JP Morgan posted a 13% profit jump in the first quarter. $16.5 billion in earnings. The stock market sits near all-time highs. Credit spreads are tight, volatility is low, and the headline economic numbers look reassuring.

Beneath the surface, something is chewing through the financial system’s load-bearing beams.

The Cockroach Warning

Six months ago, JP Morgan CEO Jamie Dimon used his quarterly earnings call to deliver one of the most quoted warnings on Wall Street in recent memory. Two private-credit-backed companies — auto parts supplier First Brands and subprime auto lender Tricolor — had collapsed in quick succession. Both later faced fraud allegations.

“My antenna goes up when things like that happen,” Dimon told analysts. “And I probably shouldn’t say this, but when you see one cockroach, there are probably more. Everyone should be forewarned on this one.”

Howard Marks, co-founder of Oaktree Capital, devoted an entire memo to the theme. The details were ugly. First Brands had allegedly used the same receivables as collateral for multiple loans and layered complex off-balance-sheet obligations — total obligations of $11.6 billion versus the $5.9 billion in debt disclosed months earlier. Tricolor had lent to buyers lacking credit scores and driver’s licenses, and had been cited for selling cars without titles.

Then came more. Zions Bancorp took a $50 million writedown on loans tied to what it described as “apparent misrepresentations and contractual defaults.” Western Alliance disclosed a fraud lawsuit against a commercial real estate borrower. Two small telecom firms borrowed against fabricated receivables before filing for bankruptcy.

“If one is an isolated instance and two hint at a pattern,” Marks wrote, “are six an ominous trend?”

Crickets So Far

Half a year later, the visible cockroaches have been scarce. Market strategist Ed Yardeni told clients this month that even private credit’s soft spot was “showing signs of stabilizing.” Morningstar DBRS labeled the Tricolor collapse an idiosyncratic event driven by fraud, not broader credit deterioration. Dimon himself walked back the urgency by April, telling analysts that losses would have to be “very large” before they rippled to major banks.

“I’m not particularly worried,” he said.

But cockroaches were never the real danger. They scatter when the lights come on. Price discovery happens, markets clear, and everyone moves on.

The Termites

The deeper problem operates silently — and it has a name. In a MarketWatch analysis published this week, analysts described what they called “credit termites”: opaque loans to AI-adjacent companies, covenant-light documentation, and non-bank leverage quietly hollowing out the bond market’s structure. The surface still looks sound. Underneath, the warning signs are accumulating.

The evidence is visible in price action. Leveraged loans, long treated as a reliable complement to high-yield bonds, have diverged from their usual correlation with junk debt. The breakdown hit precisely when AI-adjacent borrowers began straining under higher rates. Loan default rates have climbed above 7%, according to analysts cited in the piece, with a growing share of borrowers surviving through distressed exchanges and maturity extensions rather than genuine recoveries.

Mohamed El-Erian has warned that while the AI bubble may not bring down the financial system, it can produce a chain of credit accidents. The signal is not a crash. It is the divergence itself.

Large banks have reportedly pulled back from financing certain private credit funds after marking down software loans. Non-bank lenders filled the gap, extending highly leveraged credit at yields that may not reflect true risk. Monthly net asset values are smoothed by models rather than validated by actual market trades. When liquidity is model-based, the first markdown is a policy choice. The second is forced.

The structural risk compounds from there. Collateralized loan obligations — the vehicles that package leveraged loans into tradeable tranches — rely on assumed correlations between credit buckets. When loans underperform high-yield bonds because pain is concentrated in AI-adjacent borrowers, those hedging assumptions fail. CLO managers who hedged with broad high-yield indices find their protection worthless at the precise moment they need it.

What’s Rotting

Marks, channeling the economist John Kenneth Galbraith, observed that good times create conditions for what Galbraith called “the bezzle” — the inventory of fraudulently inflated wealth that swells during booms and shrinks during busts, when suspicious eyes and meticulous audits finally arrive. The worst loans, as the old banking adage puts it, are made in the best of times.

The cockroaches may have stayed in the walls for now. The termites never left.

Sources