Cockroaches in the Coal Mine

Marks argued that a cluster of recent defaults and frauds in sub-investment grade debt and private credit—including First Brands, Tricolor, and smaller telecom firms—stems from predictable behavioral cycles rather than structural market breakdown. When economic conditions remain benign for extended periods, investors and lenders lower their standards, reduce due diligence, and compete aggressively for deals, creating fertile ground for both imprudent lending and outright fraud. Marks cited JPMorgan Chase CEO Jamie Dimon's warning that "when you see one cockroach, there are probably more," but cautioned against interpreting isolated failures as systemic risk. Marks traced this pattern to what economist John Kenneth Galbraith called the "bezzle"—fraudulently inflated wealth that flourishes in good times when money is plentiful, trust is high, and audits are lax. The 16 years of largely uninterrupted growth since 2008 have created conditions for what Marks termed "a bumper crop of frauds." He emphasized that defaults are normal in sub-investment grade investing (over 2% annually in typical years) and that credit risk is precisely why yield spreads exist. The issues are "systematic" (recurring behavioral patterns) but not "systemic" (hardwired into the financial plumbing). Marks detailed Oaktree's analysis of First Brands, which disclosed $11.6 billion in total obligations versus $5.9 billion previously disclosed, with $2.3 billion in off-balance-sheet financing arrangements. He highlighted red flags Oaktree identified early—limited operating history, weak controls, and complex corporate structures—that led the firm to avoid larger exposure. Marks concluded that while frauds have likely chastened lenders into re-elevated prudence going forward, the coming period will prove "more interesting" as errors from good times surface.