Financial Cockroaches Shouldn't Be Ignored

After the collapse of used-car retailer Tricolor and auto parts maker First Brands earlier this month, JPMorgan's Jamie Dimon voiced an ominous metaphor: "When you see one cockroach, there are probably more." In a New York Times op-ed, Yale's Natasha Sarin amplifies the warning. She makes the case that our financial system is once again at risk thanks to dubious loans. But unlike what happened in the 2008 meltdown, these loans weren't issued by major institutions—which now operate under tighter rules—but by companies in the fast-growing "private credit" industry. "Today, firms like Apollo, KKR and Blackstone that manage and invest huge pools of money have gotten into the business of making direct loans, and they're doing so at staggering rates," she writes.

Leaders in this industry—now a common go-to for consumers as well as companies—say such warnings are overblown, but Sarin isn't so sure. "Because the private and public credit markets are so closely connected, cockroaches in one part of the house will always spread to the other," she writes, adding that risky lending has been on the uptick for years now. "Following the financial crisis, regulators changed the rules of the road in hopes of avoiding another crash. In retrospect, they may have just changed the zone of impact." Read the full column.