Cracks in the Credit Cycle

Table of Contents

• The Tricolor and First Brands Bankruptcies: Signs …

• The Pattern Is Right On Schedule

• The Tricolor Collapse: A Clear Breakdown

• The First Brands Implosion: When $2 Billion Vanish …

• What Makes These Failures So Dangerous

• The Systemic Risks We Face Now

• What to Watch For

• Why It Matters

The Tricolor and First Brands Bankruptcies: Signs of the Beginning of the End

The recent Tricolor and First Brands bankruptcies aren't shocks—they're alarm bells ringing exactly when we'd expect them to. These failures expose critical vulnerabilities in our financial system: weak transparency, inadequate risk controls, and dangerous interconnections that could amplify future crises.

While headlines frame these collapses as “surprises,” they’re anything but.

In fact, this is exactly what I said to expect in the 2025 Forecast:

The truth is, these collapses are arriving right on schedule for this late stage of the current credit cycle which began in March 2020. Clear signs that the US economy is in fact in either the latter stages of an Economic Slowdown or the early stages of a Recession.

The Pattern Is Right On Schedule

In every credit cycle, there comes a point when something “breaks.”
A company, or several, which suddenly can’t service its debt. The lenders panic, liquidations begin, and money vanishes from the system.

As I explain in the Economic Slowdown chapter of $ituational Awareness, my forthcoming book on credit cycles:

We have now entered this credit cycle's period of major defaults. How this plays out will have major ramifications of the length and severity of the current slowdown and now highly likely recession.

What History Teaches Us

Each major downturn is marked by this kind of event—one that reveals leverage and fragility built up in the system. Think of them as the canaries in the coal mine.

Here is how this situation has played out over the past four decades:

• The Double-Dip Recession (1980-82): The Latin American debt crisis and failures like Penn Square Bank exposed risky lending just as inflation and high rates bit hard.

• The Gulf War Recession (1990-91): The Savings & Loan crisis—hundreds of lenders collapsed after years of reckless loans and fraud, costing taxpayers over $130 billion.

• The Dot-Com Recession (2001): Telecom giants like Global Crossing and WorldCom failed, alongside frauds such as Enron and Tyco.

• The Great Financial Crisis (2008): Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, Washington Mutual, and Wachovia collapsed or needed rescue. The Great Financial Crisis was the classic case of leverage and opacity gone wild.

• The COVID-19 Recession (2020): The COVID-19 shock caused mass defaults across retail, travel, and energy as liquidity evaporated overnight. Neiman Marcus, J.C. Penney, Hertz, Chesapeake Energy, and dozens more filed for bankruptcy as the pandemic struck. Argentina defaulted on $66 billion in debt.

The names may be different, but the playbook is the same.

And now that we know where the risks are emerging in this cycle, we can begin looking for clues about how widespread they may be—and where not to put our money as risk continues to rise.

To do that, we first need to understand how Tricolor and First Brands collapsed.

The Tricolor Collapse: A Clear Breakdown

What Tricolor Did: Tricolor was a subprime auto lender operating "buy here, pay here" dealerships, primarily serving low-income and immigrant buyers in Texas and California. The company would sell used cars and provide in-house financing to customers that traditional banks typically rejected.

Then Tricolor would bundle thousands of these car loans into portfolios, using them as collateral to borrow from major banks like JPMorgan, Barclays, and Fifth Third. They also sold these portfolios as asset-backed securities to investors expecting steady returns.

The Fatal Flaw - Double-Pledging: Tricolor illegally pledged the same loan portfolios to multiple banks simultaneously. Imagine using your car's title to take out loans from two different banks—both think they have first claim on the same asset. When banks discovered this fraud, they realized their loans were far riskier than they'd believed.

The Fallout: On September 10, 2025, Tricolor filed for Chapter 7 bankruptcy, meaning complete liquidation rather than reorganization. The company simply shut down, leaving:

• Thousands of workers unemployed

• Customers stranded without dealer support

• Major banks facing massive losses:

  • JPMorgan Chase: $170 million charge-off

  • Fifth Third Bancorp: $200 million in losses

  • Barclays and Origin Bank: Significant but undisclosed amounts

Total liabilities exceed $1 billion, with more than 25,000 creditors fighting over whatever assets remain.

Market Impact: The collapse triggered immediate consequences across credit markets. Asset-backed securities tied to auto loans saw spreads widen as S&P suspended ratings on Tricolor's $2 billion ABS (asset-backed securities) pools. Banks launched systematic reviews of their subprime lending practices. Credit investors now demand higher risk premiums across the board.

Jamie Dimon captured the concern perfectly: "When you see one cockroach, there are probably more." The market is now searching for similar hidden problems.

The First Brands Implosion: When $2 Billion Vanishes

What First Brands Did: Founded in 2013, First Brands manufactured everyday car parts—oil filters, spark plugs, windshield wipers—sold to AutoZone, repair shops, and carmakers. Through aggressive acquisitions, the company grew to employ 26,000 people worldwide.

To fuel this rapid expansion, First Brands borrowed billions from banks and private credit funds, using future sales and company assets as collateral.

The Accounting Nightmare: By late 2025, lenders discovered something shocking: over $2.3 billion was missing from company accounts. First Brands had used aggressive off-balance-sheet financing and hidden debt structures, pledging the same receivables (unpaid invoices) to multiple lenders.

When investigators looked closer, they found the company had only $14 million in cash against more than $11 billion in total debts. The founder and CEO resigned, and the company filed for Chapter 11 bankruptcy in September 2025.

The losses are staggering and still growing:

• UBS: Over $500 million exposure as largest unsecured creditor

• Jefferies Financial Group: $715 million in receivables, $45 million in direct losses (and counting)

• 14 Business Development Companies: $385 million in combined write-offs

• Hundreds of others: Total losses estimated between $10-50 billion across all affected lenders and funds

The bankruptcy also brought down Carnaby Capital Holdings, a closely affiliated company with over $1 billion in liabilities, amplifying the damage.

The Deeper Problem: First Brands operated in the rapidly growing but poorly regulated private credit market—loans from investment funds rather than traditional banks. This "shadow banking" sector lacks the oversight that protects traditional banking, making it harder to spot problems until it's too late.

Weak underwriting standards, "covenant-lite" loans (fewer borrower restrictions), and fierce competition among private credit funds created perfect conditions for this disaster.

What Makes These Failures So Dangerous

Both bankruptcies share troubling characteristics that signal systemic vulnerabilities:

Double-Pledging of Assets: Both companies promised the same collateral to multiple lenders, creating confusion about who owns what and leaving everyone exposed when the truth emerged.

Opacity and Weak Oversight: These companies operated in fast-growing sectors where transparency and risk controls couldn't keep pace with expansion and leverage.

Rapid, Debt-Fueled Growth: Both relied on continuous access to new credit through private channels that allowed aggressive risk-taking with minimal scrutiny.

Fraud and Control Failures: Internal accounting was manipulated to hide real losses, making proper due diligence nearly impossible.

Sudden Contagion: Once problems surfaced, panic spread quickly as lenders and investors scrambled for assets, tightening credit conditions across entire sectors.

The Systemic Risks We Face Now

These bankruptcies reveal four critical vulnerabilities in our financial system:

1. The Shadow Banking Blindspot: Private credit and asset-backed lending markets have exploded in size but operate with far less regulation than traditional banks. When problems emerge here, regulators struggle to track exposures and contain damage.

2. Collateral Verification Failures: Without real-time monitoring and verification, double-dealing and fraud can persist undetected—especially in fast-moving lending markets.

3. Zombie Companies: The abundance of private credit has enabled companies that survive only by constantly refinancing rather than operating profitably. When credit conditions tighten, these zombies start falling.

4. Confidence Shocks: Unexpected failures undermine trust in credit ratings, asset-backed securities, and bank lending practices. This raises funding costs for everyone and can trigger a self-reinforcing credit crunch.

What to Watch For

The greatest risk now is that these aren't isolated incidents. If similar weaknesses lurk throughout private credit and asset-backed lending, discovery of more fraud or hidden losses could trigger rapid contagion—much like early subprime cracks led to the 2008 crisis.

As more banks and funds reassess their risk controls and collateral management, credit is already tightening. Lending standards are rising, loan origination is slowing, and risk premiums are climbing. For borrowers, especially in riskier segments, access to credit is shrinking.

We're watching a pattern unfold that's appeared in every credit cycle for decades. The question isn't whether something will break—it's what breaks next, and whether the system can contain the damage.

Why It Matters

This is exactly how Economic Slowdowns morph into Recessions.

Tricolor and First Brands are red flags about unchecked leverage, hidden risks in shadow banking, and the urgent need for stronger oversight and transparency.

Key implications:

• Banks and investors are reexamining collateral verification and risk models.

• Private credit and ABS (asset-backed securities) markets are tightening terms and reducing leverage.

• Capital access for lower-income borrowers and over-leveraged firms will shrink.

History shows us that these early breaks tend to precede larger problems.

The current credit cycle isn’t breaking apart yet, but it’s creaking in all the familiar ways.

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