Taking Stock 23 October 2025

WHEN the long-time chief executive of the world’s biggest and best bank (JPMorgan Chase) sent out a warning to all investors last week, he used the word “cockroach”.

He noted that when you find one cockroach, it is rare for there to be no others lurking nearby.

The “cockroach” he had found was a hidden bad loan of $170 million to a now bankrupted billion-dollar company which should never have been supported by lenders.  I will display just how visible a cockroach was, later in this newsletter.

The JPMorgan Chase CEO, Jamie Dimon, was confessing that the careless bank was the one he headed.

“This was not our finest hour,” he conceded.

Since his warning about more cockroaches was published, many other large banks and financial sages have picked up on the theme. Central to their fear has been the surge of virtually unregulated “private credit” lending, now in total around US$2 trillion, and the growing examples of extreme use of off-balance sheet borrowings, at best opaque.

That lending, sometimes called shadow banking, has its origin in desperate corporate demand for funding that the mainstream banks usually regard as “sub-prime”, words that often translate as too risky.

Meeting that demand are bigger risk-takers who usually have succeeded in attracting funds from yield-chasing pension funds and insurance companies, perhaps accompanied by risk-embracing wealthy investors.

Greed and carelessness have combined to build the money available.

Usually loan brokers, such as Jefferies (in the USA), will identify the demand for funding, scoop up the money and put together the loan, usually packaging the loans and selling them up in bits, the lower-rate bits having priority over the 10–20% charges for the slices of the loan that have no underlying assets to support them.

Jefferies, as my example, would be expected to perform the analysis of the borrower during what would be assumed to be careful due diligence.

As I noted in Taking Stock a year ago, the likes of Jefferies have far too few experienced staff to analyse the hundreds of loan applicants. Inauspiciously, some loan brokers are now saying that they are “not paid to perform due diligence”.

Investors are not helped by the understaffing and poor skills of the dozens of credit rating agencies which award a credit status to each applicant.

It seems some credit raters will set their fee based on the strength of the credit rating required by those paying the fee, a practice common in New Zealand during the lead up to the finance company collapses in 2008.

Equally in that era, property valuers also had flexible models. We all know how that misled investors and lenders.

This surging current problem was easily identified at least a year ago and was commonly discussed, not just with me in my travels and with the network of people of my age, but overtly in financial market boardrooms.

Taking Stock has regularly discussed the consequences of these dreadful practices.

The message was, and is, that poor lending analysis, over-leveraged and struggling corporate borrowers in a world made unstable by Trump’s meanderings, omnipresent greed amongst loan brokers, banks and pension funds, had come together in a world awash with printed money, most of which had fallen into the wallets of the extremely rich.

Look out, was the message quietly delivered.

There were many signals emerging to warrant attention.

Just as happened in 1982–1987 and in 2005–2008, excessive debt (leverage), greed, and incompetent lenders give birth to all manner of “new” ways of raising even more stress, by the likes of off-balance sheet hidden loans, and the various versions of selling future cash flows for instant cash (factoring).

The US markets, indeed the markets in many “rich” countries, have been reinventing those wheels.

Dimon is so admired because he is transparent in his insights. He was outspoken when leading JPMorgan prior to the 2008 crisis. He is experienced, balanced, and social.

If he were America’s President, the world would be a better place.

In recent weeks various regional US banks have disclosed real problems with looming bad debts.

One of the globe’s most active non-bank lenders and private equity investors is Apollo, based in London.

The “cockroach” that somehow infested JPMorgan Chase was the auto lender Tricolor. In the case of the giant Blackstone, the cockroach was the auto-parts conglomerate, First Brands Group, led by the recently resigned Malaysian founder, Patrick James. First Brands and the auto lender Tricolor have hit the wall, having sought every avenue to raise non-bank loans.

Apollo analysed First Brands Group. It recognised the implausibility of its financial statements and the extreme lengths to which it was resorting to pursue its need for ever more debt.

Apollo then bet against the collectability of First Brands Group, “shorting” its debt. What that meant was that if First Brands defaulted, Apollo won its bet. Whichever parties took the bet with Apollo lost.

Apollo is winning, big time.

Dimon is concerned that the deceptions from First Brands and Tricolor that have created billions of dollars of losses for banks are simply symptomatic of widespread bad practices; potentially fraud, gross over-statement of stock and/or sales, hidden double-pledging of security for loans, dreadful auditing practices, stupid bank lending, lazy or incompetent credit rating standards.

Most of all Dimon may be overlaying on those observations the brainless pursuit of high yields, led by pension funds and those who invest in the flimsier versions of private credit.

He should also be asking quite how any American banks and private credit lenders were ever persuaded to lend to Patrick James’ empire, and quite how they missed obvious red lights. The stop signals were visible to anyone who cared.

Read on.

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Patrick James is 61, from a family of modest means who left Malaysia for the USA in 1984, when he was 20.

He had attended a religious school near Kuala Lumpur, without distinction.

He arrived in Ohio, aged 20, where at university he became renowned for his affection for music, parties and women, predilections probably shared by many other students. He ran the student bar and set up a student investment club.

After leaving university, he ceased to be your typical US student.

Somehow, he found banks willing to lend him the money to buy Ohio farms with mansions, and also purchase small manufacturing companies, probably using the rising value of his indebted properties as collateral.

His manufacturing plants were not profitable, possibly because he paid himself generous management fees, from more borrowings. Debt swamped the companies.

His nouveau empire faltered. He filed for relief to close them down.

There were multiple allegations of fraud and published accounts of how he had instructed staff to shred accounting records. (If I can discover these outcomes, a US credit analyst ought to have known this.)

The Malaysian entrepreneur paid $1.2 million to close down allegations.

In 2009 he faced banking claims that he had made misrepresentations and deliberate omissions when raising loans. In 2011 he was formally charged with fraud.

Again he settled the claims with yet more borrowed money, so there was no accountability.

In 2012, private credit arrived with non-banks and loan brokers actively wooing those who embraced debt, as James clearly did. They enabled him to start again.

The large American loan broker, Jefferies, arranged huge loans when James bought Trico, a maker of windscreen wipers, to help him build his auto parts business, First Brands. Jefferies arranged billions, collateralising the loans, selling off various tranches to pension funds, then hungry for yield at a time of low investment yields.

Notably, Jefferies retained none of the debt. The company sold it to others.

Very few buyers of Frist Brands’ debts performed due diligence beyond a cursory standard.

James grew his auto conglomerate on debt, with the likes of the now collapsed Greensil Group buying tens of millions of securities to fund First Brands.

Unable to meet his need for debt, James resorted to factoring and what became known as Supply Chain Financing, both of which involve the pledging of various sums owned by those who had bought goods from First Brands.

Oddly, those banks which participated in the securitisation of those assets allowed First Brands to collect the payments on those individual invoices and then pay the banks and private credit finders who had bought them. Typically the buyer of an invoice collects the money directly. Guess why?

After First Brands collapsed, a large financier who had bought invoices rang to ask how much of the hundreds of millions owed was available to those who had funded the invoices. First Brands replied: “None”.

While First Brands was superficially flourishing, living on ever-more debt, James re-established his farming empire, on debt, of course. He bought prized homes and vintage cars. Despite his reliance on private credit and bank debt, James felt empowered to decline occasional bank requests to visit his warehouses to check stock levels.

“We do not allow lenders to enter our warehouses,” First Brands replied to requests.

By 2025 he had borrowed $5.5 billion on term loans, $3.3 billion from off-balance sheet funding, $2.3 billion from factoring, $0.8 billion from supply chain financing (a form of factoring) and $0.6 billion in asset-backed loans.

The company was making losses.

Double, perhaps triple, pledging was rife. Eventually First Brands was switching funds from different accounts, hoping this would ensure it met its payroll obligations.

On 28 September, four weeks ago, the absurdly indebted company went into bankruptcy.

James, written up by the media as one of America’s “billionaires”, was revealed as an “illusion”, carrying the moniker of a corporate crook. Others will now spend years (and millions) untangling the rats’ nest, with multiple dozens of careless investors of other people’s money left to claim whatever money is left.

It is not my habit to detail all this sort of corporate stupidity, but this has unfolded within the much bigger story of the search for other cockroaches.

Any potential lender who had performed due diligence on this fellow would surely have backed away, wallet closed.

Why did the private credit, banking, pension funds, insurance companies, buyers of securitised debt, credit raters and auditors let this business build up and blow up billions?

If you were a banker, would you have lent to First Brands?

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NOT unrelated to this inane carelessness was the news in New Zealand that a Marlborough wine producer has blown up with net losses of tens of millions.

Who provided those millions?

Various directors have been banned from such roles for terms of between five and ten years. Others in the hospitality industry have bellied up with debts of a million, often the biggest creditor being the IRD.

If you were the IRD, and a customer did not pay his GST or tax on due date, would you stand by, allowing future defaults so that eventually the debt reached hundreds of thousands?

Knowing the errant company had collected GST, and not passed it to the rightful owner (the IRD), would you expect the IRD to tolerate such misuse of money owed to the Crown?

Absurd use of debt generates stress. Stress often leads to very poor decision-making. Poor decisions never solve problems. A company not paying its GST on the due date should be a huge line in the sand, for the IRD.

Is it time for the likes of the IRD to develop a very publicly visible group whose job it is to limit the losses from GST? Zero tolerance? Personal liability? Legal description of GST misuse as a criminal offence, with a starting point of a custodial sentence?

Instead of chastising those who pay their taxes at the required rate, should the media and the far left focus on chastising those who pay none of their required taxes?

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Travel

27 October (Labour Day) morning – Arrowtown – Chris Lee28 October (morning) – Arrowtown – Chris Lee30 October – Auckland (Albany) – Edward Lee31 October – Auckland (CBD) – Edward Lee

12 November – Levin – David Colman

13 November – Whanganui – David Colman

14 November – New Plymouth – David Colman

19 November – Napier – Edward Lee

20 November – Havelock North – Edward Lee

26 November – Auckland (Ellerslie) – Edward Lee

27 November – Auckland (Albany) – Edward Lee

Chris Lee

Chris Lee & Partners Ltd