JP MORGAN AND HSBC TAKE $1B PRIVATE CREDIT LOSS - JEFF GUNDLACK SAYS INVESTORS WILL BE BAG HOLDERS

Added: 2026-05-11

[00:00:00]You will recall back in October of last year when subprime auto lender Holdings collapsed and JP Morgan came out and said that they took a $170 million charge off. Jaime Diamond said that it is not our finest moment, but he also uttered uh the now infamous words, "When you see one cockroach, there's probably more." I did a show on it that day. So, fast forward to yesterday. News broke on Bloomberg that a group of banks led by none other than JP Morgan is expected to shoulder paper losses of more than $500 million on a debt deal to software firm Qualrix International. And here's the worst part. The banks are preparing to use their own balance sheets to fund $5.3 billion dollar of debt for Qualrix acquisition of press gainy Forsta.

[00:01:07]So it says the article says it's the biggest hung deal in leveraged finance this year. And what hung deal means in this context is that the banks arranged for financing for a private equity transaction expecting that they would quickly be able to sell that debt to investors. But guess what? The investors said no. So the banks are going to be stuck holding the debt. So JP Morgan and the other banks will not only take a trading hit of $500 million are now obligated to fund $5.3 billion of financing that they originally expected to distribute and now it's going to stay on their balance sheets. If you watched yesterday's show, I covered the banks offloading AI debt to private equity firms using significant risk transfers or SRTs. I got several comments uh in that video asking, "Well, why would the private credit firms agree to take on this risk?" I responded to a few of you and I said, "Because the banks pay out a premium to the downstream buyers who pick it up." But what we're seeing here in this story with Qualrix is a situation where the underlying debt tied to this company is so risky and so bad that even the private credit institutional investors uh don't want to take it. Another big story hit yesterday regarding HSBC's expected $400 million loss connected to the MFS collapse which happened in February. Before I jump into that story, don't forget to please hit the subscribe button for me and go check out the link uh to my risk map newsletter description below. I'll be releasing some bonus materials next week on the traps people make and fall into or the mistakes people make and the traps they fall into when setting up their living trust and their estate plan. So, as all this news was breaking yesterday afternoon, Jeff Gunlock uh was out and said that investors in private credit will soon discover that they are bag holders. These are not isolated headlines. These are different parts of the same machine starting to fail at the same time. Okay? Hence the uh the the name of the thumbnail title for the video today. So keep in mind after 2008 here's the backdrop. The banking system believed it had solved all the problems.

[00:03:40]Regulators pressured banks to reduce direct exposure to their risky lending.

[00:03:46]So instead of holding large amounts of risky debt directly on their balance sheets, they financed the private credit firms and the structured vehicles and they financed the intermediaries and assumed assumed that the risk had been transferred somewhere else. But what we're now discovering with these two stories is that the risk actually never disappeared. that just moved through layers of leverage, special purpose uh vehicles and financing change chains that became so complicated that even these institutions themselves didn't fully understand how interconnected they actually were. Well, they found out the hard way with in these two stories. HSBC just proved it. According to a story out of the Financial Times yesterday, they absorbed $400 million uh taken that big of a hit tied to loans connected to financing structures involving none other than Apollo and MFS. HSBC understand they didn't even directly lend to MFS. That's the important part.

[00:04:56]Their exposure has been now come out.

[00:04:59]Their exposure uh came from so-called backle leveraged to a private credit union uh unit again uh that was done through Apollo global management. Are you guys starting to understand the magnitude of the leverage in the system right now? In other words, just like JP Morgan thought that it would be readily able to offload the debt tied to this Qualrix uh here and through a different mechanism, HSBC thought that they had pushed the risk downstream. And guess what? The risk hadn't left their books and their losses hit losses hit them anyway. Okay. So, when you hear all these uh job owners out there and the mainstream media telling you uh that the big banks are safe and they're isolated from private credit and they learned their lesson after 2008, let's just say I would suggest you take that with um let's say not a grain of salt, but a a tablespoon of salt. Okay? So JP Morgan's uh not so fine moment last year was only over $170 million write down. Now they have to share in 510 million in trading loss and absorb 5.3 billion of debt on their balance sheet. Okay. So uh we're seeing this another let's say less fine moment for JP Morgan rapidly uh unfold and this is the key point that many people uh need to understand. The entire modern private credit machine depends on one massive assumption that the risk can always be distributed. Banks originate the exposure. private credit firms buy it up, okay, through using your pensions and your 401k money. And everyone assumes liquidity will exist later if positions need to be reduced. But what happens as we're seeing here when the market stops buying? That's what we're seeing. Banks suddenly discover that they're still holding the debt. The financing structures suddenly stop functioning smoothly as let's say they always had. and the private credit firms suddenly cannot refinance what they're holding. And that's why Gunlock's comment yesterday he made at the Milkin Institute matters so much. He said that the term semiliquid is kind of a diabolic excuse me diabolical name. He said because half the time it's liquid.

[00:07:30]His quote was it's liquid when you don't want your money and illquid when you do.

[00:07:36]That statement is devastating to the entire narrative because the model private credit model we know exploded to trillions of dollars on the assumption that it offered well on the pitch I would say the sales pitch that it offered higher yields in a low rate world. Okay. Pension funds wanted yield.

[00:07:55]Insurance companies wanted yield.

[00:07:57]Retirement products wanted yield. Wealth managers of course wanted yield and the private credit firms were happy to provide these loans.

[00:08:06]But the higher yields came with a lot less transparency and a lot less liquidity. And now we're starting to see in real time what happens when this model fails. The FT article on HSBC uh contained one of the most important I think warnings in the entire story. A Bank of England official reportedly described these structures as a structures as a layer cake of leverage and said banks themselves may not fully understand how all the exposures connect together. Okay, this should get everybody's attention because it's exactly how hidden risk uh develops into systemic pressure and collapse. All right, so you would be wrong to think and I'll close this up in a second to think this only affects hedge funds and billionaires. Okay? Because retirementoriented capital is going to be forced to absorb these losses as many investors never fully understood that they were exposed to this in the first place. And that's why the HSBC story is so important. HSBC thought their exposure had already been transferred elsewhere through the structure. That's why JP Morgan's story today is so important. that bank thought the system uh that always would let's say enable them to kick the debt downstream to the next group of bag holders and they both were wrong. And the market is starting to discover that the risk transfer machine may not work as everyone cleanly assumed it would.

[00:09:35]And that's the real story. If you guys enjoy the content, leave me a like.

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[00:09:41]Leave me your thoughts and comments. Uh the the game's over. These are big stories. They're getting very little attention. Uh with that being said, leave me your thoughts and comments as I always ask. And I'll talk to you all soon. Bye.