Howard Marks, Oaktree Capital — 2025-11-06
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Memos from Howard Marks 2025-11-06T08:00:00.0000000Z" pubdate title="Time posted: >11/6/2025 8:00:00 AM (UTC)">Nov 6, 2025
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Pardon the mixed metaphor, but I couldn't resist.
Jamie Dimon, Chairman and Chief Executive Officer of JP Morgan Chase, whose comments are always insightful and direct, said the following last month with regard to the bankruptcy filings from First Brands, an auto parts supplier, and Tricolor, a seller of and subprime lender against used cars: "My antenna goes up when things like that happen. And I probably shouldn't say this, but when you see one cockroach, there are probably more . . . everyone should be forewarned on this one."
And we all know that coal miners used to bring along a canary when they entered a mine, since its tiny body would succumb to any gas that was present before the gas could pose a threat to the miners. Both the cockroach and the canary can be precursors of problems ahead. We've heard both sayings in use in the last month, and we're likely to hear them more.
One of the most prominent characteristics of the financial markets that I've detected over the years is their tendency to obsess over a single topic at a given point in time. The topic eventually changes to another, but before it does, it's often the thing people want to discuss to the near exclusion of everything else. Today it's the recent string of episodes in sub-investment grade credit.
Current Events
Given the suggestion that fraud may have played a role in both the First Brands and Tricolor bankruptcies, and given that both companies had borrowed in the private credit market, people saw a connection. Is this the beginning of a problem?
As I mentioned in my memo Gimme Credit in March, the thing people have asked me about most often over the last few years is private credit. The sector took root around 2011, when banks were limited in making loans following the Global Financial Crisis and money managers stepped in to fill the void, primarily lending to leverage-hungry private equity sponsors. Because lenders were few, those who would put out money were able to demand high interest rates and a high level of safety. These loans looked good to investors in the low-rate environment that prevailed. Thus, private credit was anointed as a magic investment solution, with perhaps $2 trillion flowing into the sector in the subsequent years. The arrival of new entrants and a great deal of incremental capital created more competition to lend and inevitably reduced some of the lenders' advantages.
When asked about private credit, I answered that the investment environment had been mostly benign over the years since 2011, meaning – to echo Warren Buffett – the tide had never gone out on private credit (i.e., it hadn't been tested). Now, with two high-profile bankruptcies in short order, people thought they might be starting to see cracks.
The tone turned more serious when it became clear that not only were there failures, but also there might be something sinister behind them. There are allegations that First Brands – which had both public and private debt outstanding – used the same receivables as collateral for multiple loans. Tricolor turns out to have made loans to buyers lacking credit scores or driver's licenses and had been previously cited by regulators for practices such as selling cars for which it lacked titles.
And then, last month, as Robert Armstrong of the Financial Times noted in his daily online column, "Unhedged" (which is one of my favorites):
On [October 15], Zions Bancorp disclosed in a regulatory filing that it "recently became aware of . . . apparent misrepresentations and contractual defaults" by two corporate borrowers that did not respond to the bank's subsequent inquiries, and would take a $50mn writedown on the loans.
And on [October 16] another mid-sized bank, Western Alliance, disclosed that back in August it had initiated a fraud lawsuit against one of its commercial real estate borrowers.
Most recently, it's been revealed that two small telecom firms under common control, Broadband Telecom and Bridgevoice, borrowed extensively on the basis of fabricated receivables and have filed for bankruptcy. If one is an isolated instance and two hint at a pattern, are six an ominous trend?
As I pointed out in my memo What Does the Market Know? in 2016, in real life things fluctuate between pretty good and not so hot, but in investors' minds they go from flawless to hopeless. We saw a very strong reaction in this case: notably, the stock prices of some prominent alternative asset managers were down 5-7% on October 16, close on the heels of the regional banks' disclosures.
The truth is that there are always defaults and not infrequently defalcations (how's that for a good old-fashioned word?). Over my 47 years in the high yield bond market, more than 2% of all bonds by value have defaulted in a typical year, and many more during crises. If you apply that percentage to the number of sub-investment grade issuers, which runs in the thousands, it shouldn't come as a surprise if there are a few dozen defaults in a normal year.
So no, I don't think this is necessarily the beginning of a trend. It's not an indictment of the whole sub-investment grade debt market, or the whole private credit market. Rather, it's just a reminder that the yield spreads people care about so much are there for a reason: because sub-investment grade debt entails credit risk. And thus a reminder that credit skills are always a necessity for debt investors . . . even if the need for those skills isn't apparent in good times.
The Cycle in Attitudes Toward Risk
In 2016, when I first sat down to write my book Mastering the Market Cycle: Getting the Odds on Your Side , I had an idea what topics I would cover – the economic cycle, the profit cycle, the cycle in investor psychology, the credit cycle, the distressed debt cycle, and the real estate cycle. The chapter I didn't plan to write – and the one that became the most important chapter in the book and one of the longest – was the one titled "The Cycle in Attitudes Toward Risk." Security prices fluctuate much more than do the intrinsic value and prospects of the underlying companies, and the main reason for this is the extreme volatility in the way people feel about risk.
When the economy is humming, companies are reporting growing earnings, security prices are rising, and profits are piling up, people say things like: "Risk is my friend. The more risk I take, the more money I make. And anyway, I don't see anything to worry about." In good times, ambiguous developments are interpreted positively, and negative ones are easily brushed aside. And when times have been good for a while, the possibility of loss recedes from consciousness. Rather, missing out on potential gains and falling behind one's competitors becomes the dominant concern. Investors' risk tolerance grows, and they tend to focus less on due diligence and more on bidding aggressively for deals (see my memo The Race to the Bottom , February 2007). In all these ways, the result is a lowering of standards.
Eventually, the economy turns down, corporate profits decline, the markets slump, and people lose money. Now, the refrain is, "Bearing risk is just a way to lose money. I'll never do it again. Get me out at any price." Now it's the negatives that are exaggerated and the positives that are ignored. People regret the due