Howard Marks Warns: Good Times Breed Bad Loans and Fraud

What's New

According to Oaktree Capital Management's Howard Marks in his November 2025 memo "Cockroaches in the Coal Mine," recent high-profile bankruptcies in private credit—including First Brands and Tricolor—signal a familiar pattern where bullish market conditions lead to relaxed lending standards and increased fraud. The $2 trillion private credit sector, which has operated in largely benign conditions since 2011, is now facing its first real stress test with six suspected fraud cases emerging in recent months.

Why It Matters

After 16 years of mostly uninterrupted economic growth and rising markets, the chickens are coming home to roost. These cases aren't isolated incidents but rather predictable outcomes of a long bull market that encouraged risk tolerance, inadequate due diligence, and aggressive deal-making. For private credit investors and institutional allocators, this marks a critical inflection point where credit selection skills—dormant during the good years—become essential for survival.

Big Picture Drivers

• Bull market complacency: Extended period of economic growth since 2009 reduced perceived need for rigorous credit analysis and due diligence

• Private credit explosion: $2 trillion flowed into the sector as new entrants and capital created intense competition, eroding lender advantages and safety margins

• Systematic fraud conditions: Good times create what economist John Kenneth Galbraith called "the bezzle"—periods when loose money and trusting investors provide fertile ground for financial scams

• Liquidity disadvantage: Private credit's illiquidity means investors can't exit quickly when red flags emerge, unlike public debt markets

By The Numbers

• $11.6 billion: First Brands' actual total obligations versus $5.9 billion disclosed during July financing—a $5.7 billion gap

• $2.3 billion: Amount one creditor's lawyer said had "simply vanished" in First Brands' complex financing arrangements

• 2%+: Typical annual default rate in high yield bonds over 47 years—defaults are normal, not exceptional, in sub-investment grade debt

• 16 years: Duration of largely uninterrupted economic growth that cultivated current crop of frauds and imprudent lending

Memorable Quotes

• "The worst of loans are made in the best of times" — Banking adage capturing how bull markets systematically lower lending standards

• "When you see one cockroach, there are probably more" — JP Morgan CEO Jamie Dimon on First Brands and Tricolor bankruptcies signaling broader problems

• "Superior credit analysis is a matter of second-level thinking based on a mosaic of information and inferences" — Marks on detecting fraud before markets fully price in negatives

• "Panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed" — 1865 observation by banker John Mills showing timeless cycle patterns

Key Trends to Watch

• Rising default clusters as malinvestments made during the long bull market get exposed in any economic downturn or credit tightening cycle.

• Heightened scrutiny of receivables financing after First Brands allegedly sold the same collateral multiple times to different lenders, exploiting payment forwarding arrangements.

• Private credit manager differentiation based on research capabilities, as thorough credit analysis costs the same whether investing $50 million or $500 million but requires scale to justify.

• Re-elevation of lending standards as recent frauds chasten lenders and investors, potentially creating better risk-adjusted opportunities for disciplined capital allocators.

The Wrap

Marks' core message echoes the timeless banking adage: "The worst of loans are made in the best of times." Superior credit analysis requires second-level thinking based on assembling a mosaic of information and inferences—not waiting for obvious red flags when it's too late. For institutional investors in private credit, the ability to detect problems early, before prices fully reflect negatives, will separate winners from losers in the coming "interesting" period ahead.