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A version of this story will appear in CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free here. Is the nightmare on Wall Street over, or have traders just covered their eyes? ICYMI: Last week, relentlessly rosy stock traders — who so far have been unfazed by threats of US troops patrolling American cities or the federal government shutdown or any number of other real-life horrors — finally got a scare from the shadowy realm of finance known as private credit. The jump scares arrived, appropriately enough, like creepy twins with a warning from beyond the grave. First came the dual bankruptcies. The blowup of First Brands, an auto parts supplier accused of fraud, and Tricolor, a subprime auto lender, had been haunting investors for weeks. The concern is less about those businesses failing than it is about major banks’ exposure to them — and whether banks have been overlooking risks in private credit, where less-regulated non-bank entities lend money. Those fears crystallized when Jamie Dimon, the head of JPMorgan Chase, revealed that his bank would take a $170 million loss on its loans to Tricolor. Dimon hinted more trouble could be coming, warning analysts that “when you see one cockroach, there are probably more.” (Ew!) With everyone’s skin effectively crawling from that imagery, then came the pair of regional banks with their spooky update. Zions Bancorp and Western Alliance disclosed that they were victims of a fraud on loans linked to distressed commercial mortgages — three words that should make anyone who lived through 2008 immediately start sweating. The news set off a panic, and regional bank shares tumbled on Thursday. For a moment, it looked like a potential credit crisis was about to become the bogeyman that would end Wall Street’s three-year bull run in stocks. But only for a moment. By Friday, the tension vanished like a ghost and investors got back to gobbling up equities. And by Monday — after the White House signaled the shutdown could end this week and corporate earnings season switched into high gear — it was as if Thursday’s panic was all just a bad dream. Subprime what? Tricolor who? If there was any fear lingering in the market, the allure of Big Tech returns and excitement for a likely Federal Reserve rate cut next week drowned them out, prompting investors to buy the dip. To be sure, the risks in the private credit market haven’t gone away. Investors are just choosing to put their focus elsewhere for the moment, while keeping their heads on a swivel for any further signs of turmoil. The consensus among analysts seems to be that the troubles at Tricolor, First Brands and the two banks, look more like isolated cases of potential fraud and poor risk management than harbingers of the next financial crisis. “It’s fair to get one’s spidey sense tingling a little bit, but it’s not necessarily fair to assume the worst right now,” Steve Sosnick, chief strategist at Interactive Brokers, told me. Buying the dip has proven to be a profitable strategy, after all. And investors who weathered the banking crisis of 2023 may be feeling confident that the Federal Reserve would, once again, step in to prevent systemic collapse. Of course, the market’s eagerness to assume the best could be pushing traders into Pollyanna-ish territory. “If this is more of an infestation, to extend Jamie Dimon’s analogy, the market’s not ready for it,” Sosnick said, “because it was so quick to shrug off the problems … If there are more cockroaches, that’s systemic and that is problematic.”
