Credit Crisis or False Flags

As a former banking regulator and current financial sector consultant, I have been following with increased interest the issues involving credit quality in two recent bankruptcy filings. The high-profile collapses of First Brands Group (a global auto-parts supplier) and Tricolor Holdings (a subprime auto lender) have sparked alarm about the elevated risk of loan portfolios. The central question is: are these isolated failures, or early warnings of deeper credit stress? 

I think the answer lies somewhere in the middle. Let’s take a look at what happened.

First Brands

• First Brands, an auto-parts supplier, filed for Chapter 11 in late September 2025.
• It had very large liabilities (billions of dollars), and used invoice factoring and supply-chain finance arrangements (including off-balance-sheet financing), which have been characterized as opaque and complex.
• Banks and other financial institutions (including non-bank finance funds) were exposed to First Brands through trade finance, factoring facilities, and indirect exposure in private credit markets.
• Alleged fraud, as evidenced by a recent lawsuit filed against the former CEO, Patrick James, involving illegitimate invoices for hundreds of millions of dollars.

Tricolor

• Tricolor, a U.S. subprime auto lender and dealer, filed for Chapter 7 liquidation in September 2025.
• It had warehouse financing, asset-backed securitizations of auto loans, and significant bank exposures.
• For example, Fifth Third Bancorp disclosed a $200 million loss tied to a $200 million loan to Tricolor. JP Morgan’s exposure to Tricolor resulted in a $170 million charge-off, which CEO Jamie Dimon described as “not our finest moment”.
• The business model involved “buy-here, pay-here” auto financing, often to high-risk borrowers, and alleged fraud, including double-pledged collateral, data irregularities, and weak underwriting.

First Brands’ bankruptcy is a compelling story for the following reason. The company, which once boasted over 26,000 employees and a portfolio spanning 25 well-known automotive brands, borrowed over $10 billion from a mix of Wall Street lenders and private funds. But as new directors and forensic accountants now sift through its books, they’ve uncovered what appears to be $2 billion in unaccounted-for funds and billions more in off–balance sheet borrowing.

From the current vantage point, it appears that exposure to First Brands’ bad loans is spread across dozens of banks and collateralized loan obligation (CLO) funds, which is actually a good thing. It means no one institution’s holdings are likely large enough to trigger a regulatory mandate or contagion. Even still, it’s a sharp reminder of the lack of transparency that has crept into parts of the private debt market, now approaching $2 trillion in size. It is relatively common for these types of credit quality issues to creep up on investors seeking higher yields.

Then there’s Tricolor Holdings, a Texas-based subprime auto lender that targeted borrowers without credit histories or immigration documentation. It filed for liquidation last month, listing liabilities of more than $1 billion. As someone who lives in Texas, I saw their dealerships in numerous suburbs, primarily in minority areas. Their business model, based on “buy here, pay here” auto sales financed through asset-backed securities, crumbled under rising delinquencies and tighter funding conditions.

In my view and experience, these bankruptcies show what happens when weaker borrowers at the fringes of the credit spectrum begin to struggle. Years of easy liquidity and investor demand for yield have encouraged aggressive underwriting. As the economy continues to slow and new immigration policies are implemented across the country, some of those credit decisions are now being tested by the question of how deep the problems really run.

It was reported that a significant percentage of these loans were structured to pay interest “in kind”, that is, with IOUs instead of cash. As high-risk borrowers began to struggle with their personal finances, their ability to repay loans became increasingly difficult, especially for smaller borrowers. I saw this as a regulator during the savings and loan crisis, when many loans had built-in interest reserves that kept the loans from being declared past due under those terms. Only when the loan reached maturity could you accurately determine the credit quality. As a regulator, I quickly moved to disallow these types of repayment options.

In my view, this is a trend that should be closely monitored; however, at this point, I think it’s important to note that “higher defaults” does not mean a full-blown “credit crisis.” The bankruptcies of Tricolor and First Brands each carry important ramifications for the banking sector. Below is a breakdown of the key issues, how they compare, and what they suggest for banks and the broader financial system.

What are the ramifications for the banking sector?

The loan losses and required provisioning by two banks have been noted. These losses erode bank profitability, increase non-performing assets, tighten provisioning needs, and ultimately put pressure on banks’ capital and earnings.

Underwriting, collateral, and risk-management weaknesses

• Tricolor’s collapse exposed problems in underwriting (high-risk borrower segment), asset-backed lending (auto loans to subprime borrowers), and collateral management (assets tied to used cars and dealer inventories) — all of which banks may have underestimated.
• First Brands’ failure highlights risks in “shadow banking” or non-traditional financing channels, including invoice factoring, supply-chain finance, double-pledged or opaque collateral, and off-balance-sheet debt.
• For banks, the lesson is that exposure to non-bank sectors (auto finance, trade finance, private credit) may hide significant hidden risk if underwriting and loan monitoring procedures are lax.
• Increased awareness of fraud and other forms of misallocation of assets in light of the recent lawsuit against management.

Contagion and systemic/regulatory risk

• While neither Tricolor nor First Brands appears to trigger a full-blown banking crisis, they serve as early warning signals. For example, Jamie Dimon warned that “when you see one cockroach, there’s probably more.” As noted, Dimon has publicly stated that the Tricolor relationship was not one of our finer moments.
• The failures raise regulatory oversight issues: the growth of private credit, non-bank lending, lightly regulated trade finance, and banks’ interactions with these non-traditional structures.
• Banks may face increased scrutiny from regulators regarding their exposures to non-traditional lending, off-balance-sheet financing, and collateral valuation practices. Stress-testing frameworks may need updating.
• These bankruptcies increase risk aversion. Bank stocks (especially regional banks) will most likely face increased earnings pressures as reserves will need to be replenished.
• Investors may demand higher spreads for riskier bank loans or asset-backed securities. Banks may pull back from higher-risk lending sectors (such as subprime auto lending and aggressive trade finance) or tighten standards.
• These events could lead to a “credit tightening” cycle: banks becoming more conservative, making credit harder or more expensive to obtain—especially for smaller dealers, borrowers with weaker credit profiles, or non-bank lenders.

How big is the risk & how should banks respond?

• Although neither event (Tricolor, First Brands) would or should be considered a crisis, they are meaningful because they reflect emerging stress in areas once considered niche but now growing (subprime auto, private credit, trade finance).
• If you recall, the 2008 crisis started with subprime mortgages.
• According to some reports, the exposures are in the hundreds of millions or low billions for banks/funds, not yet catastrophic for the banking system as a whole.
• But the concern is contagion: if these types of failures continue to proliferate (especially in high-risk lending sectors), the cumulative effect on bank balance sheets, risk capital, and lending behavior could become significant.

What should banks do?

• Banks should tighten underwriting standards, especially in segments such as subprime auto, “buy here pay here” auto lending, leveraged trade finance, factoring, and non-traditional receivables.
• They should improve collateral monitoring, especially for rapidly depreciating assets (used vehicles) and opaque collateral chains (factoring/invoice sales), which may be difficult to monitor. Tricolor’s issues with double-pledged collateral are a warning.
• They should increase transparency and due diligencewhen engaging with non-bank lenders, private credit funds, or supply-chain finance vehicles. First Brands’ case shows how hidden liabilities can indirectly expose banks.
• They should conduct stress testingfor exposures to weak credit segments and assess their liquidity buffers and loss tolerance.
• For regulators, there may need to be increased oversight of the so-called “shadow banking” sector and how it links to the regulated banking sector. The linkages matter for systemic risk.

Summary

• The Tricolor bankruptcy highlights risks in subprime auto finance, weak underwriting/collateral, and bank exposure to warehouse and securitized funding lines.
• The First Brands bankruptcy highlights risks in opaque finance structures, trade-finance/factoring receivables, private credit, and hidden collateral chains.
• For banks, the ramifications include direct losses, higher provisions, the exposure of risk-management weaknesses, potential contagion from non-bank sectors, a tougher credit environment, and increased regulatory scrutiny.