Jamie Dimon says Wall Street’s hottest trend is a recipe for a financial crisis, but he’s investing billions to get in on it anyway. His plan: swoop in strategically and profit if there’s a meltdown.

In the ballroom of the swanky Loews Hotel in Miami Beach, Dimon got on stage in front of hundreds of clients in February to talk about the boom in unregulated lending to highly indebted companies. This fast-growing market has been sidelining big banks for years, and JPMorgan Chase’s chief executive said it reminded him of the craze in subprime mortgages that sparked the 2008 financial crisis.

“Parts of direct lending are good,” Dimon said at the event in February, according to people who attended. “But not everyone does a great job, and that’s what causes problems with financial products.” He said that in the 2008 financial crisis, Bear Stearns and Lehman Brothers got in late, made bad choices and “bought these two shitty little mortgage companies,” leading eventually to “everything” blowing up.

The comparison was jarring. Just hours earlier, JPMorgan had announced it was investing $50 billion in private credit, more than a decade after financial firms such as Blackstone and Ares Management, which aren’t banks, kicked off the boom in lending to financially risky companies. Banks have typically shied away from this business because of stiff regulations meant to protect depositors.

The most successful banker in generations, Dimon has earned respect on Wall Street and beyond for steering JPMorgan away from financial fads that toppled other firms. Economists and some central bankers warn these higher-risk loans could be a major component in a potential new financial crisis, if companies with too much expensive debt hit a slowing economy.

But even though Dimon says he’s seeing history rhyme with private credit, he’s taking a big leap into the market.

The private-credit business has grown fast in the past two decades, with capital raised for lending to private-equity-backed companies—the biggest part of the market—up more than 100-fold since 2006 to nearly $700 billion in 2024. The rise of private credit has disrupted banks’ fee-rich business of lending to corporate America, and JPMorgan and some of its peers have lost out as their new, unregulated competitors have expanded.

Bankers say federal regulators in recent years have allowed some flexibility in how they enforce lending guidelines, according to people familiar with the matter, opening the door for banks to move into the market.

Dimon is racing to claim a stake before JPMorgan, the nation’s biggest and most profitable bank, is left behind, people familiar with his thinking said. Even if there is a crisis, Dimon has said he can position JPMorgan to profit. He has a proven track record of swooping in when houses of cards fall—as he did after 2008—to buy busted firms and take the best parts from them.

“There could be some pain,” said Troy Rohrbaugh, co-head of JPMorgan’s commercial and investment bank. “But we are remaining disciplined.”

A big fish gets away

The private-credit boom got into full swing around 2015. Private-equity giants and others, armed with hundreds of billions of dollars raised from pension funds and university endowments that were searching for higher returns, expanded into corporate lending.

They made a simple pitch to borrowers: They could get them funds faster and with more flexible terms, such as the ability to skip interest payments and tack them onto the total balance, than banks. Companies normally didn’t have to pay for a credit rating and could borrow more than they could get from banks.

Lenders compensated for the greater risk by charging a higher interest rate. A research report from economists at the Federal Reserve in 2024 showed that on average, companies paid between 2%-3% more to borrow from private-credit funds. While default rates have remained low, the economists pointed out that the market has yet to go through a prolonged recession.

JPMorgan was actually an early participant in the market but let its private-credit unit go just as the boom was igniting.

After the 2008 financial crisis, banks on Wall Street were reeling from huge write-downs related to the mortgage crisis and were pulling back on lending.

JPMorgan had earlier hired Scott Kapnick, a top Goldman Sachs executive, to build out a private equity and distressed debt strategy at Highbridge, a hedge fund it owned. He stepped into the lending gap with a new fund that focused on loans to small and midsize companies. It charged a few percentage points more, with the expectation that banks would eventually come back in and refinance the debt at a lower rate, paying back Highbridge in full.

Scott Kapnick built an early version of a private-lending business at JPMorgan but spun it out in 2015. It is now HPS Investment Partners, one of the world’s biggest private-credit companies.

But by around 2011, banks still weren’t back. New rules put in place after the crisis made banks less willing to lend. As a private investment fund—not subject to banking regulations meant to protect the deposits of everyday customers—Kapnick and his team at JPMorgan started to raise billions of dollars to make larger loans, cashing in on the unfolding disruption in the traditional banking system.

Dimon and Mary Erdoes, a longtime Dimon lieutenant who ran the unit that oversaw Highbridge, wanted Kapnick and his staff to work with other teams in the sprawling megabank. But they often refused to finance some deals that JPMorgan’s investment bankers brought to them, seeing low returns relative to the risk they entailed. And the new fund was finding its own pipeline of investments.

Meanwhile, Highbridge’s top executives started to worry that federal regulators could force them to shut down their lending business. JPMorgan had promised to overhaul how it managed risk after its “London Whale” debacle in 2012, when traders took aggressive bets that bank executives were effectively in the dark about and lost more than $6 billion, leading the bank to admit wrongdoing and agree to pay more than $920 million in fines. The following year regulators imposed stricter limits on how much risk banks were allowed to take in corporate lending.

In 2015, Kapnick and other executives paid over $1 billion to spin out the private-credit business. It went on to become one of the world’s biggest private-credit shops, now managing a loan book of over $157 billion. Last year, BlackRock paid $12 billion to acquire the firm, now called HPS Investment Partners.

Dimon has since told executives inside JPMorgan that, in hindsight, he believes the loss of HPS was one of the bank’s big missteps in recent years.

At the time though, JPMorgan was raking in record profits as Dimon expanded Chase Bank, its retail arm, and the investment bank was still making billions serving the world’s biggest companies. And it was getting a piece of the new boom by lending the bank’s own money to private-credit funds, a business called “back leveraging.” Banks like to do this because they are paid well without having to take as much risk as lending directly to companies.

In a 2016 interview with Bloomberg, Dimon acknowledged the growth of private markets but said JPMorgan didn’t need to worry too much. “We make money, too, so I’m not that upset,” he said.

Growing competition

But by 2020, Ares broke records with a $2 billion loan to the Ardonagh Group, a British insurance conglomerate. At the time, it was the biggest private debt deal on record. Then in 2021, Thoma Bravo’s $6.6 billion acquisition of Stamps.com was financed with around $3 billion in debt, almost all of which came from private-credit firms, including Ares and Blackstone.

The deals set off alarm bells. Banks had been dominant in arranging and financing leveraged buyouts since they took off the 1980s. Back then, Jimmy Lee at Chemical Bank, which later became part of JPMorgan, essentially invented the syndicated loan market, which lets companies tap a network of lenders in deals that banks structure.

Now, banks were getting cut out of the picture, depriving them of billions of dollars in revenue. In addition to the loan itself, banks make money through a range of related financial services, such as handling interest payments and creating investment products with the debt. Dimon said this year that around 60% of the bank’s revenue from midsize companies comes from such ancillary services.

Some of JPMorgan’s top investment bankers blamed the back-leveraging business for funding the competition. Ares alone had borrowed billions from JPMorgan over the years and was now effectively using that money to beat out JPMorgan for deals.

As private competitors took more and more market share, Dimon decided the bank needed to rebuild its own private lending business, people familiar with his thinking said. At the same time, Dimon had concerns that the fast growth in direct lending looked like a bubble, and he told JPMorgan’s shareholders in an annual letter in 2021 that private credit needed to be “assiduously monitored.”

The bank also began to think about how it could offer the loans without running afoul of post-financial crisis bank regulations that seek to limit risk-taking in lending, the people said. Much of the growth in private credit had been fueled by risky loans that banks typically avoid, so JPMorgan would need to figure out how it could offer the loans without getting demerits from regulators.

The bank rolled out a private-credit fund roughly modeled on the old Highbridge unit, again under Erdoes and in the asset-management division. The idea was to have it be separate from the core bank so it wouldn’t be subject to punitive regulations. Erdoes installed one of her lieutenants, Meg McClellan, as the global head of private credit in 2020 and hired two senior bankers from Wells Fargo with a background in lending to smaller companies. They hired a half-dozen analysts and got $10 billion from the bank to get the strategy going.

Mary Erdoes, a longtime Dimon lieutenant at JPMorgan.

By early 2022, Dimon and Erdoes scrapped the whole strategy. Dimon decided instead to put the bank’s balance sheet to work, allocating some of JPMorgan’s $100 billion in excess capital to the investment bank for private lending. The funds are above the reserves banks are required to hold to protect deposit accounts.

In the new setup, investment bankers working with companies could offer them loans directly, instead of having to pass over a Chinese Wall to Erdoes’ asset-management division to get approval for a deal.

Dimon committed $10 billion to the private-credit effort.

Many executives were pleased, seeing the lending as a way to facilitate more deals and stay relevant in a changing financial market. But some old-school bankers saw it as a sign the bank-centric model of corporate lending was ending, only to be superseded by a newer, more opaque model that JPMorgan didn’t dominate.

Walgreens deal

Under the new game plan, JPMorgan now offers corporate clients either traditional, syndicated loans, or a private-credit option—which could be larger or offer more flexible terms in exchange for a higher interest rate.

A person familiar with JPMorgan said it has a regular dialogue with regulators as it manages risk in its private loan portfolio. The bank also has its own self-imposed risk limits on deals it is willing to do, the person said.

If the client chooses a private loan, JPMorgan often holds it on its books and collects interest until it matures. In some cases, it packages the debt for a handful of private-credit funds that have partnered with the bank, including Soros Fund Management and Octagon Credit Investors.

At first, the bank mostly did small deals of a couple of million dollars. JPMorgan isn’t as dominant as other big banks in the world of private equity.

The need to scale up became clearer. Last summer, JPMorgan lost out on a deal to help Intel, a longtime investment bank client, build a major data center in Ireland.

Instead, Apollo, a private-markets competitor, invested $11 billion in the chip maker through a complex deal structure where Intel would pay variable dividends to Apollo in exchange for the investment. JPMorgan had offered a more vanilla loan deal that would have cost Intel more, people familiar with the deal said.

“As a bank, you can only watch private credit come from nowhere and get to a trillion dollar industry for so long,” said Glenn Schorr, a senior analyst at Evercore covering Wall Street. “This is what its clients are asking for.”

In February, JPMorgan announced it was dialing up its private credit commitment to $50 billion—the same day Dimon warned at the Loews Hotel about bad actors and the blowup in mortgages.

Soon after, JPMorgan did a deal when private-equity firm Sycamore Partners, which was getting ready to buy Walgreens, needed to arrange loans of around $13 billion. The deal ended up being valued at almost $24 billion including debt.

JPMorgan’s private-credit business financed part of the Walgreens deal. The bank also arranged syndicated and asset-backed loans for the buyout.

Walgreens’ businesses are split into three separate units. JPMorgan’s new private-credit team financed Sycamore’s purchase of Walgreens’ Shields, a specialty pharmacy. Walgreens borrowed a lot of debt—around nine times what Shields earns—to finance Sycamore’s purchase, something that likely would have been a “non-pass credit,” bank-speak for too risky for a traditional bank loan.

JPMorgan lent money for the $2.6 billion Shields portion of the deal with Goldman Sachs’ asset-management unit and HPS, its former private-credit business. HPS lent more than half the funds, and JPMorgan and Goldman split the remainder. JPMorgan is keeping the Shields loan on its books until it matures.

JPMorgan arranged a traditional syndicated loan for Walgreens’ international business, which includes the Boots retail chain, and it did an asset-backed loan for the third part, the flagship U.S. bricks-and-mortar franchise.

The bank said the Walgreens deal, one of the biggest leveraged buyouts in the past decade, is proof that its old and new lending businesses don’t have to cannibalize each other and can even help draw clients that want both. “We’re the Switzerland of financing,” said Kevin Foley, the global head of JPMorgan’s capital markets division.

Dimon still says he doesn’t like how some private-credit firms are increasingly using funds from mom-and-pop savers to fuel their rapid expansion, a shift from the longstanding practice of taking risks only with big investors’ money.

Blackstone, KKR and Apollo have all recently developed private-credit investment products aimed at individuals. Many of the firms are also accessing mom-and-pop savings by working with insurance companies and using annuities to grow their lending businesses faster.

Fabio Natalucci, head of the Andersen Institute, a think tank, said many of these private-markets companies are imitating banks but don’t face the same regulations. Natalucci, who studied financial stability for the Federal Reserve for 16 years, added their systemic risk to the economy isn’t fundamentally understood because of how fast they have grown.

“We have not seen this sector, at this size, go through a meaningful slowdown,” he said. “It has grown fast over the past decade and that could be a vulnerability.”

Dimon, too, told Congress in 2023 that private credit was pushing economic activity out of the sight of regulators. At a conference in 2024, he said there could “be hell to pay” if enough loans sour and everyday investors are left holding the bag.

“I think credit today is a bad risk” because its “happy-go-lucky” growth hasn’t been tested in a downturn, Dimon said in May at the bank’s investor day. But he added, “there will be a huge opportunity for this company, too.”