Transcript of THE $5B AI LOAN PANIC: Why Wall Street Just Refused AI Chip Collateral!
Wall Street Truthbombs
0:00The strongest bank in America just0:02missed. And the most important number in0:04its report is one that has absolutely0:07nothing to do with the miss.0:09By the end of this video, my friends,0:11you're going to understand exactly why0:12JPMorgan is putting away more money for0:14bad loans even as its bad loans shrink.0:19Why two of the smartest lenders on Earth0:21just got picky about an AI loan. And0:24what it means for your money if you own0:26anything touched by private credit right0:28now.0:30My friends, I want to start with a0:32movie.0:33Every December, I watch It's a Wonderful0:36Life. Every December. In fact, I'm going0:39to tell you that I actually start0:40watching it earlier, the second it shows0:42up. And while everybody else waits for0:45the most important part of the movie,0:47the bell on the tree at the end, not me.0:49I wait for the bank run. I love that0:53scene. A crowd of scared depositors0:55packs into the Bailey Building and Loan0:57demanding their cash back now. And1:01George Bailey, he climbs behind the1:03counter and he tells them that the1:04money, well, it's not in a vault.1:07"It's in Joe's house," he said. "It's in1:09the Kennedy house. It's in Mrs.1:12Macklin's house. He lent it out so1:14people could build their homes." That,1:16my friends, is the best explanation of1:19banking that I've ever heard. And I've1:21been on Wall Street for quite a few1:22years now. Wall Street calls it maturity1:25transformation,1:27borrowing short and lending long. You1:30see, a bank is a promise to give you1:32your money back. Just not all of it. Not1:35all at once and not to everybody on the1:38same afternoon. Bank earning season1:41kicked off just yesterday morning.1:43JPMorgan, Goldman Sachs, Wells Fargo,1:45and Citigroup all reported before the1:47bell.1:49Bank of America, Morgan Stanley, they1:51report this morning. The banks, well,1:53they always go first and for good1:55reason. And I say this all the time. If1:58you want to know how the economy is1:59doing, well, ask the people who are owed2:02money by everybody, pretty much. And2:05yesterday, the biggest of them came up,2:07well, short. J.P. Morgan reported2:10earnings of $5.572:13a share. If you strip out 658 million of2:17losses on its bond portfolio, and you2:20get 5.75%.2:23Wall Street was looking for 5.85 to2:26$5.90, depending on whose survey you2:29read. Revenue came in at $50.9 billion2:33against the $51.4 billion that analysts2:37surveyed by Bloomberg were expecting.2:40Profit was still $15.3 billion,2:43not too shabby. It was up 6% from a year2:46ago. According to LSEG, this is J.P.2:50Morgan's first profit miss since the end2:53of 2023.2:56This is the bank that beats my friends,2:58and everyone expects them to do so, and3:00the market doesn't price the number.3:02It's important to know that it prices3:05the change in the story, an important3:08fact. dropped in early pre-market3:11trading, then turned higher before the3:12opening bell. And bank stocks stocks3:15were already nervous. The KBW Bank Index3:18was sitting about 12% below its3:20mid-August peak. But,3:23where the miss came from matters3:25actually far more than the miss itself.3:28The culprit was the bond trading desk,3:32and guys, you know I talk about that all3:33the time. Wall Street calls it FICC.3:37That stands for fixed income,3:39currencies, and commodities. It brought3:42in $5.37 billion against a $6 billion3:47estimate. That is down 4% from a year3:49ago. The first decline in that business3:52in more than two years. Meanwhile, the3:55stock trading, well, was on fire. I'm3:59sure you're not surprised to hear that.4:00That was up 49%4:02to 4.95 billion dollars. And here's the4:06first crack in the easy narrative that4:09you're going to hear everywhere else.4:11This was not a bad quarter for bond4:13trading everywhere.4:15Citigroup said yesterday that its fixed4:18income trading desk had its best third4:20quarter in at least get this a decade.4:23So, this looks more like a well, a JP4:27Morgan problem than a market problem.4:30Take note. And trading is the most4:32volatile line on any bank's income4:35statement. I'm going to take a bad4:37quarter at the casino over a bad quarter4:39at the loan desk every single time. So,4:44let me ask you something right now.4:46If the miss came from the casino, why am4:48I making a whole video about it? Well,4:52because the most interesting thing is4:54this report is not what JP Morgan4:57earned. It is what JP Morgan is actually5:00afraid of. You want to know what that5:03is, don't you? Well, let's dig in5:05further, but before we do, please click5:06like and don't forget to subscribe. It's5:08really important to be in the know, and5:10my friends, this is exactly how you do5:13it.5:16Okay, let's start with the loan desk5:19because it was fine, actually. Actually,5:22better than fine. Net income interest,5:25what a bank earns on its loans minus5:28what it pays depositors, you and me,5:31came in at 27.155:34billion dollars. That was up 13%. Now,5:36if you strip out the trading operation,5:39it was 24.7 billion. That was up 6%.5:43Loans ended the quarter at 1.585:46trillion dollars, deposits at 2.785:50trillion. That deposit number deserves a5:53little bit of a pause. Earlier this5:55month, the 10-year Treasury yield closed5:57at 5.31%.5:59Just last week, in fact, that is the6:01highest close since 2002. I'm sure you6:04heard, certainly heard it from me6:06enough. Higher than the peak before the6:08financial crisis, my friends. You would6:10expect depositors to flee for money6:12market funds and Treasury bills in that6:15kind of scenario. But guess what?6:18They're not.6:19Not at JP Morgan, anyway. But keeping6:22them is getting more expensive. The rate6:25the bank pays on interest-bearing6:27deposits rose to 2.18%.6:30That is up from 2.11%6:33last quarter. Well, that's fair enough.6:36With the Fed hiking in September, the6:37cost of holding on to George Bailey's6:40depositors, well, my friends, it's going6:43up, and we would expect it to. Now, the6:46consumer. That's the stuff that I really6:48love. I always read the card book first.6:51Debit and credit card spending rose 10%6:54from a year ago. The share of card6:56balances written off as uncollectible7:00actually fell to 2.91%7:03from 3.34%7:06last quarter. Total write-offs across7:08the bank were 2.2 billion. And with the7:10government's weekly survey putting7:12diesel at about $6.20 a gallon earlier7:16this month, just weeks after it hit an7:18all-time record of 6.53,7:21I expected the household to look more7:23bruised than it actually was.7:26Interesting. But here's the shadow data.7:28Guys, you know I love the shadow data.7:30This is the part you have to go into the7:32bank's own supplement to find.7:35Card balances that are 90 days late7:38fell. They fell to 0.96%.7:4296 basis points percent. Good news7:46obviously, but card balances that are 307:48days late actually rose to 1.97%7:52from 1.91%.7:55The 30-day bucket is where the trouble7:57actually starts. The 90-day bucket is8:00well, unfortunately, where it ends. So,8:02the old problems are actually clearing8:05out and a few new ones are kind of8:07walking in the door at the same time.8:09And remember who banks at Chase. It's8:11important to notice that, right?8:13JPMorgan's customers actually skew8:16toward borrowers with better credit.8:19This is a read on actually the top of8:22the K-shaped economy that I talk about8:24all the time. It's not the bottom. The8:27stress shows up first at subprime8:29lenders, usually at smaller banks. Now,8:32the part that I find most telling is8:35this. Even with write-offs falling,8:38JPMorgan set aside $2.74 billion for8:42future losses. That is $539 million more8:46than it actually wrote off. Hmm. That is8:50called a reserve build. The banker's8:53version of, well, the best way to put it8:56is, an umbrella on a sunny day. And the8:59bank says that build was mainly on the9:02corporate side, not the consumer side.9:05Interesting, right? Then read what Jamie9:07Dimon actually wrote. He said the9:09economy continued to be fueled by strong9:12business investment and ongoing consumer9:15spending. You're not surprised to hear9:17that, right? What is business9:18investment? It's all those big data9:20centers that people are building and9:22trying to build across the country. And9:25consumer spending, well, that's you and9:27me using those credit cards that I9:30talked about earlier. And then in the9:32same breath, though, he listed, well,9:35large fiscal deficits. We've been9:37talking a lot about that. Sticky9:39inflation. I'm sure you're tired of9:41hearing about that. You certainly know9:43about it. And elevated asset prices.9:47Rising interest rates and geopolitical9:50conditions were also part of what9:52Diamond spoke about. He said those9:55forces continue to shift under the9:57surface. And he said the bank remains9:59prepared for a wide range of outcomes.10:03Translation for that is things are good10:06and he's preparing for them not to stay10:09that way. And when a bank boss says10:11something like exactly elevated asset10:14prices, my friends, you know what he's10:16talking about? He's talking about stocks10:19that may be overpriced. That says bank10:22talk. $53910:24million.10:26That was what he set aside in a quarter10:28when losses actually went down. So what10:31exactly is he preparing for? Well, in10:35case you guys don't know, right? I'm10:36talking about It's a Wonderful Life and10:38the holiday season and it's only10:40October, but you know, we start10:42celebrating the season earlier and10:44earlier every year. You know what I'm10:47talking about. Guess what? Another great10:49tradition here in New York City, the10:51skating rink at Rockefeller Center. It10:54actually opened up this past Saturday10:57for its 90th season. Talk about early.11:00Nobody on that ice, my friends, was11:02thinking about credit spreads. I can11:05assure you that. But on the lending11:07desks in the city, well, here is what11:10they are looking at. And I can tell you11:12that. Bloomberg reported this week that11:14JP Morgan and Goldman Sachs are leading11:17a $5 billion loan for an AI11:20infrastructure company called Volta. But11:24they're putting their own balance sheet11:26behind only 1.3 billion of that loan.11:30And that piece is backed by cash. The11:33other 3.7 billion, the piece secured by11:36roughly 36,000 Nvidia chips, well, they11:41will only try to sell. Guys, no11:44guarantees here, and the first time they11:46tried to sell this deal, it didn't11:48clear. So, now they're offering about11:5011.2%11:52to 11.75%11:55all in to get buyers to bite. In other11:58words, that's a lot of that's a lot of12:01interest to pay to get buyers incentive12:03to get involved in that deal. Yeah, read12:06that again, my friend. 11.2%12:08to 11.75%12:12Two of the most sophisticated lenders on12:14the planet would rather not hold the12:16chip risk themselves. That's the12:18important thing that you have to hear12:20there. And the buyers on the other side,12:22well, obviously, they wanted to be paid12:25more before they took that loan down.12:28That is what the early stage of what a12:30credit tightening actually looks like.12:33To be clear, it's not a crash. It's a12:35shrug, a raised eyebrow, and a higher12:38price. And that is happening right next12:41to private credit, which has spent this12:43entire year, as you probably well know,12:46living through its own building and loan12:49moment. Moment. Private credit funds12:51lend to mid-size private companies.12:53Everyday investors often own them12:56through what we call a BDC or a business12:59development company. We've been talking13:01a lot about that in the past year or so.13:04Think of it as a mini bank that you can13:06actually buy into. In the first quarter13:08of this year, non-listed BDCs paid out13:12more in redemptions than they actually13:14raised for the first time. You've13:16probably heard that. The second quarter,13:19well, it did it again. One tracker found13:22that seven of the 10 non-traded BDCs it13:25follows limited their most recent13:28withdrawal offers. That's quite a few of13:30them. Investors asked for their money13:32and got between 13 and 40 13% and 48% of13:36what they asked for. And here's the13:38thing, those limits are not a13:40malfunction, they're actually the way13:42they're designed. Those gates are put in13:44there to avoid problems. Just like13:47George's depositors, BDC investors own a13:50claim on that money that is out in the13:52world. It's lent to companies that can't13:55pay it back on demand in one single13:57afternoon.14:01So, here is the chain. Many of those14:04funds borrow from banks like JP Morgan14:06to juice their returns. When the biggest14:09banks start holding less risk and14:11demanding more yield, the funds that14:13depend on them feel it first. And then,14:16well, you know this is coming, right?14:18Then their investors feel it. Bank of14:21America and Morgan Stanley report that14:23this morning, uh when you see their14:26numbers, we're going to look for one14:27thing. Do they also build reserves while14:30their losses fall? Uh if they do, my14:32friends, that is not one cautious CEO,14:35that is an industry carrying, well,14:38umbrellas on a sunny day. Over the next14:42few weeks, the private credit funds14:43report their own third quarters. We're14:46going to watch how much investors14:47actually ask to pull out and how much14:50they actually got back. And if you own14:52one of these funds, well, you got to14:54read the redemption terms right now. Not14:57after the next letter arrives. And if14:59you just own the banks, well, this15:01quarter is not a reason to panic. The15:04crack is not in the foundation, it is in15:07who the foundation is willing to lend15:09to.15:10There's one more moment in that movie15:12that everybody overlooks.15:15You might remember this. George and15:17Mary, they hand over their own honeymoon15:20money, 2,000 bucks, to get the building15:23a loan through to closing time. The run,15:26it didn't end because the money was in15:28the vault, it ended because somebody had15:31to15:32had cash on hand when everybody else15:34came knocking at once.15:37My friends, yesterday JP Morgan missed15:39its numbers and still added 530 million15:43to its own honeymoon fund. In a few15:46weeks, the private credit funds will15:47show us how much honeymoon money they15:50have left. So, your truth bomb for today15:53is this. The strongest bank in America15:55missed on trading, but quietly saved up15:58for a rainy day. When the bank that16:00lends to everybody else gets picky, the16:02funds that live on its money are the16:05ones who get caught in the storm.16:08Join me every day for Wall Street Truth16:10Bombs, where I drop them right here16:11before the market figures them out.
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