Howard Marks Cautions On 'Cockroaches,' Warning Loans, Frauds 'Often Occur In Clusters:' Credit Issues Aren't 'Systemic,' They're 'Systematic'

Howard Marks, the co-founder of Oaktree Capital Management and a revered investor known for predicting the dot-com crash, is cautioning that a recent string of high-profile bankruptcies and frauds are “precursors of problems ahead.”

Howard Marks’ Take On Cockroaches In The Financial System

In a new client memo dated Nov. 6, titled “Cockroaches in the Coal Mine,” Marks argues that while these credit issues are alarming, they are not “systemic” threats that will cause a breakdown of the entire financial system.

Instead, he argues they are “systematic”—a “regularly recurring behavioral phenomenon”.

“I don’t think today’s issues are systemic in the sense that there’s something wrong with the lending system,” Marks wrote. “But imprudent loans and business frauds often occur in clusters for the simple reason that people who make investments and loans are highly prone to error in good times”.

Marks Echoes Jamie Dimon’s Views

The memo opens by citing JPMorgan Chase & Co. CEO Jamie Dimon's recent comment that “when you see one cockroach, there are probably more”.

Marks applies this to recent failures in the sub-investment-grade credit market, including First Brands and Tricolor Holdings, where fraud has been alleged.

He argues these are not isolated incidents but the inevitable result of a long period of “complacency, risk tolerance, and carelessness”.

See Also: From Bubble.com To AI: Howard Marks And The Art Of Not Timing The Market

A ‘Bumper Crop’ of Frauds Ahead?

Marks notes that the last 16 years of largely uninterrupted growth provided “fertile soil for financial scams”.

This environment, he explains, creates what economist John Kenneth Galbraith called a “bezzle”—the inventory of undiscovered fraud that builds during booms.

“It shouldn’t come as a surprise in the years ahead,” Marks warned, “if the last sixteen years of largely uninterrupted economic growth… are shown to have produced a bumper crop of frauds”.

Market Prudence To Increase Amid Growing Frauds

While he expects the coming period to be “more interesting, as errors that were made in those good times come to light”, he also suggests a positive outcome.

Marks concludes that these frauds “have probably chastened lenders and investors,” likely leading to a welcome “re-elevated level of prudence” in the market.

Here’s a list of some banking exchange-traded funds and stocks for investors to consider.

Read Next:

• OWL Co-CEO Claps Back On Jamie Dimon’s ‘Cockroach’ Remark: ‘Might Be A Lot More Cockroaches At JPMorgan’

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

Photo courtesy: Shutterstock