. And what do First Brands and Tricolor have in common? Private credit.

Wells Fargo (WFC) leads US banks in direct private credit lending volume, followed by Bank of America (BAC), PNC Financial (PNC), Citigroup, and JPM, with banks increasingly partnering with non-bank credit shops, like Citi's deal with Apollo (APO). We’ve noted the hyperbolic growth of bank lending to non-depository financial institutions (NDFIs), but now the prospect of rising credit defaults may start to weigh upon the equity market valuations of JPM and other major banks.

The two charts below shows total loans to NDFIs as of Q3 2025 at $1.3 trillion and also all unused bank lines. The category "all other unused loan commitments" in the second chart (purple line) is over $4 trillion and includes undrawn lines to NDFIs. For every dollar of credit already drawn by NDFIs in that $1.3 trillion figure, there is another $1 or more that borrowers can draw just prior to filing bankruptcy. This is what they call "Exposure at Default" under Basel III. And many NDFI loans by banks are non-recourse, but most NDFIs have no net assets in any event.

Source: FDIC

Source: FDIC

“Banks have adopted new strategies in reaction to the shifting market environment, with a focus on growing loans to non-depository financial institutions (NDFIs), which reached $1.2 trillion as of late June for domestically chartered US banks,” Moody’s wrote in October. “About $300 billion of these loans are to private credit providers, helping fuel the expansion of the sector.”  But we think that the total exposure to private credit by the largest US banks is far larger than most analysts appreciate.

The Next Shoe to Drop: Private Equity

Banks now actively offer non-recourse financing for private credit loans, notes our colleague Nom de Plumber. “Private Equity-affiliated insurers typically own the loans, but have posted them as collateral, in exchange for unencumbered cash, almost like buying stock on thin margin. As critical distinction, if the private credit loans go bad, these insurers can relinquish them and keep that cash, since the banks have waived recourse.”  

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