Jamie Dimon’s JPMorgan is angling to be a major private credit lender. But it may come back to bite

“They’ve had successive years and years of regulations, a lot of which stymied credit,” Dimon said at the APEC CEO summit in Lima, Peru. For good measure, he added: “You could have kept the banks equally safe but had them do more credit.”

Now, barely a month into Trump’s second term, JPMorgan bankers must be revelling in the street. The behemoth bank, the largest in the US by assets, has allocated USD 50bn of its own balance sheet to provide corporations and private equity firms with sub-investment grade private credit loans — also called direct lending.

The move marks a massive increase in the bank’s ability to compete with private credit upstarts. Asset managers such as Blackstone, Apollo Global Capital, Blue Owl Capital and Ares Management have been cutting a swathe through what was traditionally the investment bank’s capital markets business, arranging leveraged loans and high yield bonds on behalf of borrowers to sell along to investors. To see how important this activity is, consider that revenue from leveraged finance once comprised a full third of investment banking fees.

The new firepower mostly reflects a reading of the regulatory tea leaves. Bank supervisors have been trying to get banks to de-risk their balance sheets by pulling back from lending to firms that have junk ratings or would get such a grade if they were rated. JPMorgan is gambling that under Trump, regulators will, if not bless it using its balance sheet in an attempt to become a major private credit lender, then turn a blind eye.

But regulators and the public should worry. While banks have both directly lent and underwritten leveraged loans, the private credit loans being eyed by JPMorgan are different and weren’t created for banks to hold.

This column will, once again, take a wander down memory lane. After Michael Milken and investment bank Drexel Burnham Lambert created the modern leveraged finance market, some of the largest US commercial banks got into the LBO debt game. Back in the 1980s, they committed to holding a portion of the junk loan, and selling chunks to other banks. But the failure of Drexel, combined with the economic bust of Japan, left them unable to sell down and in something of a fix.

Jimmy Lee and his group at Chemical Bank (now JPMorgan) had too much of a USD 1.72bn senior loan for the buyout of hospital chain American Medical International. Peter Gleysteen, who was Lee’s number two back then and now leads AGL Credit Management, helped start selling to insurance firms. To do so, they changed the nature of the loan – the new loans would have a longer maturity than bank-held loans and would require no principal repayment until the end (rather than amortising through the life of the loan).

These became what is now a USD 1.4trn US leveraged loan market with active trading and liquidity. And also what caused the failure of investment bank First Boston, and trouble for others when they couldn’t syndicate them.

This is what JPMorgan intends to hold on its balance sheet. The bank was already forging a unique path when it earmarked USD 10bn of its balance sheet for direct lending a few years ago while other banks — fearful of regulatory retribution, as well as painful capital charges — only engaged in direct lending here and there.

But that USD 10bn pot was paltry compared to the arsenal raised by the big private credit players. Thus, while JPMorgan has been providing direct loans, it wasn’t a leader of massive billion-dollar-plus private loans. Now it has the heft to raise its stature and be a major force — but it may one day wish it wasn’t.