The Cockroach Confession

Jamie Dimon was being unusually honest on Tuesday when he dropped the metaphor that everyone's been repeating since: when you see one cockroach, there's probably more.

By Thursday, Wall Street had already found two more. And then a third. Zions Bancorp down 13%. Western Alliance Bancorp down 10%. Regional bank ETF (KRE) cratering 6% in a single day—its worst session since the tariff panic back in April. Jefferies, which has exposure to the bankruptcy of First Brands Group, down over 10% and now contemplating its worst month since March 2020. If you remember the vibe of that time, it wasn't cozy.

The thing that's happening right now is what I'll call manufactured composure. On Friday, some regional bank stocks bounced back. Truist, Fifth Third, Ally all reported earnings that beat estimates on loan loss provisions. The regional bank index jumped 1.7%. JPMorgan CEO Jamie Dimon taking a $170 million charge on Tricolor Holdings wasn't the catastrophe it could have been—just a flesh wound, relatively speaking. Treasury Secretary Scott Bessent announced he's talking to his Chinese counterpart about trade. The tariff scare deflated. Stocks recovered.

But here's what actually happened: Wall Street is doing what it always does after catching sight of something ugly underneath the furniture. It blinked. Once. Then it looked away.

The credit issues aren't contained to some fringe of the market. Tricolor, an auto subprime lender, failed. First Brands Group, an auto parts supplier, filed for bankruptcy. Both dragged down the banks foolish enough to lend to them—or in JPMorgan's case, the megabanks large enough that a $170 million hole barely registers as a paper cut. But Zions? Western Alliance? These aren't the systemically important towers of American banking. They're the regional plumbers. And they're bleeding.

What's worse is that the lending was allegedly fraudulent. Not merely risky. Not cyclically stressed. Fraudulent. Zions took a $60 million provision on a $60 million syndicated loan with alleged fraud. Western Alliance is claiming outright fraud on their exposure. This isn't the deterioration you'd expect in a tightening cycle—this is negligence. Or worse, indifference.

The question that matters isn't whether there are more cockroaches. Obviously there are. The question is whether they're concentrated enough in the system to cause a real structural problem, or whether they're just going to be an ongoing irritant that the market absorbs in quarterly cycles of shock and amnesia.

Look at the data: more than $1 trillion in commercial real estate loans mature by the end of this year. Consumer delinquency rates on auto loans and credit cards are already exceeding pre-pandemic averages. Banks have been tightening lending standards. Total consumer debt hit $17.7 trillion. We're in a "higher-for-longer" interest rate environment that keeps making it harder for borrowers to service what they already owe. These aren't conditions that breed honesty in underwriting.

Yet the big banks—JPMorgan, Bank of America, Citi, Wells Fargo, Goldman, Morgan Stanley—mostly treaded water Thursday. They're earning their valuations again. Trading is strong. Investment banking is perking up. Capital markets are humming. The megabanks essentially run a different business model than the regionals: they're market makers and deal brokers first, lenders second. When credit gets scary, they make money off the anxiety. It's almost perverse.

The real tension is between two market truths happening simultaneously. One: the Fed is cutting rates, which is historically positive for equities. Two: stretched valuations plus geopolitical uncertainty plus fiscal deficits plus growing nonbank financial intermediaries create what the IMF diplomatically calls "elevated financial stability risks." More plainly: we're in a position where a sudden shift in investor sentiment about AI profitability—or a spike in yields, or a credit event that actually matters—could trigger the kind of repricing that makes even megacap tech look vulnerable.

The regional bank selloff was a tremor. It wasn't the earthquake. But it was a reminder that the foundation's not as solid as the bounce-back on Friday suggests.

Dimon said what he said because he's been around long enough to know: if you're seeing fraud on loans to auto companies, it's not because these were isolated anomalies. It's because the machine that's supposed to catch this stuff—underwriting, risk management, the entire apparatus of credit culture—has atrophied under the weight of easy money and FOMO. The private credit market has exploded. Alternative asset managers are bigger than ever. The stuff being lent to is darker and more opaque. And the incentives are all inverted: originate and distribute, move the risk off your books, let someone else hold the bag.

Friday's rally was the market saying: "We believe it's fine." But it was also the market running out the clock before it has to stare at the next quarterly earnings release, the next fraud disclosure, the next regional bank that's suddenly not fine.

Here's the thing about cockroaches: they don't announce themselves with a blaring siren. They scurry in the periphery until the kitchen light comes on. By then, there's already been a full colony in the walls.

We're still in the phase where the light is flickering on and off. One day it's off and stocks rally. The next day someone's turning it on again. Eventually someone leaves it on long enough to see what's actually happening.

That's when the real market moves.