Jim Chanos Talks Credit Markets, Bitcoin

SPEAKER_1 (0:02)

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Scarlet Fu (0:07)

The legendary Wall Street short seller Jim Chanos also spoke out about private credit not so long ago. He said, quote, Now with the advent of private credit, institutions are putting money into this magical machine that gives you equity rates of return for senior debt exposure, which again should be the first red flag. We rarely get to see how the sausage is made. Jim Chanos joins us now. He is president and managing partner of Chanos & Company. He is here with us exclusively. Good to see you again, Jim.

Jim Chanos (0:34)

Good to be here. Thanks for having me.

Scarlet Fu (0:36)

So you heard what the CEO of Barclays said about this idea of whether it's one bad actor or some aspect of circumstances that leads people and companies to behave a certain way. What does your spidey sense tell you?

Jim Chanos (0:47)

Well, I teach a course on the history of financial fraud, as you know, and one of the themes of the course is that the fraud cycle follows the financial cycle with a lag. And the more extreme the financial cycle, i.e. the bigger the bull market, usually more fraud follows thereafter with a lag. So you don't really see the large amounts of fraud till after the cycle turns. This is early. And a lot of consumer credit metrics are still kind of holding up, but we are starting to get some canaries in the coal mine, in subprime auto, as you mentioned.

The first brand's case is kind of mind-blowing, given what they were hiding. And I suspect we will see more, but I don't think we are going to see a tidal wave of it until the actual financial cycle turns. Then I think we are going to see a lot of it.

Scarlet Fu (1:41)

And how extreme is this current financial cycle?

Jim Chanos (1:44)

This one is pretty extreme. I mean, we are now really 16 years into a bull market in credit inequities. It's getting more speculative. We saw a mini speculative blow off in 2021 We're seeing it again in 2025

Standards get reduced, as I like to say, people's sense of disbelief erodes over time. They begin to believe things that are too good to be true, because there's pressure to put the investors' money to work. And I think some of that's happening now in private credit.

Scarlet Fu (2:18)

So, the stock market has barely blinked with all these blow ups. The credit market kind of dismissed them as idiosyncratic until Jamie Dimon warned about the prospect of more cockroaches. And then that kind of got people's attention just a little bit here. At what point does this become something that the credit market starts to panic over?

Jim Chanos (2:36)

Well, we haven't seen it yet, as you say. Credit spreads are still almost record, record lows.

So people are still partying. You know, if the punch ball is being taken away, only a couple people may have noticed it yet. But so far, it's still partying, like it's 1999 in the credit markets, for the most part.

Scarlet Fu (3:00)

What I found really fascinating was that Jamie Dimon didn't really target private credit in his comments. He kind of just made the comments generally. Yet the industry got kind of defensive when he spoke up. Are these firms justified in doing so? I mean, you point out that they have promised these equity-like returns that raises questions about the economics of their business.

Jim Chanos (3:19)

Yeah, there's two things that bothered me. The way private credit is being sold to investors, and I sit on investment committees, so I see this.

And really, it's one of these two good-to-be-true type promises. We're going to give you senior debt exposure, often secured somehow, but with equity rates of return, double-digit type returns, which makes you wonder about the underlying credits themselves. That's number one. And then, related to that, is how much leverage is being used within the vehicles to juice the equity-like rate of return. And then the other thing that's concerning to me is the explosion now in captive regulated subsidiaries by the largest players in this area owning insurance companies. And where there really isn't a true arm's length difference between the people buying the credit and the people selling the credit to them. And that is worrisome. That's something we saw in the Drexel days, by the way. One of the things that got us so concerned in 1988 and 89, in the Drexel junk bond kingdom, was the fact that more and more of Mike Milken's clients had regulated subsidiaries, like Savings and Loans, Insurance Companies, Thrift, Trust Companies, where they were buying the same credit that, in effect, others in the kingdom were selling, without a lot of arm's length disclosure. And so, that is something to keep our eye on, I think, is the use of captive regulated subs to buy this stuff.