Zions, Western Alliance Disclose Bad Loans Tied to Alleged Fraud

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00:00This kind of felt like it came out of nowhere, but what's going on? What do we know right now?

00:03Right. So we have these two regional banks, Zions and Western Alliance, and shares of those are

00:08tumbling today after they said that they were victims of fraud on loans tied to the same

00:14borrowers. And those have both forced charge-offs on the debt. And it's also fueling a lot of

00:19concern, which is, I think, what we're seeing in the broader sector, that there are more cracks

00:23emerging in credit markets. You used the phrase cracks. We were doing some market entomology

00:27yesterday, picking up on what Jamie Dimon said about the potential of there being more

00:30than one cockroach in the environment. And I wonder sort of how we should look at these

00:34two events and complement both the comments that he made about the bankruptcies that we've

00:38seen and this latest news about these two regional banks.

00:40Well, they still remain quite isolated incidents, as far as we can tell. So the borrowers in this

00:48case, they were not first brands. They were not tricolor, but a group of investment funds,

00:54it seems, that have faced a number of fraud charges. But yes, while they appear to be isolated

01:02events, of course, this feeds very much into Jamie Dimon's comments of, are people doing

01:08the right amount of due diligence on borrowers in this kind of late cycle moment in the economy,

01:15where credit spreads are very tight and valuations are high? That's the kind of environment that

01:21encourages a lot of dodgy behavior and froth. And are these borrowers examples of that? So that's

01:27the through line, even if they're isolated incidents.

01:30I don't want to jump to conclusions or like get ahead of ourselves. But I just think about during

01:34the great financial crisis in the lead up where there are, you know, instances where people said,

01:38well, it's just isolated, you know, incidents, incidents. So I'm just wondering, again, what are you

01:45keeping a watch on other banks? Like, how are you guys figuring out whether this is indeed isolated

01:51or there's something more? I mean, are regulators, are we expected to hear from regulators on this?

01:55Well, this is the interesting thing with the smaller, in terms of what we're looking at,

01:58these are smaller banks. Right. So, you know, JP Morgan took this 170 million charge tied to

02:05tricolor, the subprime auto lender that collapsed in very dramatic fashion. That meant nothing to the

02:11bank. But and actually, you know, to be fair to Zions and Western Alliance, it doesn't seem like

02:16this is going to be a huge issue to either of them, even though, you know, the shares are down.

02:20But for smaller banks, a hit like this is obviously much more consequential. And so if lots of smaller

02:27banks are experiencing borrowers, particularly, you know, borrowers that are connected to the

02:34subprime or lower income or lower income consumer or low income consumer, then, you know, it could

02:41fuel a lot of a lot more pain. And actually, you know, Jamie Dimon said that, too, that if there

02:48are, you know, so many of these borrowers have been able to load up on debt, that when things start to

02:52turn, it's going to be worse and a lot more painful. Lastly, here, a stark change in tone from

02:57the conversation we were having with you yesterday about the big banks and their prospects, how they did in

03:01the third quarter as well. As we look ahead now to earnings season, which will involve, of course,

03:06a lot of these smaller and midsize regional banks as well. How much does this color the conversation

03:11what we expect to hear from bank executives as they do those earnings calls? Yeah, I think it hugely

03:15colors it because they will be asked about this. They will have to disclose this kind of thing.

03:21I mean, maybe they feel a bit of cover now that some of these banks have disclosed this. But I think

03:27it's going to be one of the number one things that investors are looking for as smaller banks.